As of May 20, 2022, 39,116,907
shares of common stock, par value $0.0001 per share, were issued and outstanding.
PART
I
Item
1. Business
Overview
of Business
Unless
otherwise stated or the context otherwise requires, the terms “we,” “us,” “our,” “AESE”
and the “Company” refer to Allied Esports Entertainment, Inc. and its subsidiaries.
The
Company operates a premier public esports and entertainment company, consisting of the Allied Esports business. On July 12, 2021, the
Company completed its sale of its business comprising the World Poker Tour (or “WPT”) for gross proceeds of approximately
$106 million.
The
rapid growth and popularity of gaming and esports during the COVID-19 pandemic has driven interest in the Company’s esports business,
Allied Esports. In January 2021, the Company’s Board of Directors decided to explore strategic options for the esports business
in order to maximize value to its stockholders, including a possible sale of such business. If the Company pursues and ultimately completes
a sale of the esports business, the Company expects to proceed (likely under a new name) as a publicly traded holding company focused
on using its cash resources to explore opportunities in online entertainment, including but not limited to, real money gaming and other
gaming sectors. However, the Company does not plan to limit itself to any particular industry or geographic location in its efforts to
identify prospective target businesses. Currently, the Company does not have any specific merger, asset acquisition, reorganization or
other business combination under consideration or contemplation.
Currently,
the Company is utilizing its experience operating the WPT business to operate the Allied Esports business, based on WPT’s success
in the following three pillars:
|
● |
developing
multiplatform content; and |
|
● |
providing
interactive services. |
Gaming
is one of the largest and fastest growing markets in the entertainment sector, with an estimated 3.1 billion gamers 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. Some of the popular esports games currently being played
include Fortnite, League of Legends, Dota 2, Counter-Strike, Call of Duty, Overwatch and FIFA. Although you can play games on your
own against the computer or console, one of the ways esports is different than the video games of old is the community and spectator
nature of esports, whereby competitive play against another person — either one-on-one or in teams — that
is viewed by an online and in-person audience, is a central feature of esports. Since players play against each other online, a
global network of players and viewers has developed as these players compete against each other worldwide. Additionally, game developers
have greatly increased the watchability of games, which has made the spectator aspect of gaming much more prevalent and further drives
expansion of the gaming market. The expanded reach of high-speed Internet service and the computer technology advances in the last
decade have also greatly accelerated the growth of esports. Esports has now become so popular that many colleges offer scholarships in
esports and the best-known esports teams are receiving mainstream sponsorships and are being bought or invested in by celebrities,
athletes and professional sports teams. The highest profile esports gamers have significant online audiences as they stream themselves
playing against other players online and potentially can generate millions of dollars in sponsorship money and subscription fees from
their online streaming channels. It is projected that by 2023, 646 million people will be watching esports globally, and that global
esports revenue will grow to approximately $1.6 billion.
WPT
successfully implemented a three-pillar strategy for over 16 years of its 18-year history. We believe this model can continue
and also be applied to Allied Esports and the esports industry over time. Allied Esports intends to use those same pillars —
in-person experiences, multiplatform content, and interactive services — independently and in connection with its strategic
partners. The COVID-19 pandemic has caused disruption in our long-term growth plans for Allied Esports, and although our long-term strategy
remains to fully implement the three-pillar strategy, we are currently focused on continuing our in-person experiences at our
current arenas and developing multiplatform content.
In
June 2019, Allied Esports entered into a series of strategic transactions with Simon Equity Development, LLC and its affiliates
(collectively, “Simon”), a global leader in the ownership of premier shopping, dining, entertainment, and mixed-use destinations,
pursuant to which Allied Esports organized and staged an esports event program called the Simon Cup at certain Simon shopping centers
in the U.S. and online. In January 2020, Allied Esports entered into a strategic partnership with Brookfield Property Partners,
one of the world’s premier real estate companies, in which Allied Esports will develop integrated esports experience venues at
mutually agreed upon shopping malls owned and/or operated by Brookfield or its affiliates that will include a dedicated gaming space
and production capabilities to attract and to activate esports and other emerging live events. In connection with the foregoing partnership,
Brookfield made a $5 million equity investment into the Company. As a result of the adverse effects that the COVID-19 pandemic
has had on the short-term operations and plans of Allied Esports, Allied Esports and its strategic partners are delaying further
execution on their strategic plans.
In-person
Experiences
Allied
Esports will continue delivering first-in-class live experiences to customers at Allied Esports’ branded properties worldwide.
Starting with the flagship esports arena, the HyperX Arena Las Vegas, the AE Studios in Germany, and its affiliate arenas in Australia,
Allied Esports offers 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 incredible esports content
with its on-site production facilities and studios and 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. Through this worldwide network of properties, Allied Esports believes it can offer customers an unmatched ability to participate
in simultaneous global esports events and offer sponsors and partners a truly scalable global platform and audience to promote their
businesses and products. Allied Esports’ flagship HyperX Arena Las Vegas serves as a marquee destination for esports fans globally
and has become one of the most recognized esports venues in the world.
Flagship
Arena. In March 2018, Allied Esports opened its first flagship arena, the HyperX Arena Las Vegas, at the Luxor Casino on the
Vegas strip, whose pyramid is one of the most visible landmarks in Las Vegas. This arena has 80 to 100 gaming stations, two bars, food
service, private rooms, a production facility, and space for up to 1,000 people for events. The arena is custom-built for esports
tournaments and has a broadcast-ready television studio to broadcast live events and produce content. Allied Esports monetizes the
arena through renting the space for live events; merchandise sales; daily usage fees from day-to-day gamers using the gaming stations;
tournament entry and player venue fees; food and beverage; and sponsorship (i.e., our HyperX naming rights relationship).
Affiliate
Arenas. One of Allied Esports’ strategic advantages is its global network of esports arena partners, which enables it to host
events and promote competitions around the world, with those competitions culminating in live events held at the flagship arena in Las
Vegas. Allied Esports achieves this through its Affiliate Program, which consists of strategic partnerships with third-party esports
operators around the globe. Allied Esports generally charges these affiliates an upfront fee and a minimal annual revenue share of gross
revenue, starting in the second year of the operation of the venue. Allied Esports’ brand visibility and reputation have already
resulted in affiliate arrangements with arenas and gaming centers in China and a multi-year agreement with Fortress Esports Pty
Ltd, a new gaming, esports and entertainment venue enterprise in Australia, which opened its first affiliate arena in Melbourne in March 2020
and reopened during the COVID-19 pandemic in December 2021. This network of affiliate arenas allows Allied Esports to scale
its brand penetration worldwide on a rapid basis, driving more gamers into the Allied Esports ecosystem, with minimal costs to Allied
Esports. Furthermore, the content that can be produced by these affiliate arenas can be on-sold by Allied Esports, with minimal
production costs.
Mobile
Arenas. The mobile arenas are 18-wheeler trucks that expand out into fully functional esports arenas with event hosting, broadcasting
and production capabilities. The mobility of the trucks makes them ideal for sponsors to reach a large audience in multiple locations
at an economical cost. The trucks serve as mobile billboards for potential third-party sponsorship, as well as the Allied Esports
brand, providing highly visible brand presence wherever they appear. Allied Esports currently has two mobile arena trucks, with the first
truck based in Germany and serving the European market, and a second truck based in Las Vegas and serving the U.S. market.
Multiplatform
Content: Leveraging Branded Properties and Strategic Partnerships to Develop Content
Allied
Esports’ worldwide network of branded esports properties provides Allied Esports with a platform to potentially develop a significant
amount of content to distribute via digital live streams, broadcast and cable, and social media outlets. Allied Esports believes that
its arenas will draw top-level esports talent (such as professional streamer Ninja, who was the featured talent at a successful
event at Allied Esports’ Las Vegas arena in April 2018) for purposes of hosting events and developing content, which it can
distribute live, post-produce into fully-produced episodic content, or repackage for over-the-top streaming platform and social
media distribution. Allied Esports intends to monetize the content in multiple ways, including direct sales of the content, sponsorship
revenue, and subscription and/or advertising fees for viewers of the content.
We
believe Allied Esports’ ecosystem of esports branded properties gives it the reach, reputation and experience to produce world-class live
events, in partnership with some of the most prominent names in the esports industry. These live events provide Allied Esports with the
material to produce exciting content that can be distributed via three different formats, each of which has its own revenue generation
model: live streaming, post-produced episodic content, and short-form repackaged content.
Live
Streaming. Live streaming of gaming content grew over 45% year-on-year on Twitch and Facebook Gaming to over 29.3 billion hours watched
in 2021 and is the most popular form of esports content delivery channel today, as it offers the best interactive experiences for the
audience. Vast improvements in technology and Internet service and speed have made live streaming with large audiences widely available
today. Well-known gamers live stream themselves playing their favorite games on any of the popular streaming services (Twitch, YouTube,
Facebook Gaming, etc.) to a worldwide audience. The streamers derive revenue from ad sales, sponsorship, subscription fees and gift payments
from spectators. Through Allied Esports’ ecosystem of esports arenas, Allied Esports can offer streamers a large platform to put
on live events that can be simultaneously streamed on both the streamer’s channels and on Allied Esports’ channels.
Post-Produced Content.
Allied Esports intends to develop esports entertainment programming around its live experiences and, using its experienced editing and
production teams, create serial, episodic content and segments that tell compelling storylines around its gaming talent, in person experiences,
and gaming events around the world. Allied Esports developed this technique through WPT, who took the slow-paced game of poker and
dramatized it and created storylines that made for exciting and compelling viewing. This post-produced content can be valuable real
estate for sponsors, as Allied Esports can integrate sponsors seamlessly into the show in a way that feels organic to the viewers. Allied
Esports can focus on different storylines, create excitement via editing and music inclusion, and generally elevate the production quality
from that achievable in a live stream. Allied Esports can then monetize this episodic content via sponsorship, advertising, selling the
content itself to third party distributors, or even use it as a marketing tool to drive customers to come to Allied Esports’ branded
properties, buy its merchandise or otherwise interact with Allied Esports.
Repackaged
Content. The library of content Allied Esports will develop from events can be cut into smaller clips that can be used as marketing
and promotion of the Allied Esports brand on social media. Allied Esports can also edit content to create new content, such as “best
of” shows, focusing on one particular game as played by multiple well-known streamers, regional shows focusing on talent from
a particular country, and so on.
Allied
Esports’ global branded esports properties ecosystem will create opportunities for live events which provide material to develop
great content, all of which Allied Esports can monetize in multiple ways. The large customer base Allied Esports develops through these
in-person experiences, live streams and content distribution will give it a customer base to launch interactive services.
Corporate
Organization
Our
principal offices are located at 745 Fifth Avenue, Suite 500, New York, NY 10151, and our telephone number at that office is (646) 768-4241.
Allied
Esports Entertainment Inc., (“AESE”), formerly known as Black Ridge Acquisition Corp, or “BRAC”, was incorporated
in Delaware on May 9, 2017 as a blank check company for the purpose of effecting a merger, share exchange, asset acquisition, share
purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities.
Allied Esports Media, Inc.
(“AEM”), a Delaware corporation, was formed in November 2018 to act as a holding company for Allied Esports International
Inc. (“Allied Esports”) and immediately prior to close of the Merger (as defined below) to also include Noble Link Global
Limited (“Noble Link”). Allied Esports, together with its subsidiaries described below owns and operates the esports-related businesses
of AESE. Noble Link (prior to the AEM Merger) and its wholly owned subsidiaries Peerless Media Limited, Club Services, Inc. and WPT Enterprises,
Inc. operated the poker-related business of AESE prior to their sale on July 12, 2021, and are collectively referred to herein as
“World Poker Tour” or “WPT.” Prior to the Merger, as described below, Noble Link and Allied Esports were subsidiaries
of Ourgame International Holdings Limited (“Ourgame”).
On
December 19, 2018, BRAC, Noble Link and AEM executed an Agreement and Plan of Reorganization (as amended from time to time, the
“Merger Agreement”). On August 9, 2019 (the “Closing Date”), Noble Link was merged with and into AEM, with
AEM being the surviving entity, which was accounted for as a common control merger (the “AEM Merger”). Further, on August 9,
2019, a subsidiary of AESE merged with AEM pursuant to the Merger Agreement, with AEM being the surviving entity (the “Merger”).
The Merger was accounted for as a reverse recapitalization, and AEM is deemed to be the accounting acquirer. Consequently, the assets
and liabilities and the historical operations that are reflected in the combined financial statements prior to the Merger are those of
Allied Esports and WPT.
The
Company operates through its wholly owned subsidiaries Allied Esports International, Inc., (“AEII”), Esports Arena Las Vegas,
LLC (“ESALV”) and Allied Esports GmbH (“AEGmbH”). 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. AEGmbH 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.
Our
fiscal year ends December 31. Neither we nor any of our predecessors have been in bankruptcy, receivership or any similar proceeding.
Regulation
Allied
Esports intends to offer subscribers the chance to win cash and prizes when playing esports games and tournaments on the esports gaming
platform it intends to develop. Similar to WPT, Allied Esports will be subject to the complicated laws and regulations in various states
or countries over sweepstakes, promotions and giveaways. Any negative finding of law regarding the characterization of the type of online
activity carried out on the esports gaming platform could limit or prevent Allied Esports’ ability to obtain subscribers in those
jurisdictions. In addition, Allied Esports is subject to a number of foreign and domestic laws and regulations that affect companies
conducting business on the Internet. In addition, laws and regulations relating to user privacy, data collection, retention, electronic
commerce, consumer protection, content, advertising, localization, and information security have been adopted or are being considered
for adoption by many jurisdictions and countries throughout the world.
Intellectual
Property
We
believe that to maintain a competitive advantage in the marketplace, we must develop and maintain protection of the proprietary aspects
of our technology and our intellectual property. We rely on trademarks and other measures to protect our intellectual property, and vigorously
defend such intellectual property as necessary (e.g. cease and desist letters directed to infringing third parties).
Allied
Esports has one (1) patent in the U.S. related to systems and methods for latency in networked competitive multiplayer gaming that was
issued by the UPSTO in July 2020. In addition to the patent, Allied Esports’ intellectual property portfolio includes the
following: (1) approximately sixty (60) registered domain names, and (2) approximately twenty-five (25) trademarks, including, but not
limited to, “Allied Esports” – which has been filed in the U.S., “Allied Esports” – which bold mark
has been filed in China and Europe; The “Allied Esports” logos – which have been filed in the U.S. and Europe; the
“Allied Esports Member Property Network” logo – which has been filed in the U.S., China, and Europe; the “Big Betty”
logos – which have been registered in Europe; “Esports Superstars” logo – which has been filed in the U.S.; “Legend
Series” logo – which has been filed in the U.S. and Europe; the “Allied Esports” emblem – which has been
filed in China and Europe, and “Glory Road” – which has been filed in the U.S. Allied Esports updates its intellectual
property portfolio from time to time as appropriate.
Competition
The
esports gaming industry is competitive. Competitors range from established leagues and championships owned directly, as well as leagues
franchised by well-known and capitalized game publishers and developers, interactive entertainment companies, diversified media companies
and emerging start-ups. New competitors will likely continue to emerge, and many of these competitors will have greater financial resources
than Allied Esports.
Territories
We
sell products and services throughout the world.
Employees
As of May 20, 2022, we had
approximately 88 employees, including 23 employees that operated under collective-bargaining agreements.
Item
1A. Risk Factors
Investing
in our securities involves a high degree of risk. You should carefully consider the specific risks described below before making an investment
decision. Any of the risks we describe below could cause our business, financial condition, results of operations or future prospects
to be materially adversely affected.
The
market price of our common stock could decline if one or more of these risks and uncertainties develop into actual events and you could
lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial
also may materially and adversely affect our business, financial condition, results of operations or future prospects. Amounts within
the “Risk Factors” section are stated in thousands with the exception of share information.
