The accompanying notes are an integral part of these condensed
consolidated financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Note 1 – Business Organization and Nature of Operations
Allied Esports Entertainment
Inc. (“AESE” and together with its subsidiaries, “the Company”) operates a public esports and entertainment company,
consisting of the Allied Esports business and, until the sale of WPT on July 12, 2021, the World Poker Tour business. Allied Esports
operates through its wholly owned subsidiaries Allied Esports International, Inc., (“AEII”), Esports Arena Las Vegas, LLC
(“ESALV”) and Allied Esports GmbH (“AEG”). 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.
AEG operates a mobile esports truck that serves as both a battleground and content generation hub and also operates a studio for recording
and streaming gaming events.
AESE’s formerly wholly
owned subsidiaries, Peerless Media Limited, Club Services, Inc. (“CSI”) and WPT Enterprises, Inc., operated the poker-related
business of AESE and are collectively referred to herein as “World Poker Tour” or “WPT”. World Poker Tour is
an internationally televised gaming and entertainment company that has been involved in the sport of poker since 2002 and created a television
show based on a series of high-stakes poker tournaments.
On January 19, 2021, the
Company entered into a stock purchase agreement (as amended and restated, the “SPA”) for the sale of 100% of the capital
stock of CSI. CSI owns 100% of each of the legal entities which comprise World Poker Tour. On July 12, 2021, the Company consummated
the sale of the World Poker Tour business. As the result of the Company’s sale of WPT, the condensed consolidated statements
of operations and comprehensive loss for the three and nine months ended September 30, 2021, and the condensed consolidated statements
of cash flows for the nine months ended September 30, 2021, present the results and accounts of World Poker Tour as discontinued operations.
Note 2 – Significant Accounting Policies
There have been no material
changes to the Company’s significant accounting policies as set forth in the Company’s audited consolidated financial statements
included in the Annual Report on Form 10-K for the year ended December 31, 2021.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly,
they do not include all of the information and disclosures required by U.S. GAAP for annual consolidated financial statements. In the
opinion of management, the accompanying condensed consolidated financial statements include all adjustments considered necessary by the
Company for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of September 30, 2022,
and for the three and nine months ended September 30, 2022 and 2021. The results of operations for the three and nine months ended September
30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any other period. These
unaudited condensed consolidated financial statements have been derived from the accounting records of the Company and should be read
in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on May 26, 2022.
Correction of an Error
See Note 6 – Correction of an Error.
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.
ALLIED ESPORTS ENTERTAINMENT,
INC. AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements.
Warrants previously issued
to the Company’s sponsor (the “Sponsor Warrants”) are classified as a liability measured at fair value. As of September
30, 2022 and December 31, 2021, the fair value of warrant liabilities related to our Sponsor Warrants totaled $10,600 and $3,200, respectively,
which is included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet. See Note
3 – Accrued Expenses and Other Current Liabilities. The Sponsor Warrants are valued using Level 3 inputs. The fair value of the
Sponsor Warrants is estimated using the Black-Scholes option pricing method. Significant Level 3 inputs used to calculate the fair value
of the Sponsor Warrants include the share price on the valuation date, expected volatility, expected term and the risk-free interest
rate.
The following is a roll
forward of the Company’s Level 3 instruments during the nine months ended September 30, 2022:
Balance, January 1, 2022 | |
$ | 3,200 | |
Change in fair value of sponsor warrants | |
| 1,300 | |
Balance, March 31, 2022 | |
| 4,500 | |
Change in fair value of sponsor warrants | |
| 65,500 | |
Balance, June 30, 2022 | |
$ | 70,000 | |
Change in fair value of sponsor warrants | |
| (59,400 | ) |
Balance, September 30, 2022 | |
$ | 10,600 | |
The key inputs into the
Black-Scholes model at the relevant measurement dates were as follows:
| |
September 30, | | |
December 31, | |
Input | |
2022 | | |
2021 | |
Risk-free rate | |
| 4.22 | % | |
| 0.97 | % |
Remaining term in years | |
| 1.86 | | |
| 2.61 | |
Expected volatility | |
| 78.3 | % | |
| 46.0 | % |
Exercise price | |
$ | 11.50 | | |
$ | 11.50 | |
Fair value of common stock | |
$ | 1.17 | | |
$ | 1.81 | |
Net Loss per Common Share
Basic loss per common share
is computed by dividing net loss attributable to the Company by the weighted average number of common shares outstanding during the period.
Diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of
common shares outstanding, plus the impact of common shares, if dilutive, resulting from the potential (a) exercise of outstanding stock
options and warrants; (b) the conversion of convertible instruments; and (c) vesting of restricted stock awards.
The following table presents
the computation of basic and diluted net (loss) income per common share:
|
|
For
the Three Months
Ended |
|
|
For
the Nine Months
Ended |
|
|
|
September
30, |
|
|
September
30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss - continuing
operations |
|
$ |
(1,642,231 |
) |
|
$ |
(2,975,395 |
) |
|
$ |
(9,082,379 |
) |
|
$ |
(11,304,858 |
) |
Net income - discontinued
operations, net of tax |
|
$ |
- |
|
|
$ |
77,277,989 |
|
|
$ |
- |
|
|
$ |
79,330,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding |
|
|
39,094,696 |
|
|
|
39,231,507 |
|
|
|
39,109,422 |
|
|
|
39,180,713 |
|
Less: weighted-average unvested
restricted shares |
|
|
- |
|
|
|
(175,104 |
) |
|
|
(17,289 |
) |
|
|
(191,042 |
) |
Denominator for basic and diluted net (loss) income per share |
|
|
39,094,696 |
|
|
|
39,056,403 |
|
|
|
39,092,133 |
|
|
|
38,989,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net (Loss) Income per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.04 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax |
|
$ |
- |
|
|
$ |
1.98 |
|
|
$ |
- |
|
|
$ |
2.03 |
|
ALLIED ESPORTS ENTERTAINMENT,
INC. AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements.
The following securities are excluded from the
calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
| |
As of September 30, | |
| |
2022 | | |
2021 | |
Restricted common shares | |
| - | | |
| 80,000 | |
Options | |
| 1,810,000 | | |
| 2,565,000 | |
Warrants | |
| 20,091,549 | | |
| 20,091,549 | |
Equity purchase options | |
| 600,000 | | |
| 600,000 | |
Contingent consideration shares (1) | |
| 192,308 | | |
| 192,308 | |
| |
| 22,693,857 | | |
| 23,528,857 | |
| (1) | Holders
who elected to convert their Bridge Note into common stock are entitled to receive contingent consideration shares equal to the product
of (i) 3,846,153 shares, multiplied by (ii) that holder’s investment amount, divided by (iii) $100,000,000, if at any time within
five years after the August 9, 2019 closing date, the last exchange-reported sale price of common stock trades at or above $13.00 for
thirty (30) consecutive calendar days. |
Revenue Recognition
To determine the proper
revenue recognition method, the Company evaluates each of its contractual arrangements to identify its performance obligations. A performance
obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of the Company’s contracts
have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from
other promises within the contract and is therefore not distinct. Some of the Company’s contracts have multiple performance obligations,
primarily related to the provision of multiple goods or services. For contracts with more than one performance obligation, the Company
allocates the total transaction price in an amount based on the estimated relative standalone selling prices underlying each performance
obligation.
The Company recognizes revenue
from continuing operations primarily from the following sources:
In-person revenue
The Company’s in-person
revenue is comprised of event revenue, sponsorship revenue, merchandising revenue and other revenue. Event revenue is generated through
Allied Esports events held at the Company’s esports properties. Event revenues recognized from the rental of the Allied Esports
arena and gaming trucks are recognized at a point in time when the event occurs. In-person revenue also includes revenue from ticket
sales, admission fees and food and beverage sales for events held at the Company’s esports properties. Ticket revenue is recognized
at the completion of the applicable event. Point of sale revenues, such as food and beverage, gaming and merchandising revenues, are
recognized when control of the related goods are transferred to the customer.
