PART
I
Item
1. Business
General
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 and World Poker Tour businesses.
For the past 16 years of its 18-year history, WPT’s business model has successfully utilized the following three pillars
for its business model in the sport of poker, which the Company believes can be utilized by Allied Esports:
|
●
|
in-person
experiences;
|
|
|
|
|
●
|
developing
multiplatform content; and
|
|
|
|
|
●
|
providing
interactive services.
|
The
Company plans to continue operating the WPT business and to utilize its business model to execute on its growth strategy in the
multibillion-dollar esports industry. Allied Esports will do this by collaborating with its strategic investors, including Simon,
a global leader in the ownership of premier shopping, dining, entertainment, and mixed-use destinations, Brookfield Property Partners,
a world premier real estate company, and TV Azteca, a premier television network in Mexico, to deliver best-in-class live events,
content and online products.
The
Allied Esports Business
Gaming
is one of the largest and fastest growing markets in the entertainment sector, with an estimated 2.56 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 $1.5 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.
In
June 2019, Allied Esports entered into a series of strategic transactions with certain affiliates of Simon, pursuant to which
Allied Esports will organize and stage an esports event program called the Simon Cup at certain Simon shopping centers in the
U.S. and online. In June 2019, the Company also launched a strategic partnership with TV Azteca, a premier television network
in Mexico. 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 each of the foregoing
partnerships, the Company’s partner made a $5 million equity investment into the Company.
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 Esports Arena Las Vegas, the HyperX Esports Studio in Germany, its on-mall
esports venues – the first of which that is planned to be open at the Mall of Georgia in the second half of 2020, and its
affiliate arenas in Santa Ana and Oakland, California, China and Australia (opening in March 2020), 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 arenas, 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 Esports Arena Las Vegas serves as a marquee destination for esports fans globally, which
it hopes will become the Madison Square Garden or Yankee Stadium of esports.
Flagship
Arena. In March 2018, Allied Esports opened its first 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. 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; food and beverage; and sponsorship (i.e., our HyperX naming rights relationship). Through the fourth quarter
of 2019, the HyperX Esports Arena Las Vegas has held the following events:
Proprietary
events by Allied Esports:
|
●
|
Allied
Esports CES Showdown
|
|
|
|
|
●
|
Day
One: The Division 2
|
|
|
|
|
●
|
PlayTime
with KittyPlays I
|
|
|
|
|
●
|
PlayTime
with KittyPlays II
|
|
|
|
|
●
|
Nation
Vs. Nation: USA vs. Mexico – English Broadcast
|
|
|
|
|
●
|
Allied
Esports Rainbow Six Siege Vegas Minor
|
|
|
|
|
●
|
World
Poker Tour
|
|
|
|
|
●
|
Glory
Road: MKLeo vs. Samsora
|
|
|
|
|
●
|
Simon
Cup Grand Finals
|
|
|
|
|
●
|
Tuesday
Faceoffs (Weekly)
|
|
|
|
|
●
|
Wednesday
Whiffs
|
|
|
|
|
●
|
Apex
Legends Game Night (Weekly)
|
|
|
|
|
●
|
Arena
Showcase (Weekly)
|
|
|
|
|
●
|
Friday
Frags (Weekly)
|
|
|
|
|
●
|
Saturday
Night Speedway (Weekly)
|
|
|
|
|
●
|
UNLV
Night (Monthly)
|
Other
events hosted by Allied Esports:
|
●
|
Nintendo
Super Smash Bros Ultimate North America Open – Online Broadcast
|
|
|
|
|
●
|
Military
Gaming League
|
|
|
|
|
●
|
Drone
Racing League
|
|
|
|
|
●
|
World
Poker Tour
|
|
|
|
|
●
|
Sony
NAB Keynote Address Remote Integration Demonstration
|
|
|
|
|
●
|
BIG3
Draft for CBS Sports Network
|
|
|
|
|
●
|
NBA
2K League “THE TURN”
|
|
|
|
|
●
|
Dragon
Ball Legends Showdown
|
|
|
|
|
●
|
NHL
Gaming World Championship
|
|
|
|
|
●
|
Newegg
Crown Royale
|
|
|
|
|
●
|
Twitch
Prime Crown Cup
|
|
|
|
|
●
|
Red
Bull Evo After Party
|
|
|
|
|
●
|
Newegg
FragFest
|
|
|
|
|
●
|
HyperX
Kickoff to WoW Classic
|
|
|
|
|
●
|
Esports
Business Summit Tempest Awards
|
|
|
|
|
●
|
Big
Buck Hunter World Championship
|
|
|
|
|
●
|
SoulCalibur
World Invitational
|
|
|
|
|
●
|
Capcom
Cup North America Regional Finals 2019
|
|
|
|
|
●
|
League
of Legends All-Star 2019
|
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 California, China
and a multi-year agreement with Fortress Esports Pty Ltd, a new gaming, esports and entertainment venue enterprise in Australia,
which plans to open its first affiliate arena in Melbourne in March 2020. 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.
Strategic
Investor Events. In addition to Allied Esports utilizing in-person experiences at its flagship, mobile and affiliate arenas,
Allied Esports is leveraging its experience to develop events and content with its strategic investors, Simon, Brookfield Property
Partners, and TV Azteca. Moreover, Allied Esports is working with TV Azteca to create in-person experiences in Mexico. These events
create content that will be used to populate the TV Azteca digital channel being developed by TV Azteca and Allied Esports.
Allied
Esports is collaborating with Simon and Brookfield Property Partners to create a new product offering focused on delivering esports
experiences through integrated gaming venues and production facilities in select shopping centers around the U.S. that are owned
and/or operated by Simon and Brookfield. The on-mall venues will be designed to activate esports and other emerging live events
through tournament play of all levels and daily use, featuring PC and console gaming, plus full food and beverage options, and
experiential retail. The venues will have the capability to be expanded into common areas for larger esports activations and live
events.
In
addition, on September 30, 2019, Allied Esports and Simon launched The Simon Cup, a co-branded esports competition and gaming
tournament series of on-mall regional festivals combining online and in-person play at select Simon centers in the New York and
Los Angeles markets, with the winners of the regionals moving on to HyperX Esports Arena Las Vegas, where the first Simon Cup
Champion was crowned on November 23. As a premier esports facility, Allied Esports believes utilizing the Las Vegas arena will
drive participants to the Simon Cup qualifying events and increase revenue for the Company.
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 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 is the most popular 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, Mixer, YouTube Gaming, 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. An example is a streaming event Allied Esports held with one of the most prominent
streamers in esports, Tyler Blevins, AKA Ninja, in April 2018. Famous for his streaming channel where he plays the popular esports
game Fortnite, Ninja held a live event at the Las Vegas flagship arena that set records for Twitch live streams, with over 667,000
peak concurrent viewers and 2.4 million unique viewers. To put those audience numbers in perspective, those numbers are significantly
higher than viewership of the average regular season NBA game in 2019. Allied Esports was able to sell multiple sponsorships for
the event and earned significant revenue from the food and beverage, merchandise sales and usage fees from the gaming stations.
Although large audiences can be garnered through these live event streams, there are limitations on the streams, as they have
a one-and-done nature; repeat viewing is not popular for these events, which limits the sponsorship opportunities. Furthermore,
due to the live nature of these events and streams, it is difficult to create a narrative or tell a story to compel viewership
past an initial viewing. This leads to Allied Esports’ development of post-produced episodic content.
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 the 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.
Strategic
Investor Content. Allied Esports will work with its strategic investors, Simon, and TV Azteca, to create valuable in-person
experiences and esports entertainment content to enhance our value proposition. Allied Esports and TV Azteca will work to develop
content and programming formats to develop a digital esports entertainment channel (described below), and content produced from
the Simon events will be developed and distributed on digital and non-digital media outlets to maximize the exposure and reach
of our joint enterprises.
Interactive
Services: Developing an Esports Entertainment Platform
Allied
Esports intends to develop its own online platform where esports players and fans can watch, play and win with other members of
the esports community and top esports personalities. The online platform will enable fans to compete against each other as well
as participate in esports programs starring their favorite players. Subscriptions will provide members with exclusive access to
numerous unique and proprietary experiences, products and services that are not available outside of Allied Esports’ ecosystem,
such as exclusive online content, member-only tournaments, prizes and cash awards, exclusive live event and merchandise access,
exclusive opportunities to be part of our entertainment programming, VIP treatment at Allied Esports’ arenas, and much more.
Allied Esports intends to use the authenticity and reach driven by its in-person experiences and content viewership to drive platform
adoption by esports fans. Allied Esports’ executive team has years of experience developing online platforms—its CEO,
Frank Ng, has managed and run online platforms with approximately 700 million registered users in China for over 14 years, and
its COO, David Moon, has produced, published and operated numerous game services for over 20 years, including helping build NHN
Corporation’s global footprint to over 1 million concurrent users. Furthermore, WPT has developed and operated its subscription
platform for poker fans, ClubWPT, since 2010, and developed and operated a social poker product, PlayWPT, starting in 2016. PlayWPT
was licensed to a third party in May of 2018.
Allied
Esports intends to sequentially roll out platform features to support core strategic initiatives with its strategic investors,
Simon and TV Azteca. The initial release of the platform will focus on supporting regular programs of esports experiences at Simon’s
premiere centers across the U.S. The platform will subsequently be released in Mexico in partnership with TV Azteca, to support
the participation, viewing, and monetization of esports events and programs, as well as the provision of a 24-hour digital esports
entertainment channel. Allied Esports believes focusing on these two projects initially is the most efficient way to build brand
equity, aggregate audience and build the initial user base that will propel Allied Esports’ platform in the future.
The
WPT Business
The
Company owns the World Poker Tour® (WPT®) – a premier name in internationally televised gaming and entertainment
with brand presence in land-based poker tournaments, television, online and mobile. A leading innovator in the sport of poker
since 2002, WPT helped ignite the global poker boom with the creation of a unique television show based on a series of high-stakes
poker tournaments. WPT’s Tour Events are held at locations throughout the world and have awarded more than one billion in
prize dollars in its 18-year history. WPT has broadcast globally in more than 150 countries and territories, and is currently
producing its 18th season, which airs on FOX Sports Regional Networks in the United States. Season 18 of WPT is sponsored by its
online subscription-based poker service, ClubWPT.com. WPT offers a suite of online poker services which it operates by itself
and through its partners offering consumers the ability to access gaming content on a year-round 24/7 basis. ClubWPT.com is a
unique online membership site that offers inside access to the WPT, as well as a sweepstakes-based poker club available in 35
states across the United States and Washington D.C., and four foreign countries with innovative features and state-of-the-art
creative elements inspired by WPT’s 18 years of experience in gaming entertainment. In addition, WPT licenses its brand
to social gaming sites through partners like Zynga as well as to educational learning platforms such as LearnWPT. These online
products are scalable and offer geographic access that might be limited if WPT relied on tour stop participation alone. Additionally,
WPT benefits from managing its own distribution business which currently has more than 1,000 hours of broadcast-ready content,
and offers demographically similar programming to its poker content, such as esports, golf and MMA. WPT uses this large suite
of programming as leverage to seek preferred airtimes on its various distribution channels where it may promote its online products
or offer airtime to sponsors in territories they seek to enter. WPT also participates in strategic brand license, partnership,
sponsorship opportunities and music licensing. As described below, WPT applies a three-pillar model of in-person experiences,
developing multiplatform content and providing interactive services, to the sport of poker.
In-person
Experiences: Worldwide Poker Tournaments
World
Poker Tour Events. The WPT is a sports league of affiliated poker tournaments that are held at prestigious casinos and poker
rooms around the world. WPT licenses the WPT brand to these casinos and card rooms so that they can brand their poker tournaments
as WPT events, and these events are integrated into WPT’s tour. These events form the backbone of WPT’s brand identity
and have turned the WPT into one of the most recognizable names in gaming. WPT has developed different types of tours, generally
distinguishable by the size of the buy-in for competitors in the applicable tour’s events. The WPT Main Tour events generally
have the biggest buy-ins (usually between $3,500 and $10,000), are held at the largest and most prestigious casinos and card rooms
and are attended by many of the top professional poker players in the world. The WPT DeepStacks Tour and WPT500 events are smaller
than Main Tour events, with buy-ins ranging from $300 to $1,000, and are meant to cater to the lower- to medium-stakes players.
In addition, through a third-party licensing arrangement, WPT licenses its name to a third party operating the WPT League, which
are small bar-league poker events held at bars and clubs on a social basis. These live events create touchpoints to a large community
of poker players to whom WPT can market other WPT live events, advertise and market its sponsor’s products, and push towards
its interactive products. Furthermore, the live events create the content WPT uses to monetize its brand, as set forth below.
Multiplatform
Content: The World Poker Tour Television Shows
The
Content. WPT films the final table of six participants from a select group of WPT’s Main Tour stops, where the
players compete for some of the poker world’s largest tournament prize pools. We then edit the footage from these tour stops,
resulting in a series of one-hour or two-hour episodes which are distributed for telecast to both domestic audiences via our broadcast
agreement with FSN, and international television audiences via numerous international distribution agreements. WPT has an agreement
with Poker Go, a prominent poker-centric online platform, pursuant to which WPT live streams many of its events to Poker Go’s
customer base. Many of WPT’s live events that are not broadcast on FSN are live streamed on Poker Go, which ensures almost
all of WPT’s events are broadcast on some format. In addition, WPT films and produces special episodes based on a variety
of non-traditional poker tournaments and/or cash games, which it also distributes for telecast along with the episodes based on
WPT’s regular tour stops. Furthermore, WPT produced specialized shows meant to promote and market its ClubWPT membership
site, such as its “King of the Club” shows in which ClubWPT members won the right, by winning certain tournaments
on the ClubWPT platform, to play against each other for cash and prizes in a single-table tournament that was filmed and broadcast
on FSN. WPT also filmed and prepared for distribution another series of shows to promote ClubWPT called “Challenge the Champs”,
in which ClubWPT members who qualified on the ClubWPT platform received the chance to play against former WPT Main Tour champions
for cash and prizes. These episodes premiered on FSN in August and September 2019.
WPT
previously produced and broadcasted on FSN a series of shows called WPT Alpha8, based on a series of high-stakes poker tournaments
with buy-ins of $100,000. In the Alpha8 events, some of the most elite high-stakes players in the world played in poker tournaments
against one another in glamorous casinos and card rooms around the world, with the final eight players of each tournament filmed
for production of the television episodes. The inaugural season of WPT Alpha8 began in 2013 and aired for three seasons, ending
in 2016 and continues to be distributed internationally. WPT has continued to expand its global footprint by entering into an
agreement with TV Azteca, pursuant to which WPT and TV Azteca are creating modified content using footage from WPT’s current
library of content and translating the shows and integrating localized hosts for distribution in the territory of Mexico. This
strategy of localizing WPT content has previously proven successful, namely in France, and we believe this localized content in
the territory of Mexico will become a significant driver for a jointly owned social gaming platform. WPT and TV Azteca recently
launched in beta this August 2019. Interest in the show so far is high, with viewership already exceeding 3 million viewers of
a single episode. In addition to the strategic advantage of the “World Poker Tour” and WPT-related brands, WPT has
created significant efficiencies in its content programming through its affiliation and use of Allied ESports’ HyperX Esports
Arena Las Vegas venue to film some of its Main Tour final tables and other special events. This change, which just began for Season
17, has significantly reduced production costs by reducing transportation and set up fees and has allowed for more content to
be produced at a significantly more efficient cost. Moreover, by reducing the physical location needs from its casino partners
that would otherwise be featured in a WPT televised event, WPT has greatly expanded the number of potential casino customers that
can meet the requirements for hosting a WPT televised final table. Finally, WPT creates, owns and publishes its own music for
WPT shows. In addition to receiving royalties for the music integrated into these programs, WPT has created a database of over
2,300 musical pieces which may be licensed for itself or for other third-party producers.
WPT
Distribution Footprint. All of the WPT television programs air on FSN in the U.S., including FSN’s regional channels
(“RSNs”), and in 33 different territories worldwide pursuant to licensing and distribution arrangements with various
linear and digital networks. Virtually all of WPT’s 17-season poker library is fully available for distribution, providing
hundreds of hours of top-tier broadcast grade poker sports content. WPT has greatly expanded the reach of its content by licensing
it for broadcast on many digital platforms as well, such as PlutoTV, Unreel Entertainment, Samsung TV Plus, and many others. WPT
does not receive fees from FSN for the domestic distribution of our content. Instead, WPT uses the WPT show to heavily promote
its ClubWPT product and other online products and partnerships, such as Zynga’s WPT social poker game. WPT does provide
FSN with a guaranteed revenue share from ClubWPT’s operations in exchange for significant promotion and distribution of
the programs featuring ClubWPT marketing. This arrangement ensures that FSN has an incentive to keep WPT’s show on the air
and to market and promote the show, as they share in the show’s success to the extent ClubWPT’s revenue increases.
Since the ClubWPT customer base and broadcast television viewers are similar in demographics, the symbiotic relationship between
FSN and WPT works well to keep WPT’s brand widely known and accessible to millions of people in the U.S. The FSN agreement
also has other important broadcast requirements to ensure that WPT’s programming remains “appointment television”
and airs at particular times on both the FSN networks and the RSNs. Internationally, some of WPT’s distribution partners
pay WPT fees to broadcast content, but usually, WPT’s international revenues are based on distribution deals that pay via
advertising time and sponsorship sales, as well as the intrinsic value of spreading WPT’s brand awareness worldwide. We
expect the international reach of WPT-related shows to grow meaningfully starting in the third quarter of 2019, as a result of
WPT’s strategic relationship agreement with TV Azteca. WPT receives additional fees from our digital distribution agreements,
but again see these as brand-building exercises and as avenues to get more people exposure for WPT’s online products, sponsors
and advertisers. In addition to its World Poker Tour content, WPT also distributes various sports and lifestyle programming through
its distribution business. As a result, WPT now controls over 1,100 hours of programming from which it may generate distribution
fees, license fees, sponsorship revenue and music licensing revenue, as well as serving as a vehicle to promote its online gaming
products worldwide. The ability to “bundle,” or offer large amounts of content, provides WPT distribution leverage
in negotiating the amount of airings or preferred airing times of its content.
The
Walt Disney Company (“Disney”) recently acquired 21st Century Fox (“FOX”). Under the terms of the acquisition,
FOX’s non-regional news and sports assets, including FSN, were spun off into a new company, Fox Corporation (which is commonly
referred to as “New Fox”), which remains owned by the prior FOX shareholders. The Department of Justice required Disney
to sell all RSNs within ninety (90) days after the closing of the Disney/FOX acquisition. The RSNs (including FSN) were recently
purchased by a joint venture company owned by Sinclair Broadcast Group and Entertainment Studios, Inc. (collectively, “Sinclair”).
It is not clear at this time whether Sinclair’s acquisition of the RSNs (including FSN) will have any material effect on
the airing of WPT’s content.
Sponsorship
Revenue. Sponsorship revenue is the prime economic driver of the distribution of WPT content. WPT partners with prestigious
brands, such as Dr. Pepper (soft drinks), Hublot (high-end timepieces), Rockstar (energy drinks), Baccarat (fine crystal), Party
Poker (online gaming in Europe), and offers them the ability to become the “Official ________ of the World Poker Tour”.
The Season 17 sponsors have included Hublot, Rockstar, Baccarat, Faded Spade Poker (a playing card manufacturer), and Zynga Inc.
(social gaming operator). WPT is able to seamlessly integrate its sponsors into the WPT television show by displaying sponsors
on poker tables, on television sets, and specialized segments that are brought to viewers by the applicable sponsor. By integrating
WPT’s sponsors into the show, WPT provides a powerful marketing tool in that viewers are seeing the sponsor as part of the
show they are watching, as opposed to an advertisement that they may mute or skip if possible. WPT’s live events also offer
WPT sponsors a great advertising platform to market directly to WPT players via signage, product sampling suites, flyers, and
similar marketing endeavors.
Interactive
Services: Poker Platforms
WPT’s
live event global footprint and distribution of its content via broadcast, streaming and social media, allow WPT to generate significant
marketing opportunities for both its sponsors and its own products. WPT has taken advantage of this marketing arm to promote several
interactive products: ClubWPT, its subscription-based online poker club that WPT owns and operates, which also offers social poker;
PlayWPT, a web and mobile social poker product that is operated by a third party utilizing software and branding that WPT licenses
to such provider; Zynga Poker, who operates one of the world’s largest social poker products, to whom WPT has licensed its
brand for certain WPT-branded poker tournaments on their platform; and HongKong Triple Sevens Interactive Co., Ltd, who licenses
WPT’s Alpha8 brand to operate a social poker product they are in the process of developing.
ClubWPT.
WPT’s subscription-based online club, ClubWPT.com, is operated in accordance with the principles of sweepstakes law and
is available in 36 U.S. states and territories and four foreign countries. A free alternative means of entry is offered for participants
who wish to play in the tournaments but do not wish to purchase the other membership benefits. VIP members can play poker to win
a share of $100,000 in cash and prizes every month, including seats in live WPT poker tournaments. Other benefits include access
to every season of the WPT television series and all related content, discounted tickets to live events through ScoreBig, everyday
savings for everyday things via the ClubWPT Entertainment Savers Guide, and other member benefits. In January of 2019, WPT added
freemium social poker and casino gaming on the platform. Since that time, daily active revenue has risen steadily, and we anticipate
the freemium products on the platform will be a meaningful driver of ClubWPT revenue going forward. The subscription fee for ClubWPT
remains the same each month and players are not allowed to wager actual money online. One must be eighteen or older to participate.
Zynga
Poker. WPT entered into a 3-year licensing agreement with Zynga, Inc. in 2018 pursuant to which Zynga agreed to pay WPT $3
million per year in exchange for the right to license the WPT name and brand to its massive social gaming database for WPT-branded
poker tournaments on the Zynga social poker platform. WPT supports Zynga’s efforts through extensive marketing of its brand
through its marketing network which includes its television programs, advertisements, and social media channels. Zynga has further
used the WPT tournaments as a vehicle to reward their players through qualifying players to play in real money poker tournaments
at WPT affiliated casinos. The partnership means that the Zynga and WPT brands elevate each other’s profile in the poker
community through millions of impressions annually.
PlayWPT
and Alpha8 Social Poker. WPT’s 3-year license agreements for PlayWPT and the Alpha8 social poker product that each commenced
in 2018 provide WPT with a share of all revenue generated on those respective platforms, with annual minimums of the greater of
$500,000 or 20% of revenue generated for PlayWPT, and the greater of $200,000 or 20% of revenue generated for the Alpha8 social
poker product. These arrangements offer WPT significant annual payments based on the value and prestige of WPT’s brands
and WPT’s ability to market and promote the platforms.
