Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Nature
of Business
Effective April 2, 2012, Ante5, Inc. changed
its corporate name to Black Ridge Oil & Gas, Inc., and continues to be quoted on the OTCQB under the trading symbol “ANFC”.
Black Ridge Oil & Gas, Inc. (formerly Ante5, Inc.) (the “Company” and “BROG”) became an independent
company in April 2010. We became a publicly traded company when our shares began trading on July 1, 2010. From October 2010
through August 2019, we had been engaged in the business of acquiring oil and gas leases and participating in the drilling of wells
in the Bakken and Three Forks trends in North Dakota and Montana and /or managing similar assets for third parties.
On September 26, 2017, the Company finalized
an equity raise utilizing a rights offering and backstop agreement, raising net proceeds of $5,051,675 and issuing 431,819,910
shares. The proceeds were used to sponsor the Company’s obligations sponsoring a special purpose acquisition company, discussed
below, with the remainder for general corporate purposes.
On
October 10, 2017, the Company’s sponsored special purpose acquisition company, Black Ridge Acquisition Corp. (“BRAC”),
completed an IPO raising $138,000,000 of gross proceeds (including proceeds from the exercise of an over-allotment option by the
underwriters on October 18, 2017). In addition, the Company purchased 445,000 BRAC units at $10.00 per unit in a private placement
transaction for a total contribution of $4,450,000 in order to fulfill its obligations in sponsoring BRAC, a blank check
company formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization,
reorganization or other similar business combination with one or more businesses or entities. BRAC’s efforts to identify
a prospective target business were not limited to a particular industry or geographic region, but the initial focus of its search
was for target businesses in the energy or energy-related industries with an emphasis on opportunities in the upstream oil and
gas industry in North America. Following the IPO and over-allotment, BROG owned 22% of the outstanding common stock of BRAC and
managed BRAC’s operations via a management services agreement.
On December 19, 2018, BRAC entered into
a business combination agreement and the business combination closed on August 9, 2019, as discussed in Note 5.
Following the close of the business combination
the Company commenced a strategic review to identify, review and explore alternatives for the Company, including a merger,
acquisition, or a business combination. The Company currently owns 2,685,500 shares of Allied Esports Entertainment, Inc. (NASDAQ:
AESE), the surviving entity after BRAC’s business combination (“Sponsor Shares”). 537,100 of the Sponsor Shares
are subject to distribution rights to officers and directors under the 2018 Management Incentive Plan dated March 6, 2018. The
Company is evaluating plans for the remaining Sponsor Shares which could include a distribution of some or all of the Sponsor Share
proceeds after expiration of the lock-up agreement on August 9, 2020.
Note 2 – Basis of Presentation
and Significant Accounting Policies
The interim condensed consolidated financial
statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US
dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to not make the information presented misleading.
These statements reflect all adjustments,
which in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise
disclosed, all such adjustments are of a normal recurring nature. It is suggested that these interim condensed financial statements
be read in conjunction with the audited financial statements for the year ended December 31, 2018, which were included
in our Annual Report on Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the following entities:
Name of entity
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State of
Incorporation
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Relationship
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Black Ridge Oil and Gas, Inc.
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Nevada
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Parent
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Black Ridge Acquisition Corp.
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Delaware
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Subsidiary(1)
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(1)Wholly-owned subsidiary through
October 10, 2017, the date of BRAC’s IPO, after which it was consolidated as a variable interest entity through August 9,
2019, the date of BRAC’s business combination. BRAC was renamed Allied Esports Entertainment, Inc. (‘AESE”) on
the date of its business combination and all references to the surviving entity following the business combination are hereafter
referred to as such.
The Company had determined that AESE, following
its IPO, was a variable interest entity (“VIE”) and that the Company was the primary beneficiary of the VIE. The Company
determined that, due to the redemption feature associated with the IPO shares, that the IPO shareholders were indirectly protected
from the operating expenses of BRAC and it had the power to direct the activities of BRAC through the date BRAC afforded the stockholders
the opportunity to vote to approve the proposed business combination. Therefore, BRAC’s operations are included in the BROG’s
consolidated financial statements herein through August 9 2019. BRAC’s IPO shareholders are reflected in our Consolidated
Financial Statements as a non-controlling interest through BRAC’s business combination on August 9, 2019. Under guidance
in ASC 810-10-05-8 (“Consolidation of VIEs”) the Company’s management has determined that BRAC, following its
merger, should no longer be consolidated for financial statement purposes as the Company no longer had the power to direct the
activities of BRAC. Following BRAC’s business combination, the Company’s investment in AESE is accounted for using
the cost method as AESE no longer was considered a VIE and the Company now owned 12.4% of the outstanding common stock of AESE.