Allied
Esports Risk Factors
Allied
Esports is subject to risks associated with operating in a rapidly developing industry and a relatively new market.
Many
elements of Allied Esports’ business are unique, evolving and relatively unproven. Its business and prospects depend on the continuing
development of live streaming of competitive esports gaming. The market for esports gaming competition is relatively new and rapidly
developing and is subject to significant challenges. 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.
In addition, Allied Esports’ continued growth depends, in part, on its ability to respond to constant changes in the esports gaming
industry, including 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, and Allied Esports will
try to adapt its business model as needed to accommodate change and remain on the forefront of its competitors, Allied Esports may be
unsuccessful in doing so and does not provide any guarantees or assurances of success as the industry continues to evolve.
Allied
Esports may not be able to generate sufficient revenue to achieve and sustain profitability.
Allied
Esports 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).
In addition, Allied Esports expects to continue to incur significant legal, accounting and other expenses related to being a public company.
If its revenue declines or fails to grow at a rate faster than these increases in operating expenses, it will not be able to achieve
profitability in future periods. As a result, Allied Esports may generate losses. Allied Esports cannot assure you that it will achieve
profitability.
Allied
Esports generates a portion of its revenues from advertising and sponsorship. If it fails to attract more advertisers and sponsors to
its live events, tournaments or content, or if advertisers or sponsors are less willing to advertise with or sponsor Allied Esports,
its revenues may be adversely affected.
Allied
Esports generates revenue from advertising and sponsorship, and it expects to further develop and expand its focus on these revenues
in the future. These revenues partly depend on the advertisers’ willingness to advertise in the esports gaming industry. If the
esports gaming advertising and sponsorship market does not continue to grow, or if Allied Esports is unable to capture and retain a sufficient
share of that market, Allied Esports’ ability to achieve profitability may be materially and adversely affected. Furthermore, with
unfavorable economic external factors, sponsors and advertisers may not have enough budget allocations for spending in sponsorship and
advertising in esports, which would also lead to an adverse impact on Allied Esports’ revenue stream.
Allied
Esports’ business model may not remain effective and it cannot guarantee that its future monetization strategies will be successfully
implemented or generate sustainable revenues and profit.
Allied
Esports generates revenues from advertising and sponsorship of its live events, its content, the sale of merchandising, and the operation
of its esports arenas. Allied Esports has generated, and expects to continue to generate, a substantial portion of revenues using this
revenue model in the near term. Although Allied Esports anticipates growth in Allied Esports’ business utilizing this revenue model,
there is no guarantee that growth will continue in the future, and the demand for its offerings may change, decrease substantially or
dissipate, or it may fail to anticipate and serve esports gamer demands effectively. The COVID-19 outbreak may also continue to
cause the demand for our in-person events to reduce and shift demand to online gaming. Allied Esports may determine to enter into
new opportunities to expand its business, including online gaming platforms, which may or may not be successful. Any such expansions
involve additional risks and costs that could materially and adversely affect its business.
The
COVID-19 pandemic has disrupted the long-term growth plans of Allied Esports, and we may not be able to implement and grow our three-pillar
objectives for long-term success in the near future, or even at all.
The COVID-19 pandemic
has caused disruption in our long-term growth plans for Allied Esports, and although our long-term strategy remains to fully
implement the three-pillar strategy, we are currently focused on continuing our in-person experiences at our current arenas
and developing multiplatform content. There is no guarantee that we will be able in the near future or at any point to be able to expand
our in-person experience to arenas beyond those in which we are currently operating or develop an esports platform.
We hold
and may acquire digital assets that are subject to volatile market prices, impairment and unique risks of loss.
In March
2022, we initiated a roadmap to increase participation and enhance user experiences in our Allied Esports community. As part of the program,
we minted our own non-fungible tokens (“NFTs”) and linked them to digital art that we own, license, or otherwise have the
right to use. We accepted ether for the NFTs as a form of payment, and may accept ether for our products in the near future, subject to
applicable laws. We may hold or sell the ether upon receipt.
The
prices of digital assets have been in the past and may continue to be highly volatile due to various associated risks and uncertainties.
For example, the prevalence of such assets is a relatively recent trend, and their long-term adoption by investors, consumers, and businesses
is unpredictable. Moreover, their lack of a physical form, their reliance on technology for their creation, existence and transactional
validation and their decentralization may subject their integrity to the threat of malicious attacks and technological obsolescence. If
we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed.
Moreover,
digital assets are currently considered indefinite-lived intangible assets under applicable accounting rules, meaning that any decrease
in their fair values below our carrying values for such assets at any time subsequent to their acquisition will require us to recognize
impairment charges, whereas we may make no upward revisions for any market price increases until a sale, which may adversely affect
our operating results in any period in which such impairment occurs. There is no guarantee that future changes in GAAP will not require
us to change the way we account for digital assets held by us.
Digital
assets, as intangible assets without centralized issuers or governing bodies, have been, and may in the future be, subject to security
breaches, cyberattacks or other malicious activities, as well as human errors or computer malfunctions that may result in the loss or
destruction of private keys needed to access such assets. While we intend to take all reasonable measures to secure any digital assets,
if such threats are realized or the measures or controls we create or implement to secure our digital assets fail, it could result in
a partial or total misappropriation or loss of our digital assets, and our financial condition and operating results may be harmed.
At
this time, the regulation of digital assets 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.
Allied
Esports’ long-term growth strategy depends on the availability of suitable locations for its proprietary and licensed esports arenas
and its ability to open new locations and operate them profitably.
A
key element of Allied Esports’ long-term growth strategy is to extend its brand by opening additional flagship arenas throughout
the world and licensing the Allied Esports brand to third party esports arena operators, which it believes will provide attractive returns
on investment. However, desirable locations may not be available at an acceptable cost. Opening these additional locations will depend
upon a number of factors, many of which are beyond Allied Esports’ control, including its ability or the ability of the selected
licensee to:
|
● |
reach
acceptable agreements regarding the lease of the locations; |
|
● |
comply
with applicable zoning, licensing, land use and environmental regulations and orders (including those related to social distancing
policies during the COVID-19 pandemic); |
|
● |
raise
or have available an adequate amount of cash or currently available financing for construction and opening costs; |
|
● |
timely
hire, train and retain the skilled management and other employees necessary to meet staffing needs; |
|
● |
negotiate
acceptable terms with any unions representing employees; |
|
● |
obtain,
for acceptable cost, required permits and approvals, including liquor licenses; and |
|
● |
efficiently
manage the amount of time and money used to build and open each new location. |
If
Allied Esports succeeds in opening new arenas on a timely and cost-effective basis, it may nonetheless be unable to attract enough
gamers or spectators to the new location (or to existing locations of affiliated arenas) because its entertainment and menu options might
not appeal to them. Failure to do so could have a significant adverse effect on Allied Esports’ overall operating results.
Allied
Esports has not entered into definitive license agreements with all game publishers that it currently has relationships with, and it
may never do so.
Although
Allied Esports has relationships with many game publishers for tournament event and content experiences involving their respective intellectual
properties and enters into definitive license agreements with such game publishers from time to time, Allied Esports does not have definitive
license agreements in place with all of its game publishers. No assurances can be given as to when or if it will be able to come to agreeable
terms with game publishers for any future license agreements. If Allied Esports is unable to come to mutually agreeable terms and enter
into definitive license agreements with game publishers, game publishers may unilaterally choose to discontinue its relationship with
Allied Esports, thereby preventing Allied Esports from offering tournament event and content experiences using their game intellectual
property. Should game publishers choose not to allow Allied Esports to offer tournament event and content experiences involving their
intellectual property to Allied Esports’ customers, the popularity of Allied Esports’ tournaments and content may decline,
which could materially and adversely affect its results of operations and financial condition.
Even
if Allied Esports is able to license its brand to third party esports operators, there is a risk that those operators could damage its
brand by operating esports arenas that are not at Allied Esports’ standards of operation.
As
Allied Esports licenses the Allied Esports brand to third party esports arena operators around the world, it will depend on those operators
to run those arenas at a quality level similar to Allied Esports’ owned and operated arenas. Allied Esports’ strategy depends
on customers associating the third party esports arenas as part of Allied Esports’ network of affiliated arenas, which it believes
will expand its brand recognition and increase customers, revenue, and growth. If Allied Esports’ affiliate arenas are poorly operated,
or if those operators fail to use Allied Esports’ name and branding in a manner consistent with Allied Esports’ corporate
messaging and branding, or if there are safety issues or other negative occurrences at affiliate arenas, Allied Esports’ name and
brand could be significantly damaged, which would make its expansion difficult and materially adversely affect its results of operations
and financial condition.
Allied
Esports’ long-term growth strategy includes deploying additional mobile arenas in the U.S. and Europe to host its tournaments and
events and it must operate them profitably.
A
key element of Allied Esports’ long-term growth strategy is to extend its brand by increasing and adding to its portfolio
of mobile arenas in the U.S. and Europe, as we believe doing so will provide attractive returns on investment. Adding these mobile arenas
will depend upon a number of factors, many of which are beyond Allied Esports’ control, including but not limited to our ability,
or the ability of our licensees, to:
|
● |
reach
acceptable agreements regarding the lease or acquisition of the trucks that are the basis of the mobile arenas; |
|
● |
comply
with applicable zoning, licensing, land use and environmental regulations and orders (including those related to social distancing
policies during the COVID-19 pandemic) and obtain required permits and approvals; |
|
● |
raise
or have available an adequate amount of cash or currently available financing for construction of the mobile arenas and the related
operational costs; |
|
● |
timely
hire, train and retain the skilled management and other employees necessary to operate the mobile arenas; |
|
● |
efficiently
manage the amount of time and money used to build and operate each new mobile arena; and |
|
● |
manage
the risks of road hazards, accidents, traffic violations, etc. that may impede the operations of the mobile arenas. |
The
nature of hosting esports events exposes Allied Esports to negative publicity or customer complaints, including in relation to, among
other things, accidents, injuries or thefts at the arenas, and health and safety concerns.
Allied
Esports’ business of hosting esports events inherently exposes it to negative publicity or customer complaints as a result of accidents,
injuries or, in extreme cases, deaths arising from incidents occurring at our arenas, including health, safety or security issues, and
quality and service standards. Even isolated or sporadic incidents or accidents may have a negative impact on Allied Esports’ brand
image and reputation, the arenas’ popularity with gamers and spectators or the ability to host esports events at all.
Allied
Esports’ marketing and advertising efforts may fail to resonate with gamers.
Allied
Esports’ live events, tournaments and competitions are marketed through a diverse spectrum of advertising and promotional programs
such as online and mobile advertising, marketing through websites, event sponsorship and direct communications with the esports gaming
community including via email, blogs and other electronic means. An increasing portion of Allied Esports’ marketing activity is
taking place on social media platforms that are either outside, or not totally within, its direct control. Changes to gamer preferences,
marketing regulations, privacy and data protection laws, technology changes or service disruptions may negatively impact its ability
to reach target gamers. Allied Esports’ ability to market its tournaments and competitions is dependent in part upon the success
of these programs.
The
esports gaming industry is competitive, and gamers may prefer competitors’ arenas, leagues, competitions or tournaments over those
offered by Allied Esports.
The
esports gaming industry is competitive. Competitors range from established leagues and championships owned directly, as well as leagues
franchised by well-known and capitalized game publishers and developers, interactive entertainment companies, diversified media
companies and emerging start-ups. New competitors will likely continue to emerge. Many of these competitors may have greater financial
resources than Allied Esports. If Allied Esports’ competitors develop and launch competing arenas, leagues, tournaments or competitions,
Allied Esports’ revenue and margins could decline.
Allied
Esports may not provide events or tournaments with games or titles for which the esports gaming community is interested.
Allied
Esports must attract and retain the popular esports gaming titles in order to maintain and increase the popularity of its live events,
leagues, tournaments and competitions. Allied Esports must identify and license popular games that resonate with the esports gamer community
on an ongoing basis. Allied Esports cannot assure you that it can attract and license popular esports games from their publishers, and
failure to do so would have a material and adverse impact on Allied Esports’ results of operations and financial conditions.
If
Allied Esports fails to keep its existing gamers engaged, acquire new gamers and expand interest in its live events, leagues, tournaments
and competitions, its business, its ability to achieve profitability and its prospects may be adversely affected.
Allied
Esports’ success depends on its ability to maintain and grow the number of gamers attending its live events, tournaments and competitions,
and keep its gamers and attendees highly engaged. In order to attract, retain and engage gamers and remain competitive, Allied Esports
must continue to develop and expand its live events, leagues, produce engaging tournaments and competitions, and implement new content
formats, technologies and strategies to improve its product offerings. There is no assurance it will be able to do so.
A
decline in the number of gamers may adversely affect the engagement level of gamers with Allied Esports’ tournament and entertainment
platform under development may reduce our revenue opportunities and have a material and adverse effect on our business, financial condition
and results of operations.
It
is vital to Allied Esports’ operations that its planned online esports tournament and gaming subscriptions platform be responsive
to evolving gamer preferences and offer first-tier esports game content and other services that attracts gamers. Allied Esports
must also keep providing gamers new features and functions to enable superior content viewing and interaction, or the number of gamers
utilizing the platform will likely decline. Any decline in the number of gamers will likely have a material and adverse effect on our
operations.
There
is no guarantee that Allied Esports will be able to complete its planned online esports tournament and gaming subscription platform,
or that such platform once completed will be or remain popular.
Allied
Esports cannot assure you that the online esports tournament and gaming subscription platform it intends to develop will be completed
in a timely manner or, if completed, become popular with gamers to offset the costs incurred to operate and expand it. This will require
substantial costs and expenses. If such increased costs and expenses do not effectively translate into improved gamer engagement, Allied
Esports’ results of operations may be materially and adversely affected.
If
Allied Esports fails to maintain and enhance its brands, its business, results of operations and prospects may be materially and adversely
affected.
Allied
Esports believes that maintaining and enhancing its brands is important for its business to succeed by increasing the number of gamers
and engagement by the esports community. Since Allied Esports operates in a highly competitive market, brand maintenance and enhancement
directly affects its ability to maintain and enhance its market position. As Allied Esports expands, it may conduct various marketing
and brand promotion activities using various methods to continue promoting its brands, but it cannot assure you that these activities
will be successful. In addition, negative publicity, regardless of its veracity, could harm Allied Esports’ brands and reputation,
which may materially and adversely affect Allied Esports’ business, results of operations and prospects.
If
Allied Esports fails to anticipate and successfully implement new esports technologies or adopt new business strategies, technologies
or methods, its business may suffer.
Rapid
technology changes in the esports gaming market requires Allied Esports to anticipate, sometimes years in advance, which technologies
it must develop, implement and take advantage of in order to be and remain competitive in the esports gaming market. Allied Esports has
invested, and in the future may invest, in new business strategies including its to-be-developed online esports tournament and entertainment
subscription platform, technologies, products, or games to engage a growing number of gamers and deliver the best gaming experiences
possible. These endeavors involve significant risks and uncertainties, and no assurance can be given that the technology it adopts and
the features it pursues will be successful. If Allied Esports does not successfully implement these new technologies, its reputation
may be materially adversely affected and its financial condition and operating results may be impacted.
Allied
Esports uses third-party services in connection with its business, and any disruption to these services could result in a disruption
to its business, negative publicity and a slowdown in the growth of its users, materially and adversely affecting its business, financial
condition and results of operations.
Allied
Esports’ business depends on services provided by, and relationships with, various third parties, including cloud hosting, server
operators, broadband providers, and computing peripheral suppliers, among others. The failure of any of these parties to perform in compliance
with our agreements may negatively impact Allied Esports’ business.
Additionally, if such third parties
increase their prices, fail to provide their services effectively, terminate their service or agreements or discontinue their relationships
with Allied Esports, Allied Esports could suffer service interruptions, reduced revenues, or increased costs, any of which may have a
material adverse effect on its business, financial condition, and results of operations.