In
addition to the three-pillar approach to monetizing the WPT brands as described above, WPT has also been able to combine these
approaches in a regional manner to create localized versions of the WPT in other parts of the world. For example, WPT has an agreement
with Adda52, one of the largest online poker operators in India, pursuant to which Adda52 utilizes WPT brands to put on WPT-branded
tournaments, create and sell WPT merchandise, sponsor and distribute WPT content, and otherwise market and promote their own products
using the WPT name. WPT had a similar arrangement for the Asia-Pacific region with WPT’s former parent company, Ourgame,
and is negotiating similar arrangements with parties in other parts of the world, such as Latin America. These brand licensing
arrangements not only provide WPT with revenue derived from upfront payments and revenue share, but they broaden WPT’s brand
reach in localized ways to parts of the world that WPT would be hard-pressed to effectively market to on its own. WPT believes
that this increased reach will have long-term benefits to WPT’s brand image and profitability.
Corporate
Organization
Our
principal offices are located at 17877 Von Karman Avenue, Suite 300, Irvine, California, 92614, and our telephone number at that
office is (949) 225-2600.
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 (see 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. operate the poker-related business of AESE 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 these condensed combined
financial statements prior to the Merger are those of Allied Esports and WPT. The preferred stock, common stock, additional paid
in capital and earnings per share amount in these condensed combined financial statements for the period prior to the Merger have
been restated to reflect the recapitalization in accordance with the shares issued to the Former Parent as a result of the Merger.
References herein to the “Company” are to the combination of AEM and WPT during the period prior to the AEM Merger
and are to AESE and subsidiaries after the Merger.
Allied
Esports 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.
Business
Strategy
For
the past 16 years of its 18-year history, WPT’s business model has successfully utilized the following three pillars in
the sport of poker for its business model, which the Company believes can be utilized by Allied Esports:
|
●
|
in-person
experiences;
|
|
|
|
|
●
|
developing
multiplatform content; and
|
|
|
|
|
●
|
providing
interactive services.
|
The
Company plans to continue operating the WPT business and to utilize its business model to execute on its growth strategy in the
multibillion-dollar esports industry. Allied Esports will do this by collaborating with its strategic investors, including certain
affiliates of Simon, a global leader in the ownership of premier shopping, dining, entertainment, and mixed-use destinations,
certain affiliates of Brookfield Property Partners, a world premier real estate company, and TV Azteca, a premier television network
in Mexico, to deliver best-in-class live events, content and online products.
Regulation
WPT
tournaments are conducted by the host casinos and card rooms, and we believe WPT is not subject to government gaming regulation
in connection with its affiliation with and telecasts of these events. We continue to monitor the legality of Internet gaming
in domestic and international jurisdictions, but cannot be certain that changes in existing regulations will be beneficial to
the gaming market. WPT’s subscription-based online club, ClubWPT.com, is operated in accordance with the principles of sweepstakes
law. A free alternative means of entry is offered for participants who wish to play in the tournaments but do not wish to purchase
the other membership benefits. The subscription fee for ClubWPT remains the same each month and players are not allowed to wager
actual money online. One must be eighteen or older to participate. However, the awarding of cash and prizes will require compliance
with the laws or regulations in various states or countries over sweepstakes, promotions and giveaways, are complicated and constantly
changing.
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. We rely on a combination of trademarks, patent, trade secret intellectual property rights and other
measures to protect our intellectual property.
WPT
has filed trademarks for the names of its shows, including the World Poker Tour name and logos. The trademark “World Poker
Tour” has been registered with the U.S. Patent and Trademark Office (“USPTO”) on the principal register in connection
with entertainment services, clothing, playing cards and poker chips, and housewares and glass; and on the supplemental register
in connection with electronic and scientific apparatus. Other registered marks around the world include: “Alpha8”
in the U.S., Canada, China, Europe, South Africa and Uruguay; “Battle of Champions” in the U.S.; “Card Design”
in Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Puerto Rico, and Venezuela; “Doyle Brunson North American
Poker Championship” in the U.S.; “Hollywood Home Game” in the U.S.; “Ladies’ Night” in the
U.S.; “Latin American Poker Tour” in Peru and Europe; “Poker Détente” in Europe; “Poker Walk
of Fame” in the U.S.; “PPT” in the U.S., Canada and Europe; “PPT & Design” in the U.S. and Canada;
“Professional Poker Tour” in the U.S.; “Professional Poker Tour PPT & Design” in the U.S.; “Royal
Flush Girls” in the U.S.; “Time Slots” in Canada, Europe and the U.S.; “World Poker Tour” in Argentina,
Australia, Brazil, Canada, Chile, Colombia, Costa Rica, Europe, Mexico, Peru, Puerto Rico, South Africa and Venezuela; “World
Poker Tour & Design” in the U.S., Canada and Europe; “WPT” in the U.S., Argentina, Australia, Brazil, Chile,
Colombia, Costa Rica, Mexico, Peru, Puerto Rico, South Africa, and Venezuela; “WPT8 Design” in U.S., Australia, Canada,
China, Europe, South Africa and Uruguay; “WPT Academy” in Europe; “WPT Alpha8 Design” in Australia, Canada,
China, Europe, South Africa and Uruguay; “WPT Boot Camp” in the U.S.; “WPT Poker Corner” in the U.S.,
Canada and Europe; “WPT Spade Card Design” in China; “WPT World Poker Tour & Design” in the U.S.,
Australia, Canada, Europe and Korea. We have registered approximately 2,100 Internet domain names in 70 regions around the world.
We also have proprietary rights to our portfolio of registered and unregistered copyrighted materials, which includes the episodes
of the televised programming and music that we produce, subject to licenses related to these episodes provided under our agreements
with our distributors and our international telecast license agreements, as well as the WPT Academy database and online videos.
WPT
has filed five U.S. and international patent applications. One application, relating to a specially designed game table that uses
integral lighting, was issued by the USPTO in 2007. WPT’s remaining applications relate to (1) systems and methods reducing
fraud in electronic games having virtual currency; (2) systems and methods to reduce impact of network disruptions; (3) systems
and methods to provide multiple commentary streams for the same broadcast content; and (4) systems and methods for securing virtual
currencies and enhancing electronic products.
Allied
Esports has filed for one patent application in the U.S. related to systems and methods for latency in networked competitive multiplayer
gaming. It has also registered approximately 45 domain names. Allied Esports has filed for trademark protection for the following
marks as well: “Allied Esports” has been filed in the U.S., “Allied Esports” bold mark has been filed
in China and Europe; The “Allied Esports” logos have been filed in the U.S. and Europe; the “Allied Esports
Member Property Network” logo has been filed in China and Europe; the “Big Betty” logos have been registered
in Europe; “E-sports Arena” have been registered in China, “Esports Superstars” logo has been filed in
the U.S.; “Legend Series” logo has been filed in the U.S. and Europe; and the “Allied Esports” emblem
has been filed in China and Europe.
Competition
WPT
competes with other poker-related television programming, including ESPN’s coverage of the “World Series of Poker”
and its “World Series of Poker” Circuit Events, among others. These and other producers of poker-related programming
are well established and may have significantly greater resources than WPT does. Based on the popularity of these poker-related
televised programs, WPT believes that additional competing televised poker programs may currently be in development or may be
developed in the future. WPT’s programming also competes for telecast audiences and advertising revenue with telecasts of
mainstream professional and amateur sports, as well as other entertainment and leisure activities.
The
esports gaming industry is also 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 March 13, 2020, we had approximately 146 employees, including 20 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
General
Risks
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 incur significant additional 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 and maintain profitability in future periods. As a result, Allied Esports may generate
losses. Allied Esports cannot assure you that it will achieve or maintain 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’ 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. 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.
Allied
Esports’ 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’ growth strategy is to extend its brand by opening additional venues throughout the world
and licensing the Allied Esports brand to third party esports venue 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;
|
|
|
|
|
●
|
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 venue operators around the world, it will depend on those
operators to run those venues at a quality level similar to Allied Esports’ owned and operated arenas. Allied Esports’
strategy depends on customers associating the third party esports venues 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’ 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’ 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 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, margins, and profitability 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, profitability and 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’ 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.
Risks
Related to Allied Esports’ Intellectual Property
Allied
Esports licenses a brand name under an agreement that will expire and may also be subject to claims of infringement of third-party
intellectual property rights.
Allied
Esports has a three-year license with a third party, ending in July 2021, to use the name “Esports Arena” which is
part of the branding for its Las Vegas flagship esports arena location. Once that license expires, there is no assurance that
Allied Esports will be able to further license those names or purchase them on satisfactory terms. Although Allied Esports intends
to market and promote its esports arenas using intellectual property it owns and controls, 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.
WPT
RISK FACTORS
Risks
Related to WPT’s Current Business
WPT’s
broadcast agreement with Fox Sports Net (“FSN”) sets a minimum level of distribution that is significantly less than
the current distribution level. If WPT’s current level of distribution is reduced, the reduction could materially and adversely
affect WPT’s results of operations.
Currently,
WPT broadcasts certain of its worldwide Main Tour events throughout the United States on FSN, and they are also available on ClubWPT.com
on demand, and on various digital streaming platforms. WPT’s programming agreement to broadcast the television series does
not provide for any license fees to be paid to WPT for the broadcast rights, and contains a minimum level of distribution. Currently,
WPT’s programming is broadcast significantly more frequently that the minimum threshold under the programming agreement.
With no license fee in place for the distribution, WPT benefits from the program’s distribution and promotion of WPT’s
online products (ClubWPT) and generates fees from sponsors by integrating sponsor logos and other advertising materials into its
programs and around the broadcast of the shows through music royalties and distribution of the shows in other markets. The Season
17 sponsors included Hublot S.A., a luxury watch maker, Rockstar, Inc., an energy drink company, Baccarat, Inc., a manufacturer
and retailer of fine crystal, Faded Spade Poker, LLC, a playing card manufacturer, and Zynga Inc., a social gaming operator. If
WPT’s level of distribution were reduced by FSN, the value of the foregoing would be significantly reduced and it may be
difficult for WPT to find sponsors on terms acceptable to WPT, or at all.
WPT’s
production costs may increase.
In
May 2016, WPT entered into a programming agreement for FSN to broadcast Seasons 15 through 18 of the WPT television series through
calendar year 2021 on terms that are similar to the prior programming agreement discussed above. WPT may be required to pay the
cost to produce these shows for FSN and depending on the amount of the related revenues it is able to generate, the lack of license
fees could have a material adverse effect on WPT’s financial condition, results of operations and cash flows.
Sinclair’s
acquisition of FSN could have negative consequences on World Poker Tour.
The
Walt Disney Company (“Disney”) recently acquired 21st Century Fox (“FOX”). Under the terms of the acquisition,
FOX’s non-regional news and sports assets, including FSN, were spun off into a new company, Fox Corporation (which is commonly
referred to as “New Fox”), which remains owned by the prior FOX shareholders. The Department of Justice required Disney
to sell all regional sports assets obtained as part of the acquisition (the “RSNs”) within ninety (90) days after
the closing of the Disney/FOX acquisition. WPT’s programming agreement with FSN’s owner requires FSN to ensure WPT’s
programming reaches a certain amount of households, which requires FSN’s owner to ensure we are broadcast on the RSNs. The
FSN agreement also has other important broadcast requirements to ensure that WPT’s programming remains “appointment
television” and airs at particular times on both the FSN networks and the RSNs. The RSNs (including FSN) were ultimately
purchased by a joint venture company owned by Sinclair Broadcast Group and Entertainment Studios, Inc. (collectively, “Sinclair”).
Although Sinclair purchased all or substantially all of FOX’s RSNs, it will be difficult to ensure WPT’s programming
is carried on all of the RSNs, or at the times and dates WPT finds desirable. Even though WPT’s FSN programming agreement
will remain an enforceable obligation against Sinclair, there is no assurance that Sinclair will continue to broadcast WPT’s
programming on FSN on terms WPT finds reasonable, if at all. Furthermore, the sale of the RSN’s to Sinclair and the changes
to the FOX and the FSN business could negatively affect WPT’s ability to find other traditional television network distribution
of the WPT shows in the United States. Any reduction or change of WPT’s distribution footprint has the potential to negatively
affect its brand and associated sponsorship, marketing and promotional efforts.
There
is no assurance that FSN will broadcast future seasons of the World Poker Tour, which would materially and adversely affect WPT’s
results of operations.
In
May 2016, WPT entered into an agreement for FSN to broadcast Seasons 15 through 18 of the WPT television series through calendar
year 2021. If FSN elects to discontinue airing either series and WPT cannot replace its programming agreement with an agreement
with a comparable U.S. broadcaster, it may be difficult for WPT to obtain sponsorship funds, it will be detrimental to the viability
of the WPT brand and, consequently, would have a material adverse effect on WPT’s financial condition, results of operations
and cash flows.
Consumers
shifting to online video on-demand services like Hulu and Netflix and away from cable could have negative consequences on World
Poker Tour.
Historically,
WPT has relied on traditional television network distribution in order to build its brand and generate sponsorship revenue. As
online video on-demand services such as Hulu and Netflix have become increasingly popular compared to traditional cable subscriptions,
WPT has increased its digital distribution. If these “cable-cutting” trends intensify, however, there is no assurance
that WPT can maintain or increase its total distribution and if it cannot, it may be difficult for WPT to obtain sponsorship funds,
it will be detrimental to the viability of the WPT brand and, consequently, it would have a material adverse effect on WPT’s
financial condition, results of operations and cash flows.
The
ClubWPT.com business is currently heavily dependent upon television as a major source for the generation of new monthly subscribers
and WPT continually seeks cost effective online and traditional marketing to generate new subscribers, which if not achieved could
materially and adversely affect its results of operations.
ClubWPT
is the official subscription online poker club of the World Poker Tour. VIP users pay a monthly subscription fee for exclusive
access to full episodes from every past season of the WPT television show, plus magazine access, coupons, and more. Each month,
members can play poker to win a share of cash and prizes, including seats to WPT events. In addition, in January 2019, WPT added
free-to-play (also known as “freemium”) social poker and casino gaming on the platform, whereby free chips are offered
for play, but additional chips can be purchased (there are no cash prizes offered for freemium play). WPT has produced ClubWPT.com-branded
television shows that aired on FSN (such as our “King of the Club” television shows), as well as incorporating significant
branding and advertising of ClubWPT into the WPT television shows to build awareness and drive traffic to ClubWPT.com. In order
for the ClubWPT business (including its freemium offering) to continue as a viable business, WPT needs to continuously identify
cost efficient marketing tools to generate new subscribers for ClubWPT. Traditionally, WPT has marketed by using its large library
of content online as a driver to the platform, or through its social media footprint. The number of paid subscribers at ClubWPT
grew throughout 2019 as a result of a significant promotion by FSN, while daily active users of our freemium products has increased
since we introduced them in January 2019. The number of paid subscribers could decrease in future quarters due to the lack of
current spending on marketing for new players. WPT will need to increase its marketing and promotion of ClubWPT through alternative
means, such as social media, in person at WPT live events, via cross-promotion with the Allied Esports business, and via other
means to ensure ClubWPT remains viable.
WPT’s
reliance on Pala Interactive LLC (“Pala”) as a third-party systems provider is subject to system security risks and
business viability risks that could disrupt services provided to ClubWPT.com customers, and any such disruption could reduce WPT’s
revenue, increase its expenses and harm its reputation.
Experienced
computer programmers and hackers may be able to penetrate Pala’s network security and misappropriate confidential information,
create system disruptions or cause shutdowns. In addition, computer programmers and hackers may be able to develop and deploy
viruses, worms and other malicious software programs that attack their products or otherwise exploit security vulnerabilities
in their products. As a result, WPT could lose its existing or potential customers. Pala is a third-party vendor whose business
is dependent upon the real money gaming and social gaming business environment. Any business interruption or failure by Pala would
directly affect WPT’s online business as WPT would need to find a suitable alternative platform provider.
Rules
and regulations governing sweepstakes, promotions and giveaways vary by state and country and these rules and regulations
could restrict or eliminate WPT’s ability to generate revenues at ClubWPT.com, which could materially and adversely impact
the viability of this business.
Changes
in laws or regulations in various states or countries over sweepstakes, promotions and giveaways or a negative finding of law
regarding the characterization of the type of online activity carried out on ClubWPT.com could result in WPT’s inability
to obtain subscribers in those jurisdictions, which in turn could significantly impact WPT’s ability to generate revenue.
The ability or willingness to work with WPT by payment processors and other service providers necessary to conduct the ClubWPT.com
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 are utilized by ClubWPT.com.
WPT’s
success depends in part on our brands and any future brands it may develop, and if the value of its brands were to diminish, its
business would be adversely affected. Licensees of WPT’s brands may diminish the value of its brands.
WPT’s
success depends on its World Poker Tour and Alpha 8 brands, which consist of a portfolio of trademarks, service marks and copyrighted
materials. WPT’s intellectual property portfolio includes, but is not limited to, existing and future episodes of the televised
programming produced in connection with its existing and future brands and certain elements of these episodes, trade names and
other intellectual property rights. In connection with WPT’s branding and licensing operations, WPT entered into agreements
with certain licensors to utilize the WPT brand and intellectual property in connection with mobile, social media and casual games,
horse racing, amateur poker leagues, governmental lottery games, and in-person and online education and training poker workshops.
While specific contractual provisions require that the licensees maintain the quality of WPT’s licensed brands, WPT cannot
be certain that its licensees or their manufacturers and distributors will honor their contractual obligations or that they will
not take other actions that will diminish the value of WPT’s brands prior to its ability to detect and prevent any such
actions.
WPT
may not be able to protect the format of its episodes, its current and future brands and its other proprietary rights.
WPT
is susceptible to others imitating its television show format and other products and infringing on its intellectual property rights.
Litigation may be necessary to enforce WPT’s intellectual property rights and to determine the validity and scope of its
proprietary rights. Any litigation could result in substantial expense, may reduce WPT’s profits and may not adequately
protect its intellectual property rights upon which it is substantially dependent. In addition, the laws of certain foreign countries
do not always protect intellectual property rights to the same extent as the laws of the U.S. Imitation of WPT’s television
show formats and other products or infringement of its intellectual property rights could diminish the value of its brands or
otherwise adversely affect its revenues.
Any
litigation or claims against WPT based upon its intellectual property or other third-party rights, whether or not successful,
could result in substantial costs and harm its reputation. In addition, such litigation or claims could force WPT to do one or
more of the following: to cease exploitation of the WPT television series and related products or portions thereof that violate
the potentially infringed third party rights or intellectual property, which would adversely affect WPT’s revenue; to negotiate
a license from the holder of the intellectual property or other right alleged to have been infringed, which license may not be
available on reasonable terms, if at all; or to modify the WPT television series and related products or portions thereof to avoid
infringing the intellectual property or other rights of a third party, which may be costly and time-consuming or impossible to
accomplish.
Early
termination of WPT’s agreements with member casinos or violation by member casinos of the restrictive covenants contained
in these agreements could negatively affect the size of telecast audiences and lead to declines in the performance of WPT’s
other lines of business.
WPT
entered into written agreements with all of the “member casinos” that host WPT tournament stops. However, any member
casino may elect to withdraw its tournament from the WPT lineup and terminate the agreement by giving WPT notice by a specified
date or, if earlier, a specified length of time before the date of the tournament, which is generally four to six months. While
each agreement remains in effect and, in some cases, for varying periods of time thereafter, the member casino is prohibited from
televising the tournament itself, permitting any third party to televise the tournament or licensing its name, trademarks or likeness
to any other party in conjunction with the telecast of a poker tournament. If a significant number of these member casinos were
to terminate their agreements and/or allow a competing company to telecast their tournaments after their expiration for the restricted
time period, this could result in a decline in WPT’s future telecast audiences, which in turn would lead to declines in
the performance and success of WPT’s other lines of business. If one or more member casinos were to breach the exclusivity
provisions of their contracts with WPT by letting a competing company telecast their tournaments within the restricted time period,
litigation may be necessary to enforce those rights. Any litigation could result in substantial expense.
Refusal
of any gaming commission to register WPT as a non-gaming vendor for its branded casino tournaments could jeopardize the ability
of WPT to continue holding its events at member casinos.
Some
states require WPT to register with the state’s gaming commissions as a non-gaming vendor of the member casino that runs
a WPT-branded tournament. If such gaming commissions refuse to provide the necessary vendor license, the member casino may not
be able to hold WPT’s tournaments, and WPT’s business could suffer.
Termination
or impairment of WPT’s relationships with key licensing and strategic partners could adversely affect its revenues and results
of operations.
WPT
has developed relationships with key strategic partners in many areas of its business, including poker tournament event sponsorship,
merchandise licensing, social poker and casino games, corporate sponsorship and international distribution. WPT hopes to derive
significant income from its licensing arrangements and its agreements with its strategic partners are vital to finding these licensing
arrangements. If WPT were to fail to manage its existing licensing relationships, this failure could have a material adverse effect
on its financial condition and results of operations. WPT would also be materially adversely affected if it were to lose rights
under any of its other key contracts or if the counterparty to any of these contracts were to breach its obligations to WPT. WPT
relies on a limited number of contracts under which third parties provide it with services vital to WPT’s business.
These
agreements include WPT’s agreements with:
|
●
|
FSN,
pursuant to which FSN broadcasts the WPT television series;
|
|
|
|
|
●
|
Pala,
who hosts and operates the ClubWPT product;
|
|
|
|
|
●
|
Zynga,
Inc., who licenses the WPT brand for use on its social poker platform;
|
|
|
|
|
●
|
Partypoker
Live Ltd., who licenses the WPT brand in connection with online and land-based poker tournaments in Europe;
|
|
●
|
Hugeous
Mass Media, who maintains WPT’s database of music and collects music royalty revenue for WPT worldwide;
|
|
|
|
|
●
|
Captiveplay
LLC, who licenses the WPT brand in order to operate a social poker product, PlayWPT;
|
|
|
|
|
●
|
HongKong
Triple Sevens Interactive Co., Ltd, who licenses the Alpha8 brand to operate a social poker product;
|
|
|
|
|
●
|
Rogers
Network and Game TV, for broadcasting in key international territories such as Canada;
|
|
|
|
|
●
|
TV
Azteca, pursuant to which WPT is partnering with TV Azteca to create localized WPT-branded content, as well as jointly brand
and market a social poker product for the territory of Mexico;
|
|
|
|
|
●
|
AMC
and Sport 1 & 2, who license rights to broadcast the WPT television series in 10 territories in Eastern Europe; and
|
|
|
|
|
●
|
OTT
(over-the-top) Platforms, specifically PLUTO TV where WPT earns sizeable revenues.
|
If
WPT’s relationship with any of these or certain other third parties were to be interrupted, or the services provided by
any of these third parties were to be delayed or deteriorate for any reason without being adequately replaced, WPT’s business
could be materially adversely affected. If WPT is forced to find a replacement for any of these strategic partners, this could
create disruption in its business and may result in reduced revenues, increased costs or diversion of management’s attention
and resources.
In
addition, while WPT has significant control over its licensed products and advertising, WPT does not have operational and financial
control over these third parties, and it has limited influence with respect to the manner in which they conduct their businesses.
If any of these strategic partners experiences a significant downturn in its business or were otherwise unable to honor its obligations
to WPT, WPT’s business could be materially disrupted.