All significant inter-company transactions have been eliminated in the preparation of these financial statements.
The parent company, BROG, and BRAC, for
the period it was consolidated, are collectively referred to herein as the “Company” or “Black Ridge”.
The Company’s headquarters is in Minneapolis, Minnesota and substantially all of its operations are in the United States.
Reclassifications
In the current year, the income, expense
and cash flows from BRAC during the period they were consolidated have been classified as discontinued operations. For comparative
purposes amounts in the prior periods have been reclassified to conform to current year presentation. Additionally, the assets
and liabilities from BRAC are shown on the balance sheet as assets and liabilities for discontinued operations.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Environmental Liabilities
The Company was formerly a direct owner
of assets in the oil and gas industry. The oil and gas industry is subject, by its nature, to environmental hazards and clean-up
costs. At this time, management knows of no substantial losses from environmental accidents or events which would have a material
effect on the Company.
Cash and Cash Equivalents
Cash equivalents include money market accounts
which have maturities of three months or less. For the purpose of the statements of cash flows, all highly liquid investments with
an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost plus accrued
interest, which approximates market value. Cash equivalents on hand at September 30, 2019 and December 31, 2018
were $-0- and $2,312, respectively.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Restricted Cash and Securities held
in Trust Account
The Company had $2,312 of cash equivalents
and $141,304,995 of marketable securities on December 31, 2018 held in the Trust Account which was restricted for the benefit of
the AESE’s IPO shareholders to be available for those shareholders in the event they elected to redeem their shares following
an approved business combination.
Cash in Excess of FDIC Limits
The Company maintains its cash in bank
deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) up to $250,000 and $500,000, respectively, under current
regulations. The Company had approximately $-0- and $1,119,770 in excess of FDIC and SIPC insured limits at September 30, 2019
and December 31, 2018, respectively. The Company has not experienced any losses in such accounts.
Income Taxes
The Company recognizes deferred tax assets
and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a
valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.
Basic and Diluted Loss Per Share
The basic net loss per share is computed
by dividing the net loss (the numerator) by the weighted average number of common shares outstanding for the period (the denominator).
Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares and potential
common shares outstanding (if dilutive) during each period. Potential common shares include stock options, warrants and restricted
stock. The number of potential common shares outstanding relating to stock options, warrants and restricted stock is computed using
the treasury stock method.
The reconciliation of the denominators
used to calculate basic EPS and diluted EPS for the three and nine months ended September 30, 2019 and 2018 are as follows:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2019
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2018
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2019
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2018
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Weighted average common shares outstanding – basic
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479,844,900
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479,821,911
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479,844,900
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479,807,318
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Plus: Potentially dilutive common shares:
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Stock options and warrants
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245,019
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221,053
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273,929
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237,953
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Weighted average common shares outstanding – diluted
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480,089,919
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480,042,964
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480,118,829
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480,045,271
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Stock options and warrants excluded from
the calculation of diluted EPS because their effect was anti-dilutive were 10,646,500 and 10,835,300 for the three months ended
September 30, 2019 and 2018, respectively, and 10,646,500 and 10,835,300 for the nine months ended September 30, 2019 and 2018,
respectively.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial
Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The
adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying
amounts of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate
fair value primarily due to the short-term nature of the instruments. The Company had no items that required fair value measurement
on a recurring basis.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Property and Equipment
Property and equipment are recorded at
cost and depreciated using the straight-line method over their estimated useful lives of three to seven years. Expenditures for
replacements, renewals, and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Long-lived
assets are evaluated for impairment to determine if current circumstances and market conditions indicate the carrying amount may
not be recoverable. Depreciation expense was $754 and $7,650 for the nine months ended September 30, 2019 and 2018, respectively.
Revenue Recognition
The Company recognizes management fee income
as services are provided.
Stock-Based
Compensation
The Company adopted FASB guidance on stock-based
compensation upon inception at April 9, 2010. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants
of employee stock options, are recognized in the income statement based on their fair values. Expense related to common stock and
stock options issued for services and compensation totaled $83,705 and $244,664 for the nine months ended September 30, 2019 and
2018, respectively, using the Black-Scholes options pricing model and an effective term of 6 to 6.5 years based on the weighted
average of the vesting periods and the stated term of the option grants and the discount rate on 5 to 7 year U.S. Treasury securities
at the grant date.
