The validity of
the shares of common stock offered by this prospectus will be passed upon for us by Maslon LLP, of Minneapolis, Minnesota. Certain
legal matters in connection with this offering will be passed upon for the underwriters by [●].
The financial statements,
which includes the combined balance sheets of World Poker Tour and Allied Esports as of December 31, 2018 and 2017, the related
combined statements of operations and comprehensive loss, changes in parent’s net investment and cash flows for each of
the two years in the period ended December 31, 2018 are included in this prospectus and the registration statement in reliance
on the reports of Marcum LLP, an independent registered public accounting firm, given on the authority of said firm as experts
in auditing and accounting.
Notes to Combined Financial Statements
Note 1 – Background and Basis
of Presentation
The accompanying combined financial statements
include the accounts of Noble Link Global Limited (“Noble”) and Allied Esports Media, Inc., formerly known as Allied
Esports Entertainment, Inc. (“AEM”). Allied Esports Media changed its name from Allied Esports Entertainment, Inc.
to Allied Esports Media, Inc. on January 29, 2019. Allied Esports Media, together with its subsidiaries described below, is referred
to herein as “Allied Esports”).
Noble was incorporated in the British
Virgin Islands on May 5, 2015. Noble operates through its wholly-owned subsidiaries Peerless Media Limited (“Peerless”),
WPT Distribution Worldwide Limited (“WPT Distribution”) and WPT Studios Worldwide Limited (“WPT Studios”)
(Noble and its subsidiaries are collectively “World Poker Tour” or “WPT”). World Poker Tour 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 is sponsored by a third-party
online social poker site. WPT also operates ClubWPT.com, a site that offers inside access to the WPT database, as well as sweepstakes-based
poker available in 35 states across the United States. WPT also participates in strategic brand licensing, partnership, and sponsorship
opportunities.
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”). Allied Esports Media, a Delaware Corporation, was formed in November 2018 to eventually
act as a holding company for Allied Esports and immediately prior to close of merger to also include WPT (see Note 11, Related
Parties – Restructuring). 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 and Allied Esports (collectively the
“Company”) are subsidiaries of Ourgame International Holdings Limited (“Parent”), which was incorporated
in the Cayman Islands on December 4, 2013. As of the earliest date of these financial statements, the Parent owned 100% and 69.3%
of WPT and AEII, respectively. The Company elected to apply pushdown accounting; accordingly, the combined financial statements
of WPT and Allied Esports represent the carrying value of the Parent’s historical cost in these entities.
On December 19, 2018, the Company became
a party to a Merger Agreement (the “Merger Agreement”) with Black Ridge Acquisition Corp. (“BRAC”), which
will result in BRAC acquiring Allied Esports and WPT (the “Merger”). On August 9, 2019, the Merger was consummated
such that Noble Link merged with and into AEM, with AEM being the surviving entity, and AEM became a wholly-owned subsidiary of
BRAC (see Note 11 – Subsequent Events).
Note 2 - Going Concern and Management’s
Plans
As of December 31, 2018, the Company had
cash, a working capital deficit and Parent’s net investment of approximately $10.5 million, $27.1 million and $24.0 million,
respectively. For the years ended December 31, 2018 and 2017, the Company incurred net losses of approximately $31.0 million and
$18.1 million, respectively, and used cash in operations of $14.6 million and $10.8 million, respectively. 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 financial statements.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
The accompanying combined 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 combined 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, Parent has funded the Company’s operations. The
Merger Agreement described above, is expected to be consummated in the second quarter of 2019, and requires that the acquiror have
a minimum of $80 million of cash on hand at closing, of which $35 million will be used to repay certain obligations to the Parent.
However, the Merger agreement is subject to approval by the stockholders and the fulfillment of certain other conditions and there
can be no assurance that the Merger will close. The Company cannot provide any assurances that it will be able to secure additional
funding, either from its Parent, or 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 Combination
The combined financial statements have
been prepared using the consolidated accounting records of WPT and Allied Esports. All intercompany transactions and accounts
within and between WPT and Allied Esports, and intercompany transactions and balances between WPT and Allied Esports and their
subsidiaries, have been eliminated. The combined 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”). Parent expenses
incurred on behalf of WPT and Allied Esports have been recorded on the books of 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 deferred tax assets and the recoverability
and useful lives of long-lived assets, including 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.
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.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Cash and Cash Equivalents
All short-term investments of the Company
that have a maturity of three months or less when purchased are considered to be cash equivalents. There were no cash equivalents
as of December 31, 2018 or 2017.
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, 2018
and 2017, 11% and 15%, respectively, of the Companies revenues were from customers in foreign countries.
During the year ended December 31, 2018,
the Company’s largest customer accounted for 15% of the Company’s total revenues.
See Note - 10 Segment Data for additional
details.
Restricted Cash
Restricted cash was comprised of cash held
in an escrow account for the purposes of constructing the Company's Esports arena in Las Vegas, Nevada. Construction was completed
and the Esports arena opened in March 2018 and any remaining cash balances held for construction were released from escrow.
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, 2018 and 2017, 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. Internally
generated software costs are expensed as incurred in the preliminary project phase and post-implementation phase and will be capitalized
during the application development stage. Assets are held in construction in progress until placed in service, upon which date,
we begin to depreciate those assets.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined 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
|
|
|
5-10 years
|
|
Goodwill and Intangibles
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. Application
of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities
to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgment is required to
estimate the fair value of reporting units which includes estimating future cash flows, determining appropriate discount rates,
consideration of the Company’s aggregate fair value, and other assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value and/or goodwill impairment.
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 would perform an analysis (step 2) to measure such impairment. At December
31, 2018 and 2017, 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 impairments were identified at
December 31, 2018 and 2017.
Impairment of Long-Lived Assets
The Company reviews for the impairment
of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it.
Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment
loss would be recognized for the amount by which the carrying value of the asset exceeds its fair value. The evaluation of asset
impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions
require significant judgment and actual results may differ from assumed and estimated amounts. During the year ended December 31,
2018 the Company recorded an aggregate of $1,005,292 for impairment charges related to deferred production costs and intangible
assets as described in Note 8 - Deferred Production Costs and Note 7 – Intangible Assets, net, and recorded an impairment
charge of $9,683,158 related to its investment in ESA as described in Note 5 – Investment.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined 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
combined 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.
Due to the inherent uncertainties involved
in making such estimates of revenues and expenses, these estimates are likely to differ to some extent from actual results. The
Company’s management regularly reviews and revises when necessary its revenue and cost estimates, which may result in a change
in the rate of amortization of film costs, participations and residuals and/or write-down of all or a portion of the unamortized
deferred production costs to its net realizable value.
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 cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to
the short-term nature of these instruments.
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.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined 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. During the year ended December 31, 2018, the Company recognized an impairment
of $768,459 related to deferred production costs that were deemed impaired due to determination that the remaining revenue associated
with the deferred production costs is not sufficient to recover the unamortized cost. Additionally, during the year ended December
31, 2018, the Company recognized an impairment of $236,833 related to certain intangible assets that were deemed impaired due to
determination that the future cash flows is not sufficient to recover the carrying value of those assets.
During the year ended December 31, 2018
the Company recorded impairment expense of $9,683,158 to reduce the carrying value of its investment in ESA to fair value, which
was determined using a combination of the market approach and asset approach. See Note 5 – Investment for additional details.
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, 2018, and 2017, 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.
See Note 12 – Income Taxes
for additional details including the effects of the Tax Cuts and Jobs Act enacted in December 2017.
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.
Revenue Recognition
The Company recognizes revenue when the
following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been
rendered; (3) fees are fixed or determinable, and (4) the collectability is reasonably assured.
For multiple element contracts, the Company
allocates consideration to the multiple elements based on the relative selling price of each separate element which are determined
using vendor specific objective evidence, third-party evidence or the Company’s best estimate in order to assign relative
fair values.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Multiplatform revenue
The Company’s multiplatform revenue
is comprised of distribution revenue, sponsorship revenue, music royalty revenue and online advertising revenue. Distribution revenue
is generated through the distribution of content from both World Poker Tour’s library as well as third-party content to global
TV networks or through online channels such as Pluto and Unreel from which the Company earns revenue through the placement of ads
around WPT’s content. Sponsorship revenue is generated through the sponsorship of the Company’s content such as its
TV content, 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 distribution revenue
and sponsorship 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.
Music royalty revenue is recognized at the point in time when the music is played.
Multiplatform revenue was comprised of
the following for the years ended December 31, 2018 and 2017:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Distribution revenue
|
|
$
|
861,994
|
|
|
$
|
191,188
|
|
Sponsorship revenue
|
|
|
1,082,077
|
|
|
|
373,445
|
|
Music royalty revenue
|
|
|
1,031,425
|
|
|
|
876,001
|
|
Online advertising revenue
|
|
|
21,161
|
|
|
|
–
|
|
Total multiplatform revenue
|
|
$
|
2,996,657
|
|
|
$
|
1,440,634
|
|
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. The Company recognizes social gaming revenue and virtual product revenue at the point when the product has been delivered.
The Company generates licensing revenue by licensing the right to use the Company’s brand on products to third-parties. Licensing
revenue is recognized 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 products that have yet to be delivered.
WORLD POKER TOUR
AND ALLIED ESPORTS
Notes to Combined Financial Statements
Interactive revenue was comprised of the following for the years
ended December 31, 2018 and 2017:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Subscription revenue
|
|
$
|
4,964,086
|
|
|
$
|
5,226,136
|
|
Virtual product revenue
|
|
|
3,093,973
|
|
|
|
–
|
|
Social gaming revenue
|
|
|
674,497
|
|
|
|
1,871,507
|
|
Licensing revenue
|
|
|
349,199
|
|
|
|
546,955
|
|
Other revenue
|
|
|
93,488
|
|
|
|
147,492
|
|
Total interactive revenue
|
|
$
|
9,175,243
|
|
|
$
|
7,792,090
|
|
In-person revenue
The Company’s in-person revenue is
comprised of event 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 revenue is generated from the use of the WPT brand by partner casinos, from naming rights for the Allied Esports arena and
from sponsorship arrangements for Allied Esports events at the Esports arena. 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.