The
loss of the services of Adam Pliska or other key employees or on-air talent, or WPT’s failure to attract key individuals,
could adversely affect its business.
WPT
is highly dependent on the services of Adam Pliska, who currently serves as Chief Executive Officer and President of WPT, as well
as President of the Company.
WPT’s
continued success is also dependent upon retention of other key management executives and upon its ability to attract and retain
employees and on-air talent to implement its corporate development strategy and its branding and licensing efforts. The loss of
some of its senior executives, or an inability to attract or retain other key individuals, could materially adversely affect WPT.
Growth in WPT’s business is dependent, to a large degree, on its ability to retain and attract such employees. WPT seeks
to compensate and provide incentives to its key executives, as well as other employees, through competitive salaries, stock ownership
and bonus plans, but it can make no assurance that these programs will allow WPT to retain key employees or hire new employees.
In addition, WPT’s future success may also be affected by the potential need to replace its key on-air talent.
Any
disputes with the IATSE 700 Editors Union could delay finishing production of shows needing to be delivered to FSN or increase
WPT’s costs to produce the shows.
Certain
of WPT’s employees involved in producing the WPT series are members of IATSE 700 Editors Union, and WPT renewed its contract
with such union in August 2019 for a three-year term. Although WPT has a current union agreement in place, there is no guarantee
that future disagreements with WPT’s unionized employees will not lead to any interruption in services. Any failure to timely
negotiate and/or settle any such disagreements could cause a delay in WPT’s ability to timely produce the WPT series for
FSN, and the costs to do so could increase. Either of these events would adversely affect WPT’s profitability.
WPT’s
quarterly results may fluctuate, which may negatively affect the value of the common stock.
Under
sponsorship agreements for WPT, revenues are recognized as each episode is aired. Therefore, WPT’s quarterly revenue can
fluctuate significantly depending on the number of episodes aired in any one quarter. In addition, the sales of consumer products
that utilize WPT’s licensed intellectual property vary greatly, due to holiday seasons, school schedules and other outside
factors. As a result, WPT’s financial results can be expected to fluctuate significantly from quarter to quarter, leading
to volatility and a possible adverse effect on the market price of the common stock.
Risks
Related to WPT’s Current Industry
WPT’s
television programming may be unable to maintain a sufficient audience for a variety of reasons, many of which are beyond its
control.
Television
production is a speculative business because revenues and income derived from television depend primarily upon the continued acceptance
of that programming by the public, which is difficult to predict. Public acceptance of particular programming is dependent upon,
among other things, the quality of the programming, the strength of networks on which the programming is telecast, the promotion
and scheduling of the programming and the quality and acceptance of competing television programming and other sources of entertainment
and information. Popularity of programming can also be negatively impacted by excessive telecasting of the programming beyond
viewers’ saturation thresholds.
WPT’s
ability to create and sponsor its television programming profitably may be negatively affected by adverse trends that apply to
the television production business generally.
Television
revenues and income may be affected by a number of factors, many of which are not within WPT’s control. These factors include
a general decline in television viewers, pricing pressure in the television advertising industry, strength of the stations on
which its programming is telecast, general economic conditions, increases in production costs and availability of other forms
of entertainment and leisure time activities. Furthermore, as the popularity of streaming content over the Internet increases
and more consumers “cut the cord” and cease watching traditional broadcast television, the audience for WPT’s
programming will be dispersed across multiple platforms and its programming could have less overall impact and watchability. All
of these factors, as well as others, may quickly change and these changes cannot be predicted with certainty. WPT’s future
sponsorship opportunities may also be adversely affected by these changes. Accordingly, if any of these changes were to occur,
the revenues WPT generates from television programming could decline.
A
decline in general economic conditions or the popularity of WPT’s brand of televised poker tournaments could adversely impact
its business.
Because
WPT’s operations are affected by general economic conditions and consumer tastes, its future success is unpredictable. The
demand for entertainment and leisure activities tends to be highly sensitive to consumers’ disposable incomes and thus a
decline in general economic conditions could, in turn, have a material adverse effect on WPT’s business, operating results
and financial condition and the price of the Company’s common stock. An economic decline could also adversely affect WPT’s
corporate sponsorship business, sales of its branded merchandise and other aspects of its business.
The
continued popularity of WPT’s type of poker entertainment is vital in maintaining the ability to leverage its brand and
develop products or services that appeal to its target audiences, which, in turn, is important to WPT’s long-term results
of operations. Public tastes are unpredictable and subject to change and may be affected by changes in the political and social
climates of those countries and territories in which WPT operates. A change in public opinion could have a material adverse effect
on WPT’s business, operating results and financial condition and, ultimately, the price of the Company’s common stock.
The
political or social climate regarding gaming and poker could negatively impact WPT’s ability to negotiate future telecast
license arrangements and could negatively impact its chances of renewal.
Although
the popularity of poker, in particular, and gaming, in general, has continued to grow in the U.S. and abroad, gaming has historically
experienced backlash from various constituencies and communities. Currently, the legal operational status of Internet-based casinos
and card rooms remains unclear in some countries. The U.S. government has taken steps to curb activities that it believes constitutes
unlawful online gaming through legislation such as the Unlawful Internet Gambling Enforcement Act of 2006 and through arrests
of off-shore online gaming operators traveling in the U.S. Also, on November 2, 2018, the U.S. Department of Justice (the “DOJ”)
issued an opinion that interprets the federal Wire Act as prohibiting any gambling that crosses state lines, including non-sports
related gambling. This opinion expands the prior opinion issued by the DOJ in 2011 that interpreted the Wire Act as prohibiting
interstate sports gambling only.
Based
on the uncertain regulatory environment surrounding the marketing and promotion of Internet-based casinos and card rooms to viewers
in the U.S., FSN has final edit rights to the shows that it broadcasts. FSN had indicated that it will only display names or logos
of Internet-based casinos and card rooms in its telecasts that are explicitly legal in select territories in the United States.
However, if FSN elects not to allow the display of logos on the WPT show, whether because of the recent DOJ opinion or otherwise,
WPT may not be able to attract other Internet-based casino sponsors or retain existing online card rooms sponsoring WPT’s
tour. Additionally, increased regulatory scrutiny on Internet gambling sites may eliminate these sites as sources of advertising
revenue for television networks that exhibit poker-related programming, thereby potentially impacting the value of such programming
to these networks. Additionally, many participants in WPT’s tournament events are sponsored by Internet-based casino sponsors
and existing online card rooms. If such sponsors’ revenues are reduced, they may not be able to sponsor WPT’s tournament
participants at the same level or at all, which could cause WPT’s tournament participation to decline (in terms of numbers
and professional players) and the quality and distribution of our WPT series could suffer.
The
television entertainment market in which WPT operates is highly competitive and competitors with greater financial resources or
marketplace presence may enter this market to WPT’s detriment.
WPT
competes with other poker-related television programming, including ESPN’s coverage of the “World Series of Poker”
and its “World Series of Poker” Circuit Events, among others. These and other producers of poker-related programming
may be well established and may have significantly greater resources than WPT does. Based on the popularity of these poker-related
televised programs, WPT believes that additional competing televised poker programs may currently be in development or may be
developed in the future. WPT’s programming also competes for telecast audiences and advertising revenue with telecasts of
mainstream professional and amateur sports, as well as other entertainment and leisure activities. These competing programs and
activities, and the brands that they build may decrease the popularity of the WPT television series and dilute the WPT’s
brand. This would adversely affect WPT’s operating results and financial condition and, ultimately, the price of the Company’s
common stock.
RISKS
RELATED TO THE COMPLETED MERGER
Future
resales of the common stock and warrants issued in the Merger may cause the market price of the Company’s securities to
drop significantly, even if the business is doing well.
In
connection with the Merger of an AESE subsidiary with and into AEM, with AEM as the surviving entity, the Company issued to the
former owners of Allied Esports and WPT (i) an aggregate of 11,602,754 shares of common stock and (ii) five-year warrants to purchase
an aggregate of 3,800,003 shares of common stock at a price per share of $11.50. Additionally, the former owners of Allied Esports
and WPT were entitled to receive their pro rata portion of an aggregate of an additional 3,846,153 shares of common stock if the
last sales price of the Company’s common stock reported on the Nasdaq Capital Market equals or exceeds $13.00 per share
(as adjusted for stock splits, dividends, and the like) for 30 consecutive trading days at any time during the five-year period
after the consummation of the Merger. At the closing of the Merger, the Company also issued the following shares of its common
stock: (i) 744,422 shares to management of WPT in satisfaction of profit participation agreements; (ii) 144,158 shares for prior
bonus amounts owed to Adam Pliska, the President of the Company post-closing and the CEO of WPT; (iii) 197,268 shares to finders
(one of whom is Adam Pliska, who received 98,634 of such shares), and (iv) 1,842,831 shares to Primo Vital Limited in cancellation
of $12,144,260 of debt owed by Allied Esports and WPT.
Pursuant
to the Merger Agreement, the foregoing recipients entered into lock-up agreements, pursuant to which they agreed to not, subject
to certain exceptions, transfer, sell, tender or otherwise dispose of the shares of Company common stock and warrants they received
for a period from the closing of the Merger as follows: (i) with respect to 50% of their common stock and warrants, the earlier
of one year after the closing of the Merger and the date on which the closing price of the Company’s common stock exceeds
$12.50 per share for any 20 trading days within a 30-trading day period following the closing of the Merger and, (ii) with respect
to the remaining 50% of their common stock and warrants, one year after closing of the Merger, or earlier in each case if, subsequent
to the Merger, the Company consummates a subsequent liquidation, merger, stock exchange, or other similar transaction which results
in all stockholders having the right to exchange their shares of common stock for cash, securities, or other property.
Upon
expiration of the applicable lock-up periods and subject to applicable securities laws, these recipients may sell large amounts
of the Company’s common stock and warrants in the open market or in privately negotiated transactions, which could have
the effect of increasing the volatility of, or putting significant downward pressure on, the trading price of our common stock
and warrants.
RISKS
RELATED TO THE BUSINESSES OF BOTH ALLIED ESPORTS AND WPT
Allied
Esports and WPT have historically operated at a net loss on a consolidated basis, and there is no guarantee that that the consolidated
company will be able to be profitable.
The
combined historical operations of Allied Esports and the WPT have resulted in net losses of $16,738,729 and $31,019,725 for the
years ended December 31, 2019 and 2018, respectively. We do not know with any degree of certainty whether or when the consolidated
operations of Allied Esports and the WPT 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 this Report 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 meets 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, our 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 and WPT have 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 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 and WPT publicly post their privacy policies and practices concerning processing, use and disclosure of the personally
identifiable information provided to them 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 pay debt, 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 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
|
|
|
|
|
●
|
pursue
acquisition opportunities.
|
While
management believes that due to the current maturity date of our debt, our current cash balance and our operational forecast for
2020, we can continue as a going concern through at least July 31, 2020, we can provide no assurance that our ongoing operational
efforts will be successful.
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 and poker 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 corona virus, may adversely affect the operations of our Allied Esports and WPT businesses,
which 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. Specifically, as
a global entertainment company that hosts numerous live events with spectators and participants in destination cities, outbreaks
may cause such people to avoid our traveling to and attending our events. Sponsors of such events may also cancel such events
as precautionary measures. Recently live events to be hosted by both of our Allied Esports and WPT businesses have been cancelled,
and at this time we cannot determine the extent that such outbreak may have on our future events.
Risks
Related to Owning Our Common Stock
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.
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. 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. In addition, our ability to pay cash dividends is restricted
by the terms of our debt financing arrangements, and any future debt financing arrangement likely will contain terms restricting
or limiting the amount of dividends that may be declared or paid on our common stock. 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.
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
may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy
our obligations under our indebtedness, which may not be successful.
Our
ability to make scheduled interest payments on or to refinance our debt obligations depends on our financial condition and operating
performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative,
regulatory and other factors, some of which are beyond our control. In some cases, we will also be required to obtain the consent
our lenders to refinance material portions of our indebtedness. We cannot assure you that we will maintain a level of cash flows
from operating activities sufficient to permit us to pay the principal, premiums, and interest, if any, on our indebtedness. Some
of our indebtedness is maturing in the near term, and if we are unable to raise sufficient capital or generate cash through our
operations, we will be unable to meet our debt obligations at maturity.
If
our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay
investments and capital expenditures, reduce or eliminate the payment of dividends, sell assets, seek additional capital or seek
to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our
scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital
markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require
us to comply with more onerous covenants, which could further restrict our business operations. We may not be able to effect any
such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not
allow us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet
our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets
or operations to attempt to meet our debt service and other obligations. We may not be able to consummate those dispositions or
consummate dispositions at prices that we believe are fair, and the proceeds that we do receive may not be adequate to meet any
debt service obligations then due.
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 Securities and Exchange Commission (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.
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 this Report, we have not included 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. Although management has not completed its assessment regarding internal control over financial reporting as of
the date of this Report, management has identified as of December 31, 2019 the following material weaknesses in internal controls:
|
●
|
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;
|
|
●
|
inadequate
controls and procedures as they relate to completeness of information reported by certain third parties that process transactions
related to specific revenue streams; and
|
|
●
|
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 ensure 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 listed on Nasdaq.
Increases
in interest rates may cause the market price of our common stock to decline.
While
interest rates are falling and have in recent years been at record low levels, any 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 3,463,305 shares of common stock for issuance under our 2019 Equity Incentive Plan (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 intend to file one or more registration
statements 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. Any such Form S-8 registration statements will automatically
become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in
the open market.
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 leased and are located at 17877 Von Karman Avenue, Suite 300, Irvine, California, 92614. The
Company considers this office space adequate for its current operations. The initial lease term will expire in approximately 2033,
and the Company has two five-year options to renew.
Item
3. Legal Proceedings
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, 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.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
Directors
and Executive Officers
As
of the date of this Report, our directors and officers are as follows:
Name
|
|
Age
|
|
Position
|
Lyle Berman
|
|
77
|
|
Chairman
|
Frank Ng
|
|
50
|
|
Director, Chief Executive Officer
|
David Moon
|
|
47
|
|
Chief Operating Officer
|
Anthony Hung
|
|
52
|
|
Chief Financial Officer
|
Bradley Berman
|
|
48
|
|
Director
|
Benjamin Oehler
|
|
70
|
|
Director
|
Joseph Lahti
|
|
58
|
|
Director
|
Eric Yang
|
|
48
|
|
Vice Chairman of the Board
|
Adam Pliska
|
|
47
|
|
Director, President, and President and CEO of WPT
|
Maya Rogers
|
|
40
|
|
Director
|
Kan Hee Anthony Tyen
|
|
64
|
|
Director
|
Ho Min Kim
|
|
48
|
|
Director
|
Lyle
Berman has served as a director of the Company since May 2017 (when the Company at the time of such election was Black
Ridge Acquisition Corp.). Mr. Berman has been a director of Black Ridge Oil & Gas, Inc. since October 2016, and is also a
director of Golden Entertainment, Inc., Mill City Ventures III, Ltd., Auego Affinity Marketing, Inc., Poker52, LLC, Redstone American
Grill, Inc., LubeZone, Inc., Drake’s Organic Spirits, LLC, and InsurTech Holdings, LLC. Since June 1990, Mr. Berman has
been the chairman and chief executive officer of Berman Consulting Corporation, a private consulting firm he founded. Mr. Berman
began his career with Berman Buckskin, his family’s leather business, which he helped grow into a major specialty retailer
with 27 outlets. After selling Berman Buckskin to W.R. Grace in 1979, Mr. Berman continued as president and chief executive officer
and led the company to become one the country’s largest retail leather chains, with over 200 stores nationwide. In 1990,
Mr. Berman participated in the founding of Grand Casinos, Inc. Mr. Berman is credited as one of the early visionaries in the development
of casinos outside of the traditional gaming markets of Las Vegas and Atlantic City. In less than five years, the company opened
eight casino resorts in four states. In 1994, Mr. Berman financed the initial development of Rainforest Cafe. He served as the
chairman and chief executive officer from 1994 unti1 2000. In October 1995, Mr. Berman was honored with the B’nai B’rith
“Great American Traditions Award.” In April 1996, he received the Gaming Executive of the Year Award; in 2004, Mr.
Berman was inducted into the Poker Hall of Fame; and in 2009, he received the Casino Lifetime Achievement Award from Raving Consulting
& Casino Journal. In 1998, Lakes Entertainment, Inc. was formed. In 2002, as chairman of the board and chief executive officer
of Lakes Entertainment, Inc., Mr. Berman was instrumental in creating the World Poker Tour. Mr. Berman served as the executive
chairman of the board of WPT Enterprises, Inc. (later known as Voyager Oil & Gas, Inc. and Emerald Oil, Inc.) from its inception
in February 2002 until July 2013. Mr. Berman also served as a director of PokerTek, Inc. from January 2005 until October 2014,
including serving as chairman of the board from January 2005 until October 2011. Mr. Berman has a degree in business administration
from the University of Minnesota. Mr. Berman is the father of Bradley Berman, one of our directors.
Kwok
Leung Frank Ng has served as a director and our Chief Executive Officer since August 2019. Mr. Ng has served as co-CEO
of Ourgame International Holdings Limited (“Ourgame”), a leading casual game operator in China and owner of the World
Poker Tour and Allied Esports, since 2006. Prior to that, he served as CFO of Ourgame beginning in 2004, when he assisted NHN
China, a global internet search engine and online game company, where he served as co-CEO from 2000 to 2004, in acquiring Ourgame.
Mr. Ng led a management buyout of Ourgame in 2010 and led the company through its listing on the Hong Kong Stock Exchange in 2014.
With its public listing and subsequent acquisition of the World Poker Tour (in 2015) and founding of Allied Esports (in 2016),
Ourgame has grown to be a leading global operator and creator of gaming and esports content and experiences. Mr. Ng served as
Chief Commercial Officer at PCCW Skyhorse, which produces content and online gaming applications, from 2000 until 2003. Mr. Ng
has a B.S. Business Administration and Management degree from the University of California, Berkeley.
David Moon has
served as our Chief Operating Officer since August 2019. Since December 2018, Mr. Moon has provided consulting services to Allied
Esports. Previously, Mr. Moon also served as Global President of Ourgame. From 2014 to 2016, Mr. Moon was COO and co-founder of
Zig Zag Zoom, a publisher of cause-driven mobile games. Before that, from 2012 to 2014, he was VP of Global Production and Operations
in Disney Interactive’s Asia Games Group. He was a co-founder of StudioEx, a mobile and PC game studio in 2009, which Disney
acquired in 2012. Mr. Moon was a founding member of Hangame, South Korea’s first casual online games portal and microtransactions
pioneer, listed in 2002 as NHN Corporation, where he led corporate development and global expansion efforts from 1999 to 2006.
He is also the founder of Metamedia Entertainment, a digital media venture that develops and produces interactive digital experiences,
including TV-everywhere content and platforms that drive virality, engagement, retention, and monetization. Mr. Moon holds a Master’s
degree in Political Science from the University of California, Berkeley and Bachelor’s degrees in Political Science and
Mathematics from Brown University.
Anthony
Hung has served as our Chief Financial Officer since September 2019. Before joining the Company, from 2012 to 2019,
he served as the CEO and CFO of Audio Design Experts, a privately held provider of premier audio solutions for leading consumer
brands around the world. Prior to his role at Audio Design Experts, from 2010 to 2012 Mr. Hung was Senior Vice President, Business
Development and Sales for Cooking.com where he oversaw the e-commerce services business as well as advertising sales operations.
He also served as the Chief Financial Officer of Golden Eye Dealership Solutions, a software-as-a-service start-up focused on
automotive dealerships, from 2008 to 2010 and was Vice President, Business Development & Acquisitions for ESPN from 2007 to
2008. Prior to this, from 1997 to 2007, he was General Partner at DynaFund Ventures, a $220 million venture capital fund. He also
held positions of increasing responsibility in finance and strategy at The Walt Disney Company (NYSE: DIS). He began his career
as an investment banker at Donaldson, Lufkin & Jenrette Securities in 1989. Mr. Hung holds a Master’s of Business Administration
degree from the Anderson School at the University of California, Los Angeles and a Bachelor of Arts degree in Economics from Harvard
College.
Bradley
Berman has served as a director of the Company since May 2017 (when the Company at the time of such election was
Black Ridge Acquisition Corp.). He has been the chairman of Black Ridge Oil & Gas, Inc. since November 2010 and has served
as a director of Black Ridge Oil & Gas, Inc. since its inception in April 2010. He was the chief executive officer of Black
Ridge Oil & Gas, Inc. from November 2010 to November 2011, its chief financial officer between November 12, 2010 and
November 15, 2010, and its corporate secretary from November 2010 to February 2011. Mr. Berman is the president of King Show
Games, Inc., a company he founded in 1998. Mr. Berman has worked in various capacities in casino gaming from 1992 to 2004
for Grand Casinos, Inc. and then Lakes Entertainment, Inc., achieving the position of Vice President of Gaming, after which
he assumed a lesser role in that company. Mr. Berman was a director of Voyager Oil and Gas, Inc. (formerly Ante4 and WPT) from
August 2004 to November 2010. Mr. Berman is the son of Lyle Berman, one of our directors.
Benjamin
S. Oehler has served as a director of the Company since May 2017 (when the Company at the time of such election was
Black Ridge Acquisition Corp.). Mr. Oehler has been a director of Black Ridge Oil & Gas, Inc. since November 2010, and
chairman of its audit committee and compensation committee since February 2011. Mr. Oehler is a Founding Partner of Windward
Mark, LLC which advises business owners with regard to strategic planning, owner governance and education, business continuity,
legacy, philanthropy and liquidity. Windward Mark LLC is a continuation of Mr. Oehler’s consulting practice at Bashaw Group.
Inc. (2007 to 2017) and Linea Capital, LLC (2009 to 2017). From 1999 to 2007, Mr. Oehler was the president and chief executive
officer of Waycrosse, Inc., a financial advisory firm for the family owners of Cargill Incorporated. While at Waycrosse, Mr. Oehler
was the primary advisor to the five family members who were serving on the Cargill Incorporated board of directors from 1999 to
2006. Mr. Oehler played a key role in two major growth initiatives for Cargill: the merger of Cargill’s fertilizer
business into a public company which is now Mosaic, Inc., and the transformation of Cargill’s proprietary financial
markets trading group into two major investment management companies: Black River Asset Management, LLC and CarVal Investors,
LLC. An investment banker for 20 years, Mr. Oehler’s transaction experience includes public offerings and private placements
of debt and equity securities, mergers and acquisitions, fairness opinions and valuations of private companies. Prior to joining
Waycrosse, Mr. Oehler was an investment banker for Piper Jaffray. By the time he left Piper Jaffray in 1999, he was group
head for Piper Jaffray’s Industrial Growth Team. He has also played a leadership role in a number of corporate buy-outs
and venture stage companies, served on corporate and non-profit boards of directors, and has been involved in the creation and
oversight of foundations and charitable organizations, as well as U.S. trusts and off-shore entities.
Mr.