Uncertain Tax Positions
Effective upon inception at April 9, 2010,
the Company adopted standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition.
Various taxing authorities may periodically
audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions,
including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures
connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable
exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and
fully resolved. Black Ridge Oil & Gas, Inc. has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax
position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Recent Accounting Pronouncements
New accounting pronouncements are issued
by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective
date. If not discussed below, management believes there have been no developments to recently issued accounting standards, including
expected dates of adoption and estimated effects on our financial statements, from those disclosed in our Annual Report on Form
10-K for the year ended December 31, 2018.
In July 2018,
the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. 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 adopted this guidance effective January 1, 2019, and the standard did
not have a material impact on the Company’s combined financial statements and related disclosures.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 – Going Concern
As shown in the accompanying financial
statements, as of September 30, 2019, the Company had a cash balance of $64,613 and total working capital of negative $2,620,633.
The Company’s management consulting agreement with AESE calls for management fees of $313,316 from October 1, 2019 through
December 31, 2019 and does not continue into 2020. Based on projections of cash expenditures in the Company’s current business
plan, the cash on hand would be insufficient to fund the Company’s general and administrative expenses over the next year.
The Company continues to pursue sources
of additional capital through various management fee agreements and financing transactions or arrangements, including joint venturing
of projects, equity financing, debt financing or other means. We may not be successful in identifying suitable funding transactions
in a sufficient time period or at all, and we may not obtain the capital we require by other means. If we do not succeed in raising
additional capital, our resources may not be sufficient to fund our business.
The financial statements do not include
any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going
concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as
a going concern.
Note 4 – Rights Offering and Formation
of Black Ridge Acquisition Corp.
The Company filed a Registration Statement
on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to register
the issuance of 431,819,910 shares of common stock in the Rights Offering that was declared effective by the SEC on August 3, 2017.
Pursuant to the Rights Offering, the Company distributed, on a pro rata basis, one right for each share of common stock owned by
shareholders on August 2, 2017 (the “Record Date”). Each right permitted a shareholder to purchase up to nine shares
of common stock at a subscription price of $0.012 per share. The Rights Offering expired on September 8, 2017 (the “Expiration
Date”).
In connection with the Rights Offering,
the Company also entered into a Standby Purchase Agreement (the “Backstop Agreement”) with a consortium of investors,
including members of the Company’s board of directors and our Chief Executive Officer (collectively, the “Backstop
Purchasers”), who agree to purchase up to $2.9 million of the unsubscribed shares following the completion of the rights
offering.
On September 26, 2017, the Company completed
the Rights Offering, raising gross proceeds of $5,181,839 and issued 431,819,910 shares in connection with the exercise of rights
in connection with the Rights Offering and related Backstop Agreement. Under the Rights Offering the Company’s current shareholders
exercised rights to purchase 199,811,421 shares of stock for a total of $2,397,737. Under the Backstop Agreement, the Backstop
Purchasers purchased 232,008,489 shares of stock for a total of $2,784,102. Additionally, as part of the Backstop agreement, the
Company issued 435,000 warrants to purchase its common stock at $0.01 to participants in the Backstop Agreement. The warrants fair
value was estimated to be $10,135. Officers and directors of the Company purchased 173,843,308 shares between the Rights Offering
and as participants of the Backstop Agreement for $2,086,120 and received 179,376 warrants to purchase shares of common stock at
$0.01 per share for their participation in the Backstop Agreement. The remaining 257,976,602 shares were purchased by non-related
parties for proceeds of $2,965,555. The fair value of warrants issued to related parties was estimated to be $4,179. The Company
incurred $130,164 in costs associated with raising capital, which has been netted against stockholders’ equity.
On October 10, 2017 and October 18, 2017,
in connection with the underwriter exercising its over-allotment option, the Company used $4,450,000 of the net proceeds of the
Rights Offering to fulfill its obligation as sponsor of BRAC, as part of BRAC’s IPO. BRAC was formed on May 9, 2017 with
the purpose of becoming the special acquisition company as a wholly owned subsidiary of the Company with an initial equity contribution
of $25,000. After the IPO, the Company retained ownership of 22% of BRAC’s common stock. The remaining proceeds from the
Rights Offering following the sponsorship are being used for general corporate purposes.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 – BRAC’s IPO, BRAC’s
Merger, Consolidation of BRAC and Non-controlling Interest
BRAC’s IPO
The registration statement for the BRAC’s
IPO was declared effective on October 4, 2017. The registration statement was initially declared effective for 10,000,000 units
(“Units” and, with respect to the common stock included in the Units being offered, the “Public Shares”),
but the offering was increased to 12,000,000 Units pursuant to Rule 462(b) under the Securities Act of 1933, as amended. On October
10, 2017, BRAC consummated the IPO of 12,000,000 units, generating gross proceeds of $120,000,000.
