Allied Gaming & Entertainment (AGAE) - 2019 Q3 - Quarterly Report

FORM 10-Q Filing Information Registrant Information This section provides key identification details for ALLIED ESPORTS ENTERTAINMENT, INC., including its SEC filing status, incorporation details, address, and stock information as of November 12, 2019 - The registrant, ALLIED ESPORTS ENTERTAINMENT, INC., is incorporated in Delaware with its principal executive offices in Irvine, California[1][2] - The company has filed all required reports during the past 12 months and has submitted electronically every Interactive Data File[2] Registrant Information Details | Indicator | Value | | :--- | :--- | | Commission File Number | 001-38226 | | Trading Symbol | AESE | | Exchange Registered | NASDAQ | | Filer Status | Accelerated filer, Smaller reporting company, Emerging growth company | | Common Stock Outstanding (as of Nov 12, 2019) | 23,176,146 shares | | Common Stock Par Value | $0.0001 per share | PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Allied Esports Entertainment, Inc., including the balance sheets, statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows for the periods ended September 30, 2019, and December 31, 2018 (for balance sheet) or September 30, 2018 (for income and cash flow statements) Condensed Consolidated Balance Sheets The balance sheet shows a significant increase in total assets and stockholders' equity, while total liabilities decreased, primarily due to changes related to convertible debt and amounts due to the Former Parent - Current assets increased by approximately $5.7 million, driven by increases in restricted cash, accounts receivable, and prepaid expenses. Investments also saw a substantial increase from $500,000 to $4,638,631[7] - Current liabilities decreased significantly by approximately $16.7 million, primarily due to the settlement of $33,019,510 owed to the Former Parent, partially offset by the introduction of convertible debt and related accrued interest[7] Balance Sheet Summary | Metric | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $74,474,724 | $65,246,937 | | Total Liabilities | $24,703,399 | $41,225,641 | | Total Stockholders' Equity | $49,771,325 | $24,021,296 | | Current Assets | $18,458,025 | $12,716,420 | | Current Liabilities | $23,144,441 | $39,841,997 | Unaudited Condensed Consolidated Statements of Operations The company reported a reduced net loss for both the three and nine months ended September 30, 2019, compared to the prior year, driven by increased revenues across all segments and a significant reduction in impairment expenses - Total revenues increased by 10.2% for the three months and 29.1% for the nine months ended September 30, 2019, compared to the same periods in 2018[8] - Impairment expense significantly decreased from $3,252,545 to $0 for the three months and from $7,590,205 to $600,000 for the nine months, contributing to the reduced net loss[8] Statements of Operations Summary | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $6,041,541 | $5,480,241 | $19,614,935 | $15,199,296 | | 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) | | 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) | Unaudited Condensed Consolidated Statements of Comprehensive Loss The comprehensive loss for both the three and nine months ended September 30, 2019, decreased compared to the prior year, primarily reflecting the reduction in net loss, with foreign currency translation adjustments having a minor impact Statements of Comprehensive Loss Summary | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Loss | $(4,253,472) | $(6,764,627) | $(10,918,910) | $(24,376,982) | | 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) | | Comprehensive Loss Attributable to Allied Esports Entertainment, Inc. | $(4,274,555) | $(6,434,288) | $(10,932,276) | $(23,902,568) | Unaudited Condensed Combined Statements of Changes in Stockholders' Equity Stockholders' equity significantly increased from $24.0 million at January 1, 2019, to $49.8 million at September 30, 2019, primarily due to the effect of the reverse merger and related capital transactions, despite ongoing net losses - The reverse merger resulted in the issuance of 11,492,999 common shares and a $36,395,355 increase in additional paid-in capital[11] - Warrants issued to convertible debt holders and contingent consideration for convertible debt holders added $114,804 and $152,590, respectively, to additional paid-in capital[11] Statements of Changes in Stockholders' Equity Summary | Metric | January 1, 2019 | September 30, 2019 | | :--- | :--- | :--- | | Common Shares | 11,602,754 | 23,176,146 | | Common Stock Amount | $1,160 | $2,317 | | Additional Paid-in Capital | $124,361,130 | $161,042,278 | | Accumulated Deficit | $(100,479,855) | $(111,398,765) | | Total Stockholder's Equity | $24,021,296 | $49,771,325 | Unaudited Condensed Combined Statements of Cash Flows Cash used in operating activities decreased, while investing activities shifted from a significant outflow to an inflow, primarily due to cash acquired in the merger and reduced capital expenditures. Financing activities saw a substantial decrease in cash provided due to reduced infusions from the former parent - Investing activities were positively impacted by $14,941,683 net cash acquired in the Merger in 2019, contrasting with significant outflows in 2018 for property and equipment purchases[14] - Financing cash flows decreased significantly due to reduced cash infusions from the Former Parent, partially offset by proceeds from convertible debt in 2019[16] Statements of Cash Flows Summary | Cash Flow Activity | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net Cash Used In Operating Activities | $(7,750,900) | $(11,232,448) | | Net Cash Provided by (Used In) Investing Activities | $7,930,030 | $(22,725,016) | | Net Cash Provided By Financing Activities | $3,653,196 | $30,444,286 | | Net Increase (Decrease) In Cash And Restricted Cash | $3,834,200 | $(3,550,050) | | Cash and Restricted Cash - End of period | $14,305,496 | $10,060,088 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's background, significant accounting policies, financial instruments, segment information, related party transactions, commitments, contingencies, and equity activities, crucial for understanding the condensed consolidated financial statements Note 1 – Background and Basis of Presentation This