Oehler has been a board member and/or founder of many non-profit organizations including the Minnesota Zoological Society, Minnesota
Landscape Arboretum, The Lake Country Land School, Greencastle Tropical Study Center, Park Nicollet Institute, Afton Historical
Society Press, United Theological Seminary and University of Minnesota Investment Advisor, Inc. He has been a director of Waycrosse,
Inc., WayTrust Inc., Dain Equity Partners, Inc., Time Management, Inc., BioNIR, Inc. and Agricultural Solutions, Inc.
In September 2007, Mr. Oehler completed the Stanford University Law School Directors Forum, a three-day update on key issues
facing corporate directors presented by the Stanford Business School and Stanford Law School. From 1984 through 1999, Mr. Oehler
was registered with the National Association of Securities Dealers as a financial principal. Mr. Oehler is a graduate of
the University of Minnesota College of Liberal Arts and has completed all course work at the University of Minnesota Business
School with a concentration in finance.
Joseph
Lahti has served as a director of the Company since May 2017 (when the Company at the time of such election was Black
Ridge Acquisition Corp.). Mr. Lahti has been a director of Black Ridge Oil & Gas, Inc. since August 2012. Mr. Lahti
is a Minneapolis native and leader in numerous Minnesota business and community organizations. As principal of JL Holdings since
1989, Mr. Lahti has provided funding and management leadership to several early-stage or distressed companies. From 1993
to 2002, he held the positions of chief operating officer, president, chief executive officer and chairman at Shuffle Master, Inc.,
a company that provided innovative products to the gaming industry. Mr. Lahti served as a director of PokerTek, Inc.,
a publicly traded company, from 2008 until it was sold in October 2014 (including serving as chairman of the board from 2012 to
2014), and he is also an independent director and chairman of the board of Innealta Capital, an investment manager. Previously,
Mr. Lahti also served on the board of directors of Voyager Oil & Gas, Inc. and Zomax, Inc., and served as the chairman
of the board of directors of Shuffle Master, Inc. Through his public company board experience, he has participated on, and
chaired, both Audit and Compensation Committees. Mr. Lahti has a Bachelor of Arts degree in Economics from Harvard College.
Ho
Min Kim has served as a director of the Company since August 2019. He is a co-Founder and Partner at SparkLabs Global
Ventures. He is also a co-Founder and Partner at SparkLabs, a startup accelerator in Korea. He was also co-Founder and President
of N3N, an IoT platform company and Cisco’s first Korean venture capital investment. Previously, he was Chief Executive
Officer of Nexonova, a game development studio of Nexon Corp (Japan Tokyo Stock Exchange: 3659) that specialized in Social Network
Games. Prior to Nexonova, he served as Executive Vice President of Nexon Corp, and Head of Nexon’s Portal and Web Services.
He received his B.S. in Bio-medical Engineering from Northwestern University, and also a M.S. in Bio-medical Engineering from
Korea Advanced Institute of Science and Technology (KAIST). He also completed the Stanford University’s Graduate School
of Business’s Executive Management Program.
Eric
Qing Yang has served as a director of the Company since August 2019. He has also served as Chairman of the Board and co-Chief
Executive Officer of Ourgame since January 2011. Since joining Ourgame, Mr. Yang spearheaded the effort to refocus the company
to its core competency of online card and board games and helped restore the company and its brand to its preeminence as one of
the leading online card and board game platforms in China with more than 200 games titles and approximately 700 million registered
users. Ourgame was listed in the Hong Kong Stock Exchange main board in June 2014. After Ourgame’s listing, Mr. Yang lead
the effort to expand Ourgame’s business globally with the acquisition of the World Poker Tour in June 2015 and the launch
of the company’s effort on eSports in China, the US and Europe and in the process transforming Ourgame into a global sports
and entertainment company. Prior to Ourgame, Mr. Yang was a partner in IBM’s Global Services division from January 1995
to December 2010 and served in a number of senior management positions that provided consulting and outsourcing services to clients
across a number of industries in China, Asia and globally that included director for Business Process Services for the Industrial
and Distribution sectors for global emerging markets, director for managed business process services for small and medium business
for Asia Pacific and partner for Distribution sector for Greater China. Mr. Yang holds a Bachelor of Science degree from the University
of California, Berkeley and an EMBA from the Cheung Kong Graduate School of Business.
Adam
Pliska has served as a director and as the Company’s President since August 2019. He has been with the World Poker
Tour since 2003. As President and CEO of WPT, Mr. Pliska has overseen the entire WPT business portfolio, including but not limited
to live events, online services, televised broadcasts, and WPT office personnel in Los Angeles, London and Beijing. He is one
of the longest serving executives in the poker industry and was named the American Poker Awards Industry Person of the Year for
2014. Under his watch, the WPT has witnessed massive global growth from 14 events to over 60 worldwide on 6 continents, has maintained
historic ratings of one of the longest running television shows in US history and has awarded more than a billion dollars over
its 18 years. In addition to his position as CEO, Mr. Pliska serves as Executive Producer of the World Poker Tour television show
and is the co-writer of the WPT Theme song Rise Above.
From
November 2000 to June 2002, Mr. Pliska served as the Vice-President of Legal and Business Affairs and eventually General Counsel
for Anticipa, LLC, a multi-media company headed by the futurist, Alvin Toffler, a Telmex Corporation. In addition, Mr. Pliska
served as an associate at the law firm of Sonnenschein, Nath & Rosenthal in Los Angeles from July 1999 to November 2000, where
he worked on various litigation and intellectual property matters. Before his legal career, Mr. Pliska worked as a television
producer in connection with noted industry veteran Al Burton, including work at Universal Television and Castle Rock Entertainment
where he produced and developed numerous television properties. Mr. Pliska contributed and worked on various programs including
The New Lassie, Baywatch, Out of the Blue, and shares an Emmy Award for his contributions to television creative development.
While at Berkeley Law, he worked as a research assistant to Professor John Yoo and was an extern to the 9th Circuit Court of Appeals
for the Judge Alex Kozinski and at the Governor’s Office of Legal Affairs in the state of California for then Governor Pete
Wilson.
He
has served as a mentor of the Tiger Wood’s Foundation Earl Woods Scholar program, is a member of the Pacific Council, a
director of the WPT Foundation and on the board of the GOCAT (Greater Orange County Community Arts Theater). Mr. Pliska holds
a B.A. from the University of Southern California’s School of Cinematic Arts and a J.D. from the University of California,
Berkeley’s Law School, Boalt Hall.
Maya
Rogers has served as a director of the Company since August 2019. She has served as President and Chief Executive Officer
of Blue Planet Software, the sole agent of the Tetris brand, since 2011.
Ms.
Rogers is also Founding Partner of Blue Startups, Hawaii’s first venture accelerator, which helps early stage startups accelerate
their businesses with investments and mentoring. From 2007 to 2009, Ms. Rogers worked as a Director of Business Development at
Tetris Online China on the go-to-market strategy assessment on mid to long-term feasibility for Tetris to enter the Chinese online
PC market. There she pursued and negotiated with potential Chinese gaming companies for joint venture opportunities in Shanghai,
Beijing and Taiwan. Prior to heading Tetris, Ms. Rogers steered cross-culturalization and development efforts for Sony Interactive
Entertainment where she executed and oversaw the localization strategies across Sony PlayStation games, including Sony’s
top titles Gran Turismo and Hotshots Golf franchises. Ms. Rogers currently serves on the boards of the Smithsonian Asian Pacific
American Center, American Red Cross - Hawaii Chapter, Women’s Fund of Hawaii, Chamber of Commerce Hawaii, and the Daniel
K. Inouye Asia-Pacific Center for Security Studies. Ms. Rogers holds a BS in Business Administration from Pepperdine University
and an Executive MBA from Pepperdine Graziadio School of Business and Management.
Kan
Hee Anthony Tyen has served as a director of the Company since August 2019. He has been an independent non-executive Director
of Ourgame since March 2018. He is also the chairman of Audit Committee, a member of the Remuneration Committee, the Risk Management
Committee and the Nomination and Corporate Governance Committee of Ourgame’s board of directors. Mr. Tyen currently serves
as served as an independent non-executive director of China Baofeng (International) Limited (formerly known as Mastercraft International
Holdings Limited) (since February 2016), and previously served as an independent non-executive director of Melco International
Development Limited from June 2010 through June 2019. Both companies are listed on the Hong Kong Stock Exchange. He is also the
chairman of the audit committees of both companies. Mr. Tyen was previously an independent non-executive director of four Hong
Kong listed companies, namely, Value Convergence Holdings Limited, Recruit Holdings Limited, ASR Logistics Holdings Limited, and
Summit Ascent Holdings Limited. He was also an independent director of Entertainment Gaming Asia Inc., a company listed at the
time on the Nasdaq Capital Market in the United States, as well as Alpha Peak Leisure Inc., a company listed on the TSX Venture
Exchange in Canada. He started his career with Price Waterhouse in 1977 and later joined KMG and Morgan Guaranty Trust Company
before incepting his own practice in 1985. His practice later merged with Grant Thornton and Mr. Tyen became a partner with the
firm between 1990 and 1998. After a short spell with a local bank in 2001, Mr. Tyen resumed his own practice in 2003. Mr. Tyen
holds a Doctoral degree in Philosophy (School of Accountancy, 1998) and a Master’s degree in Business Administration (1986),
both from The Chinese University of Hong Kong. He is an associate member of the Hong Kong Institute of Certified Public Accountants
(since 1981) and the Taxation Institute of Hong Kong (since 1985). Mr. Tyen is also a fellow member of The Association of Chartered
Certified Accountants (fellow since 1985), the Institute of Chartered Secretaries and Administrators (fellow since 2002) and The
Hong Kong Institute of Directors (fellow since 2012). He is currently a practicing certified public accountant in Hong Kong and
has over 42 years’ experience in auditing, accounting, management and company secretarial practice.
Number
and Terms of Office of Executive Officers and Directors
Our
board of directors is divided into three classes with only one class of directors being elected in each year and each class serving
a three-year term. The term of office of the first class of directors, consisting of Lyle Berman and Benjamin Oehler, will expire
at our next annual meeting of stockholders. The term of office of the second class of directors, consisting of Kan Hee Anthony
Tyen , Ho Min Kim, Bradley Berman and Joseph Lahti, will expire at the annual meeting thereafter held in 2021. The term of office
of the third class of directors, consisting of Frank Ng, Eric Yang, Adam Pliska, and Maya Rogers, will expire at the next annual
meeting thereafter held in 2022.
Our
executive officers are elected by the board of directors and serve at the discretion of the board of directors, rather than for
specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our bylaws as it
deems appropriate. Our bylaws provide that our executive officers may consist of a Chief Executive Officer, President, Chief Financial
Officer, Vice Presidents, Secretary, Assistant Secretaries, Treasurer, Controller and such other offices as may be determined
by the board of directors.
Family
Relationships
Mr.
Bradley Berman, one of our directors, is the son of Mr. Lyle Berman, one of our directors. There are no other family relationships
between any of the other executive officers and directors.
Board
Leadership Structure and Role in Risk Oversight
Upon
consummation of the Merger in August 2019, Lyle Berman was appointed as Chairman of the Board and Eric Yang was appointed as Vice
Chairman. Frank Ng also became our Chief Executive Officer. We believe that separating the positions of Chairman of the Board
and Chief Executive Officer separate will permit our Chief Executive Officer to concentrate his efforts primarily on managing
business operations and development. This will also allow us to maintain an independent Chairman of the Board who oversees, among
other things, communications and relations between our Board of Directors and senior management, consideration by our Board of
Directors of the company’s strategies and policies, and the evaluation of our principal executive officers by our Board
of Directors.
Meetings
and Committees of the Board of Directors
During
the fiscal year ended December 31, 2019, the Company’s board of directors held six meetings. We expect our directors to
attend all board meetings and any meetings of committees of which they are members and to spend the time needed and meet as frequently
as necessary to properly discharge their responsibilities. Each of our current directors attended all of the meetings of the board
and meetings of committees of which he or she was a member in fiscal year 2019. Although we do not have any formal policy regarding
director attendance at stockholder meetings, we attempt to schedule meetings so that all directors can attend.
We
have a separately standing audit committee, compensation committee and nominating committee, each of which is comprised of three
independent directors. Each of the Company’s committees have a separately adopted charter which is available on the Company’s
website at ir.alliedesportsent.com.
Audit
Committee Information
Our
audit committee consists of Benjamin Oehler (chairman), Joseph Lahti, and Anthony Tyen.
Each
member of the audit committee is financially literate and our Board of Directors has determined that Mr. Oehler qualifies as an
“audit committee financial expert” as defined in applicable SEC rules.
Pursuant
to our audit committee charter, responsibilities of the audit committee include:
|
●
|
reviewing
and discussing with management and the independent auditor the annual audited financial statements, and recommending to the
board whether the audited financial statements should be included in our Form 10-K;
|
|
|
|
|
●
|
discussing
with management and the independent auditor significant financial reporting issues and judgments made in connection with the
preparation of our financial statements;
|
|
|
|
|
●
|
discussing
with management major risk assessment and risk management policies;
|
|
|
|
|
●
|
monitoring
the independence of our independent auditor;
|
|
|
|
|
●
|
verifying
the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner
responsible for reviewing the audit as required by law;
|
|
|
|
|
●
|
reviewing
and approving all related-party transactions;
|
|
|
|
|
●
|
inquiring
and discussing with management our compliance with applicable laws and regulations;
|
|
|
|
|
●
|
pre-approving
all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms
of the services to be performed;
|
|
|
|
|
●
|
appointing
or replacing the independent auditor;
|
|
|
|
|
●
|
determining
the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management
and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related
work;
|
|
|
|
|
●
|
establishing
procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting
controls or reports which raise material issues regarding our financial statements or accounting policies; and
|
|
|
|
|
●
|
approving
reimbursement of expenses incurred by our management team in identifying potential target businesses.
|
During
the fiscal year ended December 31, 2019, the Company’s audit committee held two meetings. Each of our audit committee members
attended all of the meetings of the audit committee in fiscal year 2019.
Financial
Experts on Audit Committee
The
audit committee will, at all times, be composed exclusively of “independent directors,” as defined for audit committee
members under the Nasdaq listing standards and the rules and regulations of the SEC, who are “financially literate,”
as defined under Nasdaq’s listing standards. Nasdaq’s listing standards define “financially literate”
as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement
and cash flow statement. In addition, we must certify to Nasdaq that the committee has, and will continue to have, at least one
member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other
comparable experience or background that results in the individual’s financial sophistication. The Board of Directors has
determined that each member of the audit committee satisfies Nasdaq’s definition of financial sophistication and that Benjamin
Oehler qualifies as an “audit committee financial expert” as defined under rules and regulations of the SEC.
Nominating
Committee Information
Messrs.
Eric Yang (chairman), Ho Min Kim and Lyle Berman serve as members of our nominating committee. Each member of the nominating committee
is independent under the applicable Nasdaq listing standards. The nominating committee has a written charter. The nominating committee
is responsible for overseeing the selection of persons to be nominated to serve on our Board of Directors. During the fiscal year
ended December 31, 2019, the nominating committee met one time.
Guidelines
for Selecting Director Nominees
The
guidelines for selecting nominees, which are specified in the nominating committee charter, generally provide that persons to
be nominated:
|
●
|
should
have demonstrated notable or significant achievements in business, education or public service;
|
|
|
|
|
●
|
should
possess the requisite intelligence, education and experience to make a significant contribution to the board of directors
and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and
|
|
|
|
|
●
|
should
have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the
stockholders.
|
The
nominating committee will consider a number of qualifications relating to management and leadership experience, background and
integrity and professionalism in evaluating a person’s candidacy for membership on the board of directors. The nominating
committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that
arise from time to time and will also consider the overall experience and makeup of its members to obtain a broad and diverse
mix of board members. The nominating committee does not distinguish among nominees recommended by stockholders and other persons.
Compensation
Committee Information
Our
compensation committee consists of Maya Rogers (chairman), Ho Min Kim and Bradley Berman.
Each
of the members of the compensation committee is independent under the applicable Nasdaq listing standards. The compensation committee
has a written charter. The compensation committee’s duties, which are specified in the compensation committee charter, include,
but are not limited to:
|
●
|
reviewing
and approving on an annual basis the corporate goals and objectives relevant to the Company’s Chief Executive Officer’s
compensation, evaluating the Company’s Chief Executive Officer’s performance in light of such goals and objectives
and determining and approving the remuneration (if any) of the Company’s Chief Executive Officer’s based on such
evaluation;
|
|
|
|
|
●
|
reviewing
and approving the compensation of all of our other executive officers;
|
|
●
|
reviewing
our executive compensation policies and plans;
|
|
|
|
|
●
|
implementing
and administering our incentive compensation equity-based remuneration plans;
|
|
|
|
|
●
|
assisting
management in complying with our proxy statement and annual report disclosure requirements;
|
|
|
|
|
●
|
approving
all special perquisites, special cash payments, and other special compensation and benefit arrangements for our executive
officers and employees;
|
|
|
|
|
●
|
if
required, producing a report on executive compensation to be included in our annual proxy statement; and
|
|
|
|
|
●
|
reviewing,
evaluating, and recommending changes, if appropriate, to the remuneration for directors.
|
Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who beneficially own more
than ten percent of our common stock to file reports of ownership and changes in ownership with the SEC. These reporting persons
are also required to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of such forms, we
believe that during the year ended December 31, 2019, the following filings were delinquent: Form 3s filed by Frank Ng, Maya Rogers,
Ho Min Kim, Eric Yang and Primo Vital Ltd., David Moon, Adam Pliska, Our Game International Holdings Ltd., Kanhee Anthony Tyen
and Anthony Hung; and Form 4s filed by Lyle Berman (3 transactions), David Moon (2 Form 4s for a total of 3 transactions), Frank
Ng (2 Form 4s for a total of 5 transactions), Eric Yang and Primo Vital Ltd. (4 transactions), Kenneth DeCubellis and Black Ridge
Oil & Gas, Inc. (4 transactions), Adam Pliska (2 Form 4s for a total of 3 transactions), and Anthony Hung (1 transaction).
Item
11. Executive Compensation
The
following tables set forth information regarding compensation awarded to or earned by our “named executive officers,”
which under SEC rules and regulations include (i) all individuals serving as our principal executive officer during fiscal 2019,
(ii) our two most highly compensated other individuals who were serving as executive officers at the end of fiscal 2019 and who
received total compensation in excess of $100,000, and (iii) up to two additional individuals for whom disclosure would have been
required under (ii) but for the fact that they were not serving as executive officers at the end of fiscal 2019. For 2019, our
named executive officers were:
|
●
|
Kwok
Leung Frank Ng, Chief Executive Officer of Allied Esports Entertainment, Inc.
|
|
●
|
Judson
Hannigan, Chief Executive Officer of Allied Esports International Inc.
|
|
●
|
Adam
Pliska, President of Allied Esports Entertainment, Inc. and President and CEO of WPT Enterprises, Inc.
|
|
●
|
Ken
DeCubellis, former Chief Executive Officer of Black Ridge Acquisition Corp. (1)
|
|
(1)
|
Mr.
DeCubellis’s employment with the Company terminated after closing of the Merger on September 24, 2019.
|
Summary
Compensation Table
Summary Compensation Table
|
Name and principal position
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock Awards ($)
|
|
|
Option Awards ($)
|
|
|
Nonequity incentive plan compensation ($)
|
|
|
Nonqualified deferred compensation earnings ($)
|
|
|
All other compensation ($)
|
|
|
Total ($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
Kwok Leung Frank Ng,
|
|
2018
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Chief Executive Officer
|
|
2019
|
|
|
|
122,308
|
|
|
|
–
|
|
|
|
120,000
|
(1)
|
|
|
553,632
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
795,940
|
|
Judson Hannigan,
|
|
2018
|
|
|
|
218,588
|
(2)
|
|
|
–
|
|
|
|
91,037
|
(3)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
309,625
|
|
CEO of Allied Esports
|
|
2019
|
|
|
|
235,185
|
(4)
|
|
|
–
|
|
|
|
50,000
|
(5)
|
|
|
264,588
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
493,838
|
|
Adam Pliska,
|
|
2018
|
|
|
|
409,407
|
(6)
|
|
|
–
|
|
|
|
7,078
|
(8)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
416,485
|
|
President and Director, CEO of the World Poker Tour
|
|
2019
|
|
|
|
401,602
|
|
|
|
1,706,086
|
(7)
|
|
|
45,000
|
(9)
|
|
|
351,300
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,503,988
|
|
Ken DeCubellis,
|
|
2018
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
former CEO of BRAC
|
|
2019
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
(1)
|
Pursuant
to a Restricted Stock Agreement dated effective September 20, 2019, Mr. Ng was issued 17,668 shares of restricted common stock
of the Company, which vests on the earliest of termination of Mr. Ng’s employment without “Cause” (as defined
in the agreement), resignation of Mr. Ng for “Good Reason” (as defined in the agreement) or September 20, 2020
so long as Mr. Ng remains an employee or service provider at such time. Additionally, Mr. Ng was awarded an additional 3,534
shares of restricted common stock of the Company pursuant to a Restricted Stock Agreement dated effective September 20, 2019
for director services, which vest on September 20, 2020 so long as Mr. Ng remains a director at such time.
|
|
|
|
|
(2)
|
Consulting
services fee was paid to Big Turn International Limited, a company to which Mr. Hannigan has an ownership interest in, totaling
$74,580. Mr. Hannigan’s services as a full-time employee earned a total salary of $143,420 in 2018.
|
|
|
|
|
(3)
|
Pursuant
to a Stock Purchase Agreement dated November 5, 2018, and as amended on December 17, 2018 and April 16, 2019, Mr. Hannigan
purchased 275,871 restricted shares of common stock of Allied Esports Media, Inc. (f/ka/ Allied Esports Entertainment, Inc.)
at a price per share of $0.001. The shares are subject to the following forfeiture provisions: (i) if the Merger was not consummated
on or prior to July 1, 2019, upon request of Allied Esports Media, Inc. Mr. Hannigan would exchange such shares for options
to purchase an equal amount of shares of common stock of Allied Esports International, Inc.; (ii) effective upon the Merger
and continuing until the one-year anniversary of the Closing Date (the “Forfeiture Period”), Mr. Hannigan will
forfeit the shares unless he provides substantial services to AEM or its affiliates; and (iii) such risk of forfeiture will
lapse upon the first to occur of (A) the end of the Forfeiture Period, as described above; (B) the termination of Mr. Hannigan’s
services for any reason other than fraud, embezzlement or similar serious offense involving AEM or its affiliates, (C) a merger
or sale of AEM (excluding the Merger), or (D) the death or disability of Mr. Hannigan.
|
|
|
|
|
(4)
|
Consulting
services fee was paid to Big Turn International Limited, a company to which Mr. Hannigan has an ownership interest in, totaling
$55,935. Mr. Hannigan’s services as a full-time employee earned a total salary of $179,250 in 2019.
|
|
|
|
|
(5)
|
Pursuant
to a Restricted Stock Agreement dated effective September 20, 2019, Mr. Hannigan was issued 8,834 shares of restricted common
stock of the Company, which vests on the earliest of termination of Mr. Hannigan’s employment without “Cause”
(as defined in the agreement), resignation of Mr. Hannigan for “Good Reason” (as defined in the agreement) or
September 20, 2020 so long as Mr. Hannigan remains an employee or service provider at such time.
|
|
|
|
|
(6)
|
$85,000
of such compensation was paid to Mr. Pliska for his services as a director to Ourgame and the Allied Esports and WPT entities. $42,500
of such compensation was paid to Trisara, a consulting company in which Mr. Pliska is a member.
|
|
|
|
|
(7)
|
$1,556,250
paid to Mr. Pliska on account of Mr. Pliska’s Employment Agreement as a profitability payment after it was determined
that the WPT business reduced its losses or became profitable, and $149,836 paid for Mr. Pliska’s services in 2019.
|
|
(8)
|
Pursuant
to a Stock Purchase Agreement dated November 5, 2018, and as amended on December 17, 2018 and April 16, 2019, Mr. Pliska purchased
21,447 restricted shares of common stock of Allied Esports Media, Inc. (f/k/a Allied Esports Entertainment, Inc.) at a price
per share of $0.001. The shares are subject to the following forfeiture provisions: (i) if the Merger was not consummated
on or prior to July 1, 2019, upon request of Allied Esports Media, Inc. Mr. Pliska would exchange such shares for options
to purchase an equal amount of shares of common stock of Allied Esports International, Inc.; (ii) during the Forfeiture Period,
Mr. Pliska will forfeit the shares unless he provides substantial services to AEM or its affiliates; and (iii) such risk of
forfeiture will lapse upon the first to occur of (A) the end of the Forfeiture Period, as described above; (B) the termination
of Mr. Pliska’s services for any reason other than fraud, embezzlement or similar serious offense involving AEM or its
affiliates, (C) a merger or sale of AEM (excluding the Merger), or (D) the death or disability of Mr. Pliska.
|
|
|
|
|
(9)
|
Pursuant
to a Restricted Stock Agreement dated effective September 20, 2019, Mr. Pliska was issued 4,417 shares of restricted common
stock of the Company, which vests on the earliest of termination of Mr. Pliska’s employment without “Cause”
(as defined in the agreement), resignation of Mr. Pliska for “Good Reason” (as defined in the agreement) or September
20, 2020 so long as Mr. Pliska remains an employee or service provider at such time. Additionally, Mr. Pliska was awarded
an additional 3,534 shares of restricted common stock of the Company pursuant to a Restricted Stock Agreement dated effective
September 20, 2019 for director services, which vest on September 20, 2020 so long as Mr. Pliska remains a director at such
time.
|
In
general, Allied Esports and WPT compensated its executive officers through a combination of salary and bonuses. Bonuses have generally
been tied to performance metrics agreed to by the applicable board of directors and if earned, are typically between 10% and 20%
of the applicable employee’s annual salary (although in the case of Mr. Pliska, that bonus percentage could be as high as
60% of his annual salary). Both companies offer 401(k) benefits (including, in the case of WPT, a matching contribution of up
to 4% of the employee’s annual salary), medical, dental, life insurance and disability coverage, flexible benefit accounts,
and an employee assistance program. Both companies also provide vacation and other paid holidays to employees. Other than certain
senior-level executives, both companies typically do not enter into employment agreements with their employees.