The Company also
generates sponsorship revenues from original content and from naming rights for, and rentals 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 Condensed Consolidated Financial Statements
In-person
revenue was comprised of the following for the three and nine months ended September 30, 2022 and 2021:
| |
For the Three Months Ended | | |
For
the Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Event
revenue | |
$ | 914,386 | | |
$ | 1,002,452 | | |
$ | 2,115,530 | | |
$ | 1,420,364 | |
Sponsorship
revenue | |
| 175,299 | | |
| 161,825 | | |
| 1,657,799 | | |
| 535,355 | |
Food
and beverage revenue | |
| 291,440 | | |
| 129,549 | | |
| 651,100 | | |
| 300,357 | |
Ticket
and gaming revenue | |
| 143,413 | | |
| 159,533 | | |
| 394,564 | | |
| 357,488 | |
Merchandising
revenue | |
| 27,425 | | |
| 2,508 | | |
| 65,407 | | |
| 14,117 | |
Other
revenue | |
| - | | |
| - | | |
| - | | |
| 100 | |
Total
in-person revenue | |
$ | 1,551,963 | | |
$ | 1,455,867 | | |
$ | 4,884,400 | | |
$ | 2,627,781 | |
Multiplatform
revenue
Multiplatform
revenue was comprised of the following for the three and nine months ended September 30, 2022 and 2021:
| |
For the Three Months Ended | | |
For
the Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
NFT
revenue | |
$ | 13,441 | | |
$ | - | | |
$ | 249,889 | | |
$ | - | |
Distribution
revenue | |
| 238 | | |
| 229,961 | | |
| 1,241 | | |
| 383,684 | |
Total
multiplatform revenue | |
$ | 13,679 | | |
$ | 229,961 | | |
$ | 251,130 | | |
$ | 383,684 | |
The
Company’s NFT revenue was generated from the sale of non-fungible tokens (NFTs). The Company’s NFTs exist on the Ethereum
Blockchain under the Company’s EPICBEAST brand, a digital art collection of 1,958 unique beasts inspired by past and present e-sport
games. The Company uses the NFT exchange, OpenSea, to facilitate its sales of NFTs. The Company, through OpenSea, has custody and control
of the NFT prior to the delivery to the customer and records revenue at a point in time when the NFT is delivered to the customer and
the customer pays. The Company has no obligations for returns, refunds or warranty after the NFT sale.
The
Company also earns a royalty of up to 10% of the sale price when an NFT is resold by its owner in a secondary market transaction. The
Company recognizes this royalty as revenue when the sale is consummated.
The
Company’s distribution revenue is generated primarily through the distribution of content to online channels. Any advertising revenue
earned by online channels is shared with the Company. The Company recognizes online advertising revenue at the point in time when the
advertisements are placed in the video content.