note outlines the company's formation as a blank check company, the reverse recapitalization merger on August 9, 2019, where AEM (Allied Esports and WPT) was deemed the accounting acquirer, and describes the core businesses of Allied Esports (esports-related) and World Poker Tour (poker-related) - Allied Esports Entertainment Inc. (AESE) was formed as a blank check company and completed a reverse recapitalization merger on August 9, 2019, with Allied Esports Media, Inc. (AEM) as the accounting acquirer[18][20] - Allied Esports operates global competitive esports properties, including arenas and mobile esports trucks, while World Poker Tour (WPT) is an internationally televised gaming and entertainment company focused on poker tournaments, television content, and online/mobile applications[21][22] Note 2 - Going Concern and Management's Plans The company's financial condition, including a working capital deficit and ongoing net losses, raises substantial doubt about its ability to continue as a going concern. Management's plans focus on achieving profitability and securing additional capital through financing or strategic partnerships - As of September 30, 2019, the company had a cash balance of approximately $9.4 million (excluding restricted cash) and a working capital deficit of approximately $4.7 million[24] - The company's continuation is dependent on achieving profitable operations and raising additional capital, with no assurance of securing sufficient financing on acceptable terms[26] Net Loss and Cash Used in Operations | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net Loss | $(10.9) million | $(24.4) million | | Cash Used in Operations | $(7.8) million | $(11.2) million | Note 3 - Significant Accounting Policies This note details the significant accounting policies, including the basis of presentation, principles of consolidation, treatment of intangible assets and goodwill, net loss per common share calculation, and revenue recognition methods, along with recent accounting pronouncements Basis of Presentation and Principles of Consolidation The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and include all necessary adjustments for fair presentation, derived from the accounting records of AESE, WPT, and Allied Esports - The financial statements are prepared under U.S. GAAP for interim periods and should be read with the audited annual statements[28] Intangible Assets and Goodwill Intangible assets with definite lives are amortized over two to ten years, while those with indefinite lives, including goodwill, are tested for impairment annually or more frequently if circumstances indicate - Intangible assets with definite lives are amortized on a straight-line basis over 2 to 10 years or contract periods[29] - Intangible assets with indefinite lives and goodwill are not amortized but are evaluated for impairment at least annually[29] Net Loss per Common Share Basic and diluted net loss per common share are calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, excluding anti-dilutive securities - Basic loss per common share is calculated using net loss attributable to AESE common stockholders and weighted average common shares outstanding[30] - Diluted loss per common share includes the impact of dilutive common shares from options, warrants, and convertible instruments, but anti-dilutive securities are excluded[30] Anti-Dilutive Securities | Anti-Dilutive Securities | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Options | 400,000 | 400,000 | | Warrants | 18,637,003 | 18,637,003 | | Convertible Debt | 1,647,058 | 1,647,058 | | Equity Purchase Options | 600,000 | 600,000 | | Total | 21,284,061 | 21,284,061 | Revenue Recognition The company adopted ASC Topic 606, 'Revenue from Contracts with Customers,' on January 1, 2019, using the modified retrospective method, which had no material impact. Revenue is recognized across three main categories: in-person, multiplatform content, and interactive, each with specific recognition criteria - The adoption of ASC 606 on January 1, 2019, did not have a material impact on the company's consolidated financial statements[33] - Revenue is primarily recognized from in-person events, multiplatform content distribution and sponsorships, and interactive services like subscriptions and licensing[33][37][42] In-person revenue In-person revenue, derived from events, merchandising, and other sources, increased for both the three and nine months ended September 30, 2019, primarily driven by event revenue from WPT and Allied Esports properties - Event revenue is recognized at the time of the WPT-branded event, or on a straight-line basis for naming rights and sponsorship arrangements[35] In-person Revenue by Category | In-person Revenue Category | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 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 | $0 | $0 | $119 | $737 | | Total in-person revenue | $2,586,965 | $2,202,443 | $8,887,366 | $6,068,081 | Multiplatform content revenue Multiplatform content revenue, including distribution, sponsorship, music royalty, and online advertising, increased for both the three and nine months ended September 30, 2019, primarily driven by distribution and sponsorship revenue - Distribution revenue is recognized over the license period on a pro rata basis, while sponsorship revenue is recognized according to contract terms[37][40] Multiplatform Content Revenue by Category | Multiplatform Content Revenue Category | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 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 Interactive revenue, primarily from subscriptions, virtual products, social gaming, and licensing, showed an increase for both the three and nine months ended September 30, 2019, with subscription and virtual product revenue being key contributors - Subscription revenue is recognized on a straight-line basis, while social gaming and virtual product revenue are recognized upon delivery[43] Interactive Revenue by Category | Interactive Revenue Category | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 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 | $0 | $397,065 | $661,863 | | Licensing revenue | $16,872 | $0 | $198,481 | $50,398 | | Other revenue | $15,376 | $0 | $72,259 | $72,887 | | Total interactive revenue | $2,423,193 | $2,328,453 | $7,187,196 | $7,009,570 | Reclassification Certain prior year balances