Allied
Esports may not be able to procure the necessary permits and licenses to operate its arenas.
Allied
Esports must obtain certain permits and licenses, including liquor licenses, to operate its arenas. Often these processes can be expensive
and time consuming. There is no guarantee that Allied Esports will be able to obtain such permits and licenses on a timely or cost-effective basis.
Any delays could jeopardize the ability of Allied Esports to operate the arenas and host events. As a result, Allied Esports’ business
could suffer.
Rules
and regulations governing sweepstakes, promotions and giveaways vary by state and country and these rules and regulations could restrict
or eliminate Allied Esports’ ability to generate revenues on its esports gaming platform it intends to develop, which could materially
and adversely impact the viability of this business.
As
part of its esports gaming platform to be developed, Allied Esports intends to offer subscribers the chance to win cash and prizes when
playing esports games and tournaments on the platform. Awarding cash and prizes would require compliance with the laws or regulations
in various states or countries over sweepstakes, promotions and giveaways, which are complex and constantly changing. Any negative finding
of law regarding the characterization of the type of online activity carried out on the esports gaming platform could limit or prevent
Allied Esports’ ability to obtain subscribers in those jurisdictions, which in turn could significantly impact Allied Esports’
ability to generate revenue. The ability or willingness to work with Allied Esports by payment processors and other service providers
necessary to conduct the esports gaming platform business also may be limited due to such changes in laws or any perceived negative consequences
of engaging in the business of sweepstakes, promotions and giveaways that will be utilized by the esports gaming platform.
Negotiations
with unionized employees could delay opening or operating Allied Esports’ arenas.
Certain
of Allied Esports’ employees are represented by one or more unions. Allied Esports will need to engage such unions to seek to employ
the services of the employees on mutually acceptable terms. However, Allied Esports cannot guarantee that such negotiations will be timely
concluded to avoid interruption in its tournament schedule, or that such negotiations will ultimately result in an agreement. Any failure
to timely conclude the negotiations could cause a delay in Allied Esports’ ability to timely open arenas or host events. Either
of these events would adversely affect Allied Esports’ ability to achieve profitability.
Allied
Esports’ business is subject to regulation, and changes in applicable regulations may negatively impact its business.
Allied
Esports is subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet.
In addition, laws and regulations relating to user privacy, data collection, retention, electronic commerce, consumer protection, content,
advertising, localization, and information security have been adopted or are being considered for adoption by many jurisdictions and
countries throughout the world. These laws could harm Allied Esports’ business by limiting the products and services it can offer
consumers or the manner in which it offers them. The compliance costs for these laws may increase in the future as a result of changes
in interpretation. Furthermore, Allied Esports’ failure to comply with these laws or the application of these laws in an unanticipated
manner may harm its business and result in penalties or significant legal liability.
Allied
Esports has historically operated at a net loss on a consolidated basis, and there is no guarantee that that it will be able to be profitable.
The historical operations of
Allied Esports have resulted in net losses from continuing operations of $15.1 million and $45.8 million for the years ended December 31,
2021 and 2020, respectively. We do not know with any degree of certainty whether or when the consolidated operations of Allied Esports
will become profitable. Even if we are able to achieve profitability in future periods, we may not be able to sustain or increase our
profitability in successive periods.
We
have formulated our business plans and strategies based on certain assumptions regarding the acceptance of our business model and the
marketing of our products and services. Nevertheless, our assessments regarding market size, market share, market acceptance of our products
and services and a variety of other factors may prove incorrect. Our future success will depend upon many factors, including factors
beyond our control and those that cannot be predicted at this time.
Forecasts
of our market and market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth,
there can be no assurance that our business will grow at similar rates, or at all.
Growth
forecasts included in SEC filings relating to our market opportunities and the expected growth in those markets are subject to significant
uncertainty and are based on assumptions and estimates which may prove to be inaccurate. We also plan to operate in a number of foreign
markets, and a downturn in any of those markets could have a significant adverse effect on our businesses. Even if these markets meet
our size estimate and experiences the forecasted growth, we may not grow our business at a similar rate, or at all. Our growth is subject
to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly,
the forecasts of market growth should not be taken as indicative of our future growth.
Any
actual or perceived failure by us to comply with our privacy policies or legal or regulatory requirements in one or multiple jurisdictions
could result in proceedings, actions or penalties against us.
Allied
Esports has implemented various features intended to better comply with applicable privacy and security requirements in the collection
and use of customer data, but these features do not ensure compliance and may not be effective against all potential privacy and data
security concerns. A wide variety of domestic and foreign laws and regulations apply to the collection, use, retention, protection, disclosure,
transfer, disposal and other processing of personal data. These data protection and privacy-related laws and regulations are evolving
and may result in regulatory and public scrutiny and escalating levels of enforcement and sanctions. Our failure to comply with applicable
laws and regulations, or to protect any personal data, could result in enforcement actions against us, including fines, claims for damages
by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers and
prospective customers), any of which could adversely affect our business, operating results, financial performance and prospects.
Evolving
and changing definitions of personal data and personal information within the European Union (“EU”), the United States
and elsewhere may limit or inhibit our ability to operate or expand our business. In jurisdictions outside of the United States,
we may face data protection and privacy requirements that are more stringent than those in place in the United States. We are at
risk of enforcement actions taken by certain EU data protection authorities until such point in time that we may be able to ensure that
all transfers of personal data to us in the United States from the EU are conducted in compliance with all applicable regulatory
obligations, the guidance of data protection authorities and evolving best practices. The European General Data Protection Regulation
(“GDPR”) may impose additional obligations, costs and risks upon our business. The GDPR may increase substantially the penalties
to which we could be subject in the event of any non-compliance. In addition, we may incur substantial expense in complying with the
obligations imposed by the GDPR and we may be required to make significant changes in our business operations, all of which may adversely
affect our revenues and our business overall.
Loss,
retention or misuse of certain information and alleged violations of laws and regulations relating to privacy and data security, and
any relevant claims, may expose us to potential liability and may require us to expend significant resources on data security and in
responding to and defending such allegations and claims. In addition, future laws, regulations, standards and other obligations, and
changes in the interpretation of existing laws, regulations, standards and other obligations could impair our ability to collect, use
or disclose data relating to individuals, which could increase our costs and impair our ability to maintain and grow our customer base
and increase our revenue.
Allied
Esports publicly posts its privacy policies and practices concerning processing, use and disclosure of the personally identifiable information
provided to it by website visitors. Publication of such privacy policies and other statements published that provide promises and assurances
about privacy and security can subject us to potential state and federal action if they are found to be deceptive or misrepresentative
of actual policies and practices or if actual practices are found to be unfair. Evolving and changing definitions of what constitutes
“Personal Information” and “Personal Data” within the EU, the United States and elsewhere, especially relating
to classification of IP addresses, machine or device identification numbers, location data and other information, may limit or inhibit
our ability to operate or expand our business, including limiting technology alliance relationships that may involve the sharing of data.
Our
failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new business initiatives
in the future could reduce our ability to compete successfully and harm our operating results.
In
the future we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms,
if at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests.
If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force
us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we cannot raise
capital on acceptable terms, or at all, we may not be able to, among other things:
|
● |
develop
and enhance our products and services; |
|
● |
continue
to expand our network of arenas; |
|
● |
hire,
train and retain employees; |
|
● |
respond
to competitive pressures or unanticipated working capital requirements; or |
|
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pursue
acquisition opportunities. |
Although
we have been able to fund our current working capital requirements through operations, debt and equity financing, there is no assurance
that we will be able to do so in the future.
Our
business depends substantially on the continuing efforts of our executive officers, key employees and qualified personnel, and our business
operations may be severely disrupted if we lose the services of such personnel.
Our
future success depends substantially on the continued efforts of our executive officers and key employees. If one or more of our executive
officers or key employees are unable or unwilling to continue their services with us, we might not be able to replace them easily, in
a timely manner, or at all. Since the esports gaming industry is characterized by high demand and intense competition for talent, we
cannot assure you that we will be able to attract or retain qualified staff or other highly skilled employees. If any of our executive
officers or key employees terminate their services with us, our business may be severely disrupted, our financial condition and results
of operations may be materially and adversely affected and we may incur additional expenses to recruit, train and retain qualified personnel.
We
may experience security breaches and cyber threats.
We
face cyber risks and threats that could damage, disrupt or allow third parties to gain improper access to our networks and platforms,
supporting infrastructure, intellectual property and other assets. In addition, we rely on technological infrastructure, including third
party cloud hosting and broadband, provided by third party business partners to support the functionality of our platforms and content
distribution. These business partners are also subject to cyber risks and threats. Such cyber risks and threats may be difficult to detect.
The techniques that may be used to obtain unauthorized access or disable, degrade, exploit or sabotage these networks and gaming platforms
change frequently and often are not detected. Our systems and processes and those of our third-party business partners may not be
adequate. Any failure to prevent or mitigate security breaches or cyber risks, or respond adequately to a security breach or cyber risk,
could result in interruptions to our platforms, degrade the gamer/user experiences, cause gamers/users to lose confidence in our platforms
and cease utilizing them, as well as significant legal and financial exposure. This could harm our business and reputation, disrupt our
relationships with partners and diminish our competitive position.
Global
health threats, such as the current COVID-19 pandemic, could have a material adverse effect on our business.
Our
business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of
the COVID-19 respiratory illness first identified in Wuhan, Hubei Province, China. A significant outbreak of contagious diseases
in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of
many countries, resulting in an economic downturn that could affect demand for our products and services.
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. Allied Esports 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, Allied Esports was 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
Related to Allied Esports’ Intellectual Property
Allied
Esports licensed certain brand names under agreements that have expired and may also be subject to claims of infringement of third-party
intellectual property rights.
Allied
Esports’s license with a third party to use the names “Esports Arena Las Vegas” and “Esports Arena Drive”,
which are part of the branding for its Las Vegas flagship esports arena location and its US-based mobile arena, respectively, ended
in July 2021. Although Allied Esports intends to market and promote its esports arenas using intellectual property it owns and controls,
and is discontinuing use of such branding, there are no assurances that those efforts will be fruitful and that it will be able to maintain
brand awareness once the license expires.
Furthermore,
third parties may claim that Allied Esports has infringed their intellectual property rights. Although Allied Esports takes steps to
avoid violating the intellectual property rights of others, it is possible that third parties still may claim infringement. Infringement
claims against us, whether valid or not, may be expensive to defend and divert the attention of Allied Esports’ management and
employees from business operations. Such claims or litigation could require Allied Esports to pay damages, royalties, legal fees and
other costs. Allied Esports also could be required to stop offering, distributing or supporting esports games, its to-be-developed gaming
platform or other features or services which incorporate the affected intellectual property rights, redesign products, features or services
to avoid infringement, or obtain a license, all of which could be costly and harm its business.
Allied
Esports’ technology, content and brands are subject to the threat of piracy, unauthorized copying and other forms of intellectual
property infringement.
Allied
Esports regards its technology, content and brands as proprietary and takes measures to protect it from infringement. Piracy and other
forms of unauthorized copying and use of technology, content and brands are persistent, and policing is difficult. Further, the laws
of some countries do not protect intellectual property rights to the same extent as the laws of the United States, or are poorly
enforced. Legal protection of Allied Esports’ rights may be ineffective in such countries, which could have a material adverse
effect on its business, financial condition and results of operations.
Allied
Esports may not be able to prevent others from unauthorized use of its intellectual property, which could harm our business and competitive
position.
Allied
Esports regards its registered trademark and pending trademarks, service marks, pending patents, domain names, trade secrets, proprietary
technologies and similar intellectual property as critical to its success. Allied Esports relies on trademark and patent law, trade secret
protection and confidentiality and license agreements with its employees and others to protect its proprietary rights.
Allied
Esports has invested significant resources to develop its own intellectual property and acquire licenses to use and distribute the intellectual
property of others. Failure to maintain or protect these rights could harm its business. In addition, any unauthorized use of our intellectual
property by third parties may adversely affect its current and future revenues.
Allied
Esports may not be able to develop compelling intellectual property content or secure media content distributors to promote, sell, and
distribute such content, which could harm its business and competitive position.
Allied
Esports intends to produce licensable content from the various live events, tournaments, and its own initiatives and brands to sell to
viewers worldwide. There is no guarantee that it will be able to develop content that is compelling to its targeted customers. Media
and gaming company competitors, many of which are better funded, are also creating content from esports events, and it will be difficult
to create content that stands out and attracts customers. Furthermore, to carry out Allied Esports’ worldwide distribution plans,
film and media distribution partners will be needed and, in the event, Allied Esports is not able to secure content distributors on terms
acceptable to Allied Esports, this will have a significant adverse impact on revenue streams from the sale or licensing of intellectual
property.
General
Risk Factors
The
Company is a company with cash, investments, and our esports business, which may prove difficult for investors to evaluate our ability
to achieve stated business objectives.
As
a result of our sale of the WPT business in July 2021, we have disposed of substantially all of our operating assets other than cash,
investments and our esports business. The Company recently announced that its Board of Directors has decided to explore strategic options
for the esports business in order to maximize its value to stockholders, including a possible sale, and the Company has engaged a financial
advisor to assist with the process. If the Company pursues and ultimately completes a sale of the esports business, we would then become
a development stage company with no historic operating results. In that situation we would expect to proceed (likely under a new name)
as a publicly traded holding company focused on using our cash resources to explore opportunities in online entertainment, including
but not limited to, real money gaming and other gaming sectors; however, we do not plan to limit ourselves to any particular industry
or geographic location in its efforts to identify prospective target businesses. Currently, however, we have no specific merger, asset
acquisition, reorganization or other business combination under consideration or contemplation. We may be unsuccessful in pursuing acquisition
targets, or acquisition targets, if acquired, may not prove to have successful operations.
We
have no current plans to pay cash dividends on our common stock; as a result, you may not receive any return on investment unless you
sell your common stock for a price greater than that which you paid for it.
We
have no current plans to pay dividends on our common stock with the proceeds of the WPT sale transaction. Any future determination to
pay dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors,
including our financial condition, results of operations, capital requirements, contractual, legal, tax and regulatory restrictions,
general business conditions and other factors that our board of directors may deem relevant. As a result, you may not receive any return
on an investment in our common stock unless you sell your common stock for a price greater than that which you paid for it.
The
market price of shares of our common stock may be volatile, which could cause the value of your investment to decline.
The
market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience
significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could
reduce the market price of shares of our common stock regardless of our operating performance. In addition, our operating results could
be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly
operating results or dividends, if any, to stockholders, additions or departures of key management personnel, failure to meet analysts’
earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed
changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to
any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation
in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic
partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals,
and, in response, the market price of shares of our common stock could decrease significantly. You may be unable to resell your shares
of common stock at or above a price you feel is appropriate.
In
the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility
in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted
against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s
attention and resources.
If
our operating and financial performance in any given period does not meet the guidance that we provide to the public, the market price
of our common stock may decline.
We
may, but are not obligated to, provide public guidance on our expected operating and financial results for future periods. Any such guidance
will be comprised of forward-looking statements subject to the risks and uncertainties described in our public filings and public
statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic
uncertainty. If, in the future, our operating or financial results for a particular period do not meet any guidance we provide or the
expectations of investment analysts, or if we reduce our guidance for future periods, the market price of our common stock may decline
as well. Even if we do issue public guidance, there can be no assurance that we will continue to do so in the future.
We
incur increased costs and are subject to additional regulations and requirements as a result of being a public company, which could lower
our profits or make it more difficult to run our business.
As
a public company, we incur significant legal, accounting and other expenses that are not incurred by private companies, including costs
associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act,
and related rules implemented by the SEC and the Nasdaq Capital Market. The expenses generally incurred by public companies for reporting
and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance
costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with
any degree of certainty. These laws and regulations also may make it more difficult or costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and
retain qualified persons to serve on our Board of Directors, on our board committees or as our executive officers. Furthermore, if we
are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock on the Nasdaq market,
fines, sanctions and other regulatory action and potentially civil litigation.