ALLIED
ESPORTS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Revenue
recognition
The
following table summarizes our revenue recognized under ASC 606 in our condensed consolidated statements of operations:
| |
For the Three Months Ended | | |
For
the Nine Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Revenues
Recognized at a Point in Time: | |
| | |
| | |
| | |
| |
Event
revenue | |
$ | 914,386 | | |
$ | 1,002,452 | | |
$ | 2,115,530 | | |
$ | 1,420,364 | |
NFT
revenue | |
| 13,441 | | |
| - | | |
| 249,889 | | |
| - | |
Food
and beverage revenue | |
| 291,440 | | |
| 129,549 | | |
| 651,100 | | |
| 300,357 | |
Ticket
and gaming revenue | |
| 143,413 | | |
| 159,533 | | |
| 394,564 | | |
| 357,488 | |
Merchandising
revenue | |
| 27,425 | | |
| 2,508 | | |
| 65,407 | | |
| 14,117 | |
Distribution
revenue | |
| 238 | | |
| 229,961 | | |
| 1,241 | | |
| 383,684 | |
Other
revenue | |
| - | | |
| - | | |
| - | | |
| 100 | |
Total
Revenues Recognized at a Point in Time | |
| 1,390,343 | | |
| 1,524,003 | | |
| 3,477,731 | | |
| 2,476,110 | |
| |
| | | |
| | | |
| | | |
| | |
Revenues
Recognized Over a Period of Time: | |
| | | |
| | | |
| | | |
| | |
Sponsorship
revenue | |
| 175,299 | | |
| 161,825 | | |
| 1,657,799 | | |
| 535,355 | |
Total
Revenues Recognized Over a Period of Time | |
| 175,299 | | |
| 161,825 | | |
| 1,657,799 | | |
| 535,355 | |
Total
Revenues | |
$ | 1,565,642 | | |
$ | 1,685,828 | | |
$ | 5,135,530 | | |
$ | 3,011,465 | |
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 September
30, 2022 and December 31, 2021, the Company had contract liabilities of $411,510 and $141,825, respectively, which is included in deferred
revenue on the condensed consolidated balance sheet.
As
of September 30, 2022, $129,237 of performance obligations in connection with contract liabilities included within deferred revenue on
the prior year consolidated balance sheet have been satisfied.
Digital
Assets
The
Company accepts Ether as a form of payment for NFT sales. The Company accounts for digital assets held as the result of the receipt of
Ether, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. The Company has ownership
of and control over the digital assets and the Company may use third-party custodial services to secure them. The digital assets are
initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since the date of acquisition.
The
Company determines the fair value of its digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement,
based on quoted prices on the active exchange(s) that the Company has determined is the principal market for Ether (Level 1 inputs).
The Company performs an analysis each quarter to identify whether events or changes in circumstances, or decreases in the quoted prices
on active exchanges, indicate that it is more likely than not that the Company’s digital assets are impaired. In determining if
an impairment has occurred, the Company considers the lowest market price quoted on an active exchange since acquiring the respective
digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect
to those digital assets in the amount equal to the difference between their carrying values and the fair value of such assets.
The
impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward
for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of
any impairment losses for the same digital assets held. In determining the gain or loss to be recognized upon sale, the Company calculates
the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and
gains or losses on sales are recognized within operating expenses in our condensed consolidated statements of operations and comprehensive
loss. The Company recorded an impairment loss of $0 and $164,411 for the three and nine months ended September 30, 2022.
ALLIED
ESPORTS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
following table sets forth changes in our digital assets for the nine months ended September 30, 2022:
Balance,
December 31, 2021 | |
$ | - | |
Purchases | |
| 41,026 | |
Received
from customers | |
| 249,888 | |
Expenses
paid using digital assets | |
| (69,533 | ) |
Impairment
loss | |
| (164,411 | ) |
Balance,
September 30, 2022 | |
$ | 56,970 | |
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 three months ended September 30, 2022 and 2021, 0.5% and 1.0%, respectively, of the Company’s revenues from continuing operations
were from customers in foreign countries. During the nine months ended September 30, 2022 and 2021, 3% of the Company’s revenues
from continuing operations were from customers in foreign countries.
During the three months ended
September 30, 2022, the Company’s five largest customers accounted for 22%, 21%, 18%, 10% and 10% of the Company’s consolidated
revenues from continuing operations. During the nine months ended September 30, 2022, the Company’s three largest customers accounted
for 20%, 17%, and 11% of the Company’s consolidated revenues from continuing operations. During the three months ended September
30, 2021, the Company’s two largest customers accounted for 32% and 14% of the Company’s consolidated revenues from continuing
operations. During the nine months ended September 30, 2021, the Company’s four largest customers accounted for 22%, 15%, 13% and
11% of the Company’s consolidated revenues from continuing operations.
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 (0.9797 and 1.1342, at September 30, 2022 and December 31, 2021, respectively),
and revenue and expense accounts are translated using the weighted average exchange rate in effect for the period (1.0078 and 1.1790
for the nine months ended September 30, 2022 and 2021, respectively). Resulting translation adjustments are made directly to accumulated
other comprehensive income. Losses of $23,571 and $1,024 arising from exchange rate fluctuations on transactions denominated in a currency
other than the reporting currency for the nine months ended September 30, 2022 and 2021, respectively, are recognized in operating results
in the accompanying condensed consolidated statements of operations. The Company engages in foreign currency denominated transactions
with customers and suppliers, as well as between subsidiaries with different functional currencies.
Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the
evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure
in the condensed consolidated financial statements, except as disclosed.
Discontinued
Operations
The
results of operations of WPT for the three and nine months ended September 30, 2021 are included in “Loss from discontinued operations
before the sale of WPT” in the accompanying condensed consolidated statements of operations.
Reclassifications
Certain
prior year balances have been reclassified in order to conform to the current year presentation. These reclassifications had no
effect on previously reported results of operations or loss per share.
ALLIED
ESPORTS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Recently
Announced Accounting Pronouncements
In February 2016, the FASB
issued ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). 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.
ASU 2016-02, as amended, is now effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years
beginning after December 15, 2022. The Company plans to first present the impact of ASU 2016-02 in the consolidated financial statements
at December 31, 2022. The Company expects that the adoption of this ASU on January 1, 2022 will have a material impact, primarily as
a result of recording a right of use asset and lease liability for its operating lease in the amounts of approximately $6.6 million and
$8.7 million, respectively, with a corresponding adjustment to deferred rent of $2.1 million.
Recently
Adopted Accounting Pronouncements
On
May 3, 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation
(Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for
Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and
reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options
(such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning
after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to
modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in
an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the
beginning of the fiscal year that includes that interim period. This standard was adopted on January 1, 2022 and did not have a material
impact on the Company’s condensed consolidated financial statements.
Note
3 – Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following:
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Compensation
expense | |
$ | 2,383,035 | | |
$ | 2,202,621 | |
Current
portion of deferred rent | |
| 228,220 | | |
| 198,504 | |
Event
costs | |
| 7,008 | | |
| 8,874 | |
Legal
and professional fees | |
| 38,568 | | |
| 368,691 | |
Warrant
liabilities | |
| 10,600 | | |
| 3,200 | |
Other
accrued expenses | |
| 41,883 | | |
| 172,858 | |
Other
current liabilities (1) | |
| 59,581 | | |
| 11,497 | |
| |
$ | 2,768,895 | | |
$ | 2,966,245 | |
(1) | Balance includes a $50,000 deposit received in connection with a Unit Purchase and License Agreement dated September 6, 2022 (the “Agreement) between eSports Arena, LLC (‘the Buyer”) and AEII, under which AEII agreed to sell its 25% non-voting membership interest in the Buyer for a purchase price of $1,375,000. The Agreement provides, among other things, for the sale, transfer, and assignment of the membership units upon the payment of the remaining portion of the purchase price (the “Closing Payment”) within 60 days of the initial payment. Since the Buyer failed to make the Closing Payment, the Buyer forfeited the initial payment and the Agreement was terminated automatically. |
Note
4 – Commitments and Contingencies
Litigations,
Claims, and Assessments
The
Company is involved in various disputes, claims, liens and litigation matters arising out of the normal course of business. While the
outcome of these disputes, claims, liens and litigation matters cannot be predicted with certainty, after consulting with legal counsel,
management does not believe that the outcome of these matters will have a material adverse effect on the Company’s consolidated
financial position, results of operations or cash flows.
ALLIED
ESPORTS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Resignation
of Chief Executive Officer
On
February 18, 2022, Libing (Claire) Wu resigned as Chief Executive Officer and General Counsel of the Company. In connection with her
resignation, the Company entered into a Separation Agreement and Release with Ms. Wu (the “Release”) pursuant to which, among
other things, Ms. Wu released the Company from any and all claims she may have against the Company (subject to certain exclusions), and
the Company agreed to provide Ms. Wu with certain separation benefits, including $750,000 in severance payable over an 18-month period
which was expensed immediately, accelerated vesting of 200,000 unvested stock options previously granted to Ms. Wu pursuant to an Option
Agreement dated effective July 13, 2021, extended exercise period to exercise such options through July 13, 2031, and accelerated vesting
of 80,000 shares of restricted stock previously granted to Ms. Wu pursuant to an Executive Restricted Stock Agreement dated July 13,
2021. As no future substantive services will be performed by Ms. Wu, the Company recognized stock-based compensation expense of $0 and
$258,979, respectively, related to the modification of these equity awards during the three and nine months ended September 30, 2022.
At September 30, 2022, $458,333 of accrued expenses is included on the balance sheet, related to Ms. Wu’s severance benefit. The
Release also contains a customary non-disparagement provision.
Board
of Directors
On
February 18, 2022, Jerry Lewin resigned as a Class C Director of the Company. In appreciation of Mr. Lewin’s services to the Company
as a director, Chair of the Compensation Committee and a member of the Audit Committee, the Company paid to Mr. Lewin $25,000, accelerated
the vesting of 40,000 unvested stock options previously granted to Mr. Lewin pursuant to an option agreement dated effective May 6, 2021,
and extended the exercise period of such options to May 6, 2031. The Company recognized stock-based compensation expense of $0 and
$32,909 related to the modification of these awards for the three and nine months ended September 30, 2022, respectively.
Note
5 – Stockholders’ Equity
Stock
Options
A
summary of the option activity during the nine months ended September 30, 2022 is presented below:
| |
| | |
Weighted | | |
Weighted | | |
| |
| |
| | |
Average | | |
Average | | |
| |
| |
Number
of | | |
Exercise | | |
Remaining | | |
Intrinsic | |
| |
Options | | |
Price | | |
Term
(Yrs) | | |
Value | |
| |
| | |
| | |
| | |
| |
Outstanding,
January 1, 2022 | |
| 2,415,000 | | |
$ | 3.73 | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| (605,000 | ) | |
| 4.01 | | |
| | | |
| | |
Forfeited | |
| - | | |
| - | | |
| | | |
| | |
Outstanding,
September 30, 2022 | |
| 1,810,000 | | |
$ | 2.73 | | |
| 5.28 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable,
September 30, 2022 | |
| 1,170,000 | | |
$ | 3.57 | | |
| 7.07 | | |
$ | - | |
Options
outstanding and exercisable as of September 30, 2022 are as follows:
Options Outstanding | | |
Options Exercisable | |
| | |
| | |
Weighted | | |
| |
| | |
Outstanding | | |
Average | | |
Exercisable | |
Exercise | | |
Number of | | |
Remaining Life | | |
Number of | |
Price | | |
Options | | |
In Years | | |
Options | |
$ | 2.11 | | |
| 80,000 | | |
| 7.75 | | |
| 40,000 | |
$ | 2.17 | | |
| 120,000 | | |
| 7.75 | | |
| 120,000 | |
$ | 2.21 | | |
| 350,000 | | |
| 8.78 | | |
| 200,000 | |
$ | 2.48 | | |
| 130,000 | | |
| 7.37 | | |
| 70,000 | |
$ | 4.09 | | |
| 850,000 | | |
| 6.18 | | |
| 510,000 | |
$ | 5.66 | | |
| 280,000 | | |
| 6.97 | | |
| 230,000 | |
| | | |
| 1,810,000 | | |
| 7.07 | | |
| 1,170,000 | |
ALLIED
ESPORTS ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
For
the three months ended September 30, 2022 and 2021, the Company recorded $238,840 and $613,070, respectively, of stock-based compensation
expense related to stock options issued as compensation, of which $0 and $633,197, respectively, was included in income of discontinued
operations on the accompanying condensed consolidated statements of operations. During the nine months ended September 30, 2022 and 2021,
the Company recorded $710,884 and $1,122,767, respectively, of stock-based compensation expense related to stock options issued as compensation,
of which $0 and $746,410, respectively, was included in income of discontinued operations on the accompanying condensed consolidated
statement of operations. As of September 30, 2022, there was $509,897 of unrecognized stock-based compensation expense related to the
stock options that will be recognized over the weighted average remaining vesting period of 1.76 years.
Restricted
Common Stock
A
summary of the non-vested restricted common stock activity during the nine months ended September 30, 2022 is presented below:
| |
| | |
Weighted | |
| |
Number
of | | |
Average | |
| |
Restricted | | |
Grant
Date | |
| |
Stock | | |
Fair
Value | |
Non-vested
balance, January 1, 2022 | |
| 80,000 | | |
$ | 2.00 | |
Vested | |
| (80,000 | ) | |
| 2.00 | |
Non-vested
balance, September 30, 2022 | |
| - | | |
$ | - | |
For
the three and nine months ended September 30, 2022, the Company recorded $0 and $82,345, respectively, of stock-based compensation expense
related to restricted stock. For the three and nine months ended September 30, 2021, the Company recorded $58,923 and $219,853, respectively,
of stock-based compensation expense related to restricted stock of which $(12,425) and $14,848, respectively, was included in income
of discontinued operations on the accompanying condensed consolidated statements of operations. As of September 30, 2022, all restricted
common stock was fully vested.
Note 6 – Correction of an Error
During the review of the
Company’s condensed consolidated financial statements for the three and nine month periods ended September 30, 2022, the
Company identified errors in the reporting of historical stock-based compensation (included in general and administrative expenses)
and leasehold amortization expense (included in depreciation and amortization). The errors resulted in an understatement of general
and administrative expenses and overstatement of depreciation and amortization for the year-ended December 31, 2021 and an
overstatement of both general administrative expense and depreciation and amortization expense for the three months ended March 31,
2022, and the three and six months ended June 30, 2022. Based on management’s evaluation of the SEC Staff’s Accounting
Bulletins Nos. 99 (“SAB 99”) and 108 (“SAB 108”) and interpretations therewith, the Company concluded that
the aforementioned errors were not material to the Company’s previously filed 2022 and 2021 consolidated financial statements.
This is further supported by the fact that all errors are of a non-cash nature, do not impact Adjusted EBITDA (earnings before
income tax, depreciation and amortization, and stock-based compensation), and would not likely have materially impacted a reasonable
investor’s opinion of the Company’s financial condition and results of operations.
Because the correction of these errors was not
deemed to be material to the results for the nine-months ended September 30, 2022, to correct these errors, the Company recorded the corrections
as out-of-period adjustments in the three-month period ended September 30, 2022. See the table below for the details of the corrections:
| |
For The Three Months Ended | | |
For The Nine Months Ended | |
| |
September 30, 2022 | | |
September 30, 2022 | |
| |
Before Adjustment | | |
Adjustment | | |
As Reported | | |
Before Adjustment | | |
Adjustment | | |
As Reported | |
Condensed Consolidated Statements of Operations: | |
| | |
| | |
| | |
| | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| |
Stock-based compensation expense | |
$ | 91,250 | | |
$ | 147,590 | | |
$ | 238,840 | | |
$ | 593,155 | | |
$ | 200,074 | | |
$ | 793,229 | |
Depreciation and amortization expense | |
$ | 638,046 | | |
$ | (966,785 | ) | |
$ | (328,739 | ) | |
$ | 1,932,630 | | |
$ | (644,524 | ) | |
$ | 1,288,106 | |
Net loss | |
$ | 2,461,426 | | |
$ | (819,195 | ) | |
$ | 1,642,231 | | |
$ | 9,526,829 | | |
$ | (444,450 | ) | |
$ | 9,082,379 | |