were reclassified to conform to the current year's presentation, with no impact on previously reported results of operations or loss per share - Prior year balances were reclassified for presentation consistency, without affecting reported results or loss per share[49] Recent Accounting Pronouncements The company is evaluating the impact of several new accounting standards, including ASU 2016-02 (Leases), Topic 326 (Credit Losses), ASU 2016-15 (Cash Flows), ASU 2018-09 (Codification Improvements), ASU 2018-10 (Leases), ASU 2018-11 (Leases), and ASU 2019-02 (Production Costs for TV Series), with most effective for fiscal years beginning after December 15, 2019 or 2020 - ASU 2016-02 (Leases) requires lessees to recognize assets and liabilities for operating leases, effective for fiscal years beginning after December 15, 2019, for emerging growth companies[51] - Topic 326 (Credit Losses) mandates the measurement and recognition of expected credit losses, replacing the incurred loss model, effective January 1, 2020[52] - ASU 2019-02 aligns accounting for production costs of episodic television series with films, effective for annual periods beginning after December 15, 2020[57] Note 4 – Reverse Merger and Recapitalization On August 9, 2019, the AEM Merger and the Merger took place, resulting in the exchange of AEM capital stock for AESE common stock, warrants, and contingent shares. The company also settled $32.7 million owed to the Former Parent through cash, assumed convertible debt, and issuance of common stock - AEM capital stock was exchanged for 11,602,754 shares of AESE common stock, warrants for 3,800,003 shares, and 3,846,153 contingent shares[58] - Obligations of $32,672,622 to the Former Parent were satisfied by a $3.5 million cash repayment, assumption of $10 million in convertible debt (plus interest), and issuance of 3,528,679 shares of common stock[59] - An aggregate of 11,492,999 shares of common stock were issued in connection with the Merger, including shares for the Former Parent and BRAC shareholders[60] Note 5 – Investments The company's investments increased significantly to $4.6 million as of September 30, 2019, primarily due to a new $3.5 million investment in TV Azteca for expanding the Allied Esports brand into Mexico and additional funding to Esports Arena, LLC (ESA) - A $1,238,631 contribution to ESA in January 2019 resulted in a $600,000 impairment recognition[62] - The $3.5 million investment in TV Azteca in August 2019 is part of a strategic agreement to expand the Allied Esports brand into Mexico[63] Investment Summary | Investment | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Investment in ESA | $1,138,631 | $500,000 | | TV Azteca Investment | $3,500,000 | $0 | | Total Investments | $4,638,631 | $500,000 | Note 6 – Deferred Production Costs Net deferred production costs increased to $11.2 million as of September 30, 2019, with a weighted average remaining amortization period of 3.80 years. Production costs of $2.2 million were expensed during the nine months ended September 30, 2019 - Production costs of $2,225,442 were expensed and reflected in multiplatform content costs for the nine months ended September 30, 2019[64] Deferred Production Costs Summary | Metric | Sep 30, 2019 | Dec 31, 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 | 3.80 years | N/A | Note 7 – Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities increased to $3.47 million as of September 30, 2019, from $2.44 million at December 31, 2018, driven by increases in taxes, revenue sharing obligations, event costs, production costs, and other accrued expenses Accrued Expenses and Other Current Liabilities Breakdown | Category | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Compensation expense | $1,087,557 | $1,218,455 | | Taxes | $205,121 | $981 | | 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 | | Total | $3,474,902 | $2,442,145 | Note 8 – Convertible Debt and Convertible Debt, Related Party The company incurred $4 million in Noble Link Notes in May 2019 and assumed $10 million of Former Parent convertible debt in August 2019, totaling $14 million in convertible debt. These notes bear 12% annual interest, mature in August 2020, and are convertible into AESE common stock at $8.50 per share, with additional warrants and contingent consideration issued to noteholders - Noble Link issued $4 million in secured convertible promissory notes in May 2019, including $1 million to a related party[66] - AESE assumed $10 million of convertible debt obligations from the Former Parent on August 9, 2019, bringing total convertible debt to $14 million[67] - The convertible notes bear 12% annual interest, mature one year and two weeks after the merger closing (August 23, 2020), and are convertible into AESE common stock at $8.50 per share[68] - Noteholders received five-year warrants to purchase 532,000 shares of AESE common stock at $11.50 per share and are entitled to contingent consideration of 3,846,153 shares if the stock price reaches $13.00 for 30 consecutive days within five years[69] Note 9 – Segment Data The company operates through three reportable segments: Poker, gaming and entertainment (WPT), E-sports (Allied Esports), and Corporate. Both WPT and E-sports segments generated revenue, with E-sports showing significant growth in revenue but also higher operating losses - The company's business segments are Poker, gaming and entertainment (WPT), E-sports (Allied Esports), and Corporate[71] Segment Performance (Revenues and Loss from Operations) | Segment | 3 Months Ended Sep 30, 2019 (Revenues) | 3 Months Ended Sep 30, 2019 (Loss from Operations) | 9 Months Ended Sep 30, 2019 (Revenues) | 9 Months Ended Sep 30, 2019 (Loss from Operations) | | :--- | :--- | :--- | :--- | :--- | | Gaming & Entertainment | $4,137,091 | $172,502 | $14,022,841 | $1,069,712 | | E-sports | $1,904,450 | $2,984,047 | $5,592,094 | $8,685,384 | | Corporate | $0 | $661,054 | $0 | $661,054 | | TOTAL | $6,041,541 | $3,817,603 | $19,614,935 | $10,416,151 | Segment Assets | Segment | As of Sep 30, 2019 (Total Assets) | As of Dec 31, 2018 (Total Assets) | | :--- | :--- | :--- | | Gaming & Entertainment | $37,398,491 | $37,315,493 | | E-sports | $22,347,135 | $27,931,444 | | Corporate | $14,729,098 | $0 | | TOTAL | $74,474,724 | $65,246,937 | Note 10 – Related Parties This note details transactions with related parties, including notes payable