Through
its wholly-owned subsidiary Primo Vital Limited, Ourgame International Holdings Limited (“Ourgame”) owns a significant percentage
of our outstanding common stock, enabling it to exert significant influence over our operations and activities, which may affect the
trading price of our common stock.
According
to its SEC filings, Ourgame, through Primo Vital Limited, beneficially owns and controls approximately 35.8% of our outstanding common
stock. Primo Vital Limited is entitled to full voting rights with respect to the shares of common stock that it owns. This concentrated
ownership enables Ourgame to exert significant influence over all matters requiring stockholder votes, including: the election of directors;
mergers, consolidations, acquisitions and other strategic transactions; the sale of all or substantially all of our assets and other
decisions affecting our capital structure; amendments to our Certificate of Incorporation or our bylaws; and our winding up and dissolution.
The interests of Ourgame may not always coincide with our interests or the interests of our other stockholders, and Ourgame’s
influence may delay, deter or prevent acts that would be favored by us or our other stockholders. This concentration of ownership may
also have the effect of delaying, preventing or deterring a change in control of the Company. Also, Ourgame may seek to cause us to take
courses of action that, in its judgment, could enhance its investments in us, but which might involve risks to our other stockholders
or adversely affect us or our other stockholders. As a result, the market price of our shares could decline. In addition, this concentration
of share ownership may adversely affect the trading price of our shares because prospective investors may perceive disadvantages in owning
shares in a company such as our company with such a significant stockholder.
We
are an “emerging growth company,” and the reduced public company reporting requirements applicable to emerging growth companies
may make our common stock less attractive to investors.
We
qualify as an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company,
we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that
are not emerging growth companies. These provisions include, but are not limited to: being permitted to have only two years of audited
financial statements and only two years of related selected financial data and management’s discussion and analysis of financial
condition and results of operations disclosure; an exemption from compliance with the auditor attestation requirement in the assessment
of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; not being required to comply
with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s
report providing additional information about the audit and the financial statements; reduced disclosure obligations regarding executive
compensation arrangements in our periodic reports, registration statements and proxy statements; and exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved. In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with
new or revised accounting standards applicable to public companies. We intend to take advantage of the exemptions discussed above. As
a result, the information we provide will be different than the information that is available with respect to other public companies.
In our SEC filings, we do not include all of the executive compensation-related information that would be required if we were not
an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions.
If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock,
and the market price of our common stock may be more volatile.
We
will remain an emerging growth company until the earliest of (i) the end of our 2022 fiscal year, (ii) the first fiscal year
after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period,
issued more than $1.00 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market
value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.
Our
failure to achieve and maintain an effective system of disclosure controls and internal control over financial reporting could adversely
affect our financial position and lower our stock price.
As
a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations
of the applicable listing standards of Nasdaq. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure
controls and procedures and internal control over financial reporting. Effective internal controls are necessary for us to provide reliable
financial reports. Nevertheless, all internal control systems, no matter how well designed, have inherent limitations. Even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management identified the following
material weaknesses in internal controls as of December 31, 2020, which persist as of December 31, 2021:
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inadequate
internal controls, including inadequate segregation of duties, over the preparation and review of the consolidated financial statements
and untimely annual closings of the books; |
|
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inadequate
information technology general controls as it relates to user access and change management. |
As
a company with limited accounting resources, a significant amount of management’s time and attention has been and will be diverted
from our business to work toward compliance with these regulatory requirements. This diversion of management’s time and attention
may have a material adverse effect on our business, financial condition and results of operations.
These
material weaknesses and any significant deficiencies could harm our operating results or cause us to fail to meet our reporting obligations
and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal
control over financial reporting also could adversely affect the results of periodic management evaluations and any annual independent
registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that
we may be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures
and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information,
which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet
these requirements, we may not be able to maintain our common stock listing on Nasdaq.
Increases
in interest rates may cause the market price of our common stock to decline.
While
interest rates have in recent years been at record low levels, the likely return to increases in interest rates may cause a corresponding
decline in demand for equity investments. Any such increase in interest rates or reduction in demand for our common stock resulting from
other relatively more attractive investment opportunities may cause the market price of our common stock to decline.
If
securities or industry analysts do not publish research or reports about our business or publish negative reports, the market price of
our common stock could decline.
The
trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about
us or our business. If one of more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose
visibility in the financial markets, which in turn could cause the market price or trading volume of our common stock to decline. Moreover,
if one or more of the analysts who cover us downgrades our common stock or if our reporting results do not meet their expectations, the
market price of our common stock could decline.
You
will be diluted by the future issuance of common stock, preferred stock, or securities convertible into common or preferred stock, in
connection with our incentive plans, acquisitions, capital raises or otherwise.
Our
amended and restated certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and
appreciation rights relating to common stock for the consideration and on the terms and conditions established by our Board of Directors
in its sole discretion, whether in connection with acquisitions or otherwise.
In
the future, we expect to obtain financing or to further increase our capital resources by issuing additional shares of our capital stock
or offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity or shares
of preferred stock. Issuing additional shares of our capital stock or other equity securities or securities convertible into equity may
dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Debt securities
convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number
of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions
or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our
decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may
adversely affect the amount, timing or nature of our future offerings. As a result, holders of our common stock bear the risk that our
future offerings may reduce the market price of our common stock and dilute their stockholdings in us.
Additionally,
we have reserved an aggregate of 3,763,305 shares of common stock for issuance under our 2019 Equity Incentive Plan (as amended,
the “2019 Plan”). Any common stock that we issue, including under our 2019 Plan or other equity incentive plans that we may
adopt in the future, would dilute the percentage ownership held by our common stockholders. We have filed an effective registration statement
on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable
for shares of our common stock issued pursuant to our 2019 Plan. Accordingly, shares registered under such registration statement will
be available for sale in the open market upon issuance.
The
Company’s amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, the Court of
Chancery of the State of Delaware will be the exclusive forum for certain legal actions between the Company and its stockholders, which
could limit the Company’s stockholders’ ability to obtain a judicial forum viewed by the stockholders as more favorable for
disputes with the Company or the Company’s directors, officers or employees.
The
Company’s Certificate of Incorporation, as amended, provides that unless the Company consents in writing to the selection of an
alternative forum, the sole and exclusive forum for any stockholder (including a beneficial owner) to bring (i) any derivative action
or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director,
officer or other employee of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim
arising pursuant to any provision of the Delaware General Corporation Law or the Certificate of Incorporation, as amended, or the Company’s
Bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be the Court of Chancery of the State
of Delaware (or if the Court of Chancery does not have jurisdiction, another state court located within the State of Delaware, or if
no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) in all
cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. This exclusive forum
provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act. It could apply, however, to a suit
that falls within one or more of the categories enumerated in the exclusive forum provision and asserts claims under the Securities Act,
inasmuch as Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought
to enforce any duty or liability created by the Securities Act or the rule and regulations thereunder. There is uncertainty as to whether
a court would enforce such provision with respect to claims under the Securities Act, and our stockholders will not be deemed to have
waived our compliance with the federal securities laws and the rules and regulations thereunder.
Any
person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented
to these provisions. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum
of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our
directors, officers and other employees.
If
a court were to find the choice of forum provision contained in our Certificate of Incorporation, as amended, to be inapplicable or unenforceable
in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business,
results of operations, and financial condition. Even if we are successful in defending against these claims, litigation could result
in substantial costs and be a distraction to the Company’s management.
Our
Board of Directors’ ability to issue undesignated preferred stock and the existence of anti-takeover provisions may depress the
value of our common stock.
The
Company’s authorized capital includes 1,000,000 shares of undesignated preferred stock. Our Board has the power to issue any
or all of the shares of preferred stock, including the authority to establish one or more series and to fix the powers, preferences,
rights and limitations of such class or series, without seeking stockholder approval, subject to certain limitations on this power under
Nasdaq listing requirements. Further, as a Delaware corporation, we are subject to provisions of the Delaware General Corporation Law
regarding “business combinations.” We may, in the future, consider adopting additional anti-takeover measures. The authority
of our Board to issue undesignated stock and the anti-takeover provisions of Delaware law, as well as any future anti-takeover measures
adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of our company that
are not approved by our Board. As a result, our stockholders may lose opportunities to dispose of their shares at favorable prices generally
available in takeover attempts or that may be available under a merger proposal and the market price, voting and other rights of the
holders of common stock may also be affected.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
The
Company’s main offices are licensed and are located at 745 Fifth Avenue, Suite 500, New York, NY 10151. The Company considers this
office space adequate for its current office operations. The initial term will expire July 31, 2022, and the Company may continue on
a month-to-month basis thereafter.
Allied Esports operates its
flagship arena, the HyperX Esports Arena Las Vegas, at the Luxor Casino on the Vegas strip, whose pyramid is one of the most visible landmarks
in Las Vegas. This arena has 80 to 100 gaming stations, two bars, food service, private rooms, a production facility, and space for up
to 1,000 people for events. The arena is custom-built for esports tournaments and has a broadcast-ready television studio to broadcast
live events and produce content. The lease term expires on May 23, 2023 and the Company pays base rent of $125,000 per month.
Item
3. Legal Proceedings
See “Resolution of Expense
Reimbursement Claims” set forth in Item 9B of this Annual Report.
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, except as set forth above, the outcome of these matters, either individually or collectively, will
have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Item
4. Mine Safety Disclosures
Not
applicable.
Notes
to Consolidated Financial Statements
Note
1 – Background and Basis of Presentation
Allied
Esports Entertainment Inc., (“AESE” and formerly known as Black Ridge Acquisition Corp, or “BRAC”) was incorporated
in Delaware on May 9, 2017. 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, prior to the sale of WPT on July
12, 2021 (See Note 3 – Sale of WPT), 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 in Europe that serves as both a battleground and content generation hub and
also operates a studio for recording and streaming gaming events.
AESE’s
previous 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”. The
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 100% of the capital stock of its wholly owned
subsidiary, CSI. CSI owns 100% of each of the legal entities which comprise the World Poker Tour. On July 12, 2021, the Company consummated
the sale of the World Poker Tour business (see Note 3 – Sale of WPT for additional information).
As
a result of the Company’s sale of WPT, the Consolidated Balance Sheet as of December 31, 2020, the Consolidated Statements of Operations,
the Consolidated Statements of Comprehensive Income (Loss), and the Consolidated Statements of Cash Flows for the years ended December
31, 2021 and 2020, present the results of World Poker Tour as discontinued operations and the related assets and liabilities are presented
as assets and liabilities of discontinued operations.
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.
Note
2 – Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been derived from the accounting records of AESE and its consolidated subsidiaries.
All significant intercompany balances have been eliminated in the consolidated financial statements. The consolidated financial statements
have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to
the accounting rules and regulations of the United States Securities and Exchange Commission (“SEC”).
Use
of Estimates
Preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the financial
statements. The Company’s significant estimates used in these financial statements include, but are not limited to, the valuation
and carrying amount of intangible assets, accounts receivable reserves, the valuation of investments, stock-based compensation, warrants
and deferred tax assets, as well as the recoverability and useful lives of long-lived assets, including intangible assets and property
and equipment. Certain of the Company’s estimates could be affected by external conditions, including those unique to the Company
and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates
and could cause actual results to differ from those estimates.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Cash
and Cash Equivalents
All
short-term investments of the Company that have a maturity of three months or less when purchased are considered to be cash equivalents.
There were no cash equivalents as of December 31, 2021 or 2020.
Restricted
Cash
Restricted
cash consists of cash held in an escrow account to be utilized for various approved strategic initiatives and esports event programs
pursuant to an agreement with Brookfield Property Partners. See Note 12 – Commitments and Contingencies, Investment Agreements.
Accounts
Receivable
Accounts
receivable are carried at their contractual amounts. Management establishes an allowance for doubtful accounts based on its historic
loss experience and current economic conditions. Losses are charged to the allowance when management deems further collection efforts
will not produce additional recoveries. As of December 31, 2021 and 2020, there was no allowance for doubtful accounts.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation using the straight-line method over their estimated useful lives once
the asset is placed in service. Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the
remaining lease term (including renewal periods that are reasonably assured). Expenditures for maintenance and repairs which do not extend
the economic useful life of the related assets are charged to operations as incurred, and expenditures which extend the economic life
are capitalized. When assets are retired or otherwise disposed of, the costs and related accumulated depreciation or amortization are
removed from the accounts and any gain or loss on disposal is recognized in the statement of operations for the respective period.
The
estimated useful lives of property and equipment are as follows:
Office
equipment |
|
3 - 5 years |
|
Computer
equipment |
|
3 - 5 years |
|
Production
equipment |
|
5 years |
|
Furniture
and fixtures |
|
3 - 5 years |
|
Esports
gaming truck |
|
5 years |
|
Leasehold
improvements |
|
10 years |
|
Intangible
Assets
The
Company’s intangible assets consist of the Allied Esports trademarks, which are being amortized over a useful life of 10 years.
Intangible assets with indefinite lives are not amortized but are evaluated at least annually for impairment and more often whenever
changes in facts and circumstances may indicate that the carrying value may not be recoverable.
Impairment
of Long-Lived Assets
The
Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company measures the carrying amount of the asset against the estimated undiscounted future cash
flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated,
an impairment loss would be recognized for the amount by which the carrying value of the asset exceeds its fair value. The evaluation
of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These
assumptions require significant judgment and actual results may differ from assumed and estimated amounts.
During
the year ended December 31, 2020, the Company recognized an impairment of $6,138,631 related to certain investments, and an impairment
of $5,595,557 related to property and equipment, due to management’s determination that the future cash flows from these assets
are not expected to be sufficient to recover their carrying value. No impairment costs were recognized during the year ended December
31, 2021.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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 December 31, 2021 and 2020, the fair value of warrant liabilities related to our Sponsor Warrants totaled $3,200 and $3,000, respectively,
which is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheet. See Note 7 –
Accrued Expenses and Other Current Liabilities.
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).
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
Sponsor Warrants are carried at fair value as of December 31, 2021 and 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.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
following is a roll forward of the Company’s Level 3 instruments:
Balance, January 1, 2020 |
|
$ |
3,000 |
|
Change in fair value of sponsor warrants |
|
|
- |
|
Balance, December 31, 2020 |
|
|
3,000 |
|
Change in fair value of sponsor warrants |
|
|
200 |
|
Balance, December 31, 2021 |
|
$ |
3,200 |
|
The
key inputs into the Black-Scholes model at the relevant measurement dates were as follows:
|
|
December 31,
|
|
Input |
|
2021 |
|
|
2020 |
|
Risk-free
rate |
|
|
0.97 |
% |
|
|
0.27 |
% |
Remaining
term in years |
|
|
2.61 |
|
|
|
3.61 |
|
Expected
volatility |
|
|
46.0 |
% |
|
|
42.0 |
% |
Exercise
price |
|
$ |
11.50 |
|
|
$ |
11.50 |
|
Fair
value of common stock |
|
$ |
1.81 |
|
|
$ |
1.58 |
|
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than
not that the assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
the statements of operations in the period that includes the enactment date.
The
Company recognizes the tax benefit from an uncertain income tax position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement by examining taxing authorities.
The
Company’s policy is to recognize interest and penalties accrued on uncertain income tax positions in interest expense in the Company’s
statements of operations. As of December 31, 2021 and 2020, the Company had no liability for unrecognized tax benefits. The Company does
not expect the unrecognized tax benefits to change significantly over the next 12 months.