The Company recognizes event revenue related
to the use of the WPT brand by partner casinos at the time of the WPT-branded event. Event revenues from naming rights of the Company’s
Esports Arena are recognized on a straight-line basis over the contractual term of the naming rights agreement. Event revenues
from sponsorship arrangements for Allied Esports events are recognized on a straight-line basis over the duration of the event,
usually three to four days. Ticket revenue is recognized at the completion of an 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 records deferred revenue to the extent that payment has been received for services that have yet to be performed.
In-person revenue consisted of the following for the years ended
December 31, 2018 and 2017:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Event revenue
|
|
$
|
5,802,399
|
|
|
$
|
4,440,282
|
|
Food and beverage revenue
|
|
|
814,247
|
|
|
|
–
|
|
Ticket and gaming revenue
|
|
|
1,621,721
|
|
|
|
–
|
|
Merchandising revenue
|
|
|
167,194
|
|
|
|
–
|
|
Other revenues
|
|
|
25,794
|
|
|
|
–
|
|
Total in-person revenue
|
|
$
|
8,431,355
|
|
|
$
|
4,440,282
|
|
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. For employees, the fair value of
the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting
dates and interim financial reporting dates until the service period is complete. 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 Parent
estimates the fair value of the awards granted to its employees and service-providers using a binomial options pricing model based
on the market value of the Parent’s freely tradable common stock (listed on the Stock Exchange of Hong Kong), for awards
that have been granted by the Parent, with compensation expense recorded by the Company.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Advertising Costs
Advertising costs are charged to operations
in the year incurred and totaled approximately $1,240,000 and $1,352,000 for the years ended December 31, 2018 and 2017, respectively.
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 at the balance
sheet date (1.1444 and 1.2002 at December 31, 2018 and 2017, respectively), and revenue and expense accounts are translated at
a weighted average exchange rate for the years then ended (1.1809 and 1.1304 for the years ended December 31, 2018 and 2017, respectively).
Resulting translation adjustments are made directly to accumulated other comprehensive (loss) income. Losses of $198,513 and $6,029
arising from exchange rate fluctuations on transactions denominated in a currency other than the reporting currency for the years
ended December 31, 2018 and 2017, respectively, are recognized in operating results in the combined 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 combined
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
Vice President of Finance and the chief operating decision maker of Allied Esports is Allied Esports’ Chief Executive Officer
and Chief Financial 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 10 – Segment.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
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. Except for certain contracts related to the Company’s distribution and event revenue streams, the
Company has completed its ASC 606 analysis and, to date, has not identified any material differences in revenue recognition policies
that would have a material impact on its combined financial statements.
In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures
to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising
from leases. ASU 2016-02 is effective for private companies and emerging growth public companies for fiscal years beginning after
December 15, 2019, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its combined
financial statements.
In March 2016, the FASB issued ASU No.
2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an
entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective
for private companies and emerging growth public companies for fiscal years beginning after December 15, 2017, with early adoption
permitted. The Company adopted this guidance effective January 1, 2018, and the standard did not have a material impact on the
Company’s combined financial statements and related disclosures.
In August 2016, the FASB issued 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 will require adoption on a retrospective basis unless it is impracticable to apply, in which
case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The adoption of ASU
2016-15 is not expected to have a material impact on the Company’s combined financial statements or disclosures.
In November 2016, the FASB issued ASU 2016-18,
“Restricted Cash.” This guidance standardizes the presentation of changes to restricted cash on the statement of cash
flows by requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents,
and amount generally described as restricted cash or restricted cash equivalents. The provisions of this standard are effective
for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017, and early adoption
is permitted. The Company adopted this guidance effective January 1, 2018 and applied it retrospectively. The adoption of ASU
2016-18 had a material impact to the combined statements of cash flows, as the Company had $8,020,909 in restricted
cash at December 31. 2017.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
In May 2017, the FASB issued ASU No. 2017-09,
Compensation — Stock Compensation (Topic 718); Scope of Modification Accounting. The amendments in this ASU provide guidance
that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If
the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective
for private companies and emerging growth public companies’ fiscal years beginning after December 15, 2017 and interim periods
within those fiscal years. The Company adopted this guidance effective January 1, 2018, and the standard did not have a material
impact on the Company’s combined financial statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation — Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which simplifies
accounting for share-based payment transactions resulting for acquiring goods and services from nonemployees. ASU 2018-07 is effective
for private companies and emerging growth public companies’ fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating ASU 2018-07 and its impact
on its combined financial statements or disclosures.
In July 2018, the FASB issued ASU No. 2018-10,
“Codification Improvements to Topic 842, Leases” (“ASU 2018-10”). The amendments in ASU 2018-10 provide
additional clarification and implementation guidance on certain aspects of the previously issued ASU No. 2016-02, Leases (Topic
842) (“ASU 2016-02”) and have the same effective and transition requirements as ASU 2016-02. Upon the effective date,
ASU 2018-10 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required
to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to
make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a
right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset
for the lease term. ASU 2018-10 is effective for private companies and emerging growth public companies for interim and annual
reporting periods beginning after December 15, 2019, with early adoption permitted. The guidance is required to be applied using
a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative
periods presented in the financial statements. The Company is currently assessing the impact this guidance will have on its combined
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 Company is currently evaluating and assessing
the impact this guidance will have on its combined financial statements.
In July 2018, the FASB issued ASU No. 2018-11,
“Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”). The amendments in ASU 2018-11 related to
transition relief on comparative reporting at adoption affect all entities with lease contracts that choose the additional transition
method and separating components of a contract affect only lessors whose lease contracts qualify for the practical expedient. The
amendments in ASU 2018-11 are effective for private companies and emerging growth public companies for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. The Company is currently assessing the impact this guidance will
have on its combined financial statements.
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 Company is currently evaluating ASU 2018-13 and its impact on its combined financial statements.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Note 4 – Business Combination
In January 2018, the 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 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.
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Contribution Agreement
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 5 –
Investment 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 – Investment
As of December 31, 2018, the Company owns
a 25% non-voting membership interest in ESA and its wholly-owned subsidiary. See Note 4 – Business Combination and Contribution
Agreement. 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.
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.
Note 6 – Property and Equipment, net
Property and equipment consist of the following:
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Software
|
|
$
|
3,551,214
|
|
|
$
|
3,771,509
|
|
Equipment
|
|
|
1,172,882
|
|
|
|
1,158,650
|
|
Computer equipment
|
|
|
2,616,510
|
|
|
|
2,206,391
|
|
Esports gaming truck
|
|
|
1,128,905
|
|
|
|
771,279
|
|
Furniture and fixtures
|
|
|
877,472
|
|
|
|
292,374
|
|
Production equipment
|
|
|
7,487,752
|
|
|
|
–
|
|
Leasehold improvements
|
|
|
12,903,762
|
|
|
|
281,753
|
|
|
|
|
29,738,497
|
|
|
|
8,481,956
|
|
Less: accumulated depreciation and amortization
|
|
|
(8,718,400
|
)
|
|
|
(4,970,620
|
)
|
Subtotal
|
|
|
21,020,097
|
|
|
|
3,511,336
|
|
Construction-in-progress
|
|
|
–
|
|
|
|
5,269,155
|
|
Property and equipment, net
|
|
$
|
21,020,097
|
|
|
$
|
8,780,491
|
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
During the years ended December 31, 2018
and 2017, depreciation and amortization expense amounted to $3,867,102 and $1,111,936 respectively. During the years ended December
31, 2018 and 2017, the Company disposed of an aggregate of $67,784 and $335,694 of fully depreciated property and equipment, respectively.
Construction in progress consists of the
following:
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Esports arena in Las Vegas, Nevada
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
–
|
|
|
$
|
2,630,809
|
|
Computer equipment
|
|
|
–
|
|
|
|
2,012,470
|
|
Furniture and fixtures
|
|
|
–
|
|
|
|
263,248
|
|
Software
|
|
|
–
|
|
|
|
5,000
|
|
Total Esports arena in Las Vegas, Nevada
|
|
|
–
|
|
|
|
4,911,527
|
|
Gaming truck
|
|
|
–
|
|
|
|
357,628
|
|
Total construction-in-progress
|
|
$
|
–
|
|
|
$
|
5,269,155
|
|
In preparation for hosting Esports events,
Allied Esports committed to repurpose leased space in the Luxor Hotel (the "Lessor") in Las Vegas into an Esports gaming
arena, which opened in March 2018. As part of the lease agreement with the Lessor, Allied Esports deposited $9,000,000 with a third-party
escrow company. The deposit was held for the sole purpose of constructing the leasehold improvements and withdrawals require approval
from a third-party quality control engineer approved by the Lessor. At December 31, 2018 and 2017, $-0- and $8,020,909, respectively
remained in the escrow account.
As of December 31, 2017, Allied Esports
was in the process of developing a mobile gaming truck to allow the Company to host videogaming events and create content generation
hubs throughout the United States. The mobile gaming truck was completed and placed into service during 2018.