to the Former Parent that were converted to equity in 2018, and the satisfaction of $32.7 million owed to the Former Parent in connection with the August 2019 Merger - Notes payable to the Former Parent, totaling $11,174,913 in proceeds during the nine months ended September 30, 2018, were converted to the Former Parent's equity in November 2018[75] - Amounts due to the Former Parent, totaling $33,019,510 as of December 31, 2018, were fully satisfied on August 9, 2019, in connection with the Merger[76] Note 11 – Commitments and Contingencies The company is involved in routine legal matters and has significant commitments, including an employment agreement for its CEO, a consulting agreement with its prior sponsor, operating leases, and strategic investment agreements with TV Azteca and Simon Equity Development, LLC, involving substantial funding and restricted cash Litigations, Claims, and Assessments The company is involved in various routine legal disputes, but management believes their outcome will not have a material adverse effect on its financial position, results of operations, or cash flows - Management does not believe current legal matters will materially adversely affect the company's financial position, results of operations, or cash flows[78] Employment Agreement The CEO, Frank Ng, entered into an employment agreement effective September 20, 2019, with an annual base salary of $300,000, eligibility for bonuses, and severance provisions. He also received 17,668 restricted common shares - CEO Frank Ng's employment agreement, effective September 20, 2019, includes a $300,000 annual base salary and eligibility for annual incentive bonuses[79] - The CEO received 17,668 restricted common shares with a grant date value of $100,000, vesting one year from issuance[79] Consulting Agreement The company entered into a consulting agreement with Black Ridge Oil & Gas (BROG), its prior sponsor, for administration and accounting services through December 31, 2019, for an aggregate fee of $348,853 - A consulting agreement with Black Ridge Oil & Gas (BROG) for administration and accounting services through December 31, 2019, totals $348,853[80] Operating Leases The company entered into a new 167-month operating lease for office space in Irvine, California, with initial monthly base rent of $39,832, increasing over the term, and a tenant improvement allowance of up to $1.35 million. Aggregate rent expense for the nine months ended September 30, 2019, was $2.08 million - A new 167-month operating lease for Irvine office space began with an initial base rent of $39,832 per month, increasing to $58,495[81] - The lease includes a tenant improvement allowance of up to $1,352,790[81] Rent Expense Breakdown | Rent Expense Category | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Total Aggregate Rent Expense | $711,302 | $2,079,800 | | Capitalized into Deferred Production Costs | $96,278 | $288,835 | | Included in In-person Cost of Revenues | $448,861 | $1,073,864 | | Included in General Administrative Expenses | $166,163 | $717,102 | Investment Agreements The company entered into strategic investment agreements with TV Azteca and Simon Equity Development, LLC. The TV Azteca agreement involves a $5 million equity purchase and $7 million for strategic initiatives in Mexico, with $3.5 million paid to date. The Simon Agreement involves a $5 million escrow for esports events and venue development at Simon malls - The TV Azteca Agreement involves TV Azteca purchasing 742,692 shares of AESE common stock for $5,000,000[83] - AESE will provide $7,000,000 for strategic initiatives in Mexico, including digital channel development and facility construction, with $3,500,000 paid as of September 30, 2019[86] - The Simon Agreement involves a $5,000,000 cash placement into an escrow account for developing esports facilities and event programs at Simon malls, with $4,950,000 remaining as restricted cash[87][88] Note 12 – Stockholder's Equity This note details changes in stockholder's equity, including share purchase agreements, the approval of an Equity Incentive Plan, and activity related to stock options, warrants, restricted stock, and equity purchase options Share Purchase Agreements Allied Esports Media Inc. sold 1,199,191 restricted common shares to employees and stakeholders in November 2018, which were later exchanged for AESE common stock and warrants during the recapitalization - 1,199,191 restricted common shares were sold to employees and stakeholders in November 2018 and exchanged for AESE common stock and warrants during recapitalization[89] Equity Incentive Plan The company's Equity Incentive Plan, approved on August 9, 2019, reserves 5,000,000 shares of common stock for various stock-based awards, with 4,519,607 shares remaining available as of September 30, 2019 - The Equity Incentive Plan, approved August 9, 2019, reserves 5,000,000 common shares for awards[89] - As of September 30, 2019, 4,519,607 shares remained available under the plan[89] Stock Options On September 20, 2019, the company issued 400,000 ten-year stock options with an exercise price of $5.66 per share, vesting 25% annually over four years. The aggregate grant date fair value was $867,120, resulting in $5,940 of stock-based compensation expense for the period - 400,000 ten-year stock options were issued on September 20, 2019, with an exercise price of $5.66 per share and a 4-year vesting term[90] - The options had an aggregate grant date fair value of $867,120, calculated using the Black-Scholes model[90] - Stock-based compensation expense of $5,940 was recorded for the three and nine months ended September 30, 2019, with $861,180 unrecognized expense remaining[92] Warrants As of September 30, 2019, the company had 18,637,003 warrants outstanding, exercisable at $11.50 per share with a weighted average remaining life of 4.9 years. These include BRAC Warrants and warrants issued to former owners and noteholders in connection with the Merger - 14,305,000 BRAC Warrants for common stock at $11.50 per share were deemed issued in connection with the Merger[94] - An additional 3,800,003 warrants were issued to former owners of Allied Esports and WPT, and 532,000 warrants to noteholders, all exercisable at $11.50 per share[95] Warrant Activity | Warrant Activity | Number of Warrants | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding, December 31, 2018 | 3,800,003 | $11.50 | | Issued | 14,837,000 | $11.50 | | Outstanding, September 30, 2019 | 18,637,003 | $11.50 | | Exercisable, September 30, 2019 | 18,637,003 | $11.50 | Restricted Stock On September 20, 2019, 80,393 shares of restricted common stock were issued to board members and executives, with an aggregate grant date fair value of $455,000, vesting on the one-year anniversary. This resulted in $12,467 of stock-based compensation expense - 80,393 restricted common shares were issued on September 20, 2019, to board members and executives, with a grant date fair value of $455,000[98] - The shares vest on the one-year anniversary of the grant date, leading to $12,467 in stock-based compensation expense for the period[99] Equity Purchase Option An Equity Purchase Option to buy up to 600,000 units (converted to shares and warrants) at $11.50 per unit was outstanding, expiring on October 4, 2022. This option was deemed issued in connection with the Merger - An Equity Purchase Option for up to 600,000 units (converted to shares and warrants) at $11.50 per unit was outstanding[100] - The option expires on October 4, 2022, and was deemed issued in connection with the Merger[100] Note 13 – Subsequent Events Subsequent to September 30, 2019, $1,300,000 of restricted cash was released from escrow on October 22, 2019, to fund expenses for the Simon Cup - On October 22, 2019, $1,300,000 of restricted cash was released from escrow to fund Simon Cup expenses[103] Note 14 - Correction of Prior Period Net Loss Attributable to Non-Controlling Interest The company corrected an error in the allocation of net loss attributable to non-controlling interests for the six months ended June 30, 2018, which had overstated non-controlling interest net income by approximately $2.5 million. This correction did not affect the balance sheet or cash flow statements - An error in allocating net loss to non-controlling interests for the six months ended June 30, 2018, was corrected, reducing non-controlling interest net income by approximately $2.5 million[104] - The correction had no effect on the Condensed Combined Balance Sheet, Statements of Changes in Parent's Net Investment, or Cash Flows[104] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This section provides management's perspective on the company's financial condition, results of operations, and cash flows, including a discussion of the business background, segment performance, liquidity, and critical accounting policies. It highlights the company's strategic focus on esports and poker, leveraging a three-pillar model of in-person experiences, multiplatform content, and interactive services Cautionary Statements This section includes cautionary statements regarding forward-looking statements, emphasizing inherent risks and uncertainties that could cause actual results to differ materially from expectations. Readers are advised not to place undue reliance on these statements and to review risk factors - Forward-looking statements are subject to significant business, economic, competitive, regulatory, and other risks and uncertainties[108] - The company assumes no obligation to update forward-looking statements beyond legal requirements[109] Background Allied Esports Entertainment Inc. (AESE), formerly Black Ridge Acquisition Corp (BRAC), was formed as a blank check company and completed a merger on August 9, 2019, with Allied Esports Media, Inc. (AEM) as the surviving entity, combining Allied Esports' esports business and World Poker Tour's poker business - AESE was incorporated in May 2017 as a blank check company[110] - On August 9, 2019, AESE completed a merger with AEM, which included Allied Esports and World Poker Tour businesses[112] The Company AESE operates as a premier public esports and entertainment company, leveraging the successful three-pillar business model (in-person experiences, multiplatform content, interactive services) from its World Poker Tour (WPT) business to grow its Allied Esports segment, collaborating with strategic investors like Simon Property Group and TV Azteca - AESE operates a premier public esports and entertainment company, combining Allied Esports and World Poker Tour businesses[113] - The company plans to apply WPT's three-pillar business model (in-person experiences, multiplatform content, interactive services) to grow its esports business[113][114] - Strategic collaborations with Simon Property Group and TV Azteca are key to delivering live events, content, and online products[114] The Allied Esports Business Allied Esports focuses on the rapidly growing esports market, utilizing a three-pillar strategy of in-person experiences, multiplatform content development, and interactive services. This includes operating flagship and mobile arenas, partnering with strategic investors like Simon and TV Azteca for events and content, and developing an online platform for players and fans - Esports is a major driver of growth in the gaming market, with projected global viewership of 645 million and revenue of $1.8 billion by 2022[115] - Allied Esports applies a three-pillar strategy: in-person experiences, multiplatform content, and interactive services[116] - Strategic partnerships with Simon Property Group and TV Azteca involve equity investments and collaborations for esports events and content[117] In-person Experiences Allied Esports delivers live experiences through its global network of branded properties, including the HyperX Esports Arena Las Vegas, HyperX Esports Studio in Germany, affiliate arenas, and mobile esports trucks. These venues host proprietary and third-party events, generate revenue from various sources, and facilitate strategic investor collaborations like The Simon Cup and events in Mexico - Allied Esports operates flagship arenas (e.g., HyperX Esports Arena Las Vegas), affiliate arenas (California, China, Australia), and two mobile esports trucks[118][119][120] - The HyperX Esports Arena Las Vegas monetizes through event rentals, merchandise, daily usage fees, food and beverage, and sponsorships[119] - Collaborations with Simon and TV Azteca involve creating in-person events, such as The Simon Cup, to develop content and expand brand presence[121][122] Multiplatform Content: Leveraging Branded Properties and Strategic Partnerships to Develop Content Allied Esports leverages its global arena network and strategic partnerships to produce diverse content, including