Adam
Pliska Employment Agreement
Adam
Pliska, who served as President and CEO of the WPT Entities and as an executive for Ourgame prior to the Merger, and who now serves
as President of the Company and CEO of the WPT Entities, has an Executive Engagement Agreement with Ourgame, dated as of January
24, 2018 and as amended in June 2018 (the “Pliska Employment Agreement”). Ourgame’s obligations under the Pliska
Employment Agreement were assumed by the Company in connection with the Merger.
In
addition to the standard 401(k), healthcare, paid vacation and similar benefits provided to all employees, the Pliska Employment
Agreement contains the following general terms:
|
●
|
Four-year
term, expiring on January 24, 2022 (the “Term”), subject to renewal upon mutual agreement.
|
|
|
|
|
●
|
Annual
salary (subject to annual review) of not less than $400,000, whereby $315,000 is allocated to his employment services and
$85,000 is allocated to consultancy and board compensation services (the “Consulting Compensation”) payable to
a consulting company Mr. Pliska is a member of, Trisara Ventures, LLC (“Trisara”). If Mr. Pliska no longer provides
consulting and board services during the Term, his salary would be increased to make up the loss of the Consulting Compensation.
|
|
|
|
|
●
|
If
Mr. Pliska’s employment is terminated for any reason during the Term, he will be entitled to any payments due under
the Pliska Employment Agreements, including all salary and Consulting Compensation that would have been paid during the Term.
After the Term or any renewal thereof, Mr. Pliska will be entitled to a severance payment of 12 month’s salary (including
Consulting Compensation) plus 12 months of benefits if his employment is terminated for any reason other than fraud, misappropriation,
dishonesty, stealing and/or embezzlement (each a termination for “Cause”).
|
|
|
|
|
●
|
In
the event of the termination of Mr. Pliska’s employment of the sale of WPT from Ourgame, Ourgame’s obligations
to Trisara will continue; provided, however, the current maximum yearly payment shall increase from $85,000 to $150,000 (adjusted
yearly to higher of inflation or the deemed inflation rate of Ourgame)
|
|
●
|
Upon
any termination of Mr. Pliska’s employment, in light of his over 15 years of experience with WPT, Trisara will continue
to receive a consulting fee of $100,000 per year (subject to increase for inflation) for as long as is legally permissible,
up to a maximum of forty (40) years; provided that Mr. Pliska will not take full time employment with the World Series of
Poker without the written consent of WPT for so long as such payments are made.
|
|
|
|
|
●
|
Annual
performance bonuses upon reaching certain EBITDA performance objectives of up to 40% of Mr. Pliska’s annual salary,
as well as bonuses of up to 60% of Mr. Pliska’s base salary if he exceeds such performance objectives.
|
|
|
|
|
●
|
Grant
of equity incentives in any annual grant program at a level commensurate for his title and subject to established performance
standards.
|
|
|
|
|
●
|
A
bonus payable to Trisara upon the sale of WPT equal to 2% of the total gross proceeds up to $45 million from the sale of the
WPT business, and an additional 1% of any proceeds over $45 million. Because the WPT business was valued at $50 million for
purposes of the Merger, Trisara was entitled to a payment of $950,000 in connection with the above provisions upon the closing
of the Merger. This bonus was paid at the closing of the Merger by the issuance of 144,158 restricted shares of AESE common
stock, which are subject to transfer and forfeiture restrictions.
|
|
|
|
|
●
|
The
right to receive a profitability payment of up to $1.5 million in the event the WPT business reduced its losses or became
profitable during the term of the Pliska Employment Agreement. Pursuant to Ourgame’s and WPT’s standard employee
bonus policies, in early 2019, Ourgame and WPT determined that Mr. Pliska is entitled to receive the full $1.5 million payment.
This bonus was paid at the closing of the Merger.
|
|
|
|
|
●
|
Unless
terminated for Cause, any termination of Mr. Pliska would immediately accelerate the vesting of any unvested equity awards
previously granted.
|
|
|
|
|
●
|
Mr.
Pliska is prohibited during the Term from (i) becoming employed in any activity similar to or competitive with the business
or activities of AESE, provided that legal services, investment services and non-poker related television shall not be deemed
competitive if not engaged on a full time basis (ii) seeking to persuade any director, officer, employee, agent or independent
contractor of AESE to discontinue that individual’s status or employment with AESE; (iii) hiring or retaining any such
person who is at such time or was associated with AESE within one year prior to the cessation of the employment of Mr. Pliska;
or (iv) soliciting (or causing or authorizing), directly or indirectly, to be solicited, for or on behalf of himself or any
third party, any business from others who are then or were at any time within one (1) year prior to the cessation of Mr. Pliska’s
employment, except for Mr. Pliska’s long-time assistant if he so chooses.
|
|
|
|
|
●
|
Mr.
Pliska further agrees in the Pliska Employment Agreement to keep all confidential information of AESE confidential.
|
Profit
Participation Agreements
In January 2018, members
of the senior management of WPT entered into Profit Participation Agreements with Ourgame, pursuant to which Ourgame agreed to
pay such employees (i) a designated percentage (varying between 0.5% and 4.5%) of any profit earned by WPT during each fiscal
year (terminating upon the sale, merger or other disposition of WPT), and (ii) a payment equal to that designated percentage of
the proceeds from any sale, merger or other disposition of WPT in which Ourgame was paid at least $45 million. The closing of
the Merger triggered such a payment to WPT senior management, at a deemed value of WPT of $50 million, and such agreements were
terminated as a result of the Merger. Mr. Pliska received a payment of $2,000,120 and Deborah Frazzetta, WPT’s VP of Finance,
received a payment of $490,753 in exchange for their 4.0% and 1.5% shares of such proceeds, respectively. Such payments were made
in shares of restricted AESE common stock, valued at $6.59 per share, that would have otherwise been issued to Ourgame in the
Merger. Mr. Pliska received 303,508 shares and Ms. Frazzetta received 74,469 shares, all of which are subject to transfer and
forfeiture restrictions. Mr. Pliska’s payment was in addition to the $1.5 million payment owed to Mr. Pliska under the Pliska
Employment Agreement, discussed above.
Outstanding
Equity Awards at Fiscal Year-End
As
of December 31, 2019, the Company’s named executive officers had outstanding the following option and/or stock awards:
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of securities underlying unexercised options
exercisable
(#)
|
|
|
Number
of securities underlying unexercised options
unexercisable
(#)
|
|
|
Equity
incentive plan awards: Number of securities underlying unexercised unearned options
(#)
|
|
|
Option
exercise price
($)
|
|
|
Option
expiration date
|
|
|
Number
of shares or units of stock that have not vested
(#)
|
|
|
Market
value of shares or units of stock that have not vested
($)
|
|
|
Equity
incentive plan awards: Number of unearned shares, units or other rights that have not vested
(#)
|
|
|
Equity
incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
Kwok Leung
Frank Ng
|
|
|
–
|
|
|
|
–
|
|
|
|
40,000
|
|
|
|
5.66
|
|
|
|
9/20/2029
|
|
|
|
21,202
|
|
|
|
–
|
|
|
|
–
|
|
|
|
55,125
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
300,000
|
|
|
|
4.09
|
|
|
|
11/21/2029
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Judson Hannigan
|
|
|
–
|
|
|
|
–
|
|
|
|
170,000
|
|
|
|
4.09
|
|
|
|
11/21/2029
|
|
|
|
8,834
|
|
|
|
–
|
|
|
|
–
|
|
|
|
22,968
|
|
Adam Pliska
|
|
|
–
|
|
|
|
–
|
|
|
|
40,000
|
|
|
|
5.66
|
|
|
|
9/20/2029
|
|
|
|
7,951
|
|
|
|
–
|
|
|
|
–
|
|
|
|
20,673
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
170,000
|
|
|
|
4.09
|
|
|
|
11/21/2029
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Ken DeCubellis
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Frank
Ng Employment Agreement
On
November 5, 2019, the Company entered into a three-year written employment agreement (effective September 20, 2019) with Frank
Ng, the Company’s Chief Executive Officer. Under the employment agreement, Mr. Ng will serve as the Company’s Chief
Executive Officer and on its Board of Directors (the “Board”). Mr. Ng is entitled to receive an annual base salary
of $300,000 and is eligible for annual bonus compensation determined by the Board (the “Bonus Payments”). Mr. Ng may
participate in the Company’s benefit plans that are currently and hereafter maintained by the Company and for which he is
eligible, including, without limitation, group medical, 401(k), life insurance and other benefit plans.
Under
the employment agreement, if Mr. Ng’s employment is terminated by the Company for any reason other than Cause (as defined
in the employment agreement), or Mr. Ng resigns as an employee of the Company for Good Reason (as defined in the employment agreement),
so long as he has signed and has not revoked a release agreement, he will be entitled to receive severance comprised of one-year
of his base salary, plus a prorated Bonus Payment to the extent not already paid.
Director Compensation
|
Name
|
|
Fees earned or paid in cash
($)
|
|
|
Stock awards
($)
|
|
|
Option awards
($)
|
|
|
Non-equity incentive plan compensation
($)
|
|
|
Nonqualified deferred compensation earnings
($)
|
|
|
All other compensation ($)
|
|
|
Total
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
Bradley Berman
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
Lyle Berman
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
Ken DeCubellis
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
Ho Min Kim
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
Joseph Lahti
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
Benjamin Oehler
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
Maya Rogers
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
Kan Hee Anthony Tyen
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
Eric Yang
|
|
|
–
|
|
|
|
20,000
|
(1)
|
|
|
86,712
|
(2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
106,712
|
|
|
(1)
|
Each
director was awarded 3,534 shares of restricted common stock of the Company pursuant to a Restricted Stock Agreement dated
effective September 20, 2019 for director services, which vest on September 20, 2020 so long as such director remains a director
at such time.
|
|
|
|
|
(2)
|
On
September 20, 2019, each director received an option to purchase 40,000 shares of common stock, which vest in four equal installments
on each one-year anniversary of issuance.
|
Executive
Officer and Director Compensation of BRAC pre-Merger
Commencing
on October 4, 2017 and continuing through the consummation of the Merger, BRAC paid Black Ridge, its sponsor, an aggregate fee
of $10,000 per month for providing us with office space and certain office and secretarial services. This arrangement was solely
for our benefit and was not intended to provide compensation to our executive officers or directors. Other than the $10,000 per
month administrative fee, no compensation or fees of any kind, including finder’s, consulting fees and other similar fees,
was paid to members of BRAC’s officers or directors or their respective affiliates, for services rendered prior to or in
connection with the consummation of the Merger. However, they received reimbursement for any out-of-pocket expenses incurred by
them in connection with activities on our behalf, such as identifying potential target businesses, performing business due diligence
on suitable target businesses and business combinations as well as traveling to and from the offices, plants or similar locations
of prospective target businesses to examine their operations. There was no limit on the amount of out-of-pocket expenses reimbursable
by us.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
following table sets forth information with respect to the beneficial ownership of our common stock as of March 13, 2020 by:
|
●
|
each
beneficial owner more than five percent of our common stock;
|
|
●
|
each
of our current directors and named executive officers; and
|
|
●
|
all
of our current directors and executive officers as a group.
|
Name
and Address of Beneficial Owners(1)
|
|
Number
of
Shares (2)
|
|
|
Approximate
Percentage (2)
|
|
Five Percent Stockholders:
|
|
|
|
|
|
|
Black Ridge Oil & Gas, Inc. (3)
|
|
|
3,190,500
|
|
|
|
13.1
|
%
|
Primo Vital Limited (4)
|
|
|
15,112,163
|
|
|
|
55.8
|
%
|
Kepos Capital LP(5)
|
|
|
2,045,298
|
|
|
|
7.9
|
%
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
Lyle Berman(6)
|
|
|
459,222
|
|
|
|
1.9
|
%
|
Bradley Berman(7)
|
|
|
3,534
|
|
|
|
*
|
|
Benjamin S. Oehler(7)
|
|
|
3,534
|
|
|
|
*
|
|
Joseph Lahti(7)
|
|
|
3,534
|
|
|
|
*
|
|
Frank Ng(8)
|
|
|
453,422
|
|
|
|
1.9
|
%
|
Eric Yang(9)
|
|
|
17,447,673
|
|
|
|
64.3
|
%
|
Adam Pliska(10)
|
|
|
1,123,439
|
|
|
|
4.6
|
%
|
Maya Rogers(11)
|
|
|
3,534
|
|
|
|
*
|
|
Kan Hee Anthony Tyen(11)
|
|
|
3,534
|
|
|
|
*
|
|
Ho Min Kim(11)
|
|
|
3,534
|
|
|
|
*
|
|
Anthony Hung
|
|
|
–
|
|
|
|
*
|
|
Jud Hannigan (12)
|
|
|
375,055
|
|
|
|
1.6
|
%
|
Kenneth DeCubellis (3)(13)
|
|
|
3,190,500
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
All directors and executive officers, as a group (13 individuals) (14)
|
|
|
19,880,015
|
|
|
|
71.8
|
%
|
|
*
|
Less
than 1%
|
|
|
|
|
(1)
|
Unless
otherwise noted, the business address of each of the following entities or individuals is 17877 Von Karman Avenue, Suite 300,
Irvine, California, 92614. Unless otherwise indicated, we believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially owned by them.
|
|
|
|
|
(2)
|
The
percentage of beneficial ownership is based on 23,934,871 outstanding shares of common stock as of March 13, 2020. In computing
the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock that
could be issued upon the exercise of outstanding options or warrants held by that person that are currently exercisable or
exercisable within the next 60 days are considered outstanding. These shares, however, are not considered outstanding when
computing the percentage ownership of any other person.
|
|
|
|
|
(3)
|
Based
on a joint Schedule 13D filed on September 19, 2019. Includes 2,685,500 outstanding shares held by Black Ridge and 505,000
shares issuable upon the exercise of certain warrants held by Black Ridge that are exercisable or will become exercisable
within 60 days after March 13, 2020. Kenneth DeCubellis is a director and chief executive officer of Black Ridge and shares
voting and dispositive power over the shares held by Black Ridge. The address of Black Ridge is 110 North 5th Street,
Suite 410, Minneapolis, Minnesota 55403.
|
|
|
|
|
(4)
|
Based
on a joint Schedule 13D filed on September 18, 2019. Includes warrants to purchase 3,193,851 shares of common stock that are
currently exercisable or will become exercisable within 60 days after March 13, 2020, of which 324,665 warrants are currently
being held in escrow and are subject to forfeiture until August 9, 2020 as security for indemnification claims against AEM
that may arise under the Merger Agreement.
|
|
|
|
|
(5)
|
Based
on a joint Schedule 13G filed on February 4, 2020 by Kepos Capital LP and Mr. Mark Carhart. Includes warrants to purchase
2,006,974 shares of common stock underlying warrants that are currently exercisable or will become exercisable within 60 days
after March 13, 2020.
|
|
|
|
|
(6)
|
Includes
3,534 shares of common stock that are subject to transfer and forfeiture restrictions. Excludes shares for which Mr. Lyle
Berman has a pecuniary interest in through his ownership of common stock in Black Ridge.
|
|
|
|
|
(7)
|
Includes
3,534 shares of common stock that are subject to transfer and forfeiture restrictions. Excludes shares for which the stockholder
has a pecuniary interest in through his beneficial ownership in Black Ridge.
|
|
|
|
|
(8)
|
Includes
(i) warrants to purchase 106,233 shares of common stock that are currently exercisable or will become exercisable within 60
days after March 13, 2020, of which 6,823 warrants are currently being held in escrow and are subject to forfeiture until
August 9, 2020 as security for indemnification claims against AEM that may arise under the Merger Agreement; (ii) 117,648
shares issuable to Mr. Ng’s spouse upon conversion of a convertible promissory note issued to her by the Company; and
(iii) 21,202 shares of common stock that are subject to transfer and forfeiture restrictions.
|
|
(9)
|
Includes
(i) warrants to purchase 68,211 shares of common stock that are currently exercisable or will become exercisable within 60
days after March 13, 2020, (ii) 3,534 shares of common stock that are subject to transfer and forfeiture restrictions; (iii)
11,986,523 shares held by Primo Vital Limited (“Primo”), a 100% owned subsidiary of Ourgame, of which Mr. Yang,
as director and chief executive officer, exercises voting and dispositive power, (iv) warrants held by Primo to purchase 3,125,640
shares of common stock that are currently exercisable or will become exercisable within 60 days after March 13, 2020, and
(v) 2,055,493 shares held by former owners of AEM over which Ourgame has been granted voting power through June 1, 2020 pursuant
to proxies. Mr. Yang disclaims any pecuniary interest in the shares and warrants of Primo. Mr. Yang is a director of the Company.
|
|
|
|
|
(10)
|
Includes
(i) warrants to purchase 7,024 of common stock that are currently exercisable or will become exercisable within 60 days after
March 13, 2020, (ii) 117,648 shares issuable upon conversion of the convertible promissory note of The Lipscomb/Viscoli Children’s
Trust (the “Trust”), of which Mr. Pliska is trustee, (iii) warrants to purchase 38,000 shares of common stock
held by the Trust, (iv) warrants to purchase 95,000 shares of common stock held by Trisara, LLC, a limited liability company
wholly-owned by Mr. Pliska, and (v) 7,951 shares of common stock that are subject to transfer and forfeiture restrictions.
Mr. Pliska is the President of the Company and WPT Enterprises, Inc., serves as a director of the Company and disclaims any
pecuniary interest in the shares and warrants set forth in items (ii) and (iii).
|
|
|
|
|
(11)
|
Includes
3,534 shares that are subject to transfer and forfeiture restrictions.
|
|
|
|
|
(12)
|
Includes
90,350 five-year warrants to purchase shares of Company common stock at a price per share of $11.50 issued in the Merger on
August 9, 2019, and 8,834 shares that are subject to transfer and forfeiture restrictions.
|
|
|
|
|
(13)
|
Mr.
DeCubellis previously served as Chief Executive Officer of BRAC. He resigned as a director and Chief Financial Officer of
the Company on September 24, 2019.
|
|
|
|
|
(14)
|
Consists
of shares beneficially owned by our current directors and current executive officers, which does not include shares beneficially
owned by Mr. DeCubellis.
|
Item
13. Certain Relationships and Related Transactions, and Director Independence
Certain
Relationships and Related Transactions
Since
January 1, 2018, we have engaged in the following transactions with our directors, executive officers and holders of 5% or
more of our voting securities, and affiliates of our directors, executive officers and holders of 5% or more of our voting securities.
We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties.
Notes
Payable to Ourgame
During
the nine months ended September 30, 2018, Allied Esports and WPT received proceeds of $11,174,913 from the issuance of notes payable
to Ourgame. During November and December 2018, as part of a corporate restructuring, all outstanding principal under the notes
payable to Ourgame were converted into equity issued to Ourgame, and all accrued interest related to the notes payable to Ourgame
was forgiven and recorded as a contribution to capital.
Due
to Ourgame
As
of December 31, 2018, amounts due to Ourgame of $33,019,510 consisted of payments of certain operating expenses, investing activities
and financing activities made on behalf of the Company by Ourgame. There was no stated interest rate or definitive repayment terms
related to this liability. The weighted average balance of advances owed to Ourgame was $20,143,485 during the nine months ended
September 30, 2018 and was $32,788,017 for the period from January 1, 2019 through August 9, 2019. On August 9, 2019, all obligations
to Ourgame in the aggregate amount of $32,672,622 were satisfied in connection with the Merger.