Commitments
and Contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable
that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Net
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 potential (a) exercise
of outstanding stock options and warrants; (b) the conversion of convertible instruments; and (c) vesting of restricted stock awards.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to 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:
|
|
As
of December 31, |
|
|
|
2021 |
|
|
2020 |
|
Restricted
common shares |
|
|
80,000 |
|
|
|
199,143 |
|
Options |
|
|
2,415,000 |
|
|
|
2,430,000 |
|
Warrants |
|
|
20,091,549 |
|
|
|
20,091,549 |
|
Convertible
debt |
|
|
- |
|
|
|
439,811 |
(1) |
Equity
purchase options |
|
|
600,000 |
|
|
|
600,000 |
|
Contingent
consideration shares(2) |
|
|
192,308 |
|
|
|
269,231 |
|
|
|
|
23,378,857 |
|
|
|
24,029,734 |
|
| (1) | Common stock equivalents associated with convertible debt were calculated based on the fixed conversion price in effect for voluntary holder conversions; however, for certain convertible notes there is a variable conversion price in effect under certain scenarios that is equal to 87% of lowest daily volume weighted average price over the prior ten days, subject to a $0.734 floor price. If the applicable convertible note principal and guaranteed interest were all converted at the floor price, the potentially dilutive shares related to convertible debt would be 1,154,789 shares. |
| (2) | 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.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In-person
revenue was comprised of the following for the years ended December 31, 2021 and 2020:
|
|
For
the Years Ended |
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
Event
revenue |
|
$ |
2,459,613 |
|
|
$ |
574,536 |
|
Sponsorship
revenue |
|
|
779,487 |
|
|
|
1,730,198 |
|
Food
and beverage revenue |
|
|
446,202 |
|
|
|
310,826 |
|
Ticket
and gaming revenue |
|
|
480,519 |
|
|
|
349,526 |
|
Merchandising
revenue |
|
|
35,338 |
|
|
|
22,209 |
|
Other
revenue |
|
|
100 |
|
|
|
1,068 |
|
Total
in-person revenue |
|
$ |
4,201,259 |
|
|
$ |
2,988,363 |
|
Multiplatform
revenue
The
Company’s multiplatform content revenue is comprised of $754,781 and $222,442 as of December 31, 2021 and 2020, respectively, of
distribution revenue. 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 consolidated statements of operations:
|
|
For
the Years Ended |
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
Revenues
Recognized at a Point in Time: |
|
|
|
|
|
|
|
|
Event
revenue |
|
$ |
2,459,613 |
|
|
$ |
574,536 |
|
Distribution
revenue |
|
|
754,781 |
|
|
|
222,442 |
|
Food
and beverage revenue |
|
|
446,202 |
|
|
|
310,826 |
|
Ticket
and gaming revenue |
|
|
480,519 |
|
|
|
349,526 |
|
Merchandising
revenue |
|
|
35,338 |
|
|
|
22,209 |
|
Other
revenue |
|
|
100 |
|
|
|
1,068 |
|
Total
Revenues Recognized at a Point in Time |
|
|
4,176,553 |
|
|
|
1,480,607 |
|
|
|
|
|
|
|
|
|
|
Revenues
Recognized Over a Period of Time: |
|
|
|
|
|
|
|
|
Sponsorship
revenue |
|
|
779,487 |
|
|
|
1,730,198 |
|
Total
Revenues Recognized Over a Period of Time |
|
|
779,487 |
|
|
|
1,730,198 |
|
Total
Revenues |
|
$ |
4,956,040 |
|
|
$ |
3,210,805 |
|
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 December
31, 2021 and 2020, the Company had contract liabilities of $141,825 and $57,018, respectively, which is included in deferred revenue
on the balance sheet.
As
of December 31, 2021, all continuing operations’ performance obligations in connection with contract liabilities included within
deferred revenue on the prior year consolidated balance sheet have been satisfied. The Company expects to satisfy the remaining performance
obligations related to its December 31, 2021 deferred revenue balance within the next twelve months. During the years ended December
31, 2021 and 2020, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award on
the date of grant. The fair value amount is then recognized over the period during which services are required to be provided in exchange
for the award, usually the vesting period. The estimation of stock-based awards that will ultimately vest requires judgment, and to the
extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the
period that the estimates are revised. The Company accounts for forfeitures as they occur.
Advertising
Costs
Advertising
costs from continuing operations are charged to operations in the year incurred and totaled $127,612 and $97,840 for the years ended
December 31, 2021 and 2020, respectively.
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 (“FDIC”) 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 years ended December 31, 2021 and 2020, 4% and 10%, respectively, of the Company’s revenues from continuing operations were
from customers in foreign countries.
During
the year ended December 31, 2021, the Company’s three largest customers accounted for 20%, 15%, and 13% of the Company’s
consolidated revenues from continuing operations. During the year ended December 31, 2020, the Company’s two largest customer
accounted for 41% and 13% of the Company’s consolidated revenues from continuing operations.
As of December 31, 2021, the Company’s
four largest customers represented 31%, 29%, 15% and 10%, respectively, of the Company’s accounts receivable. As of December 31,
2020, a single customer represented 74% of the Company’s accounts receivable 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 (1.1342 and 1.2264 at December 31, 2021 and 2020, respectively), and revenue and expense accounts are translated
using the weighted average exchange rate in effect for the period (1.1830 and 1.1414 for the years ended December 31, 2021 and 2020, respectively).
Resulting translation adjustments are made directly to accumulated other comprehensive income (loss). Losses of $53,538 and $0 arising
from exchange rate fluctuations on transactions denominated in a currency other than the reporting currency for the years ended December
31, 2021 and 2020, respectively, are recognized in operating results in the 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 consolidated financial statements, except as disclosed.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
CARES
Act
On
March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The
CARES Act, amongst other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security
payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations
and technical corrections to tax depreciation methods for qualified improvement property. Pursuant to Accounting Standards Codification
Topic (“ASC 740”), the Company recognizes the tax effects of new tax legislation upon enactment. Accordingly, the CARES Act
was effective beginning in the quarter ended March 31, 2020. The new tax provisions outlined in the CARES Act have not had a material
impact on the Company’s consolidated financial statements.
Discontinued
Operations
The
assets and liabilities of WPT at December 31, 2020 are classified in the accompanying Consolidated Balance Sheets as “Current assets
of discontinued operations,” and “Current liabilities of discontinued operations”. The results of operations of WPT
for the period from January 1 through July 12, 2021 and for the year ended December 31, 2020 are included in “(Loss) income from
discontinued operations, net of tax provision” in the accompanying 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
Issued Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” ASU 2016-02
requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement
of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use
the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required
to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This amendment
will be effective for private companies and emerging growth companies for fiscal years beginning after December 15, 2021, and interim
periods within fiscal years beginning after December 15, 2022. The FASB issued ASU No. 2018-10 “Codification Improvements to Topic
842, Leases” and ASU No. 2018-11 “Leases (Topic 842) Targeted Improvements” in July 2018, and ASU No. 2018-20 “Leases
(Topic 842) - Narrow Scope Improvements for Lessors” in December 2018. ASU 2018-10 and ASU 2018-20 provide certain amendments that
affect narrow aspects of the guidance issued in ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an additional
(and optional) transition method of adoption, under which an entity initially applies the new leases standard at the adoption date and
recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company expects
that the adoption of this ASU will have a material impact on the Company’s consolidated financial statements, primarily as the
result of recording right-of-use assets and lease liability obligations for its current operating lease.
In
June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326)” and also issued subsequent
amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326). Topic 326 requires the measurement
and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model
with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The Company will
be required to adopt the provisions of this ASU on January 1, 2023, with early adoption permitted for certain amendments. Topic 326 must
be adopted by applying a cumulative effect adjustment to retained earnings. The adoption of Topic 326 is not expected to have a material
impact on the Company’s consolidated financial statements or disclosures.
In
February 2020, the FASB issued ASU No. 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) – Amendments
to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date (“ASU 2020-02”)
which provides clarifying guidance and minor updates to ASU No. 2016-13 – Financial Instruments – Credit Loss (Topic 326)
(“ASU 2016-13”) and related to ASU No. 2016-02 - Leases (Topic 842). ASU 2020-02 amends the effective date of ASU 2016-13,
such that ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after
December 15, 2022. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s consolidated financial
statements or disclosures.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—
Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own
Equity, to clarify the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in
this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash
conversion model and the beneficial conversion feature model. Limiting the accounting models will result in fewer embedded conversion
features being separately recognized from the host contract. Convertible instruments that continue to be subject to separation models
are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition
of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued
with substantial premiums for which the premiums are recorded as paid-in-capital. In addition, this ASU improves disclosure requirements
for convertible instruments and earnings-per-share guidance. The ASU also revises the derivative scope exception guidance to reduce form-over-substance-based
accounting conclusions driven by remote contingent events. The amendments in this update are effective for the Company in fiscal years
beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption will be permitted, but no earlier than
for fiscal years beginning after December 15, 2020. The adoption of ASU 2020-06 is not expected to have a material impact on the Company’s
consolidated financial statements or disclosures.
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 does not expect the adoption of this standard to have a material
effect on the Company’s consolidated financial statements.
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers, which requires an acquirer in a business combination to recognize and measure contract assets and contract
liabilities in accordance with Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning
after December 15, 2022 and early adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential
impacts of ASU 2021-08, it does not expect ASU 2021-08 will have a material effect, if any, on its consolidated financial
statements.
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 consolidated financial statements or disclosures.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Note
3 – Sale of WPT
Transaction
During
the first quarter of 2021, AESE entered into the SPA to sell the equity interests of its subsidiaries that own and operate its WPT
business (the “Sale Transaction”), subject to shareholder and regulatory approvals, for a total base purchase price of $105
million. This base purchase price was adjusted to reflect the amount of CSI’s cash (less cash required to satisfy employee payment
obligations), indebtedness and accrued and unpaid transaction expenses as of the closing of the Sale Transaction. The WPT business has
been recast as discontinued operations, and the assets and liabilities of WPT are classified as assets and liabilities of discontinued
operations. See Note 1 – Background and Nature of Operations.
In
reaching its decision to enter into the SPA, the Company’s Board of Directors, in consultation with management as well as its financial
and legal advisors, considered a number of factors, including the risks and challenges facing the WPT business in the future as compared
to the opportunities available to the WPT business in the future, and the availability of strategic alternatives. After careful consideration,
the Board of Directors unanimously approved the SPA.
On July 12, 2021, the Company
consummated the sale of the WPT business. Immediately prior to the Sale Transaction, WPT forgave $9,370,261 of amounts due from affiliates,
which was recorded as an equity transaction on the stand-alone books of WPT and its affiliates and did not have an effect on the consolidated
financial statements. The Company recorded a gain on the sale of the WPT business in the amount of $77,858,835, as follows:
Cash
consideration for sale of WPT(1) |
|
$ |
106,049,884 |
|
|
|
|
|
|
Less:
book value of assets sold |
|
|
|
|
Cash |
|
|
3,579,988 |
|
Accounts
receivable |
|
|
2,999,352 |
|
Restricted
cash |
|
|
100,000 |
|
Prepaid
expenses and other assets |
|
|
264,385 |
|
Property
and equipment, net |
|
|
1,429,706 |
|
Goodwill |
|
|
4,083,621 |
|
Intangible
assets, net |
|
|
10,986,463 |
|
Deposits |
|
|
79,500 |
|
Deferred
production costs |
|
|
12,684,054 |
|
Net
book value of assets sold |
|
|
36,207,069 |
|
|
|
|
|
|
Add:
liabilities assumed by buyer |
|
|
|
|
Accounts
payable |
|
|
487,579 |
|
Accrued
expenses and other liabilities |
|
|
5,567,072 |
|
Deferred
revenue |
|
|
1,807,176 |
|
Deferred
rent |
|
|
2,619,967 |
|
Total
liabilities assumed |
|
|
10,481,794 |
|
|
|
|
|
|
Less:
transaction expenses (2) |
|
|
2,465,774 |
|
|
|
|
|
|
Gain
on Sale of WPT (3) |
|
$ |
77,858,835 |
|
(1) | Includes $105,120 of post-closing adjustments |
(2) | Includes $1,165,774 of legal and professional fees and $1,300,000 of amounts reimbursed to the Company’s principal stockholder. See Note 7 - Accrued Expense and Other Current Liabilities for additional details |
| (3) | Management has determined that
there are no current federal or state income taxes payable in connection with the sale of WPT, after considering the Company’s
tax basis in the stock of WPT, as well as the Company’s projected tax losses for the 2021 tax year |
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
About
WPT
WPT
is an internationally televised gaming and entertainment company with brand presence in land-based tournaments, television, online and
mobile applications. WPT has been involved in the sport of poker since 2002 and created a television show based on a series of high-stakes
poker tournaments. WPT has broadcasted globally in more than 150 countries and territories and its shows are sponsored by established
brands in many areas, including watches, crystal, playing cards and online social poker operators. WPT also operates ClubWPT.com, a subscription-based
site that offers its members inside access to the WPT content database, as well as sweepstakes-based poker product that allows members
to play for real cash and prizes in 36 states and territories across the United States and 4 foreign countries. WPT also participates
in strategic brand licensing, partnership, and sponsorship opportunities.
Results
of Discontinued Operations
Results
and net income (loss) from discontinued operations are as follows, reflecting the results and net income (loss) of the WPT business:
| |
For the Years Ended | |
| |
December 31, | |
| |
2021(1) | | |
2020 | |
| |
| | |
| |
Revenues | |
$ | 13,017,362 | | |
$ | 20,149,042 | |
Operating costs and expenses | |
| 13,640,146 | | |
| 19,425,951 | |
(Loss) income from operations | |
| (622,784 | ) | |
| 723,091 | |
Other income, net | |
| 689,525 | | |
| 2,417 | |
(Loss) income from discontinued operations before the sale of WPT | |
| (66,741 | ) | |
| 725,508 | |
Gain on sale of WPT | |
| 77,858,835 | | |
| - | |
Net income from discontinued operations, before tax | |
| 77,925,576 | | |
| 725,508 | |
Income tax | |
| - | | |
| - | |
Income from discontinued operations, net of tax provision | |
$ | 77,925,576 | | |
$ | 725,508 | |
|
(1) |
Through
the date of the Sale Transaction on July 12, 2021. |
Assets
and liabilities held for sale as of December 31, 2020 were classified as current because the Sale Transaction was expected to and did
close during 2021. The details are as follows:
Assets |
|
|
|
Cash |
|
$ |
3,633,292 |
|
Accounts
receivable |
|
|
1,804,627 |
|
Prepaid
expenses and other assets |
|
|
289,968 |
|
Property
and equipment, net |
|
|
1,674,355 |
|
Goodwill |
|
|
4,083,621 |
|
Intangible
assets, net |
|
|
12,305,887 |
|
Deposits |
|
|
79,500 |
|
Deferred
production costs |
|
|
12,058,592 |
|
Due
from affiliates |
|
|
9,433,975 |
|
Current
assets held for sale |
|
$ |
45,363,817 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accounts
payable |
|
$ |
211,228 |
|
Accrued
expenses and other liabilities |
|
|
3,804,301 |
|
Accrued
interest |
|
|
4,224 |
|
Deferred
revenue |
|
|
1,970,668 |
|
Deferred
rent |
|
|
2,493,526 |
|
Loans
payable (1) |
|
|
685,300 |
|
Current
liabilities held for sale |
|
$ |
9,169,247 |
|
| (1) | Represents principal balance of PPP Loan. On January 26, 2021, WPT received notice from its lender that the entirety of the $685,300 of outstanding principal of the PPP Loan was forgiven. |
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Note
4 – Investments
As of December 31, 2021 and
2020, the Company owns a 25% non-voting membership interest in Esports Arena, LLC (“ESA”) and ESA’s wholly owned subsidiary.
Because the Company does not have the ability to exercise significant influence over the operating and financial policies of ESA and because
the investment doesn’t have a readily determinable market value, the Company elected to account for it using the adjusted cost method. During
the second quarter of 2020, the Company recorded an additional impairment charge in the amount of $1,138,631, related to its investment
in ESA, in order to reduce the carrying value of the Company’s investment in ESA to $0 at December 31, 2021 and 2020.