live streaming, post-produced episodic content, and repackaged short-form content. This content is monetized through direct sales, sponsorships, advertising, and subscriptions, aiming to engage audiences and drive brand interaction - Allied Esports produces content in three formats: live streaming, post-produced episodic content, and short-form repackaged content[124] - Live streaming events, like the one with Ninja, can attract massive audiences (e.g., 667,000 peak concurrent viewers)[125] - Strategic investor collaborations with Simon and TV Azteca are focused on developing content and programming for digital channels and media outlets[130] Interactive Services: Developing an Esports Entertainment Platform Allied Esports plans to develop an online platform for esports players and fans to watch, play, and win, offering exclusive content, tournaments, and VIP experiences through subscriptions. The platform will initially support strategic initiatives with Simon and TV Azteca, focusing on building brand equity and user base - Allied Esports plans to develop an online platform for esports players and fans, offering exclusive content, tournaments, and VIP experiences through subscriptions[132] - The platform's initial release will support esports experiences at Simon's centers and later expand to Mexico in partnership with TV Azteca, including a 24-hour digital esports entertainment channel[133] The WPT Business The World Poker Tour (WPT) business, a premier name in televised gaming and entertainment, utilizes a three-pillar model encompassing worldwide poker tournaments (in-person experiences), multiplatform content (television shows and digital distribution), and interactive services (online poker platforms like ClubWPT and licensing agreements). WPT focuses on brand licensing and strategic partnerships to expand its global reach and profitability - WPT is a premier name in internationally televised gaming and entertainment, with a brand presence in land-based tournaments, television, online, and mobile[135] - WPT's business model is based on three pillars: in-person experiences, multiplatform content, and interactive services[135] - WPT leverages brand licensing arrangements to expand its reach in localized ways, such as with Adda52 in India and TV Azteca in Mexico[147] In-person Experiences: Worldwide Poker Tournaments WPT hosts a global league of affiliated poker tournaments at casinos and poker rooms, licensing its brand for various event types (Main Tour, DeepStacks, WPT500, WPT League). These events are crucial for brand identity, marketing, and generating content for other platforms - WPT licenses its brand to casinos and card rooms for various poker tournaments globally, forming the backbone of its brand identity[136] - Tournaments range from high-stakes Main Tour events to lower-stakes DeepStacks and WPT500, and social WPT League events[136] Multiplatform Content: The World Poker Tour Television Shows WPT produces and distributes televised poker content globally, including its Main Tour final tables, special episodes, and promotional shows for ClubWPT. Content is aired on FSN in the U.S. and various international networks and digital platforms. Sponsorship revenue is a primary economic driver, with seamless integration of brands into shows and live events - WPT films and edits final tables from Main Tour stops into one-hour or two-hour episodes for domestic (FSN) and international distribution[137] - WPT content is distributed globally in over 21 territories and on digital platforms like PlutoTV and Samsung TV Plus[140] - Sponsorship revenue is the prime economic driver, with brands seamlessly integrated into WPT television shows and live events[141] Interactive Services: Poker Platforms WPT promotes several interactive products, including its subscription-based online poker club ClubWPT.com, and licenses its brand to third-party social gaming sites like Zynga Poker and PlayWPT. These platforms offer diverse gaming experiences, marketing opportunities, and revenue streams through subscriptions, licensing fees, and revenue sharing - ClubWPT.com is WPT's subscription-based online poker club, offering cash and prizes, WPT content access, and freemium social poker/casino gaming[144] - WPT has licensing agreements with Zynga (for WPT-branded tournaments on Zynga Poker) and other third parties for PlayWPT and Alpha8 social poker products, generating annual minimum payments and revenue shares[145][146] Results of Operations This section analyzes the company's financial performance for the three and nine months ended September 30, 2019, compared to 2018, detailing changes in revenues, costs, expenses, and net loss across its business segments Results of Operations for the Three Months Ended September 30, 2019 and 2018 For the three months ended September 30, 2019, total revenues increased by $561 thousand (10.2%) to $6.04 million, while total costs and expenses decreased by $2.04 million (17.1%) to $9.86 million, leading to a significant reduction in net loss from $(6.77) million to $(4.25) million Three Months Ended September 30, 2019 vs 2018 (in thousands) | Metric (in thousands) | Sep 30, 2019 | Sep 30, 2018 | Increase (Decrease) | % of Revenue 2019 | % of Revenue 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues: | | | | | | | In-person | $2,587 | $2,202 | $385 | 42.8% | 40.2% | | Multiplatform content | $1,031 | $950 | $81 | 17.1% | 17.3% | | Interactive | $2,423 | $2,328 | $95 | 40.1% | 42.5% | | Total Revenues | $6,041 | $5,480 | $561 | 100.0% | 100.0% | | Costs and Expenses: | | | | | | | In-person | $1,196 | $975 | $221 | 19.8% | 17.8% | | Multiplatform content | $787 | $860 | $(73) | 13.0% | 15.7% | | Interactive | $569 | $613 | $(44) | 9.4% | 11.2% | | Online operating expenses | $173 | $130 | $43 | 2.9% | 2.4% | | Selling and marketing | $706 | $303 | $403 | 11.7% | 5.5% | | General and administrative | $4,712 | $3,871 | $841 | 78.0% | 70.6% | | Depreciation and amortization | $1,716 | $1,893 | $(177) | 28.4% | 34.5% | | Impairment expense | $0 | $3,253 | $(3,253) | 0.0% | 59.4% | | Total Costs and Expenses | $9,859 | $11,898 | $(2,039) | | | | Loss From Operations | $(3,818) | $(6,418) | $2,600 | -63.2% | -117.1% | | Net Loss | $(4,253) | $(6,765) | $2,512 | -70.4% | -123.4% | Revenues In-person revenues increased by 17% due to Allied's HyperX Esports Arena Las Vegas and gaming truck events, while WPT casino