Noble
Link Notes
Prior
to the Merger, Noble Link and its wholly owned subsidiaries Peerless Media Limited, Club Services, Inc. and WPT Enterprises, Inc.
operated the poker-related business of the Company. On May 15, 2019, Noble Link issued a series of secured convertible promissory
notes (the “Noble Link Notes”) whereby investors provided Noble Link with $4 million to be used for the operations
of Allied Esports and WPT, of which one Noble Link Note in the amount of $1 million was issued to the wife of a related party
who formerly served as co-CEO of the Former Parent and a Director of Noble Link. Pursuant to the original terms of the Noble Link
Notes, the Noble Link Notes accrued annual interest at 12%; provided that no interest would payable in the event the Noble Link
Notes were converted into the Company’s common stock. The Noble Link Notes were due and payable on the first to occur of
(i) the one-year anniversary of the issuance date, or (ii) the date on which a demand for payment was made during the time period
beginning on the closing date of the Merger (the “Closing Date”) and ending on the date that was three (3) months
after the Closing Date. As security for purchasing the Noble Link Notes, the investors received a security interest in Allied
Esports’ assets (second to any liens held by the landlord of the Las Vegas arena for property located in that arena), as
well as a pledge of the equity of all of the entities comprising WPT, and a guarantee of the Ourgame and BRAC. Upon the closing
of the Merger, the Noble Link Notes were convertible, at the option of the holder, into shares of the Company’s common stock
at $8.50 per share.
Pursuant
to an Amendment and Acknowledgement Agreement dated August 5, 2019 (the “Amendment and Acknowledgement Agreement”),
the Noble Link Notes were amended to extend their maturity dates to August 23, 2020 (the “Maturity Date”). The Noble
Link Notes are convertible into shares of the Company’s common stock at the election of the holders at any time between
the Closing Date and the Maturity Date at a conversion price of $8.50 per share. Further, the minimum interest to be paid under
each Noble Link Note shall be the greater of (a) 18 months of accrued interest at 12% per annum; or (b) the sum of the actual
interest accrued plus six months of additional interest at 12% per annum. The Company recorded interest expense of $411,433 and
$469,296, respectively, related to the Noble Link Notes during the three and nine months ended September 30, 2019.
Pursuant
to the note purchase agreements entered into by the purchasers of the Noble Link Notes (the “Noteholders” and such
agreements, the “Note Purchase Agreements”), upon the consummation of the Merger, each Noteholder received a five-year
warrant to purchase their proportionate share of 532,000 shares of the Company’s common stock. In addition, pursuant to
the Note Purchase Agreements, each Noteholder is entitled to its proportionate share of 3,846,153 shares of the Company’s
common stock if such Noteholder’s Noble Link Note is converted into the Company’s common stock and, at any time within
five years after the date of the closing of the Merger, the last exchange-reported sale price of the Company’s common stock
equals or exceeds $13.00 for thirty (30) consecutive calendar days.
Consulting
Agreement
On
August 9, 2019 the Company entered into a consulting services agreement Black Ridge, the Company’s prior sponsor, pursuant
to which Black Ridge provided administration and accounting services to the Company through December 31, 2019, in exchange for
consulting fees in the aggregate amount of $348,853.
Put
Option Agreement
On
February 25, 2020 (the “Effective Date”), the Company entered into a Put Option Agreement (the “Agreement”)
with Lyle Berman, Chairman of the Company’s Board of Directors. Under the Agreement, the Company has an option (the “Option”),
in its discretion, to sell shares of its common stock (the “Option Shares”) to Mr. Berman for aggregate gross proceeds
of up to $2.0 million, at a purchase price of $1.963 per Option Share. The Company will be required to exercise the Option, if
at all, no later than April 9, 2020, at which time the Option will expire. The Company has no obligation to sell any Option Shares
under the Agreement. If the Company exercises the Option, it must do so in full (and not in part), subject to the Exchange Limitations
(as defined below). On March 9, 2020, the Company exercised the Option by delivering an Option election notice to Mr. Berman.
The closing of the issuance and sale of Option Shares (the “Closing”) will take place no later than 30 days following
Mr. Berman’s receipt of the Option election notice; provided, however, that Mr. Berman may, upon delivering written notice
to the Company, elect to hold two separate Closings at which the Company will deliver one-half of the Option Shares to the Mr.
Berman against Mr. Berman’s payment of one-half of the purchase price to the Company. If Mr. Berman elects to conduct two
Closings, the second Closing will be conducted no later than the one-month anniversary of the first Closing.
The
Agreement limits the Company’s ability to issue shares (and Mr. Berman’s obligation to purchase such shares) as follows
(the “Exchange Limitations”):
|
(1)
|
The
total number of shares that may be issued under the Agreement will be limited to 19.99% of the Company’s outstanding
shares on the date the Agreement is signed (the “Exchange Cap”), unless stockholder approval is obtained to issue
shares in excess of the Exchange Cap;
|
|
(2)
|
The
Company may not issue and Mr. Berman may not purchase Option Shares to the extent that such issuance would result in Mr. Berman
and his affiliates beneficially owning more than 19.99% of the then issued and outstanding shares of the Company’s common
stock unless (i) such ownership would not be the largest ownership position in the Company, or (ii) stockholder approval is
obtained for ownership in excess of 19.99%; and
|
|
(3)
|
The
Company may not issue and Mr. Berman may not purchase any Option Shares if such issuance and purchase would be considered
equity compensation under the rules of The Nasdaq Stock Market unless stockholder approval is obtained for such issuance.
|
The
number of Option Shares to be issued by the Company and purchased by Mr. Berman at the Closing(s) will be appropriately reduced
in order to comply with the Exchange Limitations. The Option Shares would be issued pursuant to available exemptions from the
registration requirements of the Securities Act of 1933, as amended, and applicable state securities laws.
Pursuant
to the Agreement, Mr. Berman has agreed that, without the prior written consent of the Company, he will not, during the period
commencing on the date of issuance of the Option Shares, and ending six months after the date of such issuance, (1) offer, pledge,
sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, the Option Shares; (2) enter
into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership
of the Option Shares; or (3) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into
any transaction, swap, hedge or other arrangement relating to the Option Shares.
Related
Party Policy
Our
Code of Ethics requires us to avoid, wherever possible, all related party transactions that could result in actual or potential
conflicts of interests, except under guidelines approved by the board of directors (or the Nominating and Corporate Governance
Committee). Related-party transactions are defined as transactions in which (1) the aggregate amount involved will or may be expected
to exceed $120,000 in any calendar year, (2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer,
director or nominee for election as a director, (b) greater than 5% beneficial owner of our shares of common stock, or (c) immediate
family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other
than solely as a result of being a director or a less than 10% beneficial owner of another entity). A “conflict of interest”
exists when a person’s private interests interfere in any way (or appear to interfere) with the interests of the Company.
A conflict of interest can arise when an officer, director or employee takes actions or has personal interests that may make it
difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise when an officer, director
or employee, or members of his or her family, receives improper personal benefits as a result of his or her position at the Company.
Our
Nominating and Corporate Governance Committee will be responsible for reviewing and approving related-party transactions to the
extent we enter into such transactions. The Nominating and Corporate Governance Committee will consider all relevant factors when
determining whether to approve a related party transaction, including whether the related party transaction is on terms no less
favorable to us than terms generally available from an unaffiliated third-party under the same or similar circumstances and the
extent of the related party’s interest in the transaction. No director may participate in the approval of any transaction
in which he is a related party, but that director is required to provide the Nominating and Corporate Governance Committee with
all material information concerning the transaction. We also require each of our directors and executive officers to complete
a directors’ and officers’ questionnaire that elicits information about related party transactions.
These
procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents
a conflict of interest on the part of a director, employee or officer.
Independence
of Directors
Nasdaq
listing standards require that a majority of our Board of Directors be “independent directors” as defined by The Nasdaq
Marketplace Rules. We currently have eight “independent directors”, Messrs. Bradley Berman, Benjamin Oehler, Joseph
Lahti, Lyle Berman, Eric Qing Yang, Kan Hee Anthony Tyen and Ho Min Kim, and Ms. Maya Rogers.
Item
14. Principal Accountant Fees and Services
The
firm of Marcum LLP acts as our independent registered public accounting firm. The following is a summary of fees paid to Marcum
LLP for services rendered.
Audit Fees.
Audit fees consist of fees billed for professional services rendered for the audit of our year-end financial statements and
services that are normally provided by Marcum LLP in connection with regulatory filings. The aggregate fees billed by
Marcum LLP for professional services rendered for the reviews and audits of the financial information included in our Forms
10-Q and 10-K for the respective periods and other required filings with the SEC for the years ended December 31, 2019 and
2018 totaled $364,620 and $399,155, respectively.
Audit-Related Fees.
Audit-related services consist of fees billed for assurance and related services that are reasonably related to performance of
the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest
services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.
During the years ended December 31, 2019 and 2018, we were billed $31,930 and $-- by Marcum LLP for audit-related fees.
Tax
Fees. We did not pay Marcum LLP for tax planning and tax advice for the years ended December 31, 2019 and 2018.
All
Other Fees. We did not pay Marcum LLP for other services for the years ended December 31, 2019 and 2018.
Pre-Approval
Policy
The
audit committee has and will pre-approve all auditing services and permitted non-audit services to be performed for us by our
auditors, including the fees and terms thereof (subject to the de minimis exceptions for non-audit services described in
the Exchange Act which are approved by the audit committee prior to the completion of the audit).
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying
notes are an integral part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying
notes are an integral part of these consolidated financial statements
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 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 (a “Business Combination”).
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 (see 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. operate the poker-related business of AESE 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 (the “Former Parent”).
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 these consolidated financial statements prior to the Merger are
those of Allied Esports and WPT. The preferred stock, common stock, additional paid in capital and earnings per share amount in
these consolidated financial statements for the period prior to the Merger have been restated to reflect the recapitalization
in accordance with the shares issued to the Former Parent as a result of the Merger. References herein to the “Company”
are to the combination of AEM and WPT during the period prior to the AEM Merger and are to AESE and subsidiaries after the Merger.
Allied Esports operates through its wholly
owned subsidiaries Allied Esports International, Inc., (“AEII”), Esports Arena Las Vegas, LLC (“ESALV”)
and ELC Gaming GMBH (“ELC Gaming”). AEII operates global competitive esports properties designed to connect players
and fans via a network of connected arenas. ESALV operates a flagship gaming arena located at the Luxor Hotel in Las Vegas, Nevada.
ELC Gaming operates a mobile esports truck that serves as both a battleground and content generation hub and also operates a studio
for recording and streaming gaming events.
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.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Going Concern and Management’s Plans
As of December 31, 2019, the Company had
cash and a working capital deficit of approximately $8.4 million (not including approximately $3.7 million of restricted cash)
and $9.0 million, respectively. For the years ended December 31, 2019 and 2018, the Company incurred net losses of approximately
$16.7 million and $31.0 million, respectively, and used cash in operations of approximately $10.1 million and $14.6 million, respectively.
Further, convertible debt obligations and related accrued interest in the aggregate amount of $14.0 million and $2.1 million,
respectively, mature on August 19, 2020, unless converted to equity prior to their maturity date (see Note 11 - Convertible Debt).
The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern within one
year after the issuance date of these consolidated financial statements.
The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets and the satisfaction
of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating
to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
The Company’s continuation is dependent
upon attaining and maintaining profitable operations and, until that time, raising additional capital as needed, but there can
be no assurance that it will be able to close on sufficient financing. The Company’s ability to generate positive cash flow
from operations is dependent upon generating sufficient revenues. To date, the Company’s operations have been funded by
the Former Parent, through the issuance of debt and with cash acquired in the Merger. The Company cannot provide any assurances
that it will be able to secure additional funding, either from equity offerings or debt financings on terms acceptable to the
Company, if at all. If the Company is unable to obtain the requisite amount of financing needed to fund its planned operations,
it would have a material adverse effect on its business and ability to continue as a going concern, and it may have to curtail,
or even cease, certain operations.
Note 3 - 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 U.S. GAAP and pursuant to the accounting rules and regulations of the United States Securities and Exchange
Commission (“SEC”). Expenses that the Former Parent incurred on behalf of WPT and Allied Esports prior to the Merger
were allocated to each entity using specific identification.
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 goodwill and other intangible assets, accounts receivable reserves, the valuation of investments, stock-based
compensation, warrants and deferred tax assets and the recoverability and useful lives of long-lived assets, including intangible
assets, property and equipment and deferred production costs. 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
Business Combinations
The Company accounts for business combinations
under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business
Combinations” using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business
are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is
recorded as goodwill. All acquisition costs are expensed as incurred. Upon acquisition, the accounts and results of operations
are consolidated as of and subsequent to the acquisition date.
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, 2019 or 2018.
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 Simon Equity Development. See Note 15 – 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, 2019 and 2018, there was no bad debt allowance.
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.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
The estimated useful lives of property
and equipment are as follows:
Equipment
|
3
- 5 years
|
Computer equipment
|
3 - 5 years
|
Production equipment
|
5 years
|
Furniture and fixtures
|
3 - 5 years
|
Software
|
1 - 5 years
|
Gaming truck
|
5 years
|
Leasehold improvements
|
14 years
|
Intangible Assets and Goodwill
Intangible assets are comprised of goodwill,
intellectual property, customer relationships, trademarks, and trade names. Intangible assets with definite lives are amortized
on a straight-line basis over the shorter of their estimate useful lives, ranging from two to ten years, or their contract periods,
if applicable. 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.
When testing goodwill for impairment,
the Company may assess qualitative factors for some or all of our reporting units to determine whether it is more likely than
not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount,
including goodwill. Alternatively, the Company may bypass this qualitative assessment for some or all of our reporting units and
perform a detailed quantitative test of impairment (step 1). If the Company performs the detailed quantitative impairment test
and the carrying amount of the reporting unit exceeds its fair value, the Company will perform an analysis (step 2) to measure
such impairment. At December 31, 2019 and 2018, the Company performed a qualitative assessment to identify and evaluate events
and circumstances to conclude whether it is more likely than not that the fair value of the Company’s reporting units is
less than their carrying amounts. Based on the Company’s qualitative assessments, the Company concluded that a positive
assertion can be made that it is more likely than not that the fair value of the reporting units exceeded their carrying values
and no impairment of goodwill was identified at December 31, 2019 and 2018.
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 years ended December 31, 2019
and 2018, the Company recognized an impairment of $0 and $236,833, respectively, related to certain intangible assets that were
deemed impaired due to management’s determination that the future cash flows are not expected to be sufficient to recover
the carrying value of those assets.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Deferred Production Costs
Capitalized production costs represent
the costs incurred to develop and produce the Company’s proprietary shows. These costs primarily consist of labor, equipment,
production overhead costs and travel expenses. Capitalized production overhead costs include rent incurred in connection with
our leased space in Los Angeles, California, which is used exclusively for film production. Capitalized production costs are stated
at the lower of cost, less accumulated amortization and tax credits, if applicable, or fair value. Production costs in an amount
up to the amount of ultimate revenue expected to be earned from the related production are capitalized in accordance with FASB
ASC Topic 926-20, “Other Assets – Film Costs”. Amortization of capitalized film costs begins when the related
film is released and begins to recognize revenue. Capitalized film costs are expensed over the expected revenue period (not to
exceed ten years) using a ratio of revenue earned during the period to estimated ultimate revenues for the related production.
Costs incurred in excess of expected ultimate revenue are expensed as incurred and included in multiplatform costs in the accompanying
consolidated statements of operations. Unamortized capitalized production costs are evaluated for impairment at each reporting
period on a season-by-season basis. If estimated remaining revenue is not sufficient to recover the unamortized capitalized production
costs for that season, the unamortized capitalized production costs will be written down to fair value.
During the years ended December 31, 2019
and 2018, the Company recognized an impairment of $330,340 and $768,459, respectively, related to deferred production costs that
were deemed impaired due to management’s determination that the remaining revenue associated with the deferred production
costs is not expected to be sufficient to recover the unamortized cost.
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 Company’s convertible debt approximates fair value due to its short-term nature
and market rate of interest.
Nonrecurring Fair Value Measurements
Certain nonfinancial assets and liabilities
are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as
when there is evidence of impairment. These fair value measurements are categorized within level 3 of the fair value hierarchy.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
The Company periodically evaluates the
carrying value of long-lived assets to be held and used when events or circumstances warrant such a review. Fair value is determined
primarily using anticipated cash flows assumed by a market participant discounted at a rate commensurate with the risk involved
or in the case of nonfinancial assets or liabilities. See “Impairment of Long-Lived Assets”, above.
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, 2019, and 2018, 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 exercise of outstanding stock
options and warrants and the conversion of convertible instruments.
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:
|
|
For the Years Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Options
|
|
|
2,480,000
|
|
|
|
-
|
|
Warrants
|
|
|
18,637,003
|
|
|
|
3,800,003
|
|
Convertible debt
|
|
|
1,647,058
|
|
|
|
-
|
|
Unit purchase options
|
|
|
600,000
|
|
|
|
-
|
|
Contingent consideration shares
|
|
|
3,846,153
|
|
|
|
-
|
|
|
|
|
27,210,214
|
|
|
|
3,800,003
|
|
Revenue Recognition
On January 1, 2019, the Company adopted
ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 requires
that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step
process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the
revenue recognition process than required under U.S. GAAP, including identifying performance obligations in the contract, estimating
the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate
performance obligation.
The Company adopted ASC 606 for all applicable
contracts using the modified retrospective method, which would have required a cumulative-effect adjustment, if any, as of the
date of adoption. The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements
as of the date of adoption. As a result, a cumulative-effect adjustment was not required.
The Company recognizes
revenue 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 World Poker Tour events
– TV, non-TV, and DeepStacks Entertainment, LLC and DeepStacks Poker Tour, LLC (collectively “DeepStacks”) events
– held at the Company’s partner casinos as well as 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, 2019 and 2018:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Event revenue
|
|
$
|
7,179,917
|
|
|
$
|
5,089,006
|
|
Sponsorship revenue
|
|
|
2,081,029
|
|
|
|
488,329
|
|
Food and beverage revenue
|
|
|
1,158,004
|
|
|
|
814,247
|
|
Ticket and gaming revenue
|
|
|
543,204
|
|
|
|
1,621,721
|
|
Merchandising revenue
|
|
|
171,014
|
|
|
|
167,194
|
|
Other revenue
|
|
|
244
|
|
|
|
858
|
|
Total in-person revenue
|
|
$
|
11,133,412
|
|
|
$
|
8,181,355
|
|
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.
Multiplatform
content revenue
The Company’s multiplatform content
revenue is comprised of distribution revenue, sponsorship revenue, music royalty revenue, online advertising revenue and content
revenue. Distribution revenue is generated primarily through the distribution of content from World Poker Tour’s library.
World Poker Tour provides video content to global television networks, who then have the right to air the content and place advertisements
on the content during the related license period. Revenue from the distribution of video content to television networks is received
pursuant to the contract payment terms and is recognized at the point in time that advertisements are aired on the WPT content.
Occasionally, WPT will bundle third-party content with its own content in a distribution arrangement and will share the revenue
with the third party. However, the revenues related to third party content are de minimis. The Company recognizes distribution
revenue pursuant to the terms of each individual contract with the customer and records deferred revenue to the extent the Company
has received a payment for services that have yet to be performed or products that have yet to be delivered
The Company also distributes video content
to online channels. Both the global television networks and the online channels place ads within the WPT content and any advertising
revenue earned by the global TV network or online channel is shared with WPT. The Company recognizes online advertising revenue
at the point in time when the advertisements are placed in the video content.
Sponsorship revenue is generated through
the sponsorship of the Company’s TV content, live and online events and online streams. Online advertising revenue is generated
from third-party advertisements placed on the Company’s website. Music royalty revenue is generated when the Company’s
music is played in the Company’s TV series both on TV networks and online. The Company recognizes sponsorship revenue pursuant
to the terms of each individual contract when the Company satisfies the respective performance obligations, which could be recognized at a point in time or over the term
of the contract. The Company records deferred
revenue to the extent the Company has received a payment for services that have yet to be performed or products that have yet to
be delivered.
Music royalty revenue is recognized at the point in time when
the music is played.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Multiplatform content revenue was comprised
of the following for the years ended December 31, 2019 and 2018:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Distribution revenue
|
|
$
|
1,694,429
|
|
|
$
|
861,994
|
|
Content revenue
|
|
|
50,000
|
|
|
|
-
|
|
Sponsorship revenue
|
|
|
2,173,286
|
|
|
|
1,332,077
|
|
Music royalty revenue
|
|
|
1,573,247
|
|
|
|
1,031,425
|
|
Online advertising revenue
|
|
|
7,442
|
|
|
|
21,161
|
|
Total multiplatform content revenue
|
|
$
|
5,498,404
|
|
|
$
|
3,246,657
|
|
Interactive
revenue
The Company’s interactive revenue
is primarily comprised of subscription revenue, licensing, social gaming and virtual product revenue. Subscription revenue is
generated through fixed rate (monthly, quarterly, annual) subscriptions which offer the opportunity for subscribers to play unlimited
poker and access benefits not available to non-subscribers.
The Company recognizes subscription revenue on a straight-line
basis and records deferred revenue to the extent the Company receives payments for services that have yet to be provided. Social
gaming revenue arises from the sale of online tokens and other online purchases on the Company’s social gaming website, and
is recognized at the point the product is delivered. Virtual product revenue is generated from the licensing of the Company’s
various brands to be used on the customers’ virtual product and social gaming platforms, and is recognized over the term
of the contractual agreement. The Company generates licensing revenue by licensing the right to use the Company’s brands
on products to third parties. Licensing revenue is recognized pursuant to the terms of each individual contract with the customer
and is recognized over the term of the contractual agreement. Deferred revenue is recorded to the extent the Company has received
a payment for products that have yet to be delivered.
Interactive revenue was comprised of the
following for the years ended December 31, 2019 and 2018:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Subscription revenue
|
|
$
|
4,823,510
|
|
|
$
|
4,964,086
|
|
Virtual product revenue
|
|
|
3,699,180
|
|
|
|
3,093,973
|
|
Social gaming revenue
|
|
|
555,643
|
|
|
|
674,497
|
|
Licensing revenue
|
|
|
290,164
|
|
|
|
349,199
|
|
Other revenue
|
|
|
71,682
|
|
|
|
93,488
|
|
Total interactive revenue
|
|
$
|
9,440,179
|
|
|
$
|
9,175,243
|
|
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes our revenue
recognized under ASC 606 in our consolidated statements of operations:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues Recognized at a Point in Time:
|
|
|
|
|
|
|
|
|
Event revenue
|
|
$
|
7,179,917
|
|
|
$
|
5,089,006
|
|
Food and beverage revenue
|
|
|
1,158,004
|
|
|
|
814,247
|
|
Ticket and gaming revenue
|
|
|
543,204
|
|
|
|
1,621,721
|
|
Merchandising revenue
|
|
|
171,014
|
|
|
|
167,194
|
|
Sponsorship revenue
|
|
|
575,067
|
|
|
|
716,277
|
|
Music royalty revenue
|
|
|
1,573,247
|
|
|
|
1,031,425
|
|
Online advertising revenue
|
|
|
7,442
|
|
|
|
21,161
|
|
Social gaming revenue
|
|
|
555,643
|
|
|
|
674,497
|
|
Content revenue
|
|
|
50,000
|
|
|
|
-
|
|
Other revenue
|
|
|
71,926
|
|
|
|
94,346
|
|
Total Revenues Recognized at a Point in Time
|
|
|
11,885,464
|
|
|
|
10,229,874
|
|
|
|
|
|
|
|
|
|
|
Revenues Recognized Over a Period of Time:
|
|
|
|
|
|
|
|
|
Sponsorship revenue
|
|
|
3,679,248
|
|
|
|
1,104,129
|
|
Licensing revenue
|
|
|
290,164
|
|
|
|
349,199
|
|
Subscription revenue
|
|
|
4,823,510
|
|
|
|
4,964,086
|
|
Virtual product revenue
|
|
|
3,699,180
|
|
|
|
3,093,973
|
|
Distribution revenue
|
|
|
1,694,429
|
|
|
|
861,994
|
|
Total Revenues Recognized Over a Period of Time
|
|
|
14,186,531
|
|
|
|
10,373,381
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
26,071,995
|
|
|
$
|
20,603,255
|
|
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, 2019, there remained
$421 of contract liabilities which were included within deferred revenue on the consolidated balance sheet as of December 31,
2018, and for which performance obligations had not yet been satisfied as of December 31, 2019. The Company expects to satisfy
its remaining performance obligations within the next twelve months. During the years ended December 31, 2019 and 2018, there
was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.