Simultaneous with the closing of the IPO,
BRAC sold 400,000 units (the “Placement Units”) at a price of $10.00 per Unit in a private placement to BROG, generating
gross proceeds of $4,000,000. BROG’s investment in BRAC’s common stock is eliminated in consolidation prior to the
BRAC’s merger on August 9, 2019.
Transaction costs relating to the IPO amounted
to $2,882,226, consisting of $2,400,000 of underwriting fees and $482,226 of other costs.
Following the closing of the IPO on October
10, 2017, an amount of $120,600,000 ($10.05 per Unit) from the net proceeds of the sale of the Units in the IPO and the Placement
Units was placed in a trust account (“Trust Account”) and invested in U.S. government securities, within the meaning
set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), with
a maturity of 180 days or less or in any open-ended investment company that holds itself out as a money market fund selected by
BRAC meeting the conditions of paragraphs (d)(2), (d)(3) and (d)(4) of Rule 2a-7 of the Investment Company Act, as determined by
BRAC, until the earlier of: (i) the consummation of a Business Combination or (ii) the distribution of the Trust Account, as described
below.
On October 18, 2017, in connection with
the underwriters’ exercise of their over-allotment option in full, BRAC sold an additional 1,800,000 Units and sold an additional
45,000 Placement Units to BROG at $10.00 per Unit, generating total proceeds of $18,450,000. Transaction costs for underwriting
fees on the sale of the over-allotment units were $360,000. Following the closing, an additional $18,090,000 of the net proceeds
($10.05 per Unit) was placed in the Trust Account, bringing the total aggregate proceeds held in the Trust Account to $138,690,000
($10.05 per Unit). BROG’s investment in BRAC’s common stock is eliminated in consolidation prior to the BRAC’s
merger on August 9, 2019.
Upon the closing of the IPO, $10.05 per
Unit sold in the IPO, including some of the proceeds of the Private Placements was deposited in a trust account (“Trust Account”)
to be held until the earlier of (i) the consummation of its initial Business Combination or (ii) BRAC’s failure to consummate
a Business Combination within 21 months from the consummation of the IPO (the “Combination Period”).
The Extension Meeting
On July 9, 2019, BRAC held a
special meeting of its stockholders (the “Meeting”). At the Meeting, BRAC’s stockholders considered a proposal
to adopt and approve an amendment to BRAC’s amended and restated certificate of incorporation (the “Charter”)
to extend the date that BRAC had to consummate a business combination (the “Extension”) to August 10, 2019. The amendment
was approved by the stockholders and filed with the Secretary of State of the State of Delaware on July 9, 2019.
In connection with this vote,
the holders of 9,246,727 shares of BRAC’s common stock properly exercised their right to convert their shares into cash at
a conversion price of approximately $10.29 per share resulting in $95,125,574 in Trust Account assets being distributed back to
shareholders. In connection with the Extension, BROG loaned $30,000 to BRAC to be placed in the Trust Account for the benefit of
the public shares that were not converted. The loan was non-interest bearing and evidenced by a promissory note issued by BRAC
on the same date. The loan was repaid on August 12, 2019.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Business Combination Agreement
On December 19, 2018, BRAC entered into
the Business Combination Agreement with Merger Sub, Allied Esports, Ourgame, Noble and Primo. The Business Combination Agreement
was amended on August 5, 2019 and the Business Combination Agreement as amended is referred to as the Amended Business Combination
Agreement. The merger closed on August 9, 2019.
Subject to the Amended Business Combination
Agreement, (i) Noble merged with and into Allied Esports (the “Redomestication Merger”) with Allied Esports being the
surviving entity in such merger and (ii) immediately after the Redomestication Merger, Merger Sub merged with into Allied Esports
with Allied Esports being the surviving entity of such merger (the “Transaction Merger” and together with the Redomestication
Merger, the “Mergers”).