Note 7 – 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, 2017
|
|
|
1,000,000
|
|
|
|
24,882,577
|
|
|
|
3,457,724
|
|
|
|
–
|
|
|
|
(6,229,824
|
)
|
|
|
23,110,477
|
|
Purchases of intangibles
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
262,092
|
|
|
|
–
|
|
|
|
262,092
|
|
Amortization expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,095,007
|
)
|
|
|
(3,095,007
|
)
|
Balance as of December 31, 2017
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining amortization period at December 31, 2018 (in years)
|
|
|
n/a
|
|
|
|
6.5
|
|
|
|
n/a
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Amortization of intangible assets consists
of the following:
|
|
Indefinite-Lived Trade Names
|
|
|
Trademarks
|
|
|
Customer Relationships
|
|
|
Intellectual Property
|
|
|
Accumulated Amortization
|
|
Balance as of January 1, 2017
|
|
$
|
–
|
|
|
$
|
3,720,649
|
|
|
$
|
2,509,175
|
|
|
$
|
–
|
|
|
$
|
6,229,824
|
|
Amortization expense
|
|
|
–
|
|
|
|
2,494,174
|
|
|
|
600,833
|
|
|
|
–
|
|
|
|
3,095,007
|
|
Balance as of December 31, 2017
|
|
|
–
|
|
|
|
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
|
|
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 combined statements of operations. As of December 31, 2018, trademarks in the aggregate amount of $133,853 have
not yet been placed in service and therefore the Company has not recognized any amortization expense relating to these intangibles
for the periods presented. These intangible assets will be amortized on a straight-line basis over the shorter of their license
periods or estimated useful lives ranging from two to ten years.
Estimated future amortization expense is
as follows:
Years Ending
December 31,
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
2,497,382
|
|
|
2020
|
|
|
2,497,382
|
|
|
2021
|
|
|
2,497,382
|
|
|
2022
|
|
|
2,497,382
|
|
|
2023
|
|
|
2,497,382
|
|
|
Thereafter
|
|
|
3,748,082
|
|
|
|
|
$
|
16,234,992
|
|
Note 8 – Deferred Production Costs
Deferred production costs consist of the
following:
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred production costs
|
|
$
|
23,604,111
|
|
|
$
|
17,905,111
|
|
Less: accumulated amortization
|
|
|
(14,545,267
|
)
|
|
|
(12,886,232
|
)
|
Deferred production costs, net
|
|
$
|
9,058,844
|
|
|
$
|
5,018,879
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining amortization period at December 31, 2018 (in
years)
|
|
|
4.02
|
|
|
|
|
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
During the years ended December 31, 2018
and 2017, production costs of $1,663,835 and $3,707,590, respectively, were expensed and are reflected in multiplatform costs in
the combined statements of operations. In addition, the Company recorded impairment of capitalized production costs of $768,459
and $0 during the years ended December 31, 2018 and 2017, respectively.
Note 9 – Line of Credit
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 is secured by a $5,000,000 certificate of deposit provided by 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 Parent using its collateralized
certificate of deposit. As a result, Allied Esports owed $5,000,000 to the Parent as of December 31, 2018. There is no stated interest
rate or repayment terms related to this liability. See Note 11 – Related Parties – Due to Parent for additional details.
During 2018, the Company incurred $55,178 of interest expense related to this line of credit.
Note 10 – 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.
The Company’s business consists of two reportable segments:
|
·
|
Poker gaming and entertainment, provided through WPT, including televised
gaming and entertainment, land-based poker tournaments, online and mobile poker applications.
|
|
·
|
Esports, provided through Allied Esports, including multiplayer video
game competitions.
|
The following tables present segment information
for each of the last two years:
|
|
For
the year ended December 31, 2018
|
|
|
For
the year ended December 31, 2017
|
|
|
|
Gaming
&
Entertainment
|
|
|
Esports
|
|
|
TOTAL
|
|
|
Gaming
&
Entertainment
|
|
|
Esports
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,326,923
|
|
|
$
|
4,276,332
|
|
|
$
|
20,603,255
|
|
|
$
|
13,575,239
|
|
|
$
|
97,767
|
|
|
$
|
13,673,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Foreign
Operations
|
|
$
|
2,499,058
|
|
|
$
|
384,433
|
|
|
$
|
2,883,491
|
|
|
$
|
2,199,058
|
|
|
$
|
97,663
|
|
|
$
|
2,296,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
$
|
(2,116,272
|
)
|
|
$
|
(26,714,191
|
)
|
|
$
|
(28,830,463
|
)
|
|
$
|
(13,512,157
|
)
|
|
$
|
(4,028,675
|
)
|
|
$
|
(17,540,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
$
|
4,003,937
|
|
|
$
|
2,707,461
|
|
|
$
|
6,711,398
|
|
|
$
|
4,070,283
|
|
|
$
|
136,660
|
|
|
$
|
4,206,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
$
|
–
|
|
|
$
|
(2,117,438
|
)
|
|
$
|
(2,117,438
|
)
|
|
$
|
(49
|
)
|
|
$
|
(540,321
|
)
|
|
$
|
(540,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
$
|
735,031
|
|
|
$
|
16,409,366
|
|
|
$
|
17,144,397
|
|
|
$
|
1,473,437
|
|
|
$
|
6,202,188
|
|
|
$
|
7,675,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
37,315,493
|
|
|
$
|
27,931,444
|
|
|
$
|
65,246,937
|
|
|
$
|
32,978,709
|
|
|
$
|
20,375,934
|
|
|
$
|
53,354,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment,
net
|
|
$
|
711,863
|
|
|
$
|
20,308,234
|
|
|
$
|
21,020,097
|
|
|
$
|
2,128,635
|
|
|
$
|
6,651,856
|
|
|
$
|
8,780,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property and
Equipment, net in Foreign Countries
|
|
$
|
–
|
|
|
$
|
442,925
|
|
|
$
|
442,925
|
|
|
$
|
2,573
|
|
|
$
|
611,809
|
|
|
$
|
614,382
|
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
One customer of the Gaming and Entertainment
segment accounted for 18% of its segment revenues and 15% of total Company revenues for the year ended December 31, 2018.
During the years ended December 31, 2018
and 2017, 9% and 100% of the Esports segment revenues, respectively, were from foreign sources, and 15% and 16%, of the Gaming
and Entertainment revenues, respectively, were from foreign sources.
Note 11 – Related Parties
Notes Payable to Parent
The Company has promissory notes payable
to Parent. Borrowings on the notes are unsecured and bear interest at 6% per annum. The notes mature on December 31, 2021. As of
December 31, 2017, the Company owed principal and interest under the Notes Payable to Parent of $23,375,380 and $550,133, respectively.
From January – October 2018, Notes Payable to Parent increased by $13,997,142 of which $8,357,057 represented cash proceeds
and $5,610,085 represented non-cash. During November and December 2018, as part of a corporate restructuring, the Parent converted
$37,372,522 of the outstanding notes payable to Parent to Parent’s Net Investment. In addition, in connection with the restructuring,
accrued interest in the amount of $2,150,487 was forgiven by the Parent, and was recorded as a contribution to capital.
Due to Parent
As of December 31, 2018 and 2017, due to
Parent consisted of payments of certain operating expenses, investing activities and financing activities made on behalf of the
Company by the Parent. There is no stated interest rate or definitive repayment terms related to this liability.
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 held by Parent as collateral. All outstanding principal and accrued
interest were due at maturity in May 2019. In October 2018, the $5,000,000 line of credit was repaid using the collateralized
certificate of deposit. As a result, Allied Esports owed $5,000,000 to Parent, which is included in the amount Due to Parent as
of December 31, 2018. There is no stated interest rate or defined repayment terms related to this liability.
During the year ended December 31, 2018,
Allied Esports received net aggregate advances of $16,800,000 from the Parent. During the years ended December 31, 2018 and 2017,
WPT received advances from the Parent net of repayments, totaling approximately $6,112,000 and $9,148,000, respectively. These
advances from the Parent were partially funded from the bridge financing described below. There are no stated interest rates or
defined repayment terms related to these advances. The weighted average balance of advances owed to the Parent during the years
ended December 31, 2018 and 2017 was $21,965,152 and $6,426,526, respectively. Advances during the years ended December 31, 2018
and 2017 consisted of the following:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Advances for working capital needs
|
|
$
|
22,912,205
|
|
|
$
|
8,123,017
|
|
Due to Parent for purchase of Deepstacks
|
|
|
–
|
|
|
|
500,000
|
|
Due to Parent for purchase of property and equipment
|
|
|
–
|
|
|
|
525,582
|
|
|
|
$
|
22,912,205
|
|
|
$
|
9,148,599
|
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Bridge Financing
On October 11, 2018, the Parent issued
a series of secured convertible promissory notes (the “Notes”) whereby investors provided Parent with $10 million
to be used for the operations of the Company. The Notes are due and payable on the first to occur of (i) the one-year anniversary
of the issuance date, or (ii) upon conversion of the Notes into equity as part of the Merger. As security for purchasing the 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. The
liens and pledge described above only apply during the period of time that the investors are note holders.
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,
AEEI, a new holding entity, was formed and AEII became a wholly-owned subsidiary of AEEI. The plan is for WPT to also become a wholly-owned
subsidiary of AEEI prior to the closing of the Merger. The restructuring resulted in a $42,505,325 increase in Parent’s net
investment consisting of notes payable, accrued interest and other related liabilities.
Stock Options
In 2015, the Parent issued options to purchase
common stock of the Parent to certain employees and a consultant of WPT. Accordingly, during the years ended December 31, 2018
and 2017, the Company recorded ($766,417) and $483,371, respectively, of stock-based compensation which is reflected in general
and administrative expenses in the combined statements of operations. As of December 31, 2018, there was $5,877 of unamortized
stock-based compensation expense which will be recognized over a remaining period of 0.5 years.