The
Company paid $3,500,000 to TV Azteca, S.A.B. DE C.V., a Grupo Salinas company (“TV Azteca”) in August 2019, and on March
4, 2020 the Company paid an additional $1,500,000 to TV Azteca in connection with a Strategic Investment Agreement with TV Azteca in
order to expand the Allied Esports brand into Mexico. During December 2020, the Company recorded an impairment charge in the amount of
$5,000,000, related to the investment in TV Azteca, such that that carrying value of the Company’s investment in TV Azteca is $0
at December 31, 2021 and 2020. (See Note 12 – Commitments and Contingencies, Investment Agreements).
Note
5 – Property and Equipment, net
Property
and equipment consist of the following:
|
|
As
of December 31, |
|
|
|
2021 |
|
|
2020 |
|
Office
equipment |
|
$ |
870,394 |
|
|
$ |
868,309 |
|
Computer
equipment |
|
|
546,945 |
|
|
|
495,643 |
|
Esports
gaming truck |
|
|
1,222,406 |
|
|
|
1,222,406 |
|
Furniture
and fixtures |
|
|
654,058 |
|
|
|
654,058 |
|
Production
equipment |
|
|
7,919,208 |
|
|
|
7,841,985 |
|
Leasehold
improvements |
|
|
4,678,038 |
|
|
|
4,645,760 |
|
|
|
|
15,891,049 |
|
|
|
15,728,161 |
|
Less:
accumulated depreciation and amortization |
|
|
(9,754,156 |
) |
|
|
(6,452,432 |
) |
Property
and equipment, net |
|
$ |
6,136,893 |
|
|
$ |
9,275,729 |
|
During
the years ended December 31, 2021 and 2020, depreciation and amortization expense amounted to $3,305,698 and $3,605,539, respectively.
During the years ended December 31, 2021 and 2020, the Company recorded impairment expense of $0 and $5,595,557, respectively, related
to its property and equipment.
Note
6 – Intangible Assets, net
Intangible
assets consist of the following:
|
|
Intellectual
Property |
|
|
Accumulated
Amortization |
|
|
Total |
|
Balance
as of January 1, 2020 |
|
$ |
36,415 |
|
|
$ |
(2,406 |
) |
|
$ |
34,009 |
|
Purchases
of intangibles |
|
|
750 |
|
|
|
- |
|
|
|
750 |
|
Amortization
expense |
|
|
- |
|
|
|
(3,941 |
) |
|
|
(3,941 |
) |
Balance
as of December 31, 2020 |
|
|
37,165 |
|
|
|
(6,347 |
) |
|
|
30,818 |
|
Amortization
expense |
|
|
- |
|
|
|
(3,991 |
) |
|
|
(3,991 |
) |
Balance
as of December 31, 2021 |
|
$ |
37,165 |
|
|
$ |
(10,338 |
) |
|
$ |
26,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average remaining amortization period at December 31, 2021 (in years) |
|
|
6.7 |
|
|
|
|
|
|
|
|
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Intangible
assets consist of the Allied Esports trademarks, which are being amortized over a useful life of 10 years. During the years ended December
31, 2021 and 2020, amortization expense amounted to $3,991 and $3,941, respectively.
Estimated
future amortization expense is as follows:
Years
Ended December 31, |
|
Amount |
|
2022 |
|
$ |
3,991 |
|
2023 |
|
|
3,991 |
|
2024 |
|
|
3,991 |
|
2025 |
|
|
3,991 |
|
2026 |
|
|
3,991 |
|
Thereafter |
|
|
6,872 |
|
|
|
$ |
26,827 |
|
Note
7– Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following:
| |
As of December 31, | |
| |
2021 | | |
2020 | |
Compensation expense | |
$ | 2,202,621 | | |
$ | 1,010,734 | |
Current portion of deferred rent | |
| 198,504 | | |
| 297,874 | |
Event costs | |
| 8,874 | | |
| 26,926 | |
Legal and professional fees | |
| 368,691 | | |
| 307,135 | |
Warrant liabilities | |
| 3,200 | | |
| 3,000 | |
Unclaimed player prizes | |
| - | | |
| 45,171 | |
Other accrued expenses | |
| 172,858 | | |
| 268,751 | |
Other current liabilities | |
| 11,497 | | |
| 27,426 | |
Accrued expenses and other current liabilities | |
$ | 2,966,245 | | |
$ | 1,987,017 | |
| |
| | | |
| | |
Accrued expenses, related party(1) | |
$ | 1,800,000 | | |
$ | - | |
| (1) | Represents amounts accrued to reimburse a principal shareholder
for costs incurred in connection with specified Company transactions, including $1,300,000 incurred in connection with the sale of WPT.
See Note 12 - Commitments and Contingencies, Principal Shareholder Matter for additional details. |
Note
8 – Convertible Debt and Convertible Debt, Related Party
As
of December 31, 2020, the Company’s convertible debt consisted of the following:
|
|
December 31,
2020 |
|
|
|
Gross
Principal Amount |
|
|
Debt
Discount |
|
|
Convertible
Debt, Net of Debt Discount |
|
Convertible
debt |
|
$ |
1,000,000 |
|
|
$ |
- |
|
|
$ |
1,000,000 |
|
Convertible
debt, related party |
|
|
1,000,000 |
|
|
|
- |
|
|
|
1,000,000 |
|
Senior
secured convertible notes |
|
|
581,818 |
|
|
|
(3,646 |
) |
|
|
578,172 |
|
Total |
|
|
2,581,818 |
|
|
|
(3,646 |
) |
|
|
2,578,172 |
|
Less:
current portion |
|
|
(2,000,000 |
) |
|
|
- |
|
|
|
(2,000,000 |
) |
Convertible
debt, non-current |
|
$ |
581,818 |
|
|
$ |
(3,646 |
) |
|
$ |
578,172 |
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Convertible
Bridge Notes and Convertible Bridge Notes, Related Party
During
2020, the holder of a $5,000,000 Bridge Note (the “Noteholder”) entered into certain Secured Convertible Note Modification
and Conversion Agreements (the “Amendments) pursuant to which the Noteholder converted $2,000,000 of the principal amount of its
$5,000,000 Bridge Note into an aggregate of 3,392,857 shares of the Company’s common stock including 1,250,000 shares upon the
conversion of $2,000,000 of principal at a reduced conversion price of $1.60 per share, and 2,142,857 shares issued upon the conversion
of the remaining principal of $3,000,000 at a reduced conversion price of $1.40 per share. The Company recorded a conversion inducement
charge of $5,247,531 as a result of the Amendments, consisting of $4,998,845, representing the value of common stock issued upon conversion
in excess of the common stock issuable under the original terms of the $5,000,000 Bridge Note, and $248,686, representing the excess
of minimum interest payable pursuant to Amendment 3 over the interest payable pursuant to the original terms of the $5,000,000 Bridge
Note. See Note 9 - Bridge Note Payable for additional details. Further, pursuant to the Amendments, minimum interest payable in
the amount of $1,421,096 (the “Accrued Interest”) was converted into principal under the Noteholder’s Bridge Note.
On
June 8, 2020, the Company paid cash of $8,670,431 in satisfaction of principal in the amount of $7,000,000 and interest in the amount
of $1,670,431 owed in connection with other Bridge Notes. Further, on June 8, 2020, the Company and the holders (the “Extending
Bridge Noteholders”) of the two remaining Bridge Notes outstanding in the aggregate principal amount of $2,000,000 (together, the
“Extended Bridge Notes”), of which principal in the amount of $1,000,000 was owed to the spouse of the Company’s Chief
Executive Officer (“CEO”) and Director, entered into a Secured Convertible Note Modification (Extension) Agreement with the
Company (together, the “Bridge Note Extensions”) pursuant to which, among other things, the Extending Bridge Noteholders
agreed to extend the maturity date of their respective Extended Bridge Notes until February 23, 2022.
On
August 13, 2020, the Company paid in cash an aggregate of $425,096 related to interest payable on the Extended Bridge Notes.
The
Company repaid all remaining balances owed on the Extended Bridge Notes in full the from the proceeds of the Sale Transaction (see Note
3 – Sale of WPT). There was no balance outstanding on the Extended Bridge Notes and all related debt discount has been fully amortized
as of December 31, 2021.
During
the year ended December 31, 2021, the Company recorded interest expense of $124,848 related to the Extended Bridge Notes (of which $62,424
was in connection with the Extended Bridge Note owed to the spouse of the Company’s CEO and Director). During the year ended December
31, 2020, the Company recorded interest expense of $1,433,054 (including amortization of debt discount of $166,384). Of the interest
expense recorded during the year ended December 31, 2020, $716,527 (including amortization of debt discount of $83,192) was in connection
with the Extended Bridge Note owed to the spouse of the Company’s CEO and Director.
Senior
Secured Convertible Notes
On
June 8, 2020, pursuant to a securities purchase agreement (the “Purchase Agreement”) between the Company and certain accredited
investors (the “Investors”), the Company issued two senior secured convertible notes (the “Senior Notes”) with
an aggregate principal balance of $9,600,000 and immediately vested five-year warrants to purchase an aggregate 1,454,546 shares of common
stock at an exercise price of $4.125 per share for net cash proceeds of $9,000,000. The Senior Notes were secured by the assets of the
Company, bore interest at 8% per annum and had a stated maturity date of June 8, 2022, with an aggregate of $1,536,000 of interest guaranteed
to be paid to the Investors.
The
Senior Notes’ principal and two years of interest were payable in equal monthly installments (the “Monthly Redemption Payment”),
commencing on August 7, 2020. Each Monthly Redemption Payment was payable at the Company’s option in cash, or in shares of common
stock at a price equal to 87% of the lowest daily volume weighted average price in the 10 days prior to the scheduled payment date (the
“Stock Settlement Price”).
Each
Investor was permitted to accelerate up to four Monthly Redemption Payments in any calendar month and could elect to have such accelerated
Monthly Redemption Payments paid in shares of the Company’s common stock at the Stock Settlement Price of the contemporaneous or
immediately prior Monthly Redemption Payment, instead of in cash.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
Senior Notes were convertible at each Investor’s option, in whole or in part, and from time to time, into shares of the Company’s
common stock (the “Holder Conversion Option” and together, with the Stock Settlement Option, the “ECOs”) at $3.30
per share. The Company determined that the ECOs contained a beneficial conversion feature (“BCF”) in the amount of $523,636,
which was credited to additional paid in capital.
Upon
the issuance of the Senior Notes, the Company recorded a debt discount at issuance in the aggregate amount $6,296,556, consisting of
(i) the $600,000 difference between the aggregate principal amount of the Senior Notes and the cash proceeds received, (ii) the relative
fair value of the warrants of $1,205,959 (which were credited to additional paid in capital), (iii) two years’ guaranteed interest
of $1,536,000 (credited to interest payable), (iv) the BCF of $523,636 (credited to additional paid in capital), (v) non-cash interest
in the amount of $1,664,000, representing the difference between the anticipated issuance date fair value of common stock issued and
the Stock Settlement Price, for Monthly Redemption Payments (credited to interest payable), and (vi) financing costs of $766,961. The
debt discount was being amortized using the effective interest method over the term of the Senior Notes.
During
the year ended December 31, 2020, the Company issued 9,678,840 shares of its common stock, as Monthly Redemption Payments in satisfaction
of aggregate amount of $9,018,182 of principal and $1,442,909 of interest payable owed on the Senior Notes as well as $2,757,000 of non-cash
interest accrued on the Senior Notes.
During
January 2021, the Company issued 529,383 shares of its common stock as Monthly Redemption Payments in full satisfaction of the remaining
$821,867 balance owned under the Senior Notes, including (i) principal in the aggregate amount of $581,818, (ii) $93,091 of interest
payable owed on the Senior Notes, and (iii) $146,958 of non-cash interest accrued on the Senior Notes.
During
years ended December 31, 2021 and 2020, the Company recorded amortization of debt discount of $3,646 and $2,854,649, respectfully, and
recorded non-cash interest expense in the amount $46,110 and $1,193,849, respectfully, related to the Senior Notes. During the year ended
December 31, 2020, the Company recorded an extinguishment loss of $3,438,261 in connection with the extinguishment of Senior Notes resulting
from accelerated Monthly Redemption Payments.
Note
9 – Bridge Note Payable
The
Bridge Note Payable of $1,421,096 at December 31, 2020 consists of the Amended Bridge Note (see Note 8 – Convertible Debt and Convertible
Debt, Related Party). The Company recorded interest expense of $89,643 and $60,698 during the years ended December 31, 2021 and 2020,
respectively, in connection with the Bridge Note. The Company repaid the Bridge Note in full from the proceeds of the Sale Transaction.
See Note 3 - Sale of WPT.
Note
10 – Loans Payable
During
May 2020, the Company’s continuing operations received aggregate cash proceeds of $907,129 pursuant to two loans (the “PPP
Loans”) provided in connection with the Paycheck Protection Program (“PPP”) under the CARES Act. The PPP Loans bore
interest at 0.98% per annum. In August 2021, the Company was awarded full forgiveness of the PPP Loans and accrued interest thereon.
During the year ended December 31, 2021, the Company recognized a gain on forgiveness of the PPP Loans and accrued interest in the amount
of $912,475.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Note
11 – Income Taxes
The
Company and its subsidiaries file income tax returns in the United States (federal and California) and Germany.
The
U.S. and foreign components of loss before income taxes from continuing operations were as follows:
| |
For the Years Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
| |
| | |
| |
United States | |
$ | (14,568,373 | ) | |
$ | (45,315,394 | ) |
Foreign | |
| (491,472 | ) | |
| (468,944 | ) |
Loss before income taxes | |
$ | (15,059,845 | ) | |
$ | (45,784,338 | ) |
The
income tax provision (benefit) from continuing operations for the years ended December 31, 2021 and 2020 consists of the following:
| |
For the Years Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Federal | |
| | |
| |
Current | |
$ | - | | |
$ | - | |
Deferred | |
| (2,857,515 | ) | |
| (7,159,062 | ) |
State and local: | |
| | | |
| | |
Current | |
| - | | |
| - | |
Deferred | |
| (272,144 | ) | |
| (681,815 | ) |
Foreign | |
| | | |
| | |
Current | |
| - | | |
| - | |
Deferred | |
| (66,229 | ) | |
| (63,193 | ) |
| |
| (3,195,888 | ) | |
| (7,904,070 | ) |
Change in valuation allowance | |
| 3,195,888 | | |
| 7,904,070 | |
Income tax provision (benefit) | |
$ | - | | |
$ | - | |
The
reconciliation of the expected tax expense (benefit) based on the U.S. federal statutory rates for 2021 and 2020, respectively, with
the actual expense is as follows:
| |
For the Years Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
U.S. Federal statutory rate | |
| 21.0 | % | |
| 21.0 | % |
State taxes, net of federal benefit | |
| 6.1 | % | |
| 6.3 | % |
Permanent differences | |
| 1.5 | % | |
| (10.7 | )% |
Untaxed foreign jurisdictions | |
| 0.0 | % | |
| 0.0 | % |
Lower taxed foreign jurisdictions | |
| (0.4 | )% | |
| (0.1 | )% |
Change in deferred taxes | |
| (6.9 | )% | |
| (0.9 | )% |
Rate change impact | |
| 0.0 | % | |
| 1.0 | % |
Change in valuation allowance | |
| (21.3 | )% | |
| (17.0 | )% |
Other | |
| 0.0 | % | |
| 0.4 | % |
Total | |
| 0.0 | % | |
| 0.0 | % |
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
tax effects of temporary differences that give rise to deferred tax assets are presented below:
| |
As of December 31, | |
| |
2021 | | |
2020 | |
Deferred Tax Assets: | |
| | |
| |
Net operating loss carryforwards | |
$ | 13,561,888 | | |
$ | 13,022,656 | |
Production costs | |
| 272,810 | | |
| 274,355 | |
Investment | |
| 5,800,616 | | |
| 2,909,497 | |
Stock-based compensation | |
| 730,832 | | |
| 387,410 | |
Capitalized start-up costs | |
| 224,682 | | |
| 322,793 | |
Property and equipment | |
| - | | |
| 1,022,026 | |
Accruals and other | |
| 1,674,367 | | |
| 1,252,731 | |
Gross deferred tax assets | |
| 22,265,195 | | |
| 19,191,468 | |
Valuation Allowance | |
| (21,258,645 | ) | |
| (19,191,468 | ) |
Deferred tax assets, net of valuation allowance | |
| 1,006,550 | | |
| - | |
Deferred Tax Liabilities: | |
| | | |
| | |
Property and equipment | |
| (1,006,550 | ) | |
| - | |
Deferred Tax Liabilities | |
| (1,006,550 | ) | |
| - | |
Deferred tax assets, net of valuation allowance | |
$ | - | | |
$ | - | |
As of December 31, 2021, the Company
had $57,256,984, $14,681,537 and $4,726,053 of federal, state and foreign net operating loss (“NOL”) carryforwards available
to offset against future taxable income. The federal NOL may be carried forward indefinitely. For state, these NOLs will begin to expire
in 2038. For the foreign NOLs, these NOLs can be carried forward indefinitely. The federal and state NOL carryovers are subject to annual
limitations under Section 382 of the U.S. Internal Revenue Code when there is a greater than 50% ownership change, as determined under
the regulations. The Company is not aware that any annual limitations have been triggered. The Company remains subject to the possibility
that a future greater than 50% ownership change could trigger annual limitations on the usage of NOLs. For federal income tax purposes,
the Company’s future utilization of its NOLs may be limited to 80% of taxable income as provided under Tax Cuts and Jobs Act of
2017.