The Mergers resulted in BRAC acquiring
two of Ourgame’s global esports and entertainment assets, Allied Esports and WPT. Allied Esports is a premier esports entertainment
company with a global network of dedicated esports properties and content production facilities. WPT is the creator of the World
Poker Tour® (WPT®) – the premier name in internationally televised gaming and entertainment with brand presence in
land-based tournaments, television, online and mobile. The transactions strategically combined the globally recognized Allied Esports
brand with the three-pronged business model of the iconic World Poker Tour, featuring in-person experiences, multiplatform content
and interactive services, to leverage the high-growth opportunities in the global esports industry.
Upon consummation of the Mergers (the “Closing”),
BRAC issued to the former owners of Allied Esports and WPT (i) an aggregate of 11,602,754 shares of common stock, par value $0.0001
per share, of BRAC common stock and (ii) an aggregate of 3,800,003 warrants to purchase shares of common stock of the BRAC.
In addition to the consideration described
above, the former owners of Allied Esports and WPT will receive their pro rata portion of an aggregate of an additional 3,846,153
shares of the BRAC’s common stock if the last sales price of BRAC’s common stock equals or exceeds $13.00 per share
(as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for thirty (30) consecutive days at any
time during the five (5) year period commencing on the date of the Closing (the “Closing Date”).
The Business Combination Agreement, which
original called for a debt repayment to Ourgame of $35,000,000 was amended to call for BRAC to (i) assume $10,000,000 of the debt
obligations of Ourgame and Noble (including an additional $1,200,000 of accrued interest) and (ii) repay Ourgame the remaining
balance of $23,800,000 by paying $3,500,000 in cash to Ourgame and its designees, issuing to Ourgame and its designees 2,928,679
shares of BRAC’s common stock and Ourgame retaining $1,000,000 of the proceeds of such loans to pay its transaction expenses
incurred in the Merger. In connection with entering into the Amendment, BROG, as BRAC’s founder, agreed to transfer an aggregate
of 600,000 shares of BRAC’s common stock held by it to Ourgame.
Additionally, In July and August 2019,
BRAC and BROG entered into several share purchase agreements (the “Purchase Agreements”) with several parties (collectively
referred to as the “Purchasers”). Pursuant to the Purchase Agreements, the Purchasers agreed to purchase an aggregate
of $18,000,000 of shares of BRAC’s common stock in open market or privately negotiated transactions. If the Purchasers were
unable to purchase the full $18,000,000 of shares of common stock in open market or privately negotiated transactions, BRAC will
issue to the Purchasers newly issued shares at the Closing at a per-share price equal to the per-share amount held in BRAC’s
trust account ($10.30 per share), and having an aggregate value equal to the difference between $18,000,000 and the dollar amount
of shares purchased by them in the open market or in privately negotiated transactions. At the Closing, BRAC agreed to issue to
the Purchasers 1.5 shares of common stock for every 10 shares purchased by them under the Purchase Agreements. Additionally, BROG
agreed to transfer an aggregate of 720,000 shares held by it of BRAC common stock to the Purchasers. Pursuant to the Purchase Agreements,
BRAC is required to file a registration statement with the SEC as promptly as practicable following the closing of the merger to
register the resale of any securities purchased by the Purchasers that are not already registered and cause such registration statement
to become effective as soon as possible. The Purchasers included a $3 million investment from Lyle Berman, a member of the
board of directors of both BRAC and BROG and the largest shareholder of BROG. Additionally, $5 million will be held in an
escrow account and its usage will be limited to specific capital projects.
Consummation of the transactions contemplated
by the Amended Business Combination Agreement was subject to certain closing conditions including, among others, (i) approval by
the stockholders of BRAC, and (ii) that BRAC have available cash in an amount not less than $22,000,000 after payment to stockholders
who elect to redeem their shares of common stock in accordance with the provisions of BRAC’s charter documents. This second
condition was waived by Ourgame prior to the close.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Consolidation of BRAC and Non-controlling
Interest
The Company determined that BRAC, following
its IPO, was a VIE and that the Company is the primary beneficiary of the VIE. The Company determined that, due to the redemption
feature associated with the IPO shares, that the IPO shareholders are indirectly protected from the operating expenses of BRAC
and BROG had the power to direct the activities of BRAC through the date at which BRAC affords the stockholders the opportunity
to vote to approve a proposed business combination. Therefore, the consolidated financial statements contain the operations of
the BRAC from its inception on May 9, 2017 through the date of the merger, when BRAC was determined to no longer be a VIE. BRAC’s
IPO shareholders are reflected in our Consolidated Financial Statements as a redeemable non-controlling interest prior to the merger.