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 Parent’s
common stock. The Company recognized expense of $70,000 related to the Profit Participation Plan during the year ended December
31, 2018.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Share Purchase Agreements
On November 5, 2018, Allied Esports Media
Inc. sold 1,199,191 shares of restricted common stock, representing an aggregate 12.16% ownership interest, to certain employees
and stakeholders of the Company, for consideration of $0.001 per share. A December 17, 2018 Letter Agreement between the parties
clarifies that if the Merger fails to close before July 1, 2019, upon the request of Allied Esports Media, Inc. or Allied Esports
International, Inc., the common stock will be forfeited and it will be replaced with an equivalent number of options to purchase
the equity of Allied Esports International, Inc., but the remaining option terms, including the exercise price, have not been
specified. Accordingly, the option doesn’t currently meet the accounting definition of a grant. The Company has determined
that it cannot consider the closing of the Merger to be probable as of December 31, 2018. Accordingly, the Company has not recognized
any stock-based compensation during 2018. The excess of the grant date fair value of the common stock as compared to the purchase
price will eventually be recorded as stock-based compensation, if the merger closes on a timely basis. Management, with the assistance
of a third-party valuator, estimated the grant date fair value on November 5, 2018 (prior to combination with World Poker Tour
and prior to the conversion of notes payable to Parent to Parent’s Net Investment) to be $0.33 per share by weighting the
estimated values derived under the asset approach, the market approach and by reference to the letter of intent terms for the
Merger.
Note 12 – Income Taxes
The Company and its subsidiaries file tax
returns in the United States (federal and California), Gibraltar, Ireland and Germany.
In December 2017, the U.S. Congress enacted
The Tax Cuts and Jobs Act (the “Act”). The primary provisions of the Act impacting the Company is the reduction to
the U.S. corporate income tax rate from 35% to 21%, eliminating certain deductions, and imposing a mandatory one-time transition
tax on accumulated earnings of foreign subsidiaries. The change in tax law required the Company to remeasure existing net deferred
tax assets using the lower rate in the period of enactment resulting in an income tax expense of approximately $5,300,000 which
is fully offset by a corresponding tax benefit of $5,300,000 which related to the corresponding reduction in the valuation allowance
for the year ended December 31, 2017. There were no specific impacts of Tax Reform that could not be reasonably estimated which
the Company accounted for under prior tax law.
The U.S. and foreign components of income
(loss) before income taxes were as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(28,118,382
|
)
|
|
$
|
(14,890,677
|
)
|
Foreign
|
|
|
(2,901,343
|
)
|
|
|
(3,196,554
|
)
|
Loss before income taxes
|
|
$
|
(31,019,725
|
)
|
|
$
|
(18,087,231
|
)
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
The income tax provision (benefit) for
the years ended December 31, 2018 and 2017 consist of the following:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
–
|
|
|
$
|
–
|
|
Deferred
|
|
|
(4,840,852
|
)
|
|
|
847,315
|
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
–
|
|
|
|
–
|
|
Deferred
|
|
|
346,679
|
|
|
|
(1,290,314
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
Current
|
|
|
–
|
|
|
|
–
|
|
Deferred
|
|
|
(187,853
|
)
|
|
|
(160,764
|
)
|
|
|
|
(4,682,026
|
)
|
|
|
(603,763
|
)
|
Change in valuation allowance
|
|
|
4,682,026
|
|
|
|
603,763
|
|
Income tax provision (benefit)
|
|
$
|
–
|
|
|
$
|
–
|
|
The reconciliation of the expected tax
expense (benefit) based on the U.S. federal statutory rates for 2018 and 2017, respectively, with the actual expense is as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
U.S. federal statutory rate
|
|
|
(21.0%
|
)
|
|
|
(34.0%
|
)
|
State taxes, net of federal benefit
|
|
|
(2.0%
|
)
|
|
|
(6.0%
|
)
|
Permanent differences
|
|
|
3.8%
|
|
|
|
1.4%
|
|
Statutory rate differential - domestic. vs. foreign
|
|
|
1.8%
|
|
|
|
6.2%
|
|
Changes in tax rates
|
|
|
2.9%
|
|
|
|
29.2%
|
|
Other
|
|
|
(0.6%
|
)
|
|
|
(0.1%
|
)
|
Change in valuation allowance
|
|
|
15.1%
|
|
|
|
3.3%
|
|
Income tax provision (benefit)
|
|
|
0.0%
|
|
|
|
0.0%
|
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
The tax effects of temporary differences
that give rise to deferred tax assets are presented below:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
13,521,964
|
|
|
$
|
7,465,367
|
|
Production costs
|
|
|
2,056,726
|
|
|
|
3,512,147
|
|
Investment
|
|
|
2,183,396
|
|
|
|
–
|
|
Stock-based compensation
|
|
|
40,516
|
|
|
|
540,277
|
|
Capitalized start-up costs
|
|
|
411,842
|
|
|
|
517,932
|
|
Property and equipment
|
|
|
–
|
|
|
|
123,241
|
|
Accruals and other
|
|
|
398,310
|
|
|
|
343,689
|
|
Gross deferred tax assets
|
|
|
18,612,754
|
|
|
|
12,502,653
|
|
Property and equipment
|
|
|
(1,428,075
|
)
|
|
|
–
|
|
Net deferred tax assets
|
|
|
17,184,679
|
|
|
|
12,502,653
|
|
Valuation allowance
|
|
|
(17,184,679
|
)
|
|
|
(12,502,653
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
–
|
|
|
$
|
–
|
|
As of December 31, 2018, the Company had
approximately $51,000,000, $33,500,000 and $3,500,000 of federal, state and foreign net operating loss (“NOL”) carryforwards
available to offset against future taxable income. Of the federal NOLS, $25,900,000 may be carried forward for twenty years and
begin to expire in 2035, while $25,100,000 have no expiration. 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 the Company has determined that, approximately $34,000,000
of federal and state NOLs will expire unused and are not included in the available NOLs stated above. Therefore, we reduced the
related deferred tax asset for these NOL carryovers by approximately $13,600,000 from June 2015 forward. 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, 2018 and 2017. For the years ended December 31, 2018 and 2017, the increase in the
valuation allowance was $4,682,026 and $603,763, respectively.
The 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, 2018 and 2017.
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Note 13 – Commitments and Contingencies
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 are scheduled to start at
the Commencement Date. The aggregate base rent payable over the lease term will be recognized on a straight-line basis.
The Las Vegas Lease also provides for Allied
Esports to pay to the lessor an amount equal to 7% of Allied Esports gross sales from the Las Vegas arena, as defined, ("Percentage
Rent") to the extent that the Percentage Rent exceeds the minimum annual rent commitment. The Percentage rent shall not exceed
$3,000,000 per lease year and is to be paid in monthly installments.
The Company recognized lease expense related
to the Las Vegas Lease amounted to $1,250,000 and $968,750 for years ended December 31, 2018 and 2017, respectively, which is included
in in-person costs on the accompanying statement of operations.
WPT entered into a non-cancellable operating
lease in 2004 for 8,519 square feet of space located in Los Angeles, California (the “LA Lease”) with respect to its
operations. The LA Lease calls for an annual base rental during the term ranging between $393,578 and $442,975 and expires in January
2021, with an option to extend for an additional 60 months at the market rate, as defined. The aggregate base rent payable over
the lease term will be recognized on a straight-line basis. Rent expense in connection with the LA Lease is capitalized as deferred
production costs as incurred (see Note 8 - Deferred Production Costs).
ELC Gaming maintains an office space under
a non-cancellable operating lease in Germany that expires in December 2019 with an option to extend for three years (the “Germany
Lease”). Lease payments are approximately $7,100 per month.
WPT entered into a non-cancellable operating
lease in 2011 for 11,156 square feet of space located in Irvine, California (the “Irvine Lease”) with respect to its
operations. The Irvine Lease calls for minimum monthly payments ranging between $25,101 and $29,563 during the rental term and
expires in April 2019 with an option to extend for an additional 60 months at the market rate, as defined. The aggregate base rent
payable over the lease term is recognized on a straight-line basis. The lease was not renewed and WPT plans to move its headquarters
to a temporary location while construction is completed on a new lease that the Company entered on March 29, 2019 (see Note 14
– Subsequent Events).
The Company’s aggregate rent expense
related to the Germany Lease and the Irvine Lease amounted to $432,707 and $400,224 for the years ended December 31, 2018 and 2017,
respectively, and is reflected in general and administrative expenses in the combined statements of operations.
The scheduled future minimum lease payments
under the Company’s leases are as follows:
Year Ending
December 31,
|
|
|
|
|
|
|
2019
|
|
2,163,160
|
|
|
2020
|
|
1,941,900
|
|
|
2021
|
|
1,536,915
|
|
|
2022
|
|
1,500,000
|
|
|
2023
|
|
337,500
|
|
|
|
$
|
7,479,475
|
|
WORLD POKER TOUR AND ALLIED ESPORTS
Notes to Combined Financial Statements
Executive Engagement Agreement
In January 2018, the Parent amended an
employment agreement between the Parent and the Chief Executive Officer of WPT (the “WPT CEO”), such that WPT guarantees
any unpaid compensation obligations earned through June 2019, including payments to the WPT CEO upon the closing of the Merger,
as described below.
Payments to WPT CEO
Pursuant to the employment agreement of the WPT CEO, both
personally and through his consulting company, upon the closing of the Merger, the WPT CEO will be entitled to receive
payments equal to (i) 2% of the sale of WPT up to $45 million, and 1% of the sale of WPT over $45 million; (ii) 2.5% of the
shares and cash received by Parent in the Merger; and (iii) a payment of $1.5 million for reaching certain profitability
goals of WPT, as described above, which are an obligation of the Parent.
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 combined financial position, results of
operations or cash flows.
Note 14 – Subsequent Events
Lease Agreement
On March 29, 2019, WPT entered into
an operating lease for approximately 25,000 square feet of space located in Irvine, California (the “New Irvine
Lease”) with respect to its operations. The lease term is 167 months and monthly base rent under the New Irvine lease
begins at $65,134 and increases to $95,652 over the term of the lease. The lease is guaranteed by the Parent. WPT has a
one-time option of reducing the size of the leased premises to 10,000 square feet on or before June 15, 2019. In the event of
such reduction, the parties have agreed to amend the lease agreement, along with the base rent and other costs payable by
WPT, based upon the reduced square footage.
Allied Esports Entertainment, Inc.