revenue decreased. Multiplatform content revenues rose 9% driven by WPT sponsorship, offset by lower music royalty. Interactive revenues grew 4% from WPT product licensing, social gaming, and subscriptions - In-person revenues increased by $385 thousand (17%) due to Allied's HyperX Esports Arena Las Vegas and gaming truck events, despite a $467 thousand decrease in WPT casino revenue[152] - Multiplatform content revenues increased by $81 thousand (9%), primarily from a $224 thousand increase in WPT sponsorship revenue, partially offset by a $139 thousand decrease in music royalty revenue[153] - Interactive revenues increased by $95 thousand (4%), driven by WPT product licensing ($17 thousand), social gaming ($152 thousand), and subscription revenue ($41 thousand)[154] Costs and expenses In-person costs increased by 23% due to higher event costs. Multiplatform content costs decreased by 8% from lower commissions. Interactive costs decreased by 7% due to reduced subscription costs. Online operating expenses rose 33%. Selling and marketing expenses surged 133% due to Allied's arena promotions and new WPT events. General and administrative expenses increased 22% from higher accounting, legal, and consulting fees. Depreciation and amortization decreased 9% due to fully depreciated WPT assets, partially offset by Allied's arena and truck depreciation. Impairment expense was zero in 2019, compared to $3.3 million in 2018 - In-person costs increased by $221 thousand (23%) due to higher event costs[155] - Selling and marketing expenses increased by $0.4 million (133%), driven by Allied's Las Vegas arena promotions ($251 thousand) and new WPT Party Poker Live events ($152 thousand)[159] - General and administrative expenses increased by $0.8 million (22%) due to higher accounting, legal, and consulting fees related to public company activities[161] - Impairment expense was $0 in 2019, a decrease of $3.3 million from 2018, which was related to an investment in ESA[163] Interest expense Interest expense decreased from $0.6 million in 2018 to $0.5 million in 2019. The 2019 interest was primarily from $14 million of convertible debt assumed or incurred in May and August 2019, while 2018 interest was from loans from the Former Parent - Interest expense decreased from approximately $0.6 million in 2018 to $0.5 million in 2019[164] - The 2019 interest relates to $14 million of convertible debt, with $10 million assumed in the Merger and $4 million incurred in May 2019[164] Results of Operations for the Nine Months Ended September 30, 2019 and 2018 For the nine months ended September 30, 2019, total revenues increased by $4.42 million (29.1%) to $19.62 million, while total costs and expenses decreased by $7.77 million (20.6%) to $30.03 million. This resulted in a significant reduction in net loss from $(24.38) million to $(10.92) million Nine Months Ended September 30, 2019 vs 2018 (in thousands) | Metric (in thousands) | Sep 30, 2019 | Sep 30, 2018 | Increase (Decrease) | % of Revenue 2019 | % of Revenue 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues: | | | | | | | In-person | $8,888 | $6,068 | $2,820 | 45.3% | 39.9% | | Multiplatform content | $3,540 | $2,121 | $1,419 | 18.0% | 14.0% | | Interactive | $7,187 | $7,010 | $177 | 36.7% | 46.1% | | Total Revenues | $19,615 | $15,199 | $4,416 | 100.0% | 100.0% | | Costs and Expenses: | | | | | | | In-person | $2,901 | $3,993 | $(1,092) | 14.8% | 26.3% | | Multiplatform content | $2,908 | $2,034 | $874 | 14.8% | 13.4% | | Interactive | $1,975 | $1,903 | $72 | 10.1% | 12.5% | | Online operating expenses | $489 | $1,542 | $(1,053) | 2.5% | 10.1% | | Selling and marketing | $2,645 | $3,143 | $(498) | 13.5% | 20.7% | | General and administrative | $13,378 | $12,365 | $1,013 | 68.2% | 81.4% | | Depreciation and amortization | $5,134 | $5,229 | $(95) | 26.2% | 34.4% | | Impairment expense | $600 | $7,590 | $(6,990) | 3.1% | 49.9% | | Total Costs and Expenses | $30,030 | $37,799 | $(7,769) | | | | Loss From Operations | $(10,415) | $(22,600) | $12,185 | -53.1% | -148.7% | | Net Loss | $(10,918) | $(24,378) | $13,460 | -55.7% | -160.4% | Revenues In-person revenues increased by 46% due to Allied's HyperX Esports Arena Las Vegas and gaming truck events. Multiplatform content revenues surged 67% from increased distribution channels, sponsorship (PartyPoker Live), and music revenue. Interactive revenues grew 3% from third-party virtual products and product licensing, partially offset by the licensing out of PlayWPT - In-person revenues increased by $2.8 million (46%), primarily from Allied's HyperX Esports Arena Las Vegas (15 events in 2019 vs. 5 in 2018) and gaming truck events[166] - Multiplatform content revenues increased by $1.4 million (67%), driven by increases in distribution revenue ($552 thousand), sponsorship revenue ($476 thousand), and music revenue ($406 thousand)[167] - Interactive revenues increased by $177 thousand (3%), mainly from third-party virtual products ($301 thousand) and product licensing ($148 thousand), partially offset by a $265 thousand decrease from licensing out PlayWPT[168] Costs and expenses In-person costs decreased by 27% due to deconsolidation of Esports Arenas Santa Ana and Oakland. Multiplatform content costs increased by 43% from higher production costs. Interactive costs rose 4% due to increased revenue share costs. Online operating expenses decreased by 68% from licensing out the PlayWPT platform. Selling and marketing expenses decreased by 16% due to reduced advertising for Allied's arena grand opening and WPT promotional activities. General and administrative expenses increased by 8% due to WPT's audit, legal, consulting costs, and new Irvine lease, partially offset by Allied's reduced corporate expenses. Depreciation and amortization decreased by 2% due to fully depreciated assets, offset by Las Vegas arena depreciation. Impairment expense decreased significantly from $7.6 million to $0.6 million - In-person costs decreased by $1.1 million (27%) due to the deconsolidation of Esports Arenas Santa Ana and Oakland[169] - Online operating expenses decreased by $1.0 million (68%) due to the PlayWPT platform being operated by a third party[172] - General and administrative expenses increased by $1.0 million (8%), driven by WPT's audit, legal, and consulting costs ($527 thousand) and new Irvine lease ($241 thousand), partially offset by Allied's reduced