The non-controlling interest was recorded at fair value on October 10, 2017, with an addition on October 18, 2017 as a result of
the underwriters’ exercise of their over-allotment option. During the period in which BRAC was consolidated, the net earnings
attributable to the IPO shareholders are subtracted from the net gain (loss) for any period to arrive at the net loss attributable
to the Company and the non-controlling interest on the balance sheet is adjusted to include the net earnings attributable to the
IPO shareholders.
Deconsolidation of BRAC
Additionally, US GAAP (ASC 810-10-40) provides
guidance on “Derecognition” of a previously consolidated entity or entities. Under this guidance, the Company shall
account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A by recognizing
a gain or loss in net income attributable to the parent, measured as the difference between the combination of:
a) The fair value of:
|
·
|
any consideration received. In this case, the Company received no consideration.
|
|
·
|
any retained non-controlling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated,
or the group of assets is derecognized. In this case the fair value of the BRAC common stock at the close of the business combination
was $11,950,475; and
|
b) The carrying amount of the former
subsidiaries assets and liabilities or the carrying amount of the group of assets.
With the above guidance the Company determined
that the effect of the deconsolidation of BRAC produced a gain of $26,322,687, which is a non-cash adjustment.
Intercompany transactions and eliminations
BROG was paid a management fee by AESE
of $10,000 per month as part of an administrative services agreement, which commenced October 5, 2017 and ended on the date of
the merger, for general and administrative services including the cost of office space and personnel dedicated to AESE. BROG was
also reimbursed for any out-of-pocket expenses, particularly travel, incurred in connection with activities on AESE’s behalf,
including but not limited to identifying potential target businesses and performing due diligence on suitable business combinations.
AESE paid a total of $72,903 to BROG for such services for the nine months ended September 30, 2019 while AESE remained a VIE and
was consolidated. The management services income of BROG and the management services expense of AESE as well as any balances due
between the companies for such services or reimbursements were eliminated in consolidation. Management fees earned by BROG of $153,279
subject to the management services agreement between AESE and BROG in effect subsequent to the merger are not eliminated.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 – Prepaid Expenses
Prepaid expenses consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid insurance costs
|
|
$
|
12,156
|
|
|
$
|
17,501
|
|
Prepaid employee benefits
|
|
|
500
|
|
|
|
11,865
|
|
Prepaid office and other costs
|
|
|
12,166
|
|
|
|
13,319
|
|
Total prepaid expenses
|
|
$
|
24,822
|
|
|
$
|
42,685
|
|
Note 7 – Property and Equipment
Property and equipment at September 30, 2019 and December 31,
2018, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Property and equipment
|
|
$
|
128,965
|
|
|
$
|
128,156
|
|
Less: Accumulated depreciation and amortization
|
|
|
(127,685
|
)
|
|
|
(126,931
|
)
|
Total property and equipment, net
|
|
$
|
1,280
|
|
|
$
|
1,225
|
|
The Company recognized depreciation expense of $754 and $7,650
for the nine month periods ended September 30, 2019 and 2018, respectively.
Note 8 – Investment in Allied
Esports Entertainment, Inc.
Following the close of
BRAC’s merger, the Company retained 2,685,500 shares of AESE common stock with a value, based on the closing stock of
$4.45 on the merger, of $11,950,475. As noted below, in Note 9 - Related Party Transactions, 20% or 537,100, of the shares
are committed to be released to employees one year from the date of the merger, or on August 9, 2020. Therefore, the Company
recorded compensation expense and recorded a deferred compensation liability of $2,309,095 to recognize the commitment to
employees. To facilitate the BRAC merger the Company transferred 1,320,000 shares to the former owners of Allied Esports and
WPT and other investors, recognizing an expense of $5,874,000.
As of September 30, 2019, the market value
of the Company’s investment in AESE’s common stock was $14,045,165, based on the closing stock price of $5.23 per share.
Thus, we recorded an unrealized gain of $2,094,690, as part of other comprehensive income, and adjusted the compensation expense
and deferred compensation expense to $2,809,033 to reflect the change in the market value of the stock committed to employees and
directors. The balance in deferred compensation will be adjusted quarterly to reflect changes in the market value of the AESE common
stock committed to them.
Note 9 – Related Party Transactions
On March 1, 2018, the Board of Directors
(the “Board”) of the Company approved and adopted the Black Ridge Oil & Gas, Inc. 2018 Management Incentive Plan
(the “Plan”) and the form of 2018 Management Incentive Plan Award Agreement (the “Award Agreement”).