The
Company assesses the likelihood that deferred tax assets will be realized. ASC 740, “Income Taxes” requires that a valuation
allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized.
A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes
that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation
allowance as of December 31, 2021 and 2020.
The
Company’s tax returns remain subject to examination by various taxing authorities beginning with the tax year ended December 31,
2017. No tax audits were commenced or were in process during the years ended December 31, 2021 and 2020.
The
Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required
to file. The Company recognizes liabilities for uncertain tax positions based on a two-step process. To the extent a tax position does
not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If a position meets the more-likely-than-not
level of certainty, it is recognized in the consolidated financial statements at the largest amount that has a greater than 50% likelihood
of being realized upon ultimate settlement. The Company has not recognized any liability related to uncertain tax provisions as of December
31, 2021 and 2020.
The
Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had
no accrual for interest or penalties at December 31, 2021 and December 31, 2020, respectively, and has not recognized interest and/or
penalties during the years then ended as there are no material unrecognized tax benefits. Management does not anticipate any material
changes to the amount of unrecognized tax benefits within in the next 12 months.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Note
12 – 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.
Principal
Shareholder Matter
During
August 2021, the Company received a $2.3 million expense reimbursement request from a principal shareholder. The principal shareholder
alleged that former officers of the Company verbally agreed to reimburse certain costs of the principal shareholder that were incurred
in connection with specified Company transactions. On April 6, 2022, the Company reached a settlement agreement with the principal
shareholder in which the Company agreed to reimburse the principal shareholder an aggregate of $1.8 million for the full and final settlement
of any and all claims by the principal shareholder.
Operating
Leases
Effective
on March 23, 2017, Allied Esports entered into a non-cancellable operating lease for 30,000 square feet of event space in Las Vegas,
Nevada, for the purpose of hosting Esports activities (the “Las Vegas Lease”). The Arena opened to the public on March 23,
2018 (the “Commencement Date”). Initial lease terms are for minimum monthly payments of $125,000 for 60 months from the Commencement
Date with an option to extend for an additional 60 months at $137,500 per month. Additional annual tenant obligations are estimated at
$2 per square foot for Allied Esports’ portion of real estate taxes and $5 per square foot for common area maintenance costs.
On
November 5, 2020, Allied Esports entered into an amendment of the Las Vegas Lease (the “Amended Las Vegas Lease”), pursuant
to which (i) $299,250 of deferred minimum monthly rent and additional rent due under the lease for the period from April 1, 2020 through
June 3, 2020 was paid in its entirety by December 31, 2021; (ii) the monthly rent to be paid for the period from June 25 through December
31, 2020 (the “Rent Relief Period) was reduced to an amount equal to 20% of gross sales (excluding food sales) at the event space
(the “Percentage Rent”), (iii) the initial term of the lease was extended for two additional months until May 31, 2023, and
(iv) the option period to extend the lease was extended to between April 1, 2022 and September 30, 2022 (“the extension period”).
Pursuant to the Amended Las Vegas Lease, if the aggregate Percentage Rent during the Rent Relief Period is less than $194,000, Allied
Esports must pay the shortfall no later than December 31, 2021. There was no shortfall during the Rent Relief Period. Rent expense incurred
during the rent relief period under the Amended Las Vegas Lease was $200,570. The Las Vegas Lease expires on May 31, 2023. However, the
Company plans on extending the lease an additional five years and a commitment of $8,250,000.
The
Company also leases office and production space in Germany, pursuant to a lease dated August 1, 2020 which expires on July 31, 2023 (the
“Germany Lease”). Rent expense under the lease is €4,000 (approximately $4,536 United States dollars) per month. The
lease includes an option to extend for an additional three-year term.
The
Company’s aggregate rent expense incurred during the years ended December 31, 2021 and 2020 amounted to $1,714,894 and $1,967,967,
respectively, of which $1,216,415 and $1,390,093, respectively, is included within in-person costs and $498,480 and $577,874, respectively,
is included in general and administrative expenses on the accompanying consolidated statements of operations.
The
scheduled future minimum lease payments under the Company’s continuing non-cancellable operating leases are as follows:
Year ending December 31, | |
Amount | |
| |
| |
2022 | |
$ | 1,554,432 | |
2023 | |
| 669,252 | |
| |
$ | 2,223,684 | |
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
AESE
is currently the guarantor of WPT’s lease of Irvine, California office space (the “Irvine Lease”). The lease expires
on October 1, 2033. Current base rent pursuant to the Irvine Lease is $41,027 per month, increasing to $58,495 per month over the term
of the lease.
AESE
is no longer the guarantor of WPT’s lease of Los Angeles, California office space (the “LA Lease”).
The Company and the purchaser
of WPT are working toward releasing the Company as a guarantor on the Irvine lease.
Investment
Agreements
TV
Azteca Investment
In
June 2019, the Company entered into an exclusive ten-year strategic investment and revenue sharing agreement (the “TV Azteca Agreement”)
with TV Azteca, in order to expand the Allied Esports brand into Mexico. Pursuant to the terms of the TV Azteca Agreement, as amended,
TV Azteca purchased 742,692 shares of AESE common stock for $5,000,000.
Through
December 31, 2020, the Company paid $5,000,000 in connection with the TV Azteca agreement. On December 31, 2020, the Company recognized
an impairment of $5,000,000 related to its investment in TV Azteca due to management’s determination that the future cash flows
are not expected to be sufficient to recover the carrying value of this investment.
Simon
Agreement
In
June 2019, the Company entered into an agreement (the “Simon Agreement”) with Simon Equity Development, LLC (“Simon”),
a shareholder of the Company, pursuant to which Allied Esports would conduct a series of mobile esports gaming tournaments and events
at selected Simon shopping malls and online called the Simon Cup, in each of 2019, 2020 and 2021, and would also develop esports and
gaming venues at certain Simon shopping malls in the U.S.
In
connection with the Simon Agreement, AESE placed $4,950,000 of cash into an escrow account to be utilized for various strategic initiatives
including the build-out of branded esports facilities at Simon malls, and esports event programs. On October 22, 2019, $1,300,000 was
released from escrow in order to fund expenses incurred in connection with the 2019 Simon Cup.
The
Simon Agreement and the related Escrow Agreement, as amended, permitted Simon to request the return of any funds remaining in escrow
if the parties did not agree on the 2020 spending plan by March 8, 2020. On March 18, 2020, as the COVID-19 pandemic accelerated in the
United States, Simon notified the escrow agent that the parties had not agreed on a 2020 spending plan and requested the return of the
remaining funds in the escrow account. The escrow agent returned the remaining $3,650,000 to Simon on March 26, 2020. During the year
ended December 31, 2020, the Company recorded $3,650,000 of stock-based compensation related to the return of cash held in escrow, which
is reflected in general and administrative expense on the accompanying consolidated statements of operations.
Brookfield
Partnership
On
January 14, 2020, the Company issued 758,725 shares of its common stock to BPR Cumulus LLC, an affiliate of Brookfield Property Partners
(“Brookfield”) in exchange for $5,000,000 (the “Purchase Price”) pursuant to a Share Purchase Agreement (the
“Brookfield Agreement”). The Purchase Price was placed into escrow and is to be used by the Company or its subsidiaries to
develop integrated esports experience venues at mutually agreed upon shopping malls owned and/or operated by Brookfield or any of its
affiliates (each, an “Investor Mall”), that will include a dedicated gaming space and production capabilities to attract
and to activate esports and other emerging live events (each, an “Esports Venue”). To that end, half of the Purchase Price
will be released from escrow to the Company upon the execution of a written lease agreement between Brookfield and the Company for the
first Esports Venue, and the other half will be released to the Company upon the execution of a written lease agreement between Brookfield
and the Company for the second Esports Venue. Further, pursuant to the Brookfield Agreement, the Company must create, produce, and execute
three (3) esports events during each calendar year 2020, 2021 and 2022 that will include the Company’s esports truck at one or
more Investor Malls at mutually agreed times. The balance held in escrow as of December 31, 2021 is $5,000,000 and is reflected in restricted
cash on the accompanying consolidated balance sheet. As of the date of this document, no additional documents have been drafted or executed
between the Company and Brookfield as the parties have agreed not to move forward with any leases until the pandemic has ended.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Former
Chief Executive Officer Agreements
On
April 24, 2020, the CEO Agreement between the Company and Frank Ng, who served as Chief Executive Officer and director of the Company
(“Former CEO”), was amended such that effective May 1, 2020, the Former CEO’s annual salary was reduced by 80% to $60,000
for a six-month period. On September 30, 2020, the Former CEO Agreement was further amended such that effective November 1, 2020, the
Former CEO’s annual salary would be $210,000 for a six-month period, and thereafter the initial annual base salary of $300,000
set forth in the Former CEO Agreement would be restored. On December 31, 2020, the Former CEO Agreement was further amended
such that Mr. Ng’s annual salary was increased to $400,000 per year payable in cash, and that the Company may, but was no
longer required to, issue to Mr. Ng any shares of the Company’s common stock as compensation for his services.
On
July 13, 2021, Frank Ng resigned as chief executive officer of the Company, effective immediately. In connection with his resignation,
the Company entered into a Release and Separation Agreement with Mr. Ng (the “Separation Agreement”) pursuant to which, among
other things, Mr. Ng has agreed to provide reasonable assistance to the Company (when, as and if requested) in connection with the Company’s
Esports division, Mr. Ng released any and all claims he may have against the Company and its subsidiaries (subject to certain exclusions),
and the Company agreed to provide Mr. Ng with certain separation benefits, including $400,000 (gross) in severance pay payable over a
twelve-month period, accelerated vesting of 225,000 unvested stock options previously granted to Mr. Ng pursuant to an Option Agreement
dated effective November 21, 2019, and accelerated vesting of all unvested shares of restricted stock previously granted to Mr. Ng pursuant
to an Executive Restricted Stock Agreement dated August 7, 2020.
Appointment
of Chief Executive Officer, President and General Counsel
On
July 13, 2021, the Company appointed Libing (Claire) Wu as its Chief Executive Officer, President and General Counsel. The Company entered
into an employment agreement (the “Next CEO Agreement”) with Ms. Wu that provides for, among other things, payment to Ms.
Wu of an annual base salary equal to $500,000, subject to certain cost-of-living adjustments.
Ms.
Wu is also eligible to receive an annual incentive bonus of up to 60% of her annual salary, determined at the discretion of the Board
of Directors and subject to the attainment of certain Board objectives. In addition, Ms. Wu received a $200,000 bonus payable upon the
commencement of her employment. Also, upon commencement of her employment, Ms. Wu was granted 80,000 shares of restricted common stock,
subject to transfer and forfeiture restrictions until the shares vest on August 16, 2022, and ten-year stock options to purchase up to
200,000 shares of the Company’s common stock at an exercise price of $2.21 per share that are scheduled to vest in four equal annual
installments commencing on the one-year anniversary of the grant date.
The
Next CEO Agreement expires automatically on the five-year anniversary of the effective date. However, the Next CEO Agreement may be extended for
additional periods of up to one year by the parties’ mutual written agreement at least thirty days prior to expiration of the current
term. The Next CEO Agreement can be terminated by the Company or by Ms. Wu prior to expiration.
In
the event the Next CEO Agreement is terminated without cause (as described in the Next CEO Agreement) by the Company, or by Ms. Wu for
good reason (as described in the Next CEO Agreement), Ms. Wu is entitled to receive severance from the Company equal to eighteen months
of base salary, then in effect at the time of termination, payable over an eighteen-month period in equal installments on the Company’s
regular pay dates, less applicable taxes and withholdings. Ms. Wu shall also receive any accrued, but unused vacation pay. See Note 14
– Subsequent Events related to the Next CEO’s resignation.
Board
of Directors
Ho
Min Kim and Maya Rogers resigned from the Company’s Board of Directors (“Board”) on May 5, 2021. In connection with
Ms. Rogers’ and Mr. Kim’s resignations, the Board permitted the accelerated vesting of 10,000 outstanding options previously
issued to each person for their director services scheduled to vest on September 19, 2021 and extended the exercise period to exercise
20,000 vested outstanding options issued to each person to September 19, 2029.
On
May 3, 2021, Frank Ng resigned from the Board of Directors (the “Board”). In connection with Mr. Ng’s resignation,
the Board permitted the accelerated vesting of 10,000 outstanding options previously issued to Mr. Ng for his director services scheduled
to vest on September 19, 2021 and extended the exercise period to exercise 20,000 vested outstanding options issued to Mr. Ng to September
19, 2029.
On
July 6, 2021, the Board approved the following compensation for non-executive directors: (i) annual $30,000 fee for director services;
(ii) annual $10,000 fee for non-chair committee services (capped at $10,000 per director); and (iii) annual $15,000 fee for committee
chairs (capped at $15,000 per director). The Company has the option to pay such amounts in cash or stock from the Company’s incentive
plan (valued at the closing price of AESE common stock on the trading day immediately prior to issuance), with the current fees payable
in cash. The fees are payable monthly by the Company.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
2020
Cash Bonus Payments
On
December 30, 2020, the Company’s Board of Directors authorized the payment of an aggregate of approximately $1,245,000 in cash
bonus payments to its employees for services provided during the year 2020, contingent upon the closing of the sale of WPT. During July
2021, cash bonuses of $1,245,000 were paid from the proceeds of the Sale Transaction, of which approximately $674,000 was paid to the
employees of WPT and approximately $571,000 was paid to the employees of the Company’s continuing operations.
Change
of Control Agreements
On
December 30, 2020, the Company’s Board of Directors authorized the Company to enter into an agreement with the Company’s
CEO which, upon the closing of a transaction that resulted in a change-in-control of WPT, as defined, would obligate the Company
to pay the CEO $1,000,000 upon the earlier of his termination of employment with AESE without cause, as defined, or the two-year anniversary
of the closing of the change-in-control transaction. Payment may be made in either cash or shares of AESE common stock (valued at
the trailing 10-day volume-weighted-average-price prior to the issuance date), at the Company’s discretion (See Note
13 – Stockholders’ Equity, Restricted Stock Units).