Condensed Consolidated Balance Sheets
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
9,355,496
|
|
|
$
|
10,471,296
|
|
Restricted cash
|
|
|
4,950,000
|
|
|
|
–
|
|
Accounts receivable
|
|
|
2,446,427
|
|
|
|
1,533,235
|
|
Prepaid expenses and other current assets
|
|
|
1,706,102
|
|
|
|
711,889
|
|
Total Current Assets
|
|
|
18,458,025
|
|
|
|
12,716,420
|
|
Property and equipment, net
|
|
|
19,918,061
|
|
|
|
21,020,097
|
|
Goodwill
|
|
|
4,083,621
|
|
|
|
4,083,621
|
|
Intangible assets, net
|
|
|
15,459,080
|
|
|
|
17,234,992
|
|
Deposits
|
|
|
712,463
|
|
|
|
632,963
|
|
Deferred production costs
|
|
|
11,204,843
|
|
|
|
9,058,844
|
|
Investments
|
|
|
4,638,631
|
|
|
|
500,000
|
|
Total Assets
|
|
$
|
74,474,724
|
|
|
$
|
65,246,937
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,285,149
|
|
|
$
|
1,072,499
|
|
Accrued expenses and other current liabilities
|
|
|
3,474,902
|
|
|
|
2,442,145
|
|
Deferred revenue
|
|
|
3,153,197
|
|
|
|
3,307,843
|
|
Convertible debt, net of discount
|
|
|
12,785,519
|
|
|
|
–
|
|
Convertible debt, related party, net of discount
|
|
|
983,501
|
|
|
|
–
|
|
Accrued interest on convertible debt
|
|
|
1,462,173
|
|
|
|
–
|
|
Due to Former Parent
|
|
|
–
|
|
|
|
33,019,510
|
|
Total Current Liabilities
|
|
|
23,144,441
|
|
|
|
39,841,997
|
|
Deferred rent
|
|
|
1,558,958
|
|
|
|
1,383,644
|
|
Total Liabilities
|
|
|
24,703,399
|
|
|
|
41,225,641
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 1,000,000 shares authorized, none issued and outstanding
|
|
|
–
|
|
|
|
–
|
|
Common stock, $0.0001 par value; 35,000,000 shares authorized, 23,176,146 and 11,602,754
shares issued and outstanding at September 30, 2019 and December 31, 2018,
respectively
|
|
|
2,317
|
|
|
|
1,160
|
|
Additional paid in capital
|
|
|
161,042,278
|
|
|
|
124,361,130
|
|
Accumulated deficit
|
|
|
(111,398,765
|
)
|
|
|
(100,479,855
|
)
|
Accumulated other comprehensive income
|
|
|
125,495
|
|
|
|
138,861
|
|
Total Stockholders' Equity
|
|
|
49,771,325
|
|
|
|
24,021,296
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
74,474,724
|
|
|
$
|
65,246,937
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Allied Esports Entertainment, Inc.
Condensed Consolidated
Statements of Operations
(unaudited)
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-person
|
|
$
|
2,586,965
|
|
|
$
|
2,202,443
|
|
|
$
|
8,887,366
|
|
|
$
|
6,068,081
|
|
Multiplatform content
|
|
|
1,031,383
|
|
|
|
949,345
|
|
|
|
3,540,373
|
|
|
|
2,121,645
|
|
Interactive
|
|
|
2,423,193
|
|
|
|
2,328,453
|
|
|
|
7,187,196
|
|
|
|
7,009,570
|
|
Total Revenues
|
|
|
6,041,541
|
|
|
|
5,480,241
|
|
|
|
19,614,935
|
|
|
|
15,199,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-person (exclusive of depreciation and amortization)
|
|
|
1,196,572
|
|
|
|
975,254
|
|
|
|
2,901,220
|
|
|
|
3,992,607
|
|
Multiplatform content (exclusive of depreciation and amortization)
|
|
|
786,706
|
|
|
|
860,332
|
|
|
|
2,907,827
|
|
|
|
2,033,834
|
|
Interactive (exclusive of depreciation and amortization)
|
|
|
569,478
|
|
|
|
612,786
|
|
|
|
1,976,012
|
|
|
|
1,903,347
|
|
Online operating expenses
|
|
|
172,879
|
|
|
|
129,770
|
|
|
|
489,269
|
|
|
|
1,541,789
|
|
Selling and marketing expenses
|
|
|
705,714
|
|
|
|
302,508
|
|
|
|
2,644,645
|
|
|
|
3,143,563
|
|
General and administrative expenses
|
|
|
4,711,692
|
|
|
|
3,871,179
|
|
|
|
13,378,166
|
|
|
|
12,364,722
|
|
Depreciation and amortization
|
|
|
1,716,103
|
|
|
|
1,892,665
|
|
|
|
5,133,947
|
|
|
|
5,228,709
|
|
Impairment expense
|
|
|
–
|
|
|
|
3,252,545
|
|
|
|
600,000
|
|
|
|
7,590,205
|
|
Total Costs and Expenses
|
|
|
9,859,144
|
|
|
|
11,897,039
|
|
|
|
30,031,086
|
|
|
|
37,798,776
|
|
Loss From Operations
|
|
|
(3,817,603
|
)
|
|
|
(6,416,798
|
)
|
|
|
(10,416,151
|
)
|
|
|
(22,599,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
15,684
|
|
|
|
102,613
|
|
|
|
15,684
|
|
|
|
115,508
|
|
Interest expense
|
|
|
(451,553
|
)
|
|
|
(564,358
|
)
|
|
|
(518,443
|
)
|
|
|
(1,877,616
|
)
|
Foreign currency exchange income (loss)
|
|
|
–
|
|
|
|
113,916
|
|
|
|
–
|
|
|
|
(15,394
|
)
|
Total Other Expense
|
|
|
(435,869
|
)
|
|
|
(347,829
|
)
|
|
|
(502,759
|
)
|
|
|
(1,777,502
|
)
|
Net Loss
|
|
|
(4,253,472
|
)
|
|
|
(6,764,627
|
)
|
|
|
(10,918,910
|
)
|
|
|
(24,376,982
|
)
|
Net loss attributed to non-controlling interest
|
|
|
–
|
|
|
|
(76,525
|
)
|
|
|
–
|
|
|
|
(403,627
|
)
|
Net Loss Attributable to Allied Esports Entertainment, Inc.
|
|
$
|
(4,253,472
|
)
|
|
$
|
(6,688,102
|
)
|
|
$
|
(10,918,910
|
)
|
|
$
|
(23,973,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per Common Share
|
|
$
|
(0.24
|
)
|
|
$
|
(0.58
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(2.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
18,098,797
|
|
|
|
11,602,754
|
|
|
|
13,791,896
|
|
|
|
11,602,754
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Allied Esports Entertainment, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,253,472
|
)
|
|
$
|
(6,764,627
|
)
|
|
$
|
(10,918,910
|
)
|
|
$
|
(24,376,982
|
)
|
Other comprehensive (loss) gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(21,083
|
)
|
|
|
253,814
|
|
|
|
(13,366
|
)
|
|
|
70,787
|
|
Total comprehensive loss
|
|
|
(4,274,555
|
)
|
|
|
(6,510,813
|
)
|
|
|
(10,932,276
|
)
|
|
|
(24,306,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive loss attributable to non-controlling
interests
|
|
|
–
|
|
|
|
(76,525
|
)
|
|
|
–
|
|
|
|
(403,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to Allied Esports
Entertainment, Inc.
|
|
$
|
(4,274,555
|
)
|
|
$
|
(6,434,288
|
)
|
|
$
|
(10,932,276
|
)
|
|
$
|
(23,902,568
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Allied Esports Entertainment, Inc.
Condensed Combined Statements of Changes in Stockholders’ Equity
For The Nine Months ended September 30, 2019
(unaudited)
|
|
|
Common Stock
|
|
|
|
Additional Paid-in
|
|
|
|
Accumulated Other Comprehensive
|
|
|
|
Accumulated
|
|
|
|
Total Stockholder’s
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Capital
|
|
|
|
Income
|
|
|
|
Deficit
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019
|
|
|
11,602,754
|
|
|
$
|
1,160
|
|
|
$
|
124,361,130
|
|
|
$
|
138,861
|
|
|
$
|
(100,479,855
|
)
|
|
$
|
24,021,296
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,854,152
|
)
|
|
|
(3,854,152
|
)
|
Other comprehensive loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,082
|
)
|
|
|
–
|
|
|
|
(3,082
|
)
|
Balance, March 31, 2019
|
|
|
11,602,754
|
|
|
|
1,160
|
|
|
|
124,361,130
|
|
|
|
135,779
|
|
|
|
(104,334,007
|
)
|
|
|
20,164,062
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(2,811,286
|
)
|
|
|
(2,811,286
|
)
|
Other comprehensive income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
10,799
|
|
|
|
–
|
|
|
|
10,799
|
|
Balance, June 30, 2019
|
|
|
11,602,754
|
|
|
|
1,160
|
|
|
|
124,361,130
|
|
|
|
146,578
|
|
|
|
(107,145,293
|
)
|
|
|
17,363,575
|
|
Effect of reverse merger
|
|
|
11,492,999
|
|
|
|
1,149
|
|
|
|
36,395,355
|
|
|
|
–
|
|
|
|
–
|
|
|
|
36,396,504
|
|
Warrants issued to convertible debt holders
|
|
|
–
|
|
|
|
–
|
|
|
|
114,804
|
|
|
|
–
|
|
|
|
–
|
|
|
|
114,804
|
|
Contingent consideration for convertible debt holders
|
|
|
–
|
|
|
|
–
|
|
|
|
152,590
|
|
|
|
–
|
|
|
|
–
|
|
|
|
152,590
|
|
Restricted stock
|
|
|
80,393
|
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
5,940
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,940
|
|
Restricted stock
|
|
|
–
|
|
|
|
–
|
|
|
|
12,467
|
|
|
|
–
|
|
|
|
–
|
|
|
|
12,467
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(4,253,472
|
)
|
|
|
(4,253,472
|
)
|
Other comprehensive loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(21,083
|
)
|
|
|
–
|
|
|
|
(21,083
|
)
|
Balance, September 30, 2019
|
|
|
23,176,146
|
|
|
$
|
2,317
|
|
|
$
|
161,042,278
|
|
|
$
|
125,495
|
|
|
$
|
(111,398,765
|
)
|
|
$
|
49,771,325
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Allied Esports Entertainment, Inc.