In connection with the approval of the
Plan and Award Agreement, the Board approved the issuance of awards (the “Awards”) to certain individuals including
officers and directors (the “Grantees”), representing 20% of the shares of AESE held by the Company as of the date
of closing of a business combination for the acquisition of a target business as described in the AESE prospectus dated October
4, 2017, as follows:
|
|
Percentage of AESE Shares Owned by the
|
|
Name
|
|
Company to be Granted to the Grantee
|
|
Bradley Berman
|
|
|
1.6%
|
|
Lyle Berman
|
|
|
1.6%
|
|
Benjamin Oehler
|
|
|
1.6%
|
|
Joe Lahti
|
|
|
1.6%
|
|
Kenneth DeCubellis
|
|
|
4.0%
|
|
Michael Eisele
|
|
|
2.8%
|
|
James Moe
|
|
|
2.1%
|
|
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2019, and following
the AESE merger on August 9, 2019, the Company owned 2,685,500 shares of AESE common stock. As a result, 537,100 shares of AESE
common stock (the “AESE Shares”) are committed to employees and directors of the Company. Employees and directors are
required to remain in their positions for a one-year period, with certain exceptions, to receive the granted shares. The AESE Shares
had a fair market value of $2,809,033 on September 30, 2019. The Company is recognizing the full expense related to the Plan immediately
upon the AESE merger date. Compensation expense of $2,309,095 was recognized upon merger and was adjusted on September 30, 2019
to $2,809,033 due to changes in the AESE market price between the August 9, 2019 merger and September 30, 2019. Subsequent adjustments
will be required each quarter to adjust the deferred compensation liability until the shares can be transferred to the employees.
Shares Transferred to Purchasers of
BRAC Common Stock
As presented in Note 5, In July and
August 2019, BRAC and BROG entered into several share purchase agreements (the “Purchase Agreements”) with
several parties (collectively referred to as the “Purchasers”). Pursuant to the Purchase Agreements, the
Purchasers agreed to purchase an aggregate of $18,000,000 of shares of BRAC’s common stock in open market or privately
negotiated transactions. If the Purchasers were unable to purchase the full $18,000,000 of shares of common stock in open
market or privately negotiated transactions, BRAC will issue to the Purchasers newly issued shares at the Closing at a
per-share price equal to the per-share amount held in BRAC’s trust account ($10.30 per share), and having an aggregate
value equal to the difference between $18,000,000 and the dollar amount of shares purchased by them in the open market or in
privately negotiated transactions. At the Closing, BRAC agreed to issue to the Purchasers 1.5 shares of common stock for
every 10 shares purchased by them under the Purchase Agreements. Additionally, the Company agreed to transfer an aggregate of
720,000 shares held by it of BRAC common stock to the Purchasers. The Purchasers included a $3 million investment from
Lyle Berman, a member of the board of directors of both BRAC and BROG and the largest shareholder of BROG, and a $2 million
investment from Morris Goldfarb, a major shareholder of the Company. Mr. Berman and Mr. Goldfarb received 43,800 and 29,127 bonus
shares, respectively, of BRAC common stock issued by BRAC and 120,000 and 80,000 shares, respectively, of BRAC common stock
transferred from the Company.
BRAC Convertible Loans
In order to finance transaction costs in
connection with an intended initial business combination, BROG had loaned AESE an aggregate $750,000 in the form of convertible
notes. The notes were unsecured, non-interest bearing and payable upon the consummation by AESE of a merger, share exchange, asset
acquisition, or other similar business combination, with one or more businesses or entities (a “Business Combination”).
Upon consummation of a Business Combination, the principal balance of the notes could be converted, at BROG’s option, to
units at a price of $10.00 per unit. The terms of the units are identical to the units issued by BRAC in its IPO, except the
warrants included in such units could be exercised on a cashless basis, in each case so long as they continued to be held by BROG
or its permitted transferees. BROG elected to convert $600,000 of the principal balance of the convertible promissory notes and
received 60,000 units consisting of 66,000 shares of AESE common stock (after conversion of the stock rights into 6,000 shares)
and 60,000 warrants. The remaining $150,000 was repaid to BROG at the date of merger.
Note 10 – Fair Value of Financial Instruments
The Company adopted FASB ASC 820-10 upon
inception at April 9, 2010. Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).
The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability
of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value,
and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The Company had revolving credit facilities
that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using
inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.
Level 2 - Inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield
curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means
(market corroborated inputs).