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.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Advertising Costs
Advertising costs are charged to operations
in the year incurred and totaled approximately $565,000 and $1,240,000 for the years ended December 31, 2019 and 2018, 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, 2019
and 2018, 13% and 15%, respectively, of the Company’s revenues were from customers in foreign countries. See Note 12 - Segment
Data for additional details.
During the year ended December 31, 2019,
the Company’s largest customer accounted for 12% of the Company’s consolidated revenues.
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 (1.1215 and 1.1444 at December 31, 2019 and 2018, respectively), and revenue and expense
accounts are translated using the weighted average exchange rate in effect for the period (1.1194 and 1.1809 for the years ended
December 31, 2019 and 2018, respectively). Resulting translation adjustments are made directly to accumulated other comprehensive
(loss) income. Losses of $2,124 and $198,513 arising from exchange rate fluctuations on transactions denominated in a currency
other than the reporting currency for the years ended December 31, 2019 and 2018, 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.
Segment Reporting
Reportable segments are components of
an enterprise about which separate financial information is available for evaluation by the chief operating decision maker in
making decisions about how to allocate resources and assess performance. The chief operating decision maker of WPT is WPT’s
chief executive officer, and the chief operating decision maker of Allied Esports is Allied Esports’ chief executive officer.
Separate discrete financial information for each of WPT and Allied Esports are reviewed separately by different chief operating
decision makers, and the operations of each of WPT and Allied Esports are managed separately. As such, the operations of WPT (principally
poker gaming and entertainment) and Allied Esports (principally video game events and competitions) are reported as separate operating
segments of the Company. See Note 12 – Segment Data.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Reclassification
Certain prior year balances have been
reclassified in order to conform to current year presentation. These reclassifications have no effect on previously reported results
of operations or loss per share.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU
2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”)
and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number
of specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this
core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process
than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows
arising from an entity’s contracts with customers. The guidance may be adopted through either retrospective application
to all periods presented in the financial statements (full retrospective approach) or through a cumulative effect adjustment to
retained earnings at the effective date (modified retrospective approach). The guidance was revised in July 2015 to be effective
for private companies and emerging growth public companies for annual and interim periods beginning on or after December 15, 2018.
These new standards became effective for AESE on January 1, 2019 and were adopted using the modified retrospective method. The
adoption of ASC Topic 606 did not have a material impact on the Company’s consolidated financial statements as of the date
of adoption, and therefore a cumulative-effect adjustment was not required.
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, 2020, and interim
periods within fiscal years beginning after December 15, 2021. 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 is currently evaluating the impact that this guidance will have on its consolidated financial
statements.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
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 August 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-15, “Statement
of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). The new
standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement
of cash flows. The new standard for private companies and emerging growth public companies is effective for fiscal years beginning
after December 15, 2018. The Company adopted this new standard on January 1, 2019. The adoption of ASU 2016-15 did not have a
material impact on the Company’s consolidated financial statements or disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles
– Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance simplifies the accounting
for goodwill impairment by eliminating Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill
impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill
recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the
reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard,
goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the
reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. The
Company does not expect the impact of adopting this guidance to be material to its consolidated financial statements.
In July 2018, the FASB issued ASU No.
2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments provide clarifications and corrections
to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive Income – Overall (Topic 220-10),
Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from Equity – Overall (Topic 480-10),
Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations - Income Taxes (Topic 805-740), Derivatives
and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall (Topic 820-10). The majority of the amendments
in ASU 2018-09 will be effective in annual periods beginning after December 15, 2019. The adoption of ASU 2018-09 is not expected
to have a material impact on the Company’s consolidated financial statements or disclosures.
In August 2018, the FASB issued ASU No.
2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair
Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements associated with
fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The
amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively
for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should
be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for
fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. The adoption of ASU 2018-13 it not expected to have a material impact on the Company’s consolidated
financial statements.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
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. The Company is currently evaluating the impact
that this pronouncement will have on its consolidated financial statements.
In December 2019, the FASB issued ASU
2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. The new guidance simplifies the accounting for
income taxes by removing several exceptions in the current standard and adding guidance to reduce complexity in certain areas,
such as requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate
computation in the interim period that includes the enactment date. The new standard is effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently
assessing the impact that adopting this guidance will have on its consolidated financial statements.
Note 4 – Business Combination
In January 2018, the Former Parent sold
its 18.2% ownership interest in Esports Arena, LLC (“ESA”), to Allied Esports. Simultaneously, Allied Esports paid cash
of $1,337,454 to purchase an additional 64.2% interest in ESA, such that Allied Esports owned an aggregate 82.4% controlling interest
in Esports Arena. The acquisition was considered a business combination as the assets and the intangible assets acquired represent
an integrated set of inputs and processes.
Allied Esports recognized goodwill of
$4,337,660, arising from the acquisition, which is due mainly to the strategic nature of the Esports Arena acquisition. The goodwill
acquired is expected to be deductible for income tax purposes. The following table summarizes the fair value of the assets
acquired and the liabilities recognized at the acquisition date:
Assets acquired:
|
|
|
|
Cash
|
|
$
|
10,353
|
|
Property, plant and equipment
|
|
|
1,975,864
|
|
Customer list
|
|
|
940,000
|
|
Trade names
|
|
|
140,000
|
|
Goodwill
|
|
|
4,337,660
|
|
Other intangibles
|
|
|
22,300
|
|
Total assets acquired
|
|
|
7,426,177
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
Affiliate advances
|
|
|
(3,013,706
|
)
|
Accounts payable
|
|
|
(241,716
|
)
|
Debt
|
|
|
(120,447
|
)
|
Total liabilities assumed
|
|
|
(3,375,869
|
)
|
|
|
|
|
|
Non-controlling interests
|
|
|
(712,854
|
)
|
|
|
$
|
3,337,454
|
|
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Allied Esports identified the following
intangible assets that meet the criteria for separate recognition apart from the goodwill for financial reporting purposes:
|
●
|
Customer list in the amount of $940,000, which represents the
important relationships with its customers who purchased sponsorships, merchandise, gaming services and rented the facilities,
and,
|
|
●
|
Trade names in the aggregate amount of $140,000, which includes
Esports Arena names, trademarks, and related domain names, which have recognition in the industry.
|
Deconsolidation of ESA
In January 2018, Allied Esports entered
into a contribution agreement with ESA (the “Contribution Agreement”), whereby Allied Esports committed to contribute
$40 million to ESA for the acquisition, construction and development of up to 12 new arenas through January 31, 2020 (“Funding”).
Pursuant to the terms of the Contribution
Agreement, in the event that Allied Esports failed to contribute the minimum funding commitments noted above, Allied Esports would
be required to convey a portion of its membership interests in ESA to the minority investors of ESA. Effective August 1, 2018,
Allied Esports entered into an amendment to the agreement with the non-controlling interest members of ESA (who are not related
parties to Allied Esports) to reduce Allied Esports’s ongoing contribution requirements, and accordingly, conveyed a majority
of its membership interests in ESA to the minority investors, and only retained a 25% non-voting interest in ESA. Additionally,
as part of the amendment, Allied Esports reduced its funding commitment to $1,803,126. As of August 1, 2018, Allied Esports derecognized
the assets, liabilities and equity of ESA since Allied Esports no longer had a controlling interest in ESA. See Note 6 –
Other Assets for additional details. The deconsolidation of ESA is not considered a discontinued operation, because deconsolidation
of ESA does not meet the criteria for discontinued operations under ASC 205-20 “Presentation of Financial Statements, Discontinued
Operations”.
Note 5 – Reverse Merger and Recapitalization
As described in Note 1 – Background
and Basis of Presentation above, on the Closing Date, the AEM Merger and the Merger took place. All of AEM capital stock outstanding
immediately prior to the merger was exchanged for (i) 11,602,754 shares of AESE common stock, (ii) warrants for the purchase of
3,800,003 shares of AESE common stock with an exercise price of $11.50 per share, and (iii) 3,846,153 contingent shares to be
issued if the last exchange-reported sales price of AESE common stock equals or exceeds $13.00 per share for any thirty consecutive
days during the five year period commencing on the Closing Date.
On the Closing Date, pursuant to the Merger
Agreement, in order to extinguish amounts owed to the Former Parent by WPT and Allied Esports in the aggregate amount of $32,672,622,
AESE (i) repaid $3,500,000 of the amount due to the Former Parent in cash, (ii) assumed $10,000,000 principal of the convertible
debt obligations of the Former Parent plus $992,877 of related accrued interest, (iii) issued 2,928,679 shares of the Company’s
common stock to the Former Parent with no limitations or encumbrances on sale and (iii) transferred 600,000 shares of the Company’s
common stock to the Former Parent which will be subject to a lockup period for one year from the Closing Date.
In connection with the Merger, the Company
issued an aggregate of 11,492,999 shares of common stock, including 3,528,679 shares issued in satisfaction of amount owed to
the Former Parent as described above, and 7,964,320 shares of common stock issued to BRAC shareholders prior to the Merger, but
which are deemed to be issued by the Company on the Closing Date as a result of the reverse recapitalization.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Other Assets
The Company’s other assets consist
of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Investment in ESA
|
|
$
|
1,138,631
|
|
|
$
|
500,000
|
|
Investment in TV Azteca
|
|
|
3,500,000
|
|
|
|
-
|
|
|
|
$
|
4,638,631
|
|
|
$
|
500,000
|
|
As of December 31, 2019, the Company owns
a 25% non-voting membership interest in Esports Arena, LLC (“ESA”) and ESA’s wholly owned subsidiary. The investment
is accounted for as a cost method investment, since the Company does not have the ability to exercise significant influence over
the operating and financial policies of ESA.
During January 2019, the Company contributed
$1,238,631 to ESA, in order to fulfill the remainder of its funding commitment to ESA. The Company recognized an immediate impairment
of $600,000 related to this funding.
During 2018, management estimated the
fair value of ESA with the assistance of a third-party valuation advisor who weighted the estimated fair values determined using
the asset approach and the market approach. The income approach wasn’t utilized due to the uncertainty associated
with any financial projections that could have been prepared. Under the asset approach, management assessed the fair value
of the assets and liabilities using the ESA balance sheets as of each valuation date. Under the market approach, management
assessed the fair value of ESA by applying the observed market multiples for a group of comparable public companies, include revenue
multiples of 3.7-4.5x and book value multiples of 0.6-1.3x, depending on the valuation date. Management wrote down the carrying
value of the investment in ESA to its estimated fair value, recording an aggregate 2018 impairment charge of $9,683,158,
which consisted of a $7,438,324 impairment loss at deconsolidation and an additional subsequent impairment loss of $2,244,834.
In August 2019, the Company paid $3,500,000
to TV Azteca, S.A.B. DE C.V., a Grupo Salinas company (“TV Azteca”), in connection with a Strategic Investment Agreement
with TV Azteca in order to expand the Allied Esports brand into Mexico. See Note 15 – Commitments and Contingencies, Investment
Agreements, for additional details.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 7 – Property and Equipment, net
Property and equipment consist of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Software
|
|
$
|
4,729,200
|
|
|
$
|
3,971,214
|
|
Equipment
|
|
|
1,172,882
|
|
|
|
1,172,882
|
|
Computer equipment
|
|
|
2,173,224
|
|
|
|
2,616,510
|
|
Esports gaming truck
|
|
|
1,222,406
|
|
|
|
1,128,905
|
|
Furniture and fixtures
|
|
|
1,100,256
|
|
|
|
877,472
|
|
Production equipment
|
|
|
7,876,423
|
|
|
|
7,487,752
|
|
Leasehold improvements
|
|
|
14,715,726
|
|
|
|
12,903,762
|
|
|
|
|
32,990,117
|
|
|
|
30,158,497
|
|
Less: accumulated depreciation and amortization
|
|
|
(12,435,810
|
)
|
|
|
(8,718,400
|
)
|
Property and equipment, net
|
|
$
|
20,554,307
|
|
|
$
|
21,440,097
|
|
During the years ended December 31, 2019
and 2018, depreciation and amortization expense amounted to $4,272,529 and $3,867,102 respectively. During the years ended December
31, 2019 and 2018, the Company disposed of an aggregate of $550,736 and $67,784, respectively, of fully depreciated property and
equipment. The Company has $850,703 of fixed assets in process that have not yet been placed into service. No depreciation expense
is recorded on fixed assets in process until such time as the assets are completed and are placed into service.
Note 8 – Intangible Assets, net
Intangible assets consist of the following:
|
|
Indefinite-Lived
Trade
Names
|
|
|
Trademarks
|
|
|
Customer
Relationships
|
|
|
Intellectual
Property
|
|
|
Accumulated
Amortization
|
|
|
Total
|
|
Balance as of January 1, 2018
|
|
$
|
1,000,000
|
|
|
$
|
24,882,577
|
|
|
$
|
3,457,724
|
|
|
$
|
262,092
|
|
|
$
|
(9,324,831
|
)
|
|
$
|
20,277,562
|
|
Purchases of intangibles
|
|
|
-
|
|
|
|
31,739
|
|
|
|
-
|
|
|
|
6,820
|
|
|
|
-
|
|
|
|
38,559
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,844,296
|
)
|
|
|
(2,844,296
|
)
|
Impairment of intellectual
property
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(236,833
|
)
|
|
|
-
|
|
|
|
(236,833
|
)
|
Balance as of December 31, 2018
|
|
|
1,000,000
|
|
|
|
24,914,316
|
|
|
|
3,457,724
|
|
|
|
32,079
|
|
|
|
(12,169,127
|
)
|
|
|
17,234,992
|
|
Purchases of intangibles
|
|
|
-
|
|
|
|
45,761
|
|
|
|
-
|
|
|
|
4,335
|
|
|
|
-
|
|
|
|
50,096
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,495,212
|
)
|
|
|
(2,495,212
|
)
|
Impairment of intellectual
property
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2019
|
|
$
|
1,000,000
|
|
|
$
|
24,960,077
|
|
|
$
|
3,457,724
|
|
|
$
|
36,414
|
|
|
$
|
(14,664,339
|
)
|
|
$
|
14,789,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining amortization period
at December 31, 2019 (in years)
|
|
|
n/a
|
|
|
|
5.5
|
|
|
|
n/a
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Intangible assets are amortized on a straight-line
basis over the shorter of their license periods or estimated useful lives ranging from two to ten years. Amortization of intangible
assets consists of the following:
|
|
Indefinite-Lived
Trade
Names
|
|
|
Trademarks
|
|
|
Customer
Relationships
|
|
|
Intellectual
Property
|
|
|
Accumulated
Amortization
|
|
Balance as of January 1, 2018
|
|
$
|
-
|
|
|
$
|
6,214,823
|
|
|
$
|
3,110,008
|
|
|
$
|
-
|
|
|
$
|
9,324,831
|
|
Amortization expense
|
|
|
-
|
|
|
|
2,494,174
|
|
|
|
347,716
|
|
|
|
2,406
|
|
|
|
2,844,296
|
|
Balance as of December 31, 2018
|
|
|
-
|
|
|
|
8,708,997
|
|
|
|
3,457,724
|
|
|
|
2,406
|
|
|
|
12,169,127
|
|
Amortization expense
|
|
|
-
|
|
|
|
2,495,212
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,495,212
|
|
Balance as of December 31, 2019
|
|
$
|
-
|
|
|
$
|
11,204,209
|
|
|
$
|
3,457,724
|
|
|
$
|
2,406
|
|
|
$
|
14,664,339
|
|
As of December 31, 2018, management determined
that the projected cash flows from certain intellectual property would not be sufficient to recover the carrying value of those
assets. Accordingly, the Company recorded an impairment charge of $236,833 which is included in operating costs and expenses on
the accompanying consolidated statements of operations.
Estimated future amortization expense
is as follows:
Years
Ending December 31,
|
|
|
|
|
|
|
|
2020
|
|
|
2,498,676
|
|
2021
|
|
|
2,498,676
|
|
2022
|
|
|
2,498,676
|
|
2023
|
|
|
2,498,676
|
|
2024
|
|
|
2,498,676
|
|
Thereafter
|
|
|
1,296,496
|
|
|
|
$
|
13,789,876
|
|
Note 9 – Deferred Production Costs
Deferred production costs consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred production costs
|
|
$
|
28,290,200
|
|
|
|
23,604,111
|
|
Less: accumulated amortization
|
|
|
(17,327,718
|
)
|
|
|
(14,545,267
|
)
|
Deferred production costs, net
|
|
$
|
10,962,482
|
|
|
$
|
9,058,844
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining amortization period at December 31, 2019 (in years)
|
|
|
4.08
|
|
|
|
|
|
During the years ended December 31, 2019
and 2018, production costs of $2,782,451 and $1,663,835 respectively, were expensed and are reflected in multiplatform content
costs in the consolidated statements of operations.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Note 10 – Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the
following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Compensation expense
|
|
$
|
1,348,066
|
|
|
$
|
1,188,104
|
|
Rent
|
|
|
124,969
|
|
|
|
126,963
|
|
Revenue sharing obligations
|
|
|
319,833
|
|
|
|
122,928
|
|
Event costs
|
|
|
186,173
|
|
|
|
61,740
|
|
Legal and professional fees
|
|
|
154,799
|
|
|
|
-
|
|
Accrued software costs
|
|
|
-
|
|
|
|
420,000
|
|
Production costs
|
|
|
55,679
|
|
|
|
15,329
|
|
Unclaimed player prizes
|
|
|
342,535
|
|
|
|
380,120
|
|
Other accrued expenses
|
|
|
721,693
|
|
|
|
357,610
|
|
Other current liabilities
|
|
|
369,614
|
|
|
|
189,351
|
|
Accrued leasehold improvement costs
|
|
|
269,110
|
|
|
|
-
|
|
|
|
$
|
3,892,471
|
|
|
$
|
2,862,145
|
|
Note 11 – Convertible Debt and Convertible Debt, Related
Party
On May 15, 2019, Noble Link issued a series
of secured convertible promissory notes (the “Noble Link Notes”) whereby investors provided Noble Link with $4 million
to be used for the operations of Allied Esports and WPT, of which one Noble Link Note in the amount of $1 million was issued to
the wife of a related party who formerly served as co-CEO of the Former Parent and a Director of Noble Link. Pursuant to the original
terms of the Noble Link Notes, the Noble Link Notes accrued annual interest at 12%; provided that no interest would payable in
the event the Noble Link Notes were converted into AESE common stock, as described below. The Noble Link Notes were due and payable
on the first to occur of (i) the one-year anniversary of the issuance date, or (ii) the date on which a demand for payment was
made during the time period beginning on the Closing Date and ending on the date that was three (3) months after the Closing Date.
As security for purchasing the Noble Link Notes, the investors received a security interest in Allied Esports’ assets (second
to any liens held by the landlord of the Las Vegas arena for property located in that arena), as well as a pledge of the equity
of all of the entities comprising WPT, and a guarantee of the Former Parent and BRAC. Upon the closing of the Merger, the Noble
Link Notes were convertible, at the option of the holder, into shares of AESE common stock at $8.50 per share. On August 5, 2019,
the Noble Link Notes were amended pursuant to an Amendment and Acknowledgement Agreement as described below.
Pursuant to the Merger Agreement, on the
Closing Date, in addition to the $4 million of Noble Link Notes, AESE assumed $10,000,000 of the convertible debt obligations
of the Former Parent (the “Former Parent Notes”; see Note 5 - Reverse Merger and Recapitalization), such that the
aggregate indebtedness of the Company pursuant to the Noble Link Notes and the Former Parent Notes (collectively, the “Notes”)
is $14 million. The Notes bear interest at 12% per annum. Pursuant to the Amendment and Acknowledgement agreement discussed below,
the Former Parent Notes are also secured by all property and assets owned by AESE and its subsidiaries. No interest is payable
in connection with the Notes if the Notes are converted into shares of AESE common stock.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Pursuant to an Amendment and Acknowledgement
Agreement dated August 5, 2019 (the “Amendment and Acknowledgement Agreement”), the Notes were amended such that the
Notes mature one year and two weeks after the closing of the Merger (the “Maturity Date”). The Notes are convertible
into shares of AESE common stock at any time between the Closing Date and the Maturity Date at a conversion price of $8.50 per
share. Further, the minimum interest to be paid under each Note shall be the greater of (a) 18 months of accrued interest at 12%
per annum; or (b) the sum of the actual interest accrued plus 6 months of additional interest at 12% per annum.
Pursuant to the note purchase agreements
entered into by the purchasers of the Notes (the “Noteholders” and such agreements, the “Note Purchase Agreements”),
upon the consummation of the Merger, each Noteholder received a five-year warrant to purchase their proportionate share of 532,000
shares of AESE common stock. In addition, pursuant to the Note Purchase Agreements, Noteholders are each entitled to their proportionate
share of 3,846,153 shares of AESE common stock if such Noteholder’s Note is converted into AESE common stock and, at any
time within five years after the date of the closing of the Mergers, the last exchange-reported sale price of AESE common stock
is at or above $13.00 for thirty (30) consecutive calendar days (the “Contingent Consideration”). The relative
fair value of the warrants and the Contingent Consideration of $114,804 and $152,590, respectively, was recorded as debt discount
and additional paid in capital.
The Company recorded interest expense
of $1,096,117 related to the Notes during the year ended December 31, 2019, which includes amortization of debt discount in the
amount of $101,010. Unamortized debt discount is $166,384 at December 31, 2019.
Note 12 – Segment Data
Each of the Company’s business segments
offer different, but synergistic products and services, and are managed separately, by different chief operating decision makers. Segment
performance is evaluated based on operating results. Adjustments to reconcile segment results to consolidated
results are included under the caption “Corporate,” which primarily includes unallocated corporate activity.