Condensed Combined Statements of Changes in Stockholders’ Equity
For The Nine Months
ended September 30, 2018
(unaudited)
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated Other Comprehensive
|
|
|
Non- Controlling
|
|
|
Accumulated
|
|
|
Total Stockholder’s
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Interest
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
11,602,754
|
|
$
|
1,160
|
|
$
|
82,622,222
|
|
$
|
(149,250
|
)
|
$
|
–
|
|
$
|
(69,863,757
|
)
|
$
|
12,610,375
|
|
Net loss
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(136,156
|
)
|
|
(6,175,136
|
)
|
|
(6,311,292
|
)
|
Acquisition of ESA
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
712,854
|
|
|
–
|
|
|
712,854
|
|
Other comprehensive loss
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(225,992
|
)
|
|
–
|
|
|
–
|
|
|
(225,992
|
)
|
Net contributions from Parent
|
|
–
|
|
|
–
|
|
|
(779,000
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(779,000
|
)
|
Balance at March 31, 2018
|
|
11,602,754
|
|
|
1,160
|
|
|
81,843,222
|
|
|
(375,242
|
)
|
|
576,698
|
|
|
(76,038,893
|
)
|
|
6,006,945
|
|
Net loss
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(190,946
|
)
|
|
(11,110,116
|
)
|
|
(11,301,062
|
)
|
Other comprehensive income
|
|
–
|
|
|
–
|
|
|
–
|
|
|
42,965
|
|
|
–
|
|
|
–
|
|
|
42,965
|
|
Balance at June 30, 2018
|
|
11,602,754
|
|
|
1,160
|
|
|
81,843,222
|
|
|
(332,277
|
)
|
|
385,752
|
|
|
(87,149,009
|
)
|
|
(5,251,152
|
)
|
Net loss
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(76,525
|
)
|
|
(6,688,103
|
)
|
|
(6,764,628
|
)
|
Deconsolidation of ESA
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(309,227
|
)
|
|
–
|
|
|
(309,227
|
)
|
Other comprehensive income
|
|
–
|
|
|
–
|
|
|
–
|
|
|
253,814
|
|
|
–
|
|
|
–
|
|
|
253,814
|
|
Balance at September 30, 2018
|
|
11,602,754
|
|
$
|
1,160
|
|
$
|
81,843,222
|
|
$
|
(78,463
|
)
|
$
|
–
|
|
$
|
(93,837,112
|
)
|
$
|
(12,071,193
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Allied Esports Entertainment, Inc.
Condensed Combined Statements of Cash Flows
(unaudited)
|
|
For The Nine Months Ended
|
|
|
|
September
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,918,910
|
)
|
|
$
|
(24,376,982
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
18,407
|
|
|
|
(779,000
|
)
|
Amortization of debt discount
|
|
|
36,414
|
|
|
|
–
|
|
Bad debt expense
|
|
|
115,726
|
|
|
|
79,414
|
|
Depreciation and amortization
|
|
|
5,133,947
|
|
|
|
5,228,709
|
|
Realized loss on equity method investment
|
|
|
–
|
|
|
|
151,881
|
|
Subsidiary impairment / loss during consolidation period
|
|
|
–
|
|
|
|
1,838,739
|
|
Impairment / loss on deconsolidation of subsidiary
|
|
|
–
|
|
|
|
7,438,324
|
|
Impairment expense
|
|
|
600,000
|
|
|
|
–
|
|
Write-off of capitalized software costs
|
|
|
–
|
|
|
|
648,563
|
|
Deferred rent
|
|
|
175,314
|
|
|
|
(147,605
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,029,096
|
)
|
|
|
(593,675
|
)
|
Deposits
|
|
|
(79,500
|
)
|
|
|
19,397
|
|
Deferred production costs
|
|
|
(2,145,999
|
)
|
|
|
(4,108,748
|
)
|
Prepaid expenses and other current assets
|
|
|
(227,324
|
)
|
|
|
(179,247
|
)
|
Accounts payable
|
|
|
(642,686
|
)
|
|
|
367,956
|
|
Accrued expenses
|
|
|
898,157
|
|
|
|
576,731
|
|
Accrued interest on convertible debt
|
|
|
469,296
|
|
|
|
–
|
|
Accrued interest on notes payable to Former Parent
|
|
|
–
|
|
|
|
1,787,527
|
|
Deferred revenue
|
|
|
(154,646
|
)
|
|
|
815,568
|
|
Total adjustments
|
|
|
3,168,010
|
|
|
|
13,144,534
|
|
Net Cash Used In Operating Activities
|
|
|
(7,750,900
|
)
|
|
|
(11,232,448
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Net cash acquired in Merger
|
|
|
14,941,683
|
|
|
|
–
|
|
Investment in TV Azteca
|
|
|
(3,500,000
|
)
|
|
|
–
|
|
Investment in ESA
|
|
|
(1,238,631
|
)
|
|
|
(5,851,858
|
)
|
Purchases of property and equipment
|
|
|
(2,173,200
|
)
|
|
|
(16,834,824
|
)
|
Purchases of intangible assets
|
|
|
(99,822
|
)
|
|
|
(38,334
|
)
|
Net Cash Provided by (Used In) Investing Activities
|
|
$
|
7,930,030
|
|
|
$
|
(22,725,016
|
)
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Allied Esports Entertainment, Inc.
Condensed Combined Statements of Cash Flows, continued
(unaudited)
|
|
For The Nine Months Ended
|
|
|
|
September
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
$
|
–
|
|
|
$
|
5,000,000
|
|
Proceeds from convertible debt
|
|
|
3,000,000
|
|
|
|
–
|
|
Proceeds from convertible debt, related party
|
|
|
1,000,000
|
|
|
|
–
|
|
Proceeds from notes payable to Parent
|
|
|
–
|
|
|
|
11,174,913
|
|
Due to Former Parent
|
|
|
(346,804
|
)
|
|
|
14,269,373
|
|
Net Cash Provided By Financing Activities
|
|
|
3,653,196
|
|
|
|
30,444,286
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash
|
|
|
1,874
|
|
|
|
(36,872
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) In Cash And Restricted Cash
|
|
|
3,834,200
|
|
|
|
(3,550,050
|
)
|
Cash and restricted cash - Beginning of period
|
|
|
10,471,296
|
|
|
|
13,610,138
|
|
Cash and restricted cash - End of period
|
|
$
|
14,305,496
|
|
|
$
|
10,060,088
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash consisted of the following:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
9,355,496
|
|
|
|
10,060,088
|
|
Restricted cash
|
|
|
4,950,000
|
|
|
|
–
|
|
|
|
$
|
14,305,496
|
|
|
$
|
10,060,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
–
|
|
|
$
|
46,466
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Non cash investment in ESA
|
|
$
|
–
|
|
|
$
|
5,610,085
|
|
Due to Former Parent satisfied by issuance of common stock in connection with Merger
|
|
$
|
18,179,745
|
|
|
$
|
–
|
|
Convertible debt and related interest assumed in Merger
|
|
$
|
10,992,877
|
|
|
$
|
–
|
|
Warrants granted to convertible debt holders in connection with
Merger
|
|
$
|
114,804
|
|
|
$
|
–
|
|
Contingent consideration for convertible debt holders in connection with
Merger
|
|
$
|
152,590
|
|
|
$
|
–
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed 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 condensed 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 condensed 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.
World Poker Tour 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.
Notes to Condensed Consolidated Financial
Statements
Note 2 - Going Concern and Management’s Plans
As of September 30, 2019, we had
cash and a working capital deficit of approximately $9.4 million (not including approximately $5.0 million of restricted
cash) and $4.7 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company incurred net losses
of approximately $10.9 million and $24.4 million, respectively, and used cash in operations of approximately $7.8 million and
$11.2 million, respectively. 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 condensed consolidated financial statements.
The accompanying condensed 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 condensed 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 and through the issuance of debt. 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
There are no material changes from the
significant accounting policies set forth in Note 3 – Significant Accounting Policies of the Company’s accompanying
notes to the audited combined financial statements of Allied Esports and WPT for the year ended December 31, 2018, as presented
in the Company’s Form 8k filed on August 15, 2019, except for the following accounting policies.
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 combined financial statements. For additional information, these condensed consolidated
financial statements should be read in conjunction with the audited combined financial statements of Allied Esports and WPT for
the years ended December 31, 2018 and 2017, included in the Report on Form 8-K filed with the SEC on August 15, 2019. In the opinion
of management, the accompanying condensed consolidated financial statements include all adjustments which are considered necessary
for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of September 30, 2019 and
for the nine months ended September 30, 2019 and 2018. The results of operations for the nine months ended September 30, 2019 are
not necessarily indicative of the operating results for the full year ending December 31, 2019 or any other period. These unaudited
condensed consolidated financial statements have been derived from the accounting records of AESE, WPT and Allied Esports and should
be read in conjunction with the accompanying notes thereto.
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.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
Net Loss per Common Share
Basic loss per common share is computed
by dividing net loss attributable to AESE common stockholders 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.
The following securities are excluded from
the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
Three and Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Options
|
|
|
400,000
|
|
|
|
–
|
|
Warrants
|
|
|
18,637,003
|
|
|
|
3,800,000
|
|
Convertible Debt
|
|
|
1,647,058
|
|
|
|
–
|
|
Equity Purchase Options
|
|
|
600,000
|
|
|
|
600,000
|
|
|
|
|
21,284,061
|
|
|
|
4,400,000
|
|
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, 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 revenue is generated from the use of the WPT brand by partner casinos, from naming rights for the HyperX Esports Arena Las
Vegas and from sponsorship arrangements for Allied Esports events held at the Las Vegas arena. 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.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
The Company recognizes event revenue related
to the use of the WPT brand by partner casinos at the time of the WPT-branded event. Event revenues from naming rights of the
Company’s esports arena are recognized on a straight-line basis over the contractual term of the naming rights agreement.