expenses[174] - Impairment expense decreased by $6.99 million, from $7.6 million in 2018 to $0.6 million in 2019, related to an investment in ESA[176] Interest expense Interest expense decreased significantly from $1.9 million in 2018 to $0.5 million in 2019. The 2019 interest primarily relates to $14 million of convertible debt, while 2018 interest was from Former Parent loans that were converted to equity - Interest expense decreased from approximately $1.9 million in 2018 to $0.5 million in 2019[177] - The 2019 interest is primarily from $14 million of convertible debt, while 2018 interest was from Former Parent loans converted to equity[177] Liquidity and Capital Resources The company faces substantial doubt about its ability to continue as a going concern due to a working capital deficit and ongoing net losses, necessitating additional capital. Primary liquidity sources are cash and debt/equity financing, with a focus on leveraging strategic partnerships. Convertible debt of $14 million was incurred/assumed in 2019, with warrants and contingent consideration - The company had a cash balance of approximately $9.4 million (excluding restricted cash) and a working capital deficit of $4.7 million as of September 30, 2019[179] - Net losses of $10.9 million and $24.4 million, and cash used in operations of $7.8 million and $11.2 million for the nine months ended September 30, 2019 and 2018, respectively, raise substantial doubt about the company's going concern ability[179] Working Capital Summary (in thousands) | Metric (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Current Assets | $18,458 | $12,716 | | Current Liabilities | $23,144 | $39,842 | | Working Capital Deficit | $(4,686) | $(27,126) | Convertible Debt The company has $14 million in convertible debt, comprising $4 million in Noble Link Notes and $10 million of assumed Former Parent obligations. These notes bear 12% interest, mature in August 2020, and are convertible into common stock at $8.50 per share. Warrants and contingent consideration shares are also associated with this debt - The company has $14 million in aggregate convertible debt, consisting of $4 million in Noble Link Notes and $10 million of assumed Former Parent obligations[185][186] - The notes bear 12% annual interest, mature on August 23, 2020, and are convertible into common shares at $8.50 per share[187] - Noteholders received five-year warrants exercisable at $11.50 per share and are entitled to contingent consideration shares if the stock price reaches $13.00 for 30 consecutive days within five years[188][190] Cash Flows from Operating, Investing and Financing Activities Cash used in operating activities decreased by $3.4 million, while investing activities shifted from a $22.7 million outflow to a $7.9 million inflow, primarily due to cash acquired in the Merger and reduced capital expenditures. Financing activities provided significantly less cash due to reduced infusions from the Former Parent Cash Flow Activities (in thousands) | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) Operating activities | $(7,751) | $(11,232) | | Net cash provided by (used in) Investing activities | $7,930 | $(22,725) | | Net cash provided by Financing activities | $3,653 | $30,444 | Net Cash Used in Operating Activities Net cash used in operating activities decreased by $3.4 million to $7.8 million for the nine months ended September 30, 2019, primarily due to a reduction in net loss driven by increased sales and lower impairment expenses - Net cash used in operating activities decreased by $3.4 million, from $11.2 million in 2018 to $7.8 million in 2019[194] - The reduction was driven by a decrease in net loss (from $24.4 million to $10.9 million) and a $7.0 million reduction in impairment expenses[194] Net Cash Provided By (Used in) Investing Activities Net cash provided by investing activities was $7.9 million in 2019, a $30.6 million improvement from the $22.7 million used in 2018. This shift was primarily due to $14.9 million cash acquired in the Merger and a significant decrease in property and equipment purchases as the Las Vegas arena construction was completed in 2018 - Net cash provided by investing activities was $7.9 million in 2019, a $30.6 million difference from the $22.7 million used in 2018[196] - The company acquired $14.9 million in net cash from the Merger in 2019[196] - Purchases of property and equipment decreased from $16.8 million in 2018 to $2.2 million in 2019, following the completion of the Las Vegas arena[196] Net Cash Provided by Financing Activities Net cash provided by financing activities decreased significantly by $26.7 million to $3.7 million in 2019, compared to $30.4 million in 2018. This was mainly due to a net decrease in cash infusions from the Former Parent, partially offset by $4.0 million raised through convertible debt in 2019 - Net cash provided by financing activities decreased by $26.7 million, from $30.4 million in 2018 to $3.7 million in 2019[199] - The decrease was primarily due to a net decrease in cash infusions from the Former Parent (from $25.4 million received in 2018 to $0.3 million repaid in 2019)[199] - In 2019, the company raised $4.0 million through the issuance of convertible debt[199] Capital Expenditures The company plans to pivot its business goals to focus on expanding strategic partnerships and developing new business avenues, requiring continual investment to facilitate growth - The company plans to pivot business goals to focus on expanding strategic partnerships and developing new business avenues[200] - Continual investment will be required to facilitate growth plans[200] Off-Balance Sheet Arrangements The company does not engage in any off-balance sheet financing activities or have interests in variable interest entities - The company does not engage in off-balance sheet financing activities[201] Critical Accounting Policies and Estimates This section highlights critical accounting policies and estimates that require significant management judgment, including impairment of long-lived assets, deferred production costs, and revenue recognition, due to inherent uncertainties in future estimates - The preparation of financial statements requires management to make significant estimates and assumptions[202] - Critical accounting policies include impairment of long-lived assets, deferred production costs, and revenue recognition[203][204](index=204&typ