On December 30, 2020,
the Company’s Board of Directors authorized WPT to enter into agreements with the WPT CEO and General Counsel which, upon the closing
of a transaction that resulted in a change-in-control of WPT, as defined, would obligate WPT to pay the WPT CEO and General Counsel
aggregate lump-sum severance payments of $522,827.
On December 30, 2020,
Company’s Board of Directors approved, subject to a change-in-control of WPT which accelerates the vesting of AESE option grants
held by WPT employees, the extension of the exercise period of the options as follows: (i) the options to purchase an aggregate of 340,000 shares
of AESE common stock held by the WPT CEO and General Counsel may be exercised until the 10-year anniversary of the issuance date,
and (ii) the remaining options to purchase an aggregate of 300,000 shares of AESE common stock may be exercised until the one-year anniversary
of the change-in-control.
Note
13 – Stockholders’ Equity
Amendment
to Company Charter
On
July 27, 2020, the Company filed an Amendment to its Second Amended and Restated Certificate of Incorporation with the Secretary of State
of the State of Delaware to increase the number of shares of common stock currently authorized by the Certificate by 10,000,000 shares,
from 65,000,000 shares to 75,000,000 shares.
On
November 4, 2020, the Company filed with the Delaware Secretary of State an amendment to its Second Amended and Restated Certificate
of Incorporation to increase the total number of authorized shares of its common stock from 75,000,000 shares to 100,000,000 shares.
Equity
Incentive Plan
On
August 9, 2019, the Company’s Equity Incentive Plan (the “Incentive Plan”) was approved by the Company’s stockholders.
The Incentive Plan is administered by the Board of Directors, or a committee designated by the Board of Directors to do so. The effective
date of the Incentive Plan was December 19, 2018. The Incentive Plan provides the grant of incentive stock options (“ISOs”),
nonstatutory stock options, stock appreciation rights, restricted common stock awards, restricted common stock unit awards, as well
as other stock-based awards that are deemed to be consistent with the purposes of the plan.
On
December 30, 2021, the stockholders approved an amendment to the 2019 Equity Incentive Plan (the “Plan”) to increase the
number of shares of common stock authorized under the Plan from 3,463,305 shares to 3,763,305 shares. As of December 31, 2021 there were
304,904 shares available under the plan.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Put
Option Agreement and Exercise
On
February 25, 2020 (the “Effective Date”), the Company entered into a Put Option Agreement (the “Agreement”) with
the Chairman of the Company’s Board of Director (the “Chairman”), pursuant to which the Company has an option in its
discretion, to sell shares of its common stock (the “Option Shares”) to the Chairman for aggregate gross proceeds of up to
$2.0 million, at a purchase price of $1.963 per Option Share.
On
March 9, 2020, the Company provided notice to the Chairman that it had elected to exercise the Put Option to sell 1,018,848 Option Shares
at a purchase price of $1.963 per share for total proceeds of $2,000,000. The Option Shares were issued on May 15, 2020. On September
29, 2020, the Company received proceeds of $21,875 from the Chairman, representing the disgorgement of short swing profits realized from
the sale of shares.
Equity
Purchase Option
Prior
to the Closing Date, BRAC sold an option to purchase up to 600,000 units, exercisable at $11.50 per Unit, in connection with BRAC’s
initial public offering (the “Equity Purchase Option”). Each Unit consisted of one and one-tenth shares of common stock and
a warrant to purchase one share of common stock at $11.50 per share. Effective upon the closing of the Merger, the units converted by
their terms into the shares and warrants, and the option now represents the ability to buy such securities directly (and not units).
The Equity Purchase Option may be exercised on either a cash or a cashless basis, at the holder’s option, and expires on October
4, 2022. These previously issued BRAC Shares and Warrant Purchase Options are deemed to be issued in connection with the Merger, as a
result of the reverse recapitalization.
Common
Stock
On
January 14, 2020, the Company issued 758,725 shares of its common stock to an investor in exchange for $5,000,000 (the “Purchase
Price”) pursuant the Brookfield Agreement (see Note 12 – Commitments and Contingencies, Brookfield Partnership).
On
August 6, 2020, the Company issued 50,000 shares of common stock to its Chief Financial Officer. The shares were immediately vested with
no restrictions and had a grant date value of $109,000. On September 24, 2020, the Company issued 14,286 shares of common stock to the
Chairman of the Board of Directors. The common stock was immediately vested with no restrictions and had a grant date value of $20,000.
On
August 7, 2020, the Company issued 217,999 shares of common stock with a grant date value of $474,000 to certain officers and employees
of the Company, in satisfaction of bonus obligations incurred in previous years, which were included in accrued expenses as of December
31, 2019.
On
April 29, 2020, the Company issued 3,392,857 shares of its common stock valued at $9,998,845 upon the conversion of $5,000,000 debt (see
Note 8 – Convertible Debt and Convertible Debt, Related Party, Convertible Bridge Notes and Convertible Bridge Notes, Related Party).
During
the year ended December 31, 2020, the Company issued 9,678,840 shares of its common stock valued at $13,218,091 for the redemption of
$10,461,191 of debt and accrued interest (see Note 8 – Convertible Debt and Convertible Debt, Related Party, Senior Secured Convertible
Notes).
In
January 2021, the Company issued 529,383 shares of its common stock valued at $821,867 for the redemption of $674,909 of debt and accrued
interest (See Note 8 - Convertible Debt and Convertible Debt, Related Party, Senior Secured Convertible Notes).
For
the years ended December 31, 2021 and 2020, the Company issued to its non-executive directors an aggregate of 126,584 and 64,286
shares of common stock, respectively, from its 2019 Equity Incentive Plan for their director services to the Company. For the years ended
December 31, 2021 and 2020, the Company recognized stock-based compensation of $200,000 and $129,000, respectively, in connection with
the issuance of these shares.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Stock
Options
A
summary of the option activity during the year ended December 31, 2021 is presented below:
|
|
|
|
|
|
Weighted Average |
|
|
Weighted Average |
|
|
|
|
|
|
|
Number of |
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
Options |
|
|
Price |
|
|
Term (Yrs) |
|
|
Value |
|
Outstanding, January 1, 2021 |
|
|
|
2,430,000 |
|
|
$ |
4.15 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
510,000 |
|
|
|
2.29 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
(525,000 |
) |
|
|
4.27 |
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2021 |
|
|
|
2,415,000 |
|
|
$ |
3.73 |
|
|
|
7.52 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2021 |
|
|
|
1,360,000 |
|
|
$ |
4.08 |
|
|
|
6.34 |
|
|
$ |
- |
|
Options
outstanding and exercisable as of December 31, 2021 are as follows:
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
Outstanding |
|
|
Weighted |
|
|
Exercisable |
|
Exercise |
|
|
Number of |
|
|
Average Remaining |
|
|
Number of |
|
Price |
|
|
Options |
|
|
Life In Years |
|
|
Options |
|
$ |
2.11 |
|
|
|
80,000 |
|
|
|
8.50 |
|
|
|
20,000 |
|
$ |
2.17 |
|
|
|
120,000 |
|
|
|
8.60 |
|
|
|
120,000 |
|
$ |
2.21 |
|
|
|
350,000 |
|
|
|
- |
|
|
|
- |
|
$ |
2.48 |
|
|
|
160,000 |
|
|
|
- |
|
|
|
- |
|
$ |
4.09 |
|
|
|
1,425,000 |
|
|
|
5.84 |
|
|
|
1,060,000 |
|
$ |
5.66 |
|
|
|
280,000 |
|
|
|
7.72 |
|
|
|
160,000 |
|
|
|
|
|
|
2,415,000 |
|
|
|
6.34 |
|
|
|
1,360,000 |
|
The
option grants described below were issued from the Company’s 2019 Stock Incentive Plan (“Incentive Plan”).
On
May 6, 2021, the Company granted ten-year stock options to purchase an aggregate of 160,000 shares of common stock to its directors.
The shares vest in equal annual installments over four years and have an exercise price of $2.48 per share, which represents the Company’s
closing stock price on the day prior to the date of grant. The options had an aggregate grant date fair value of $145,777 and are being
amortized into expense over the vesting period.
On
July 13, 2021, the Company granted ten-year stock options to purchase an aggregate of 200,000 shares of common stock to Ms. Wu. The shares
vest in equal annual installments over four years and have an exercise price of $2.21 per share, which represents the Company’s
closing stock price on the day prior to the date of grant. The options had an aggregate grant date fair value of $202,910 and are being
amortized over the vesting period.
On
November 11, 2021, the Company granted ten-year stock options to purchase an aggregate of 150,000 shares of common stock to several of
its directors. The shares vest in equal annual installments over four years and have an exercise price of $2.21 per share, which represents
the Company’s closing stock price on the day prior to the date of grant. The options had an aggregate grant date fair value of
$159,756 and are being amortized into expense over the vesting period.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
grant date value of options granted during the years ended December 31, 2021 and 2020 were calculated using the Black-Scholes option
pricing model, with the following assumptions used:
|
|
For
the Years Ended |
|
|
|
December 31, |
|
|
|
2021 |
|
|
2020 |
|
Risk
free interest rate |
|
0.94% - 1.58% |
|
|
0.55% - 0.69% |
|
Expected
term (years) |
|
6.25 |
|
|
6.25 |
|
Expected
volatility |
|
40% - 46% |
|
|
38% |
|
Expected
dividends |
|
0.00% |
|
|
0.00% |
|
The
weighted average grant date fair value of the stock options granted during the years ended December 31, 2021 and 2020 was approximately
$1.00 and $0.80 per share, respectively.
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
is utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the
expected life of the instrument being valued, of similarly positioned public companies within its industry. 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 years ended December 31, 2021 and 2020, the Company recorded $1,224,699 and $1,158,173, respectively, of stock-based compensation
expense related to stock options, of which $767,942 and $214,239, respectively, was included in (loss) income from discontinued operations
before the sale of WPT on the accompanying consolidated statements of operations. As of December 31, 2021, there was $1,220,881 of unrecognized
stock-based compensation expense related to the stock options that will be recognized over the weighted average remaining vesting period
of 2.5 years.
Restricted
Common Stock
A
summary of the non-vested restricted common stock activity during the year ended December 31, 2021 is presented below:
|
|
|
|
|
|
Weighted |
|
|
|
|
Number
of |
|
|
Average |
|
|
|
|
Restricted |
|
|
Grant
Date |
|
|
|
|
Stock |
|
|
Fair
Value |
|
Non-vested
balance, January 1, 2021 |
|
|
|
199,143 |
|
|
$ |
2.03 |
|
Granted |
|
|
|
80,000 |
|
|
|
2.00 |
|
Vested |
|
|
|
(174,143 |
) |
|
|
1.69 |
|
Forfeited |
|
|
|
(25,000 |
) |
|
|
2.17 |
|
Non-vested
balance, December 31, 2021 |
|
|
|
80,000 |
|
|
$ |
2.00 |
|
For
the years ended December 31, 2021 and 2020, the Company recorded $260,433 and $459,220, respectively, of stock-based compensation expense
related to restricted stock of which $14,848 and $40,165, respectively, was included in (loss) income from discontinued operations before
the sale of WPT on the accompanying statements of operations. As of December 31, 2021, there was $99,946 of unrecognized stock-based
compensation expense related to restricted stock that will be recognized over the weighted average remaining vesting period of 0.6 years.
During
the year ended December 31, 2021, 100,904 shares of common stock valued at $210,147 were withheld by the Company to cover employee payroll
tax liabilities in connection with the vesting of restricted stock, including 23,411 shares valued at $50,802 for employee payroll tax
liabilities related to restricted stock vested during the year ended December 31, 2020 and 77,493 shares valued at $159,345 for restricted
stock vested during the year ended December 31, 2021.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Restricted
Stock Units
On
January 19, 2021, the Company entered into a Restricted Stock Unit Agreement with the Former CEO, pursuant to which the Former CEO received
restricted stock units having a stated value equal to $1,000,000. The restricted stock units represent the right to receive $1,000,000,
contingent upon the closing of the Sale Transaction, which is payable upon the earlier of the two-year anniversary of the closing date
of the Sale Transaction (provided that the Former CEO remains continuously employed by the Company through such date), or the termination
of the Former CEO’s employment without cause after the closing of the Sale Transaction (as defined in his employment agreement)
(as applicable, the “Vesting Date”). At the time of payment, the Company may elect to pay the $1,000,000 award in cash or
in shares of common stock valued at the fair market value of our common stock on the Vesting Date, or any combination thereof. All issuances
of common stock will be issued from the 2019 Equity Incentive Plan. If payments or benefits provided or to be provided by the Company
or its affiliates to the Former CEO pursuant to the agreement or otherwise (“Covered Payments”) constitute “parachute
payments” within the meaning of Section 280G of the Internal Revenue Code of 1986 (the “Code”) that would be subject
to the excise tax imposed under Section 4999 of the Code (collectively, the “Excise Tax”), payments to be made under the
agreement will be reduced to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise
Tax. Pursuant to the Separation Agreement, the Vesting Date was amended to be the earlier of (i) the sale of substantially all of the
assets or equity interests comprising the Company’s esports business, or (ii) the two-year anniversary of the sale of CSI (provided
that the Former CEO provides consulting services (when, as and if requested) to the Company through such date). The Company recorded
a charge to stock-based compensation and a corresponding credit to accrued compensation expense in the amount of $1,000,000 for the year
ended December 31, 2021, representing the full amortization of this award because the Company doesn’t expect the Former CEO to
provide substantive services (See Note 12 – Commitments and Contingencies – Change of Control Agreements).
Warrants
Prior
to the August 9, 2019 Closing Date of the Merger (see Note 1 – Background and Basis of Presentation), BRAC issued 14,305,000 five-year
warrants (the “BRAC Warrants”) for the purchase of the Company’s common stock at $11.50 per share in connection with
BRAC’s initial public offering. These previously issued BRAC Warrants are deemed to be issued in connection with the Merger, as
a result of the reverse recapitalization.
As
of result of the August 9, 2019 Merger, the Company issued to the former owners of Allied Esports and WPT five-year warrants to purchase
an aggregate of 3,800,003 shares of common stock at a price of $11.50 per share and issued five-year warrants for the purchase of an
aggregate of 532,000 shares of common stock to the Noteholders with an exercise price of $11.50 per share.
On
June 8, 2020, the Company issued warrants for the purchase of 1,454,546 shares of common stock at $4.13 per share in connection with
the issuance of Senior Secured Convertible Notes (See Note 8 – Convertible Debt and Convertible Debt, Related Party, Senior Secured
Convertible Notes).
A
summary of warrants outstanding and exercisable as of December 31, 2021 is presented below:
Warrants
Outstanding |
|
|
Warrants
Exercisable |
|
Exercise
Price |
|
|
Exercisable
Into |
|
Outstanding
Number of Warrants |
|
|
Weighted
Average Remaining
Life in Years |
|
|
Exercisable
Number of Warrants |
|
$ |
11.50 |
|
|
Common Stock |
|
|
18,637,003 |
|
|
|
2.6 |
|
|
|
18,637,003 |
|
$ |
4.13 |
|
|
Common Stock |
|
|
1,454,546 |
|
|
|
3.4 |
|
|
|
1,454,546 |
|
|
|
|
|
|
|
|
20,091,549 |
|
|
|
|
|
|
|
20,091,549 |
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Note
14 – Subsequent Events
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 $750,000 (gross) in severance pay payable over an 18-month
period, accelerated vesting of 200,000 unvested stock options previously granted to Ms. Wu pursuant to an Option Agreement dated effective
July 13, 2021, extended the exercise period to exercise such options to July 13, 2031, respectively, and accelerated vesting of 80,000
shares of restricted stock previously granted to Ms. Wu pursuant to an Executive Restricted Stock Agreement dated July 13, 2021. The
Release also contains a customary non-disparagement provision.
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 $25,000, accelerated
vesting of 40,000 unvested stock options previously granted to Mr. Lewin pursuant to an Option Agreement dated effective May 6, 2021,
and extended the exercise period of such options to May 6, 2031