Level 3 - Unobservable inputs
that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation
of financial instruments at fair value on a recurring basis in the balance sheets as of September 30, 2019 and December 31, 2018:
|
|
Fair Value Measurements at September 30, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
64,613
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Investment in Allied Esports Entertainment, Inc.
|
|
|
14,045,165
|
|
|
|
–
|
|
|
|
–
|
|
Total assets
|
|
|
14,109,778
|
|
|
|
–
|
|
|
|
–
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
14,109,778
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
Fair Value Measurements at December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,503,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Restricted cash and investments held in trust
|
|
|
141,307,307
|
|
|
|
–
|
|
|
|
–
|
|
Total assets
|
|
|
142,810,807
|
|
|
|
–
|
|
|
|
–
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
142,810,807
|
|
|
$
|
–
|
|
|
$
|
–
|
|
There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the nine months ended September 30, 2019.
Note 11 – Stockholders’
Equity
Preferred Stock
The Company has 20,000,000 authorized shares
of $0.001 par value preferred stock. No shares have been issued to date.
Common Stock
The Company has 500,000,000 authorized
shares of $0.001 par value common stock. As of September 30, 2019, and December 31, 2018, a total of 479,844,900 shares of
common stock have been issued.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 12 – Options
Options Granted
No options were granted during the nine
months ended September 30, 2019 and 2018.
The Company recognized a total of $83,705,
and $244,664 of compensation expense during the nine months ended September 30, 2019 and 2018, respectively, related to common
stock options issued to Employees and Directors that are being amortized over the implied service term, or vesting period, of the
options. The remaining unamortized balance of these options is $44,079 as of September 30, 2019.
Options Exercised
No options were exercised during the nine
months ended September 30, 2019 and 2018.
Options Forfeited
A total of 137,000 options expired and
were forfeited during the nine months ended September 30, 2019. A total of 22,000 options were forfeited during the nine months
ended September 30, 2018.
Note 13 – Warrants
Warrants Granted
No warrants were granted during the nine
months ended September 30, 2019 and 2018.
Warrants Exercised
No warrants were exercised during the nine
months ended September 30, 2019. Warrants to purchase 45,000 shares were exercised in the nine months ended September 30, 2018
for proceeds of $450.
Outstanding Warrants
The Company issued 435,000 warrants (of
which 390,000 are outstanding as of September 30, 2019) to purchase shares at $0.01 per share to participants of the Backstop Agreement
on September 22, 2017. The Company accounted for the warrants as an expense of the Rights Offering which resulted in a charge directly
to stockholders’ equity. The Company estimated the fair value of these warrants to be approximately $10,135 (or $0.0233 per
warrant) using the Black-Scholes option-pricing model. The fair value of the warrants was estimated as of the date of grant using
the following assumptions: (1) expected volatility of 388%, (2) risk-free interest rate of 1.89% and (3) expected life of five
years.
Note 14 – Income Taxes
The Company accounts for income taxes under
ASC Topic 740, Income Taxes, which provides for an asset and liability approach of accounting for income taxes. Under this
approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted
tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts calculated for income tax purposes.
Losses incurred during the period from
April 9, 2011 (inception) to September 30, 2019 could be used to offset future tax liabilities. Accounting standards require the
consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component
or all of the benefits of deferred tax assets will not be realized. As of September 30, 2019, net deferred tax assets were $4,359,663,
with no deferred tax liability, primarily related to net operating loss carryforwards. A valuation allowance of approximately $4,359,663
was applied to the net deferred tax assets. Therefore, BROG has no tax expense for 2019 to date.
In accordance with FASB ASC 740, the Company
has evaluated its tax positions and determined there are no significant uncertain tax positions as of any date on, or before September
30, 2019.
BLACK RIDGE OIL & GAS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 15 – Commitments
The Company from time to time may be involved
in various inquiries, administrative proceedings and litigation relating to matters arising in the normal course of business. The
Company is not aware of any inquiries or administrative proceedings and is not currently a defendant in any material litigation
and is not aware of any threatened litigation that could have a material effect on the Company.
The Company periodically maintains cash
balances at banks in excess of federally insured amounts. The extent of loss, if any, to be sustained as a result of any future
failure of a bank or other financial institution is not subject to estimation at this time.
Note 16 – Subsequent Events
The Company evaluates events that
have occurred after the balance sheet date through the date these financial statements were issued. No events occurred of a material
nature that would have required adjustments to or disclosures in these financial statements.