Event revenues from sponsorship arrangements for Allied Esports events are recognized on a straight-line basis over the duration
of the event, usually three to four days. 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 records deferred revenue to the extent that payment has been received for services that have yet
to be performed.
In-person revenue was comprised of the
following for the three and nine months ended September 30, 2019 and 2018:
In-person revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event revenue
|
|
$
|
2,064,618
|
|
|
$
|
1,551,861
|
|
|
$
|
7,322,466
|
|
|
$
|
4,603,071
|
|
Food and beverage revenue
|
|
|
289,261
|
|
|
|
292,306
|
|
|
|
972,352
|
|
|
|
619,647
|
|
Ticket and gaming revenue
|
|
|
182,136
|
|
|
|
290,518
|
|
|
|
447,156
|
|
|
|
695,227
|
|
Merchandising revenue
|
|
|
50,950
|
|
|
|
67,758
|
|
|
|
145,273
|
|
|
|
149,399
|
|
Other revenue
|
|
|
–
|
|
|
|
–
|
|
|
|
119
|
|
|
|
737
|
|
Total in-person revenue
|
|
$
|
2,586,965
|
|
|
$
|
2,202,443
|
|
|
$
|
8,887,366
|
|
|
$
|
6,068,081
|
|
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 and online advertising
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
over 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 over the license period on a pro rata basis. 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 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. Advertising revenue is received on a lag, based upon the number of times an advertisement
is aired during the previous month, and is recognized during the period that the ad aired on the network or online channel.
Sponsorship revenue is generated through
the sponsorship of the Company’s TV content, 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.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
The Company recognizes distribution revenue
and sponsorship 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.
Music royalty revenue is recognized at the point in time when the music is played.
Multiplatform content revenue was
comprised of the following for the three and nine months ended September 30, 2019 and 2018:
Multiplatform content revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution revenue
|
|
$
|
282,508
|
|
|
|
280,708
|
|
|
$
|
1,069,328
|
|
|
$
|
516,874
|
|
Sponsorship revenue
|
|
|
544,541
|
|
|
|
320,624
|
|
|
|
1,252,131
|
|
|
|
776,327
|
|
Music royalty revenue
|
|
|
200,787
|
|
|
|
339,547
|
|
|
|
1,214,286
|
|
|
|
808,537
|
|
Online advertising revenue
|
|
|
3,547
|
|
|
|
8,466
|
|
|
|
4,628
|
|
|
|
19,907
|
|
Total multiplatform content revenue
|
|
$
|
1,031,383
|
|
|
$
|
949,345
|
|
|
$
|
3,540,373
|
|
|
$
|
2,121,645
|
|
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. The Company recognizes social gaming revenue and virtual product revenue at the point when the product has been delivered.
The Company generates licensing revenue by licensing the right to use the Company’s brand on products to third parties. Licensing
revenue is recognized pursuant to the terms of each individual contract with the customer and 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 three and nine months ended September 30, 2019 and 2018:
Interactive revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
1,313,217
|
|
|
$
|
1,272,077
|
|
|
$
|
3,745,622
|
|
|
$
|
3,751,379
|
|
Virtual product revenue
|
|
|
925,411
|
|
|
|
1,056,376
|
|
|
|
2,773,769
|
|
|
|
2,473,043
|
|
Social gaming revenue
|
|
|
152,317
|
|
|
|
–
|
|
|
|
397,065
|
|
|
|
661,863
|
|
Licensing revenue
|
|
|
16,872
|
|
|
|
–
|
|
|
|
198,481
|
|
|
|
50,398
|
|
Other revenue
|
|
|
15,376
|
|
|
|
–
|
|
|
|
72,259
|
|
|
|
72,887
|
|
Total interactive revenue
|
|
$
|
2,423,193
|
|
|
$
|
2,328,453
|
|
|
$
|
7,187,196
|
|
|
$
|
7,009,570
|
|
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues Recognized at a Point in Time:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event revenue
|
|
$
|
2,064,618
|
|
|
$
|
1,551,861
|
|
|
$
|
7,322,466
|
|
|
$
|
4,603,071
|
|
Food and beverage revenue
|
|
|
289,261
|
|
|
|
292,306
|
|
|
|
972,352
|
|
|
|
619,647
|
|
Ticket and gaming revenue
|
|
|
182,136
|
|
|
|
290,518
|
|
|
|
447,156
|
|
|
|
695,227
|
|
Merchandising revenue
|
|
|
50,950
|
|
|
|
67,758
|
|
|
|
145,273
|
|
|
|
149,399
|
|
Sponsorship revenue
|
|
|
544,541
|
|
|
|
320,624
|
|
|
|
1,252,131
|
|
|
|
776,327
|
|
Music royalty revenue
|
|
|
200,787
|
|
|
|
339,547
|
|
|
|
1,214,286
|
|
|
|
808,537
|
|
Online advertising revenue
|
|
|
3,547
|
|
|
|
8,466
|
|
|
|
4,628
|
|
|
|
19,907
|
|
Virtual product revenue
|
|
|
925,411
|
|
|
|
1,056,376
|
|
|
|
2,773,769
|
|
|
|
2,473,043
|
|
Social gaming revenue
|
|
|
152,317
|
|
|
|
–
|
|
|
|
397,065
|
|
|
|
661,863
|
|
Distribution revenue
|
|
|
282,508
|
|
|
|
280,708
|
|
|
|
1,069,328
|
|
|
|
516,874
|
|
Other revenue
|
|
|
15,376
|
|
|
|
–
|
|
|
|
72,378
|
|
|
|
73,624
|
|
Total Revenues Recognized at a Point in Time
|
|
|
4,711,452
|
|
|
|
4,208,164
|
|
|
|
15,670,832
|
|
|
|
11,397,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues Recognized Over a Period of Time:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing revenue
|
|
|
16,872
|
|
|
|
–
|
|
|
|
198,481
|
|
|
|
50,398
|
|
Subscription revenue
|
|
|
1,313,217
|
|
|
|
1,272,077
|
|
|
|
3,745,622
|
|
|
|
3,751,379
|
|
Total Revenues Recognized Over a Period of Time
|
|
|
1,330,089
|
|
|
|
1,272,077
|
|
|
|
3,944,103
|
|
|
|
3,801,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
6,041,541
|
|
|
$
|
5,480,241
|
|
|
$
|
19,614,935
|
|
|
$
|
15,199,296
|
|
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, 2019, there remained
$38,245 of contract liabilities which were included within deferred revenue on the combined balance sheet as of December 31, 2018,
and for which performance obligations had not yet been satisfied as of September 30, 2019. The Company expects to satisfy its
remaining performance obligations within the next twelve months. During the three and nine months ended September 30, 2019, there
was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.
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.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
Recent Accounting
Pronouncements
In February 2016, the FASB issued Accounting
Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” ASU 2016-02 requires that a lessee recognize the
assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability
to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the
lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of
underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize
and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This amendment will
be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December
15, 2020. 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.
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, 2020, with early adoption permitted for certain amendments. Topic 326 must be
adopted by applying a cumulative effect adjustment to retained earnings. The Company is currently evaluating Topic 326, including
its potential impact to its process and controls.
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 will require adoption on a retrospective basis unless it is impracticable to apply, in which
case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The adoption of ASU
2016-15 is not expected to have a material impact on the Company’s condensed consolidated financial statements or disclosures.
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 Company is currently evaluating and assessing
the impact this guidance will have on its consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-10,
“Codification Improvements to Topic 842, Leases” (“ASU 2018-10”). The amendments in ASU 2018-10 provide
additional clarification and implementation guidance on certain aspects of the previously issued ASU No. 2016-02, Leases (Topic
842) (“ASU 2016-02”) and have the same effective and transition requirements as ASU 2016-02. Upon the effective date,
ASU 2018-10 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required
to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to
make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a
right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset
for the lease term. ASU 2018-10 is effective for private companies and emerging growth public companies for interim and annual
reporting periods beginning after December 15, 2019, with early adoption permitted. The guidance is required to be applied using
a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative
periods presented in the financial statements. The Company is currently assessing the impact this guidance will have on its combined
financial statements.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
In July 2018, the FASB issued ASU
No. 2018-11, “Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”). The amendments in ASU 2018-11
related to transition relief on comparative reporting at adoption affect all entities with lease contracts that choose the additional
transition method and separating components of a contract affect only lessors whose lease contracts qualify for the practical expedient.
The amendments in ASU 2018-11 are effective for private companies and emerging growth public companies for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal years. The Company is currently assessing the impact this guidance
will have on its combined 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.
Note 4 – 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.
Note 5 – Investments
The Company’s investments consist
of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Investment in ESA
|
|
$
|
1,138,631
|
|
|
$
|
500,000
|
|
TV Azteca Investment
|
|
|
3,500,000
|
|
|
|
–
|
|
|
|
$
|
4,638,631
|
|
|
$
|
500,000
|
|
As of September 30, 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.
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 11 – Commitments
and Contingencies, Investment Agreements for additional details.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
Note 6 – Deferred Production Costs
Deferred production costs consist of the
following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Deferred production costs
|
|
$
|
27,975,552
|
|
|
|
23,604,111
|
|
Less: accumulated amortization
|
|
|
(16,770,709
|
)
|
|
|
(14,545,267
|
)
|
Deferred production costs, net
|
|
$
|
11,204,843
|
|
|
$
|
9,058,844
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining amortization period at September 30, 2019 (in
years)
|
|
|
3.80
|
|
|
|
|
|
During the nine months ended September
30, 2019 and 2018, production costs of $2,225,442 and $1,307,069 respectively, were expensed and are reflected in multiplatform
content costs in the condensed consolidated statements of operations.