The Company’s business consists of two reportable business
segments:
|
●
|
Poker, gaming and entertainment, provided through WPT, including televised
gaming and entertainment, land-based poker tournaments, online and mobile poker applications.
|
|
●
|
E-sports, provided through Allied Esports, including multiplayer
video game competitions.
|
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
The following tables present segment information for each of
the years ended December 31, 2019 and 2018:
|
|
For the Year ended December 31, 2019
|
|
|
For the Year ended December 31, 2018
|
|
|
|
Gaming &
Entertainment
|
|
|
E-sports
|
|
|
Corporate(1)
|
|
|
TOTAL
|
|
|
Gaming &
Entertainment
|
|
|
E-sports
|
|
|
Corporate(1)
|
|
|
TOTAL
|
|
Revenues
|
|
$
|
18,523,632
|
|
|
$
|
7,548,363
|
|
|
$
|
-
|
|
|
$
|
26,071,995
|
|
|
$
|
16,326,923
|
|
|
$
|
4,276,332
|
|
|
$
|
-
|
|
|
$
|
20,603,255
|
|
Revenues from Foreign Operations
|
|
$
|
2,441,660
|
|
|
$
|
858,277
|
|
|
$
|
-
|
|
|
$
|
3,299,937
|
|
|
$
|
2,499,058
|
|
|
$
|
384,433
|
|
|
$
|
-
|
|
|
$
|
2,883,491
|
|
Depreciation and Amortization
|
|
$
|
3,218,931
|
|
|
$
|
3,548,810
|
|
|
$
|
-
|
|
|
$
|
6,767,741
|
|
|
$
|
4,003,937
|
|
|
$
|
2,707,461
|
|
|
$
|
-
|
|
|
$
|
6,711,398
|
|
Loss from Operations
|
|
$
|
1,011,550
|
|
|
$
|
12,260,957
|
|
|
$
|
2,272,580
|
|
|
$
|
15,545,087
|
|
|
$
|
2,116,272
|
|
|
$
|
26,714,191
|
|
|
$
|
-
|
|
|
$
|
28,830,463
|
|
Interest Expense
|
|
$
|
115,726
|
|
|
$
|
-
|
|
|
$
|
1,081,401
|
|
|
$
|
1,197,127
|
|
|
$
|
-
|
|
|
$
|
2,117,438
|
|
|
$
|
-
|
|
|
$
|
2,117,438
|
|
Capital Expenditures
|
|
$
|
939,576
|
|
|
$
|
1,324,546
|
|
|
$
|
-
|
|
|
$
|
2,264,122
|
|
|
$
|
766,770
|
|
|
$
|
16,416,186
|
|
|
$
|
-
|
|
|
$
|
17,182,956
|
|
Total Property and Equipment, net
|
|
$
|
2,470,293
|
|
|
$
|
18,084,014
|
|
|
$
|
-
|
|
|
$
|
20,554,307
|
|
|
$
|
711,863
|
|
|
$
|
20,308,234
|
|
|
$
|
-
|
|
|
$
|
21,020,097
|
|
Total Property and Equipment, net in Foreign Countries
|
|
$
|
-
|
|
|
$
|
358,481
|
|
|
$
|
-
|
|
|
$
|
358,481
|
|
|
$
|
-
|
|
|
$
|
442,925
|
|
|
$
|
-
|
|
|
$
|
442,925
|
|
Total Assets
|
|
$
|
39,290,001
|
|
|
$
|
21,702,158
|
|
|
$
|
10,328,915
|
|
|
$
|
71,321,074
|
|
|
$
|
37,315,493
|
|
|
$
|
27,931,444
|
|
|
$
|
-
|
|
|
$
|
65,246,937
|
|
|
1)
|
Represents
unallocated corporate assets not directly attributable to any one of the business segments
and unallocated corporate operating losses resulting from general corporate overhead
expenses not directly attributable to any one of the business segments. Corporate operating
expense are reported separate from the Company’s identified segments and are included
in general and administrative expenses on the accompanying consolidated statements of
operations.
|
During the year ended December 31,
2019, one customer accounted for 16% of the Gaming & Entertainment segment total revenues, and a different customer accounted
for 14% of the E-Sports segment total revenues.
Note 13 – Related Parties
Notes Payable to Former Parent
During November and December 2018, as
part of a corporate restructuring, the Former Parent converted $37,372,522 of outstanding notes payable to the Former Parent to
Stockholders’ Equity. In addition, in connection with the restructuring, accrued interest in the amount of $2,150,487 was
forgiven by the Former Parent, and was recorded as a contribution to capital.
Due to Former Parent
In May 2018, Allied Esports entered into
a $5,000,000 line of credit with a bank, bearing interest of 2.650% per annum with monthly payments of interest only. The line
of credit was secured by a $5,000,000 certificate of deposit provided by Former Parent as collateral. All outstanding principal
and accrued interest are due at maturity in May 2019. In October 2018, the $5,000,000 line of credit was repaid by the Former
Parent using its collateralized certificate of deposit. As a result, Allied Esports owed $5,000,000 to the Former Parent as of
December 31, 2018, related to the repayment of the line of credit. There was no stated interest rate or repayment terms related
to this liability. During 2018, the Company incurred $55,178 of interest expense related to this line of credit.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
During the year ended December 31, 2018,
the Company received net aggregate advances of $22,912,000 from the Former Parent. As of December 31, 2018, the aggregate amount
due to the Former Parent of $33,019,510 consisted of payments of certain operating expenses, investing activities and financing
activities made on behalf of the Company by the Former Parent. There was no stated interest rate or definitive repayment terms
related to this liability. The weighted average balance of advances owed to the Former Parent was $21,965,526 during the year
ended December 31, 2018 and was $32,788,017 for the period from January 1, 2019 through August 9, 2019.
On August 9, 2019, all obligations to
the Former Parent in the aggregate amount of $32,672,622 were satisfied in connection with the Merger. See Note 5 – Reverse
Merger and Recapitalization, for additional details.
Bridge Financing
On October 11, 2018, the Former Parent
issued a series of secured convertible promissory notes (the “Notes”) whereby investors provided the Former Parent
with $10 million to be used for the operations of the Company. Pursuant to the Merger Agreement, on the Closing Date, the Company
assumed the convertible debt obligations of the Former Parent. See Note 11 – Convertible Debt and Convertible Debt, related
parties, for additional details.
Restructuring
In November and December 2018, the Company
underwent a corporate entity restructuring for the purpose preparing the Company for the Merger. As part of the restructuring,
AEM a new holding entity, was formed and AEII became a wholly-owned subsidiary of AEM. The restructuring resulted in a $42,505,325
increase in the Former Parent’s net investment consisting of notes payable, accrued interest and other related liabilities,
which were recorded as a contribution to capital as a result of the restructuring.
Stock Options
In 2015, the Former Parent issued options
to purchase common stock of the Former Parent to certain employees and a consultant of WPT. All of the unvested options were forfeited
in January 2018 in connection with the employees’ entry into profit participation agreements as described in the Profit
Participation Plan paragraph below. Accordingly, during the years ended December 31, 2019 and 2018, the Company recorded $0 and
($766,417), respectively, of stock-based compensation which is reflected in general and administrative expenses in the consolidated
statements of operations.
Profit Participation Plan
In January 2018, certain employees of
WPT entered into profit participation agreements pursuant to which the employees, commencing with the calendar year 2018, were
entitled to an annual payment equal to a range of 1% to 4% of the net profits of the Company during such calendar year. Upon an
occurrence of a change in control of WPT, the employees would be entitled to: (i) a payment equal to a range of 1% to 4% of the
net profits of the Company through the fiscal quarter end prior to the closing of such change in control; and (ii) a payment equal
to a range of 0.5% to 4% of the value of outstanding shares of WPT, pursuant to the profit participation agreement. In connection
with the profit participation agreement, the participating employees forfeited the unvested portion of their options to purchase
the Former Parent’s common stock. On the Closing Date, pursuant to the terms of the Merger Agreement, as amended, the Company
issued 744,422 shares of its common stock to employees of WPT in full satisfaction of the profit participation agreements.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 – Income Taxes
The Company files tax returns in the United
States (federal and California), Gibraltar, Ireland and Germany.
The U.S. and foreign components of income
(loss) before income taxes were as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(15,339,841
|
)
|
|
$
|
(28,118,382
|
)
|
Foreign
|
|
|
(1,398,888
|
)
|
|
|
(2,901,343
|
)
|
Loss before income taxes
|
|
$
|
(16,738,729
|
)
|
|
$
|
(31,019,725
|
)
|
The income tax provision (benefit) for
the years ended December 31, 2019 and 2018 consist of the following:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred
|
|
|
(3,036,568
|
)
|
|
|
(4,840,852
|
)
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
–
|
|
|
|
–
|
|
Deferred
|
|
|
(289,197
|
)
|
|
|
346,679
|
|
Foreign:
|
|
|
|
|
|
|
|
|
Current
|
|
|
–
|
|
|
|
–
|
|
Deferred
|
|
|
(38,037
|
)
|
|
|
(187,853
|
)
|
|
|
|
(3,287,728
|
)
|
|
|
(4,682,026
|
)
|
Change in valuation allowance
|
|
|
3,287,728
|
|
|
|
4,682,026
|
|
Income tax provision (benefit)
|
|
$
|
–
|
|
|
|
–
|
|
The reconciliation of the expected tax
expense (benefit) based on the U.S. federal statutory rates for 2019 and 2018, respectively, with the actual expense is as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
U.S. federal statutory rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
State taxes, net of federal benefit
|
|
|
(2.0
|
)%
|
|
|
(2.0
|
)%
|
Permanent differences
|
|
|
0.6
|
%
|
|
|
3.8
|
%
|
Statutory rate differential - domestic. vs. foreign
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
Changes in tax rates
|
|
|
0.0
|
%
|
|
|
2.9
|
%
|
Other
|
|
|
(1.2
|
)%
|
|
|
(0.6
|
)%
|
Adjustment in deferred taxes
|
|
|
41.6
|
%
|
|
|
0.0
|
%
|
Change in valuation allowance
|
|
|
(19.6
|
)%
|
|
|
15.1
|
%
|
Income tax provision (benefit)
|
|
|
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:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
9,343,617
|
|
|
$
|
13,521,964
|
|
Production costs
|
|
|
1,929,672
|
|
|
|
2,056,726
|
|
Investment
|
|
|
2,190,138
|
|
|
|
2,183,396
|
|
Stock-based compensation
|
|
|
104,236
|
|
|
|
40,516
|
|
Capitalized start-up costs
|
|
|
353,651
|
|
|
|
411,842
|
|
Accruals and other
|
|
|
898,494
|
|
|
|
398,310
|
|
Gross deferred tax assets
|
|
|
14,819,808
|
|
|
|
18,612,754
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(922,857
|
)
|
|
|
(1,428,075
|
)
|
Net deferred tax assets
|
|
|
13,896,951
|
|
|
|
17,184,679
|
|
Valuation allowance
|
|
|
(13,896,951
|
)
|
|
|
(17,184,679
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
–
|
|
|
$
|
–
|
|
As of December 31, 2019, the Company had
approximately $38,678,795, $30,900,000 and $3,800,000 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 NOL, these NOLs
will begin to expire in 2038.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. There was a change
of control on or about June 2015 and on or about August 9, 2019 and the Company has determined that, approximately $58,289,156
of federal NOLs and $56,508,507 state NOLs will expire unused and are not included in the available NOLs stated above. To date,
no additional annual limitations have been triggered, but the Company remains subject to the possibility that a future greater
than 50% ownership change could trigger annual limitations on the usage of NOLs.
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, 2019 and 2018.
ASC 740 requires the Company to
recognize in the consolidated financial statements the impact of a tax position only if it is more likely than not to be sustained
upon examination based on the technical merits of the position. After assessing its income tax positions, the Company has determined
that there are no significant uncertain tax positions to record as of December 31, 2019.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Company’s tax returns remain subject
to examination by various taxing authorities beginning with the tax year ended December 31, 2015. No tax audits were commenced
or were in process during the years ended December 31, 2019 and 2018.
Note 15 – 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.
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”). As part of the Las Vegas Lease, Allied Esports committed to build
leasehold improvements to repurpose the space for Esports events prior to March 23, 2018, the day the Arena opened to the public
(the “Commencement Date”). Initial lease terms are for minimum monthly payments of $125,000 for 60 months 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. Lease
payments began at the Commencement Date. The aggregate base rent payable over the lease term will be recognized on a straight-line
basis.
On March 29, 2019, AEM entered into a
167-month operating lease for approximately 25,000 square feet of space located in Irvine, California (the “New Irvine Lease”)
with respect to its operations. On June 15, 2019, the New Irvine Lease was amended to reduce the leased space to approximately
15,000 square feet. On August 9, 2019 the lease was assigned to WPT. The initial base rent pursuant to the lease, as amended,
is $39,832 per month, increasing to $58,495 per month over the term of the lease. Lease payments under the New Irvine Lease began
on November 1, 2019. The New Irvine Lease also provides for a tenant improvement allowance of up to $1,352,790. The New
Irvine lease contains two five-year options to renew.
The Company’s aggregate rent expense incurred during the
years ended December 31, 2019 and 2018 amounted to $2,659,308 and $2,523,075, respectively, of which $385,113 and $385,113, respectively
was capitalized into deferred production costs, $1,351,139 and $1,364,394, respectively, was included within in-person costs, and
$923,056 and $773,568, respectively, was included within general administrative expenses on the consolidated statements of operations.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
The schedule future minimum lease payments
under the Company’s leases are as follows:
Years
Ending December 31,
|
|
|
|
|
|
|
|
2020
|
|
$
|
2,422,276
|
|
2021
|
|
|
2,031,702
|
|
2022
|
|
|
2,009,631
|
|
2023
|
|
|
2,099,920
|
|
2024
|
|
|
2,190,667
|
|
Thereafter
|
|
|
10,899,477
|
|
|
|
$
|
21,653,673
|
|
Investment Agreements
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.
In connection with the TV Azteca Agreement,
AESE will provide $7,000,000 to be used for various strategic initiatives including digital channel development, facility and
flagship construction in Mexico, co-production of Spanish language content, platform socialization, and marketing initiatives.
The Company will be entitled to various revenues generated from the investment.
Currently, the Company has paid $3,500,000
with the rest of the payments being due as follows:
|
●
|
$1,500,000 payable on March 1, 2020;
|
|
●
|
$1,000,000 payable on March 1, 2021, and
|
|
●
|
$1,000,000 payable on March 1, 2022.
|
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 will conduct a series of mobile esports gaming tournaments and events at selected Simon
shopping malls and online called the Simon Cup, and will also develop esports and gaming venues at certain Simon shopping malls
in the U.S. The Simon Cup will be staged in each of 2019, 2020 and 2021. 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, cash in the amount
of $1,300,000 was released from escrow in order to fund expenses incurred in connection with the Simon Cup. As of December 31,
2019, the balance in the escrow account is $3,650,000, which is shown as restricted cash on the accompanying consolidated balance
sheet.
Consulting Agreement
On August 9, 2019 the Company entered
into a consulting services agreement with a related party, Black Ridge Oil & Gas, the Company’s prior sponsor (“BROG”),
pursuant to which BROG will provide administration and accounting services to the Company through December 31, 2019, in exchange
for consulting fees in the aggregate of $348,853.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Employment Agreements
WPT CEO Agreement
In connection with the Merger, the Company
assumed the obligations under an employment agreement (the “WPT CEO Agreement”) with the chief executive officer of
WPT (the “WPT CEO”), which expires on January 25, 2022 and is renewable upon the agreement of the parties. The WPT
CEO Agreement provides for a base salary of not less than $400,000, of which $315,000 is allocated to his employment and $85,000
is allocated to consultancy and board compensation and is payable to a consulting company of which the WPT CEO is a member (the
“Consulting Company.”). The WPT CEO agreement also provides for annual performance bonuses based upon reaching certain
EBITDA performance objectives. Further, pursuant to the terms of the WPT CEO Agreement, the WPT CEO is entitled to a profitability
payment of up to $1.5 million in the event the WPT business reduces its losses or becomes profitable during the term of the WPT
Agreement.
Upon the termination for any reason during
the term of the WPT CEO Agreement, the WPT CEO is entitled to all payments that would have earning during the term. After the
term, the WPT CEO is entitled to a severance of 12 months’ salary (including consulting compensation) plus 12 months of
benefits, unless terminated for cause. Upon any termination the WPT CEO, the Consulting Company will continue to receive a consulting
fee of $100,000 per year (subject to increase for inflation) for as long as is legally permissible, up to a maximum of forty (40)
years; provided that the WPT CEO will not take full time employment with the World Series of Poker without the written consent
of WPT for so long as such payments are made. Unless terminated for cause, any unvested equity awards are immediately vested upon
termination.
CEO Agreement
On November 5, 2019, the Company entered
into an employment agreement (the “CEO Agreement”) with the Company’s Chief Executive Officer (“CEO”).
The CEO Agreement is effective as of September 20, 2019. The CEO Agreement provides for a base salary of $300,000 per annum as
well as annual incentive bonuses as determined by the Board of Directors, subject to the attainment of certain objectives. The
CEO Agreement provides for severance equal to twelve months of the CEO’s base salary. In connection with the CEO agreement,
the CEO also received 17,668 shares of the Company’s restricted common stock, with a grant date value of $100,000, which
vest one year from date of issuance (See Note 16 – Stockholders’ Equity, Restricted Stock). Unless terminated for
cause, any unvested equity awards are immediately vested upon termination. The employment agreement expires on August 9, 2022
and may be extended for a period up to one year upon mutual written agreement by the CEO and the Company at least thirty days
prior to expiration.
Note 16 – Stockholders’ Equity
Share Purchase Agreements
On November 5, 2018, Allied Esports Media
Inc. sold 1,199,191 shares of restricted common stock (the “Employee Shares”), to certain employees and stakeholders
of the Company, for consideration of $0.001 per share, which were exchanged for AESE common stock and warrants in connection with
the recapitalization (See Note 5 - Reverse Merger and Recapitalization).
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
A summary of the Equity Purchase Option
activity during the year ended December 31, 2019 is presented below:
|
|
Number of
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Unit
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Purchase
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (Yrs)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2019
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
600,000
|
|
|
$
|
11.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
600,000
|
|
|
$
|
11.50
|
|
|
|
2.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
600,000
|
|
|
$
|
11.50
|
|
|
|
2.8
|
|
|
$
|
-
|
|
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 is 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. There are 3,463,305 shares of common stock reserved under the Incentive
Plan, of which 902,912, shares remain available to be issued as of December 31, 2019.
Stock Options
On September 20, 2019 the Company issued
ten-year options for the purchase of 400,000 shares of AESE common stock, pursuant to the Incentive Plan. The options had an exercise
price of $5.66 per share and a 4-year vesting term, with 25% vesting on each anniversary of the date of grant. The options had
an aggregate grant date fair value of $867,120.
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
On November 21, 2019 the Company issued
ten-year options for the purchase of 2,080,000 shares of AESE common stock, pursuant to the Incentive Plan. The options had an
exercise price of $4.09 per share and a 4-year vesting term, with 25% vesting on each anniversary of the date of grant. The options
had an aggregate grant date fair value of $3,263,551.
The fair value of options granted during
the year ended December 31, 2019 was calculated using the Black-Scholes option pricing model, with the following assumptions used:
Risk free interest rate
|
|
1.74 – 1.77
|
%
|
Expected term (years)
|
|
6.25 years
|
|
Expected volatility
|
|
|
36
|
%
|
Expected dividends
|
|
|
0.0
|
|
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.
During the year ended December 31, 2019,
the Company recorded stock-based compensation expense of $149,893 related to stock options issued as compensation, which is included
in general and administrative expense on the accompanying consolidated statements of operations. As of December 31, 2019, there
was $3,980,778 of unrecognized stock-based compensation expense related to the stock options that will be recognized over the
remaining vesting period of 3.86 years.
A summary of the option activity during
the years ended December 31, 2019 is presented below:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
(in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2019
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,480,000
|
|
|
$
|
4.34
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
2,480,000
|
|
|
$
|
4.34
|
|
|
|
9.86
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
Allied Esports Entertainment, Inc. and
Subsidiaries
Notes to Consolidated Financial Statements
Restricted Stock
On September 20, 2019 the Company issued
an aggregate of 80,393 shares of restricted common stock, pursuant to the Incentive Plan, to certain members of the Board of Directors
and Executives. The restricted common stock had an aggregate grant date fair value of $455,000, and vest on the one-year anniversary
of the date of grant. The shares were valued at the trading price of the Company’s stock on the date of grant.
The Company recorded stock-based compensation
expense of $127,152 for the year ended December 31, 2019, related to restricted common stock issued as compensation, which is
recorded in general and administrative expenses on the accompanying consolidated statements of operations. As of December 31,
2019, there was $327,848 of unrecognized stock-based compensation expense related to the restricted stock that will be recognized
over the remaining vesting period of 0.72 years.
Warrants
Prior to the Closing Date, 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 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 (presented below as outstanding on December 31, 2018 as a result of the recapitalization) 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.
A summary of warrant activity during the
years ended December 31, 2019 is presented below:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining
Life in Years
|
|
|
Intrinsic Value
|
|
Outstanding, December 31, 2018
|
|
|
3,800,003
|
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
14,837,000
|
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
18,637,003
|
|
|
$
|
11.50
|
|
|
|
4.6
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
18,637,003
|
|
|
$
|
11.50
|
|
|
|
4.6
|
|
|
$
|
-
|
|
Note 17 – Subsequent Events
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 to a Share Purchase Agreement.
The Purchase Price 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 investor 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 is held in escrow until the parties execute a written
lease agreement for the first Esports Venue, and the other half is held in escrow until the parties execute a written lease agreement
for the second Esports Venue. Further, pursuant to the Share Purchase 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.
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, subject to the following limitations:
|
a)
|
The total number of shares that
may be issued under the Agreement will be limited to 19.99% of the Company’s outstanding
shares on the date the Agreement is signed (the “Exchange Cap”), unless stockholder
approval is obtained to issue shares in excess of the Exchange Cap;
|
|
b)
|
The Company may not issue and the
Chairman may not purchase Option Shares to the extent that such issuance would result
in the Chairman and his affiliates beneficially owning more than 19.99% of the then issued
and outstanding shares of the Company’s common stock unless (i) such ownership
would not be the largest ownership position in the Company, or (ii) stockholder approval
is obtained for ownership in excess of 19.99%; and
|
|
c)
|
The Company may not issue and the
Chairman may not purchase any Option Shares if such issuance and purchase would be considered
equity compensation under the rules of The Nasdaq Stock Market unless stockholder approval
is obtained for such issuance.
|
Option shares purchased pursuant to the
Agreement are subject to a six-month lock-up period whereby they cannot be sold or transferred. The Put Option expires on April
9, 2020. On March 9, 2020, the Company provided notice to the Chairman that they 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 Company expects to close
on the sale of the Option Shares within 30 days of the notice of exercise of the Put Option.