Note 7 – Accrued Expenses and Other Current Liabilities
Accrued expenses and other
current liabilities consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
$
|
1,087,557
|
|
|
$
|
1,218,455
|
|
Taxes
|
|
|
205,121
|
|
|
|
981
|
|
Rent
|
|
|
53,561
|
|
|
|
58,781
|
|
Revenue sharing obligations
|
|
|
380,677
|
|
|
|
122,928
|
|
Event costs
|
|
|
107,753
|
|
|
|
61,740
|
|
Production costs
|
|
|
143,707
|
|
|
|
15,329
|
|
Unclaimed player prizes
|
|
|
420,993
|
|
|
|
380,120
|
|
Other accrued expenses
|
|
|
1,025,223
|
|
|
|
395,441
|
|
Other current liabilities
|
|
|
50,310
|
|
|
|
188,370
|
|
|
|
$
|
3,474,902
|
|
|
$
|
2,442,145
|
|
Note 8 – 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.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
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 4 - Reverse Merger and Recapitalization), such that the
aggregate indebtedness of the Company pursuant to the Noble Link Notes and Bridge 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 secured by all property and assets owned by AESE and its subsidiaries.
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. The Company recorded
interest expense of $411,433 and $469,296, respectively, related to the Notes during the three and nine months ended September
30, 2019.
Pursuant to the note purchase agreements
entered into by the purchase 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 amortization of debt discount of $36,414 during the three and nine months
ended September 30, 2019, which is included in interest expense on the accompanying condensed consolidated statements of operations.
Unamortized debt discount is $230,980 at September 30, 2019.
Note 9 – 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.
The Company’s business consists of three reportable 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.
|
|
·
|
Corporate
|
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
The following tables present segment information for
each of the three and nine months ended September 30, 2019 and 2018:
|
|
For
the three months ended September 30, 2019
|
|
For
the nine months ended September 30, 2019
|
|
|
|
Gaming
&
Entertainment
|
|
E-sports
|
|
Corporate(1)
|
|
TOTAL
|
|
Gaming
&
Entertainment
|
|
E-sports
|
|
Corporate(1)
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,137,091
|
|
$
|
1,904,450
|
|
$
|
–
|
|
$
|
6,041,541
|
|
$
|
14,022,841
|
|
$
|
5,592,094
|
|
$
|
–
|
|
$
|
19,614,935
|
|
Loss
from Operations
|
|
$
|
172,502
|
|
$
|
2,984,047
|
|
$
|
661,054
|
|
$
|
3,817,603
|
|
$
|
1,069,712
|
|
$
|
8,685,384
|
|
$
|
661,054
|
|
$
|
10,416,151
|
|
|
|
For
the three months ended September 30, 2018
|
|
For
the nine months ended September 30, 2018
|
|
|
|
Gaming
&
Entertainment
|
|
E-sports
|
|
Corporate(1)
|
|
TOTAL
|
|
Gaming
&
Entertainment
|
|
E-sports
|
|
Corporate(1)
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,426,935
|
|
$
|
1,053,306
|
|
$
|
–
|
|
$
|
5,480,241
|
|
$
|
12,347,616
|
|
$
|
2,851,680
|
|
$
|
–
|
|
$
|
15,199,296
|
|
Loss
from Operations
|
|
$
|
232,220
|
|
$
|
6,184,578
|
|
$
|
–
|
|
$
|
6,416,798
|
|
$
|
1,926,092
|
|
$
|
20,673,388
|
|
$
|
–
|
|
$
|
22,599,480
|
|
|
As
of September 30, 2019
|
|
As
of December 31, 2018
|
|
|
|
Gaming
&
Entertainment
|
|
|
E-sports
|
|
|
Corporate(2)
|
|
|
TOTAL
|
|
|
Gaming
&
Entertainment
|
|
|
E-sports
|
|
|
Corporate(2)
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
$
|
37,398,491
|
|
$
|
22,347,135
|
|
$
|
14,729,098
|
|
$
|
74,474,724
|
|
$
|
37,315,493
|
|
$
|
27,931,444
|
|
$
|
–
|
|
$
|
65,246,937
|
|
___________________
|
1)
|
Unallocated corporate operating losses result from general corporate overhead expenses not directly
attributable to any one of the business segments. These expenses are reported separate from the Company’s identified segments
and are included in General and Administrative expenses on the accompanying condensed consolidated statements of operations.
|
|
2)
|
Unallocated corporate assets not directly attributable to any one of the business segments.
|
Note 10 – Related Parties
Notes Payable to Former Parent
During the nine months ended September
30, 2018, the Company received proceeds of $11,174,913 from the issuance of notes payable to the Former Parent. During November
and December 2018, as part of a corporate restructuring, all outstanding notes payable to Former Parent were converted to Former
Parent’s equity, and all accrued interest related to the notes payable to Former Parent was forgiven and recorded as a contribution
to capital.
Due to Former Parent
As of December 31, 2018, amounts 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 $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 the Former Parent in the aggregate amount of $32,672,622 were satisfied in connection with the Merger. See Note
4 – Reverse Merger and Recapitalization, for additional details.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
Note 11 – 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 combined financial position, results of
operations or cash flows.
Employment 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 the twelve months of the CEO’s base salary. In connection with the CEO agreement,
the CEO also received 17,668 of the Company’s restricted common stock, with a grant date value of $100,000, which vests
one year from date of issuance (See Note 12 – Equity, Restricted Stock). 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.
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.
Operating Leases
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 leases, as amended,
is $39,832 per month, increasing to $58,495 per month over the term of the lease. The New Irvine Lease also provides for a tenant
improvement allowance of up to $1,352,790.
The Company’s aggregate rent
expense incurred during the three and nine months ended September 30, 2019 amounted to $711,302 and $2,079,800, respectively,
of which $96,278 and $288,835, respectively was capitalized into deferred production costs, $448,861 and $1,073,864, respectively,
was included within in-person cost of revenues, and $166,163 and $717,102, respectively, was included within general administrative
expenses on the condensed consolidated statements of operations. The Company’s aggregate rent expense incurred during the
three and nine months ended September 30, 2018 amounted to $706,160 and $2,420,717, respectively, of which $96,278 and $288,835,
respectively was capitalized into deferred production costs, $370,993 and $1,395,203, respectively, was included within in-person
cost of revenues, and $238,889 and $736,679, respectively, was included within general administrative expenses on the condensed
consolidated statements of operations.
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.
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
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 localization, 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 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 $5,000,000 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.
As of September 30, 2019, the balance
in the escrow account is $4,950,000, which is shown as restricted cash on the accompanying condensed consolidated balance
sheet. (See Note 13 – Subsequent Events).
Note 12 – Stockholder’s
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 4 - Reverse Merger and Recapitalization).
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 2,982,912 shares remain available to be issued as of September 30, 2019.
Stock Options
On September 20, 2019 the Company issued
ten-year options for the purchase of 400,000 shares of AESE common stock, with an exercise price of $5.66 per share, pursuant to
the Incentive Plan. The options have a 4-year vesting term, and vest 25% on each anniversary of the date of grant. The options
had an aggregate grant date fair value of $867,120, calculated using the Black-Scholes option pricing model, with the following
assumptions used:
Risk free interest rate
|
|
|
1.74%
|
|
Expected term (years)
|
|
|
6.25 years
|
|
Expected volatility
|
|
|
36%
|
|
Expected dividends
|
|
|
0.0
|
|
ALLIED
ESPORTS ENTERTAINMENT, INC.
Notes to Condensed Consolidated Financial
Statements
The expected term used for options is the
estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified”
method to develop an estimate of the expected term of “plain vanilla” option grants. The Company 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.
The Company recorded stock-based compensation
expense of $5,940 for the three and nine months ended September 30, 2019 related to stock options issued as compensation, which
is included in general and administrative expense on the accompanying condensed consolidated statements of operations. As of September
30, 2019, there was $861,180 of unrecognized stock-based compensation expense related to the stock options that will be recognized
over the remaining vesting period of 3.97 years.
A summary of the option activity during
the nine months ended September 30, 2019 is presented below:
Prior to the Closing Date, BRAC issued
14,305,000 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 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.
A summary of warrant activity during the nine months ended September
30, 2019 is presented below:
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 $12,467 for the three and nine months ended September 30, 2019 related to restricted common stock issued as compensation,
which is recorded in general and administrative expenses on the accompanying condensed consolidated statements of operations. As
of September 30, 2019, there was $442,533 of unrecognized stock-based compensation expense related to the restricted stock that
will be recognized over the remaining vesting period of 0.97 years.
Prior to the Closing Date, BRAC sold an
option to purchase of 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 nine months ended September 30, 2019 is presented below:
On October 22, 2019, restricted cash in
the amount of $1,300,000 was released from escrow in order to fund expenses incurred in connection with the Simon Cup (see Note
11 – Commitments and Contingencies).
Subsequent to the issuance of the
Company’s Current Report on Form 8-K on August 15, 2019 (the “Report”), the Company determined that there
was an error in the allocation of net loss attributable to controlling and non-controlling interests on the
Condensed Combined Statements of Operations and Comprehensive Loss for the six months ended June 30, 2018, such that the net
income attributable to non-controlling interests was overstated (and net loss attributable to the Parent was understated) by
approximately $2.5 million. There was no effect of this error on the Condensed Combined Balance Sheet, on the Condensed
Combined Statements of Changes in Parent’s Net Investment, or on the Condensed Combined Statements of Cash Flows
contained in the Report. The Company evaluated the effect of this error and determined that the error was not qualitatively
significant for the period presented.
The following
tables summarize the impact of this error on the Condensed Combined Statements or Operations and Comprehensive Loss for the six
months ended June 30, 2018: