As
of April 12, 2021, 39,139,502 shares of common stock, par value $0.0001 per share, were issued and outstanding.
PART
I
Item
1. Business
Overview
of Business
Unless
otherwise stated or the context otherwise requires, the terms “we,” “us,” “our,” “AESE”
and the “Company” refer to Allied Esports Entertainment, Inc. and its subsidiaries.
The
Company operates a premier public esports and entertainment company, consisting of the Allied Esports and World Poker Tour businesses.
For the past 16 years of its 18-year history, WPT’s business model has successfully utilized the following three
pillars for its business model in the sport of poker, which the Company believes can be utilized by Allied Esports:
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developing
multiplatform content; and
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providing
interactive services.
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The
Allied Esports Business
Gaming
is one of the largest and fastest growing markets in the entertainment sector, with an estimated 2.7 billion gamers globally,
and esports is the major driver of this growth. Esports, short for “electronic sports,” is a general label that comprises
a diverse offering of competitive electronic games that gamers play against each other. Some of the popular esports games currently
being played include Fortnite, League of Legends, Dota 2, Counter-Strike, Call of Duty, Overwatch and FIFA. Although you
can play games on your own against the computer or console, one of the ways esports is different than the video games of old is
the community and spectator nature of esports, whereby competitive play against another person — either one-on-one or
in teams — that is viewed by an online and in-person audience, is a central feature of esports. Since players play
against each other online, a global network of players and viewers has developed as these players compete against each other worldwide.
Additionally, game developers have greatly increased the watchability of games, which has made the spectator aspect of gaming
much more prevalent and further drives expansion of the gaming market. The expanded reach of high-speed Internet service
and the computer technology advances in the last decade have also greatly accelerated the growth of esports. Esports has now become
so popular that many colleges offer scholarships in esports and the best-known esports teams are receiving mainstream sponsorships
and are being bought or invested in by celebrities, athletes and professional sports teams. The highest profile esports gamers
have significant online audiences as they stream themselves playing against other players online and potentially can generate
millions of dollars in sponsorship money and subscription fees from their online streaming channels. It is projected that by 2023,
646 million people will be watching esports globally, and that global esports revenue will grow to approximately $1.5 billion.
WPT
successfully implemented a three-pillar strategy for over 16 years of its 18-year history. We believe this model
can continue and also be applied to Allied Esports and the esports industry over time. Allied Esports intends to use those same
pillars — in-person experiences, multiplatform content, and interactive services—independently and in connection
with its strategic partners. The COVID-19 pandemic has caused disruption in our long-term growth plans for Allied Esports, and
although our long-term strategy remains to fully implement the three-pillar strategy, we are currently focused on continuing our
in-person experiences at our current arenas and developing multiplatform content. The COVID-19 pandemic has caused disruption in our long-term growth plans for Allied Esports, and although our
long-term strategy remains to fully implement the three-pillar strategy, we are currently focused on continuing our in-person experiences
at our current arenas and developing multiplatform content.
In June 2019, Allied
Esports entered into a series of strategic transactions with Simon Equity Development, LLC and its affiliates (collectively, “Simon”),
a global leader in the ownership of premier shopping, dining, entertainment, and mixed-use destinations, pursuant to which Allied
Esports organized and staged an esports event program called the Simon Cup at certain Simon shopping centers in the U.S. and online. In
January 2020, Allied Esports entered into a strategic partnership with Brookfield Property Partners, one of the world’s premier
real estate companies, in which Allied Esports will develop integrated esports experience venues at mutually agreed upon shopping malls
owned and/or operated by Brookfield or its affiliates that will include a dedicated gaming space and production capabilities to attract
and to activate esports and other emerging live events. In connection with the foregoing partnership, Brookfield made a $5 million
equity investment into the Company. As a result of the adverse effects that the COVID-19 pandemic has had on the short-term operations
and plans of Allied Esports, Allied Esports and its strategic partners are delaying further execution on their strategic plans as the
COVID-19 pandemic continues.
In-person
Experiences
Allied
Esports will continue delivering first-in-class live experiences to customers at Allied Esports’ branded properties
worldwide. Starting with the flagship esports arena, the HyperX Esports Arena Las Vegas, the AE Studios in Germany, its
on-mall esports venues – the first of which that is planned to be open at the Mall of Georgia with construction
and opening dates postponed until further assessment can be made following the COVID-19 pandemic, and its affiliate arenas
in China and Australia, Allied Esports offers esports fans state-of-the-art facilities to compete against other players in
esports competitions, host live events with esports superstars that potentially stream to millions of viewers worldwide, produce
and distribute incredible esports content with its on-site production facilities and studios and provide an attractive facility
for hosting corporate events, tournaments, game launches or other events. Additionally, Allied Esports has two mobile esports
arenas, which are 18-wheel semi-trailers that convert into first class esports arenas and competition stages with
full content production capabilities and interactive talent studios. Through this worldwide network of arenas, Allied Esports
believes it can offer customers an unmatched ability to participate in simultaneous global esports events and offer sponsors and
partners a truly scalable global platform and audience to promote their businesses and products. Allied Esports’ flagship
HyperX Esports Arena Las Vegas serves as a marquee destination for esports fans globally, and has become one of the most recognized
esports venues in the world.
Flagship
Arena. In March 2018, Allied Esports opened its first flagship arena, the HyperX Esports Arena
Las Vegas, at the Luxor Casino on the Vegas strip, whose pyramid is one of the most visible landmarks in Las Vegas. This arena
has 80 to 100 gaming stations, two bars, food service, private rooms, a production facility, and space for up to 1,000 people
for events. The arena is custom-built for esports tournaments and has a broadcast-ready television studio to broadcast
live events and produce content. Allied Esports monetizes the arena through renting the space for live events; merchandise sales;
daily usage fees from day-to-day gamers using the gaming stations; tournament entry and player venue fees; food and beverage;
and sponsorship (i.e., our HyperX naming rights relationship).
Affiliate
Arenas. One of Allied Esports’ strategic advantages is its global network of esports arena partners,
which enables it to host events and promote competitions around the world, with those competitions culminating in live events
held at the flagship arena in Las Vegas. Allied Esports achieves this through its Affiliate Program, which consists of strategic
partnerships with third-party esports operators around the globe. Allied Esports generally charges these affiliates an upfront
fee and a minimal annual revenue share of gross revenue, starting in the second year of the operation of the venue. Allied Esports’
brand visibility and reputation have already resulted in affiliate arrangements with arenas and gaming centers in China and a
multi-year agreement with Fortress Esports Pty Ltd, a new gaming, esports and entertainment venue enterprise in Australia,
which opened its first affiliate arena in Melbourne in March 2020 and reopened during the COVID-19 pandemic in December 2020.
This network of affiliate arenas allows Allied Esports to scale its brand penetration worldwide on a rapid basis, driving more
gamers into the Allied Esports ecosystem, with minimal costs to Allied Esports. Furthermore, the content that can be produced
by these affiliate arenas can be on-sold by Allied Esports, with minimal production costs.
Mobile
Arenas. The mobile arenas are 18-wheeler trucks that expand out into fully functional esports
arenas with event hosting, broadcasting and production capabilities. The mobility of the trucks makes them ideal for sponsors
to reach a large audience in multiple locations at an economical cost. The trucks serve as mobile billboards for potential third-party sponsorship,
as well as the Allied Esports brand, providing highly visible brand presence wherever they appear. Allied Esports currently
has two mobile arena trucks, with the first truck based in Germany and serving the European market, and a second truck based in
Las Vegas and serving the U.S. market.
Strategic Investor Events.
In addition to Allied Esports utilizing in-person experiences at its flagship, mobile and affiliate arenas, Allied Esports plans
to leverage its experience to develop events and content with its strategic investors, Simon Property Group and Brookfield Property Partners.
Allied Esports plans to collaborate
with Brookfield Property Partners to create a new product offering focused on delivering esports experiences through integrated gaming
venues and production facilities in select shopping centers around the U.S. that are owned and/or operated by Brookfield. The on-mall venues
will be designed to activate esports and other emerging live events through tournament play of all levels and daily use, featuring PC
and console gaming, plus full food and beverage options, and experiential retail. The venues will have the capability to be expanded into
common areas for larger esports activations and live events.
In
addition, on September 30, 2019, Allied Esports and Simon launched The Simon Cup, a co-branded esports competition and gaming
tournament series of on-mall regional festivals combining online and in-person play at select Simon centers in the New York
and Los Angeles markets, with the winners of the regionals moving on to HyperX Esports Arena Las Vegas, where the first Simon Cup Champion
was crowned on November 23, 2019.
As a result of the material
adverse effects that the COVID-19 pandemic has had on the short-term operations and plans of Allied Esports, Allied Esports and its strategic
partners are delaying further execution on their strategic plans as the COVID-19 pandemic continues.
Multiplatform
Content: Leveraging Branded Properties and Strategic Partnerships to Develop Content
Allied
Esports’ worldwide network of branded esports properties provides Allied Esports with a platform to potentially develop
a significant amount of content to distribute via digital live streams, broadcast and cable, and social media outlets. Allied
Esports believes that its arenas will draw top-level esports talent (such as professional streamer Ninja, who was the featured
talent at a successful event at Allied Esports’ Las Vegas arena in April 2018) for purposes of hosting events and developing
content, which it can distribute live, post-produce into fully-produced episodic content, or repackage for over the
top streaming platform and social media distribution. Allied Esports intends to monetize the content in multiple ways, including
direct sales of the content, sponsorship revenue, and subscription and/or advertising fees for viewers of the content.
We
believe Allied Esports’ ecosystem of esports branded properties gives it the reach, reputation and experience to produce
world-class live events, in partnership with some of the most prominent names in the esports industry. These live events
provide Allied Esports with the material to produce exciting content that can be distributed via three different formats, each
of which has its own revenue generation model: live streaming, post-produced episodic content, and short-form repackaged
content.
Live
Streaming. Live streaming is the most popular esports content delivery channel today, as it offers
the best interactive experiences for the audience. Vast improvements in technology and Internet service and speed have made live
streaming with large audiences widely available today. Well-known gamers live stream themselves playing their favorite games
on any of the popular streaming services (Twitch, YouTube, Facebook Gaming, etc.) to a worldwide audience. The streamers derive
revenue from ad sales, sponsorship, subscription fees and gift payments from spectators. Through Allied Esports’ ecosystem
of esports arenas, Allied Esports can offer streamers a large platform to put on live events that can be simultaneously streamed
on both the streamer’s channels and on Allied Esports’ channels. An example is a streaming event Allied Esports held
with one of the most prominent streamers in esports, Tyler Blevins, AKA Ninja, in April 2018. Famous for his streaming channel
where he plays the popular esports game Fortnite, Ninja held a live event at the Las Vegas flagship arena that set records for
Twitch live streams, with over 667,000 peak concurrent viewers and 2.4 million unique viewers. To put those audience numbers
in perspective, those numbers are significantly higher than viewership of the average regular season NBA game in 2019. Allied
Esports was able to sell multiple sponsorships for the event and earned significant revenue from the food and beverage, merchandise
sales and usage fees from the gaming stations. Although large audiences can be garnered through these live event streams, there
are limitations on the streams, as they have a one-and-done nature; repeat viewing is not popular for these events, which
limits the sponsorship opportunities.
Post-Produced Content. Allied
Esports intends to develop esports entertainment programming around its live experiences and, using its experienced editing and
production teams, create serial, episodic content and segments that tell compelling storylines around its gaming talent, in person
experiences, and gaming events around the world. Allied Esports developed this technique through the WPT, who took the slow-paced game
of poker and dramatized it and created storylines that made for exciting and compelling viewing. This post-produced content
can be valuable real estate for sponsors, as Allied Esports can integrate sponsors seamlessly into the show in a way that feels
organic to the viewers. Allied Esports can focus on different storylines, create excitement via editing and music inclusion, and
generally elevate the production quality from that achievable in a live stream. Allied Esports can then monetize this episodic
content via sponsorship, advertising, selling the content itself to third party distributors, or even use it as a marketing tool
to drive customers to come to Allied Esports’ branded properties, buy its merchandise or otherwise interact with Allied
Esports.
Repackaged
Content. The library of content Allied Esports will develop from events can be cut into smaller clips
that can be used as marketing and promotion of the Allied Esports brand on social media. Allied Esports can also edit content
to create new content, such as “best of” shows, focusing on one particular game as played by multiple well-known streamers,
regional shows focusing on talent from a particular country, and so on.
Allied
Esports’ global branded esports properties ecosystem will create opportunities for live events which provide material to
develop great content, all of which Allied Esports can monetize in multiple ways. The large customer base Allied Esports develops
through these in-person experiences, live streams and content distribution will give it a customer base to launch interactive
services.
Interactive
Services: Developing an Esports Entertainment Platform
Allied
Esports intends to develop its own online platform where esports players and fans can watch, play and win with other members of
the esports community and top esports personalities. The online platform will enable fans to compete against each other as well
as participate in esports programs starring their favorite players. Subscriptions will provide members with exclusive access to
numerous unique and proprietary experiences, products and services that are not available outside of Allied Esports’ ecosystem,
such as exclusive online content, member-only tournaments, prizes and cash awards, exclusive live event and merchandise access,
exclusive opportunities to be part of our entertainment programming, VIP treatment at Allied Esports’ arenas, and much more.
Allied Esports intends to use the authenticity and reach driven by its in-person experiences and content viewership to drive
platform adoption by esports fans. Allied Esports’ executive team has years of experience developing online platforms —
its CEO, Frank Ng, has managed and run online platforms with approximately 700 million registered users in China for over
14 years, and its COO, David Moon, has produced, published and operated numerous game services for over 20 years, including
helping build NHN Corporation’s global footprint to over 1 million concurrent users. Furthermore, WPT has developed
and operated its subscription platform for poker fans, ClubWPT, since 2010, and developed and operated a social poker product,
PlayWPT, starting in 2016. PlayWPT was licensed to a third party in May of 2018.
The
WPT Business
The
Company owns the World Poker Tour® (WPT®) — a premier name in
internationally televised gaming and entertainment with brand presence in land-based poker tournaments, television,
online and mobile. A leading innovator in the sport of poker since 2002, WPT helped ignite the global poker boom with the
creation of a unique television show based on a series of high-stakes poker tournaments. WPT’s Tour Events are
held at locations throughout the world and have awarded more than one billion in prize dollars in its 18-year history.
WPT has broadcast globally in more than 150 countries and territories, and is currently producing its 18th season, which airs
on FOX Sports Regional Networks in the United States. Season 18 of WPT is sponsored by its online
subscription-based poker service, ClubWPT.com. WPT offers a suite of online poker services which it operates by itself
and through its partners offering consumers the ability to access gaming content on a year-round 24/7 basis. ClubWPT.com
is a unique online membership site that offers inside access to the WPT, as well as a sweepstakes-based poker club
available in 43 states and territories across the United States, Australia, Canada, France and the United Kingdom,
with innovative features and state-of-the-art creative elements inspired by WPT’s 18 years of experience in
gaming entertainment. In June 2020, ClubWPT launched a premium level of ClubWPT membership called ClubWPT Diamond, which
allows members to play for larger prize pools, more qualifying seats to official WPT live events, and exclusive
line-ups of unique experience packages. In addition, WPT licenses its brand to social gaming sites through partners like
Zynga as well as to educational learning platforms such as LearnWPT. These online products are scalable and offer geographic
access that might be limited if WPT relied on tour stop participation alone. Additionally, WPT benefits from managing its own
distribution business which currently has more than 1,100 hours of broadcast-ready content, and offers demographically
similar programming to its poker content, such as esports, golf and MMA. WPT uses this large suite of programming as leverage
to seek preferred airtimes on its various distribution channels where it may promote its online products or offer airtime to
sponsors in territories they seek to enter. WPT also participates in strategic brand license, partnership, sponsorship
opportunities and music licensing. As described below, WPT applies a three-pillar model of in-person experiences,
developing multiplatform content and providing interactive services, to the sport of poker.
In-person
Experiences: Worldwide Poker Tournaments
World
Poker Tour Events. The WPT is a sports league of affiliated poker tournaments that are held at prestigious casinos and poker
rooms around the world. WPT licenses the WPT brand to these casinos and card rooms so that they can brand their poker tournaments
as WPT events, and these events are integrated into WPT’s tour. These events form the backbone of WPT’s brand identity
and have turned the WPT into one of the most recognizable names in gaming. WPT has developed different types of tours, generally
distinguishable by the size of the buy-in for competitors in the applicable tour’s events. The WPT Main Tour events
generally have the biggest buy-ins (usually between $3,500 and $10,000), are held at the largest and most prestigious casinos
and card rooms and are attended by many of the top professional poker players in the world. The WPT DeepStacks Tour and WPT500
events are smaller than Main Tour events, with buy-ins ranging from $300 to $1,000, and are meant to cater to the lower-
to medium-stakes players. In addition, through a third-party licensing arrangement, WPT licenses its name to a third
party operating the WPT League, which are small bar-league poker events held at bars and clubs on a social basis. These live
events create touchpoints to a large community of poker players to whom WPT can market other WPT live events, advertise and market
its sponsor’s products, and push towards its interactive products. Furthermore, the live events create the content WPT uses
to monetize its brand, as set forth below. The World Poker Tour live events have been postponed during the recent outbreak of
the COVID-19 virus throughout the world.
Multiplatform
Content: The World Poker Tour Television Shows
The
Content. WPT films the final table of six participants from a select group of WPT’s Main Tour
stops, where the players compete for some of the poker world’s largest tournament prize pools. We then edit the footage
from these tour stops, resulting in a series of one-hour or two-hour episodes which are distributed for telecast to
both domestic audiences via our broadcast agreement with Sinclair, and international television audiences via numerous international
distribution agreements. WPT has an agreement with Poker Go, a prominent poker-centric online platform, pursuant to which
WPT live streams many of its events to Poker Go’s customer base. Many of WPT’s live events that are not broadcast
on Sinclair are live streamed on Poker Go, which ensures almost all of WPT’s events are broadcast on some format. In addition,
WPT films and produces special episodes based on a variety of non-traditional poker tournaments and/or cash games, which
it also distributes for telecast along with the episodes based on WPT’s regular tour stops. Furthermore, WPT produced specialized
shows meant to promote and market its ClubWPT membership site, such as its “King of the Club” shows in which ClubWPT
members won the right, by winning certain tournaments on the ClubWPT platform, to play against each other for cash and prizes
in a single-table tournament that was filmed and broadcast on FSN. WPT also filmed and prepared for distribution another
series of shows to promote ClubWPT called “Challenge the Champs”, in which ClubWPT members who qualified on the ClubWPT
platform received the chance to play against former WPT Main Tour champions for cash and prizes. These episodes premiered on FSN
in August and September 2019.
WPT previously produced and
broadcasted on FSN a series of shows called WPT Alpha8, based on a series of high-stakes poker tournaments with buy-ins of $100,000.
In the Alpha8 events, some of the most elite high-stakes players in the world played in poker tournaments against one another in
glamorous casinos and card rooms around the world, with the final eight players of each tournament filmed for production of the television
episodes. The inaugural season of WPT Alpha8 began in 2013 and aired for three seasons, ending in 2016 and continues to be distributed
internationally. In addition to the strategic advantage of the “World Poker Tour” and WPT-related brands, WPT has created
significant efficiencies in its content programming through its affiliation and use of Allied ESports’ HyperX Esports Arena Las
Vegas venue to film some of its Main Tour final tables and other special events. This change, which just began for Season 17, has
significantly reduced production costs by reducing transportation and set up fees and has allowed for more content to be produced at a
significantly more efficient cost. Moreover, by reducing the physical location needs from its casino partners that would otherwise be
featured in a WPT televised event, WPT has greatly expanded the number of potential casino customers that can meet the requirements for
hosting a WPT televised final table. Finally, WPT creates, owns and publishes its own music for WPT shows. In addition to receiving royalties
for the music integrated into these programs, WPT has created a database of over 2,300 musical pieces which may be licensed for itself
or for other third-party producers.
WPT Distribution Footprint.
All of the WPT television programs air on Sinclair’s RSNs in the U.S., and in 33 different territories worldwide pursuant to licensing
and distribution arrangements with various linear and digital networks. Virtually all of WPT’s 17-season poker library is fully
available for distribution, providing hundreds of hours of top-tier broadcast grade poker sports content. WPT has greatly expanded
the reach of its content by licensing it for broadcast on many digital platforms as well, such as PlutoTV, Unreel Entertainment, Samsung
TV Plus, and many others. WPT does not receive fees from Sinclair for the domestic distribution of our content. Instead, WPT uses the
WPT show to heavily promote its ClubWPT product and other online products and partnerships, such as Zynga’s WPT social poker game.
WPT does provide Sinclair with a guaranteed revenue share from ClubWPT’s operations in exchange for significant promotion and distribution
of the programs featuring ClubWPT marketing. This arrangement ensures that Sinclair has an incentive to keep WPT’s show on the air
and to market and promote the show, as they share in the show’s success to the extent ClubWPT’s revenue increases. Since the
ClubWPT customer base and broadcast television viewers are similar in demographics, the symbiotic relationship between Sinclair and WPT
works well to keep WPT’s brand widely known and accessible to millions of people in the U.S. The Sinclair agreement also has other
important broadcast requirements to ensure that WPT’s programming remains “appointment television” and airs at particular
times on both the Sinclair networks and the RSNs. Internationally, some of WPT’s distribution partners pay WPT fees to broadcast
content, but usually, WPT’s international revenues are based on distribution deals that pay via advertising time and sponsorship
sales, as well as the intrinsic value of spreading WPT’s brand awareness worldwide. The international reach of WPT-related shows
has grown meaningfully as a result of our expanding digital distribution footprint. WPT receives additional fees from our digital distribution
agreements, but again see these as brand-building exercises and as avenues to get more people exposure for WPT’s online products,
sponsors and advertisers. In addition to its World Poker Tour content, WPT also distributes various sports and lifestyle programming through
its distribution business. As a result, WPT now controls over 1,100 hours of programming from which it may generate distribution fees,
license fees, sponsorship revenue and music licensing revenue, as well as serving as a vehicle to promote its online gaming products worldwide.
The ability to “bundle,” or offer large amounts of content, provides WPT distribution leverage in negotiating the amount of
airings or preferred airing times of its content.
The
Walt Disney Company (“Disney”) recently acquired 21st Century Fox (“FOX”). Under the terms of the
acquisition, FOX’s non-regional news and sports assets, including FSN, were spun off into a new company, Fox
Corporation (which is commonly referred to as “New Fox”), which remains owned by the prior FOX shareholders. The
Department of Justice required Disney to sell all RSNs within ninety (90) days after the closing of the Disney/FOX
acquisition. The RSNs (including FSN) were recently purchased by a joint venture company owned by Sinclair Broadcast Group
and Entertainment Studios, Inc. (collectively, “Sinclair”). To date, Sinclair’s acquisition of the RSNs
(including FSN) has not had any material effect on the airing of WPT’s content.
Sponsorship
Revenue. Sponsorship revenue is the prime economic driver of the distribution of WPT content. WPT partners
with prestigious brands, such as Dr. Pepper (soft drinks), Hublot (high-end timepieces), Corona (beer), Rockstar (energy
drinks), Baccarat (fine crystal), Party Poker (online gaming in Europe), and offers them the ability to become the “Official
________ of the World Poker Tour”. The Season 17 sponsors have included Hublot, Rockstar, Baccarat, Faded Spade Poker (a
playing card manufacturer), and Zynga Inc. (social gaming operator). WPT is able to seamlessly integrate its sponsors into the
WPT television show by displaying sponsors on poker tables, on television sets, and specialized segments that are brought to viewers
by the applicable sponsor. By integrating WPT’s sponsors into the show, WPT provides a powerful marketing tool in that viewers
are seeing the sponsor as part of the show they are watching, as opposed to an advertisement that they may mute or skip if possible.
WPT’s live events also offer WPT sponsors a great advertising platform to market directly to WPT players via signage, product
sampling suites, flyers, and similar marketing endeavors.
Interactive
Services: Poker Platforms
WPT’s
live event global footprint and distribution of its content via broadcast, streaming and social media, allow WPT to generate significant
marketing opportunities for both its sponsors and its own products. WPT has taken advantage of this marketing arm to promote several
interactive products: ClubWPT, its subscription-based online poker club that WPT owns and operates, which also offers social
poker; PlayWPT, a web and mobile social poker product that is operated by a third party utilizing software and branding that WPT
licenses to such provider; Zynga Poker, who operates one of the world’s largest social poker products, to whom WPT has licensed
its brand for certain WPT-branded poker tournaments on their platform; and HongKong Triple Sevens Interactive Co., Ltd, who
licenses WPT’s Alpha8 brand to operate a social poker product they are in the process of developing.
ClubWPT. WPT’s
subscription-based online club, ClubWPT.com, is operated in accordance with the principles of sweepstakes law and is available
in 43 states and territories across the United States, Australia, Canada, France and the United Kingdom. A free alternative
means of entry is offered for participants who wish to play in the tournaments but do not wish to purchase the other membership
benefits. VIP members can play poker to win a share of $100,000 in cash and prizes every month, including seats in live WPT poker
tournaments. Other benefits include access to every season of the WPT television series and all related content, discounted tickets
to live events through ScoreBig, everyday savings for everyday things via the ClubWPT Entertainment Savers Guide, and other member
benefits. In January of 2019, WPT added freemium social poker and casino gaming on the platform. Since that time, daily active
revenue has risen steadily, and we anticipate the freemium products on the platform will be a meaningful driver of ClubWPT revenue
going forward. The subscription fee for ClubWPT remains the same each month and players are not allowed to wager actual money
online. One must be eighteen or older to participate. In June 2020, ClubWPT launched a premium level of ClubWPT membership
called ClubWPT Diamond, which allows members to play for larger prize pools, more qualifying seats to official WPT live events,
and exclusive line-up of unique experience packages.
Zynga
Poker. WPT entered into a 3-year licensing agreement with Zynga, Inc. in 2018 pursuant to which
Zynga agreed to pay WPT $3 million per year in exchange for the right to license the WPT name and brand to its massive social
gaming database for WPT-branded poker tournaments on the Zynga social poker platform. WPT supports Zynga’s efforts
through extensive marketing of its brand through its marketing network which includes its television programs, advertisements,
and social media channels. Zynga has further used the WPT tournaments as a vehicle to reward their players through qualifying
players to play in real money poker tournaments at WPT affiliated casinos. The partnership means that the Zynga and WPT brands
elevate each other’s profile in the poker community through millions of impressions annually.
PlayWPT
and Alpha8 Social Poker. WPT’s 3-year license agreements for PlayWPT and the Alpha8 social
poker product that each commenced in 2018 provide WPT with a share of all revenue generated on those respective platforms, with
annual minimums of the greater of $500,000 or 20% of revenue generated for PlayWPT, and the greater of $200,000 or 20% of revenue
generated for the Alpha8 social poker product. These arrangements offer WPT significant annual payments based on the value and
prestige of WPT’s brands and WPT’s ability to market and promote the platforms.
In
addition to the three-pillar approach to monetizing the WPT brands as described above, WPT has also been able to combine
these approaches in a regional manner to create localized versions of the WPT in other parts of the world. For example, WPT has
an agreement with Adda52, one of the largest online poker operators in India, pursuant to which Adda52 utilizes WPT brands to
put on WPT-branded tournaments, create and sell WPT merchandise, sponsor and distribute WPT content, and otherwise market
and promote their own products using the WPT name. WPT had a similar arrangement for the Asia-Pacific region with WPT’s
former parent company, Ourgame, and is negotiating similar arrangements with parties in other parts of the world, such as Latin
America. These brand licensing arrangements not only provide WPT with revenue derived from upfront payments and revenue share,
but they broaden WPT’s brand reach in localized ways to parts of the world that WPT would be hard-pressed to effectively
market to on its own. WPT believes that this increased reach will have long-term benefits to WPT’s brand image and
profitability.
Recent
Developments.
On January 19, 2021, the Company
and its direct and indirect wholly-owned subsidiaries, Allied Esports Media, Inc. (“Esports Media,” and together with the
Company, the “Selling Parties”) and Club Services, Inc. (“CSI”), entered into a Stock Purchase Agreement (the
“Original Agreement”) with Element Partners, LLC (“Buyer”), pursuant to which the Selling Parties have agreed
to sell 100% of the outstanding capital stock of CSI to Buyer. CSI is the Company’s indirect wholly-owned subsidiary that directly
or indirectly owns 100% of the outstanding capital stock of each of the legal entities that collectively operate or engage in the Company’s
poker-related business and assets (the “WPT Business”). The proposed sale of CSI is referred to herein as the “Sale
Transaction.” In connection with the Original Agreement, Buyer agreed to pay Esports Media a total purchase price of $78.25 million
for the stock of CSI, including an initial purchase price at closing of $68.25 million and $10.0 million in future payments after the
closing of the Sale Transaction. After the execution of the Original Agreement, the Company received multiple unsolicited competing proposals
to sell the Company and/or CSI to Bally’s Corporation. As a result of such proposals and further negotiation with Buyer, the Selling
Parties, CSI and Buyer entered into an Amended and Restated Stock Purchase Agreement on March 19, 2021, and thereafter amended such agreement
on March 29, 2021 (as amended, the “Stock Purchase Agreement”).
Buyer has agreed to pay Esports
Media a total purchase price of $105 million for the stock of CSI (the “base purchase price”) at the closing of the Sale Transaction,
as further described below. The base purchase price will be adjusted to reflect the amount of CSI’s cash, indebtedness and accrued
and unpaid transaction expenses as of the closing of the Sale Transaction. Buyer remitted a $10.0 million advance payment of the base
purchase price upon the execution of the Stock Purchase Agreement and is required to pay the balance of the base purchase price at the
closing of the Sale Transaction.
The Stock Purchase Agreement
contains customary representations and warranties, covenants and indemnification provisions. The closing of the Sale Transaction is subject
to closing conditions, including the approval of the Sale Transaction by the Company’s stockholders and other customary closing
conditions. The Company intends to consummate the Sale Transaction shortly after obtaining stockholder approval, assuming all other conditions
to the completion of the Sale Transaction have been satisfied or waived by the appropriate parties.
The Stock Purchase Agreement
may be terminated by Buyer or the Company if the closing of the Sale Transaction has not occurred by September 30, 2021, or upon the occurrence
of certain customary events as set forth in the Stock Purchase Agreement. Depending on the circumstances surrounding a termination of
the Stock Purchase Agreement, the Buyer may be required to pay a $10.0 million non-performance fee to the Company, and the Selling Parties
may be required to pay a $3.45 million termination fee to the Buyer, and the Selling Parties may be required to return to Buyer the $10.0
million advance payment of the purchase price and reimburse Buyer for up to $1.0 million of its documented out of pocket expenses incurred
in connection with the authorization, preparation, negotiation, execution and performance of the Stock Purchase Agreement and the Sale
Transaction.
Effective upon any termination
of the Stock Purchase Agreement, other than a termination in which Buyer is required to pay a non-performance fee to us, Buyer (or its
affiliate) and Peerless Media Limited, an indirect subsidiary of the Company that owns intellectual property related to the WPT Business,
will enter into a 3-year brand license for Buyer’s (or its affiliate’s) use of the WPT brand in the territory of Asia for
real-money gaming in exchange for revenue-based royalty payments of 20% of qualifying revenues, and minimum annual guaranteed royalty
payments of $4.0 million, $6.0 million and $8.0 million for the first, second and third years, respectively. Such license will be subject
to further customary terms and conditions and provide Peerless Media Limited with a $2.0 million buy-out right after the first year. In
the event of any termination of the Stock Purchase Agreement under any circumstance in which the Buyer is required to pay a termination
fee to us, the Company will have the option, but not the obligation, to require the Buyer to enter into such license agreement with Peerless
Media Limited.
The
rapid growth and popularity of gaming and esports during the COVID-19 pandemic has driven interest in the Company’s esports
business, Allied Esports. In January 2021, the Company’s Board of Directors decided to explore strategic options for the
esports business in order to maximize value to its stockholders, including a possible sale, and the Company has engaged a financial
advisor to assist with the process. If the Company pursues and ultimately completes a sale of the esports business in addition
to the sale of the WPT Business in the Sale Transaction (described below), the Company expects to proceed (likely under a new
name) as a publicly traded holding company focused on using its cash resources to explore opportunities in online entertainment,
including but not limited to, real money gaming and other gaming sectors. However, the Company does not plan to limit itself to
any particular industry or geographic location in its efforts to identify prospective target businesses. Currently, the Company
does not have any specific merger, asset acquisition, reorganization or other business combination under consideration or contemplation.
At this time no potential or particular buyer has been identified to purchase the esports business, and there are no initial or
ongoing negotiations in respect of the sale of the esports business.
Corporate
Organization
Our
principal offices are located at 17877 Von Karman Avenue, Suite 300, Irvine, California, 92614, and our telephone number at that
office is (949) 225-2600.
Allied
Esports Entertainment Inc., (“AESE”), formerly known as Black Ridge Acquisition Corp, or “BRAC”, was incorporated
in Delaware on May 9, 2017 as a blank check company for the purpose of effecting a merger, share exchange, asset acquisition,
share purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities.
Allied
Esports Media, Inc. (“AEM”), a Delaware corporation, was formed in November 2018 to act as a holding company
for Allied Esports International Inc. (“Allied Esports”) and immediately prior to close of the Merger (as defined
below) to also include Noble Link Global Limited (“Noble Link”). Allied Esports, together with its subsidiaries described
below owns and operates the esports-related businesses of AESE. Noble Link (prior to the AEM Merger) and its wholly owned
subsidiaries Peerless Media Limited, Club Services, Inc. and WPT Enterprises, Inc. operate the poker-related business of
AESE and are collectively referred to herein as “World Poker Tour” or “WPT.” Prior to the Merger, as described
below, Noble Link and Allied Esports were subsidiaries of Ourgame International Holdings Limited (“Ourgame”).
On
December 19, 2018, BRAC, Noble Link and AEM executed an Agreement and Plan of Reorganization (as amended from time to time,
the “Merger Agreement”). On August 9, 2019 (the “Closing Date”), Noble Link was merged with and into
AEM, with AEM being the surviving entity, which was accounted for as a common control merger (the “AEM Merger”). Further,
on August 9, 2019, a subsidiary of AESE merged with AEM pursuant to the Merger Agreement, with AEM being the surviving entity
(the “Merger”). The Merger was accounted for as a reverse recapitalization, and AEM is deemed to be the accounting
acquirer. Consequently, the assets and liabilities and the historical operations that are reflected in the combined financial
statements prior to the Merger are those of Allied Esports and WPT. The preferred stock, common stock, additional paid in capital
and earnings per share amount in the combined financial statements for the period prior to the Merger have been restated to reflect
the recapitalization in accordance with the shares issued to the Former Parent as a result of the Merger. References herein to
the “Company” are to the combination of AEM and WPT during the period prior to the AEM Merger and are to AESE and
subsidiaries after the Merger.
Allied
Esports operates through its wholly owned subsidiaries Allied Esports International, Inc., (“AEII”), Esports Arena
Las Vegas, LLC (“ESALV”) and Allied Esports GmbH (“AEGmbH”). AEII operates global competitive esports
properties designed to connect players and fans via a network of connected arenas. ESALV operates a flagship gaming arena located
at the Luxor Hotel in Las Vegas, Nevada. AEGmbH operates a mobile esports truck that serves as both a battleground and content
generation hub and also operates a studio for recording and streaming gaming events.
Our
fiscal year ends December 31. Neither we nor any of our predecessors have been in bankruptcy, receivership or any similar proceeding.
Regulation
WPT
tournaments are conducted by the host casinos and card rooms, and we believe WPT is not subject to government gaming regulation
in connection with its affiliation with and telecasts of these events. We continue to monitor the legality of Internet gaming
in domestic and international jurisdictions, but cannot be certain that changes in existing regulations will be beneficial to
the gaming market. WPT’s subscription-based online club, ClubWPT.com, is operated in accordance with the principles
of sweepstakes law. A free alternative means of entry is offered for participants who wish to play in the tournaments but do not
wish to purchase the other membership benefits. The subscription fee for ClubWPT remains the same each month and players are not
allowed to wager actual money online. One must be eighteen or older to participate. However, the awarding of cash and prizes will
require compliance with the laws or regulations in various states or countries over sweepstakes, promotions and giveaways, are
complicated and constantly changing.
Allied
Esports intends to offer subscribers the chance to win cash and prizes when playing esports games and tournaments on the esports
gaming platform it intends to develop. Similar to WPT, Allied Esports will be subject to the complicated laws and regulations
in various states or countries over sweepstakes, promotions and giveaways. Any negative finding of law regarding the characterization
of the type of online activity carried out on the esports gaming platform could limit or prevent Allied Esports’ ability
to obtain subscribers in those jurisdictions. In addition, Allied Esports is subject to a number of foreign and domestic laws
and regulations that affect companies conducting business on the Internet. In addition, laws and regulations relating to user
privacy, data collection, retention, electronic commerce, consumer protection, content, advertising, localization, and information
security have been adopted or are being considered for adoption by many jurisdictions and countries throughout the world.
Intellectual
Property
We
believe that to maintain a competitive advantage in the marketplace, we must develop and maintain protection of the proprietary
aspects of our technology. We rely on a combination of trademarks, patent, trade secret intellectual property rights and other
measures to protect our intellectual property.
WPT
has filed trademarks for the names of its shows, including the World Poker Tour name and logos. The trademark “World Poker
Tour” has been registered with the U.S. Patent and Trademark Office (“USPTO”) on the principal register in connection
with entertainment services, clothing, playing cards and poker chips, and housewares and glass; and on the supplemental register
in connection with electronic and scientific apparatus. Other registered marks around the world include: “Alpha8”
in the U.S., Canada, China, Europe, South Africa and Uruguay; “Battle of Champions” in the U.S.; “Card Design”
in Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Puerto Rico, and Venezuela; “Doyle Brunson North American
Poker Championship” in the U.S.; “Hollywood Home Game” in the U.S.; “Ladies’ Night” in the
U.S.; “Latin American Poker Tour” in Peru and Europe; “Poker Détente” in Europe; “Poker Walk
of Fame” in the U.S.; “PPT” in the U.S., Canada and Europe; “PPT & Design” in the U.S.
and Canada; “Professional Poker Tour” in the U.S.; “Professional Poker Tour PPT & Design” in
the U.S.; “Royal Flush Girls” in the U.S.; “Time Slots” in Canada, Europe and the U.S.; “World Poker
Tour” in Argentina, Australia, Brazil, Canada, Chile, Colombia, Costa Rica, Europe, Mexico, Peru, Puerto Rico, South Africa
and Venezuela; “World Poker Tour & Design” in the U.S., Canada and Europe; “WPT” in the U.S.,
Argentina, Australia, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Puerto Rico, South Africa, and Venezuela; “WPT8
Design” in U.S., Australia, Canada, China, Europe, South Africa and Uruguay; “WPT Academy” in Europe; “WPT
Alpha8 Design” in Australia, Canada, China, Europe, South Africa and Uruguay; “WPT Boot Camp” in the U.S.; “WPT
Poker Corner” in the U.S., Canada and Europe; “WPT Spade Card Design” in China; “WPT World Poker Tour &
Design” in the U.S., Australia, Canada, Europe and Korea. We have registered approximately 2,100 Internet domain names in
70 regions around the world. We also have proprietary rights to our portfolio of registered and unregistered copyrighted materials,
which includes the episodes of the televised programming and music that we produce, subject to licenses related to these episodes
provided under our agreements with our distributors and our international telecast license agreements, as well as the WPT Academy
database and online videos.
WPT
has filed five U.S. and international patent applications. One patent relating to a specially designed game table that uses integral
lighting, was issued by the USPTO in 2007. Another patent, relating to systems and methods reducing fraud in electronic games
having virtual currency, was issued by the USPTO in April 2020. A third patent relating to systems and methods for securing
virtual currencies and enhancing electronic products, was issued by the USPTO in May 2020. WPT’s remaining patent applications
relate to (1) systems and methods to reduce impact of network disruptions; and (2) systems and methods to provide multiple
commentary streams for the same broadcast content.
Allied
Esports has one patent in the U.S. related to systems and methods for latency in networked competitive multiplayer gaming that
was issued by the UPSTO in July 2020. It has also registered approximately 45 domain names. Allied Esports has filed for
trademark protection for the following marks as well: “Allied Esports” has been filed in the U.S., “Allied Esports”
bold mark has been filed in China and Europe; The “Allied Esports” logos have been filed in the U.S. and Europe; the
“Allied Esports Member Property Network” logo has been filed in China and Europe; the “Big Betty”
logos have been registered in Europe; “E-sports Arena” have been registered in China, “Esports Superstars”
logo has been filed in the U.S.; “Legend Series” logo has been filed in the U.S. and Europe; and the “Allied
Esports” emblem has been filed in China and Europe.
Competition
WPT
competes with other poker-related television programming, including ESPN’s coverage of the “World Series of Poker”
and its “World Series of Poker” Circuit Events, among others. These and other producers of poker-related programming
are well established and may have significantly greater resources than WPT does. Based on the popularity of these poker-related televised
programs, WPT believes that additional competing televised poker programs may currently be in development or may be developed
in the future. WPT’s programming also competes for telecast audiences and advertising revenue with telecasts of mainstream
professional and amateur sports, as well as other entertainment and leisure activities.
The
esports gaming industry is also competitive. Competitors range from established leagues and championships owned directly, as well
as leagues franchised by well-known and capitalized game publishers and developers, interactive entertainment companies,
diversified media companies and emerging start-ups. New competitors will likely continue to emerge, and many of these competitors
will have greater financial resources than Allied Esports.
Territories
We
sell products and services throughout the world.
Employees
As
of April 11, 2021, we had approximately 114 employees, including 44 employees that operated under collective-bargaining agreements.
Item
1A. Risk Factors
Investing
in our securities involves a high degree of risk. You should carefully consider the specific risks described below before making
an investment decision. Any of the risks we describe below could cause our business, financial condition, results of operations
or future prospects to be materially adversely affected.
The
market price of our common stock could decline if one or more of these risks and uncertainties develop into actual events and
you could lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially and adversely affect our business, financial condition, results of operations or future
prospects. Amounts within the “Risk Factors” section are stated in thousands with the exception of share information.
Risks
Related to the Sale Transaction
If
the Company fails to complete the Sale Transaction, it may not be able to successfully complete another strategic transaction.
The
consummation of the proposed Sale Transaction is subject to a number of closing conditions, including that the Company’s
stockholders approve the Sale Transaction. The obligation of Buyer to complete the Sale Transaction is also subject to the absence
of a change in circumstances that are materially adverse to the Company’s financial condition, assets, business or results
of operations. If the closing conditions for the Sale Transaction are not satisfied, then the Stock Purchase Agreement can be
terminated.
If
the Company does not complete the Sale Transaction, it will review all options for continuing operations, possibly including seeking
to identify and effect an alternative business combination, sale of assets or another similar strategic transaction or transactions.
However, the Company may not be able to consummate such an alternative transaction on favorable terms, if at all, and a third
party may not offer to purchase the Company’s assets for a price equal to or greater than the price proposed to be paid
by Buyer. If the Company is unable to successfully consummate one or more alternative strategic transactions relating to its business,
the Company will continue to execute on its current business plan. The Company intends to continue exploring strategic options
for its esports business, including the possible sale of such business.
If
we fail to complete the Sale Transaction, the Company’s business may be harmed, we may not be able to find another buyer
for the WPT business and our stock price could be negatively impacted
The
Company cannot predict whether it will succeed in obtaining the approval of its stockholders, or that the other conditions to
close the Sale Transaction will be satisfied. As a result, the Company cannot guarantee that the Sale Transaction will be completed.
Following
the Company’s public announcement of the Sale Transaction, third parties may be unwilling to enter into material agreements
with the Company. New and existing customers and business partners may prefer to enter into agreements with the Company’s
competitors because such customers and partners perceive that its relationships are likely to be more stable. If the Company fails
to complete the Sale Transaction, the failure to maintain existing relationships with our customers, suppliers and employees or
enter into new relationships, may harm our business, and the results of operations, financial condition and the market price for
our common stock may decline.
In
addition, if we are required to pay a termination fee or expense reimbursements in connection with the termination of the Stock
Purchase Agreement, we may have difficulty recouping such costs, in addition to the costs incurred in connection with negotiating
the Sale Transaction.
We
may not be able to find another buyer willing to pay an equivalent or higher price in an alternative transaction than the price
that would be paid pursuant to the Sale Transaction. Further, we may experience negative reactions from the financial markets,
which could cause a decrease in the market price of our stock, particularly if the market price reflects a market assumption that
the Sale Transaction will be completed. We may also experience negative reactions from our customers, employees and vendors, which
could have an adverse effect on our business.
Pending
the completion of the Sale Transaction, the Company may not make certain changes in the business and may not be able to enter
into a business combination with another party.
Covenants
in the Stock Purchase Agreement impede the Company’s ability to enter into specified transactions that are not in the ordinary
course of business pending completion of the Sale Transaction. Existing and potential customers and vendors of our poker business
may delay or cease entering into transactions with our poker business until the ownership and management of the poker business
is clarified and employees and other key partners in the poker business may choose to leave the poker business due to uncertainties
inherent in the Sale Transaction process.
Moreover, while the Stock
Purchase Agreement is in effect and subject to limited exceptions, the Company is prohibited from soliciting, initiating, encouraging,
taking actions designed to facilitate any inquiries or the making of any proposal or offer that could lead to, or entering into discussions
or negotiations with regard to, an acquisition proposal with any third party, subject to specified exceptions. Any such acquisition proposal
could be favorable to the Company’s stockholders. Bally’s Corporation has in the past made unsolicited proposals to acquire
the WPT business, and the provisions of the Stock Purchase Agreement prohibit us from continuing or initiating new discussions with Bally’s
Corporation, subject to the limited exceptions set forth in the Stock Purchase Agreement.
The
Company will incur significant expenses in connection with the Sale Transaction and could be required to make significant payments
if the Stock Purchase Agreement is terminated under certain conditions.
Depending on the circumstances
surrounding a termination of the Stock Purchase Agreement, the Company may be required to pay a $3.45 million termination fee to Buyer,
and we may be required to reimburse Buyer for up to $1.0 million of its documented out of pocket expenses incurred in connection
with the authorization, preparation, negotiation, execution and performance of the Stock Purchase Agreement and the Sale Transaction.
In addition, the Company expects to pay legal fees, accounting fees and financial and other advisory fees and expenses whether or not
the Sale Transaction is completed. As a result, we may have difficulty recouping the costs incurred in connection with pursuing the Sale
Transaction, and our cash position would be adversely impacted.
The
WPT business will be subject to the terms of a license agreement for real money gaming in Asia if the Stock Purchase Agreement
is terminated under certain circumstances.
Effective
upon any termination of the Stock Purchase Agreement, other than a termination in which Buyer is required to pay a termination
or non-performance fee to us, Buyer (or its affiliate) and Peerless Media Limited, an indirect subsidiary of the Company
that owns intellectual property related to the WPT Business, will enter into a 3-year brand license for Buyer’s (or
its affiliate’s) use of the WPT brand in the territory of Asia for real-money gaming in exchange for revenue-based royalty
payments of 20% of qualifying revenues, and minimum annual guaranteed royalty payments of $4.0 million, $6.0 million
and $8.0 million for the first, second and third years, respectively. Such license will be subject to further customary terms
and conditions, and provide Peerless Media Limited with a $2.0 million buy-out right after the first year. In the event
of any termination of the Stock Purchase Agreement under any circumstance in which the Buyer is required to pay a termination
fee to us, the Company will have the option, but not obligation, to require the Buyer to into such license agreement with Peerless
Media Limited. The form of the agreement governing the license is attached as Exhibit B to the Stock Purchase Agreement. The existence
of the license will prevent us from pursuing and entering into a similar license in the Asian territory with another third party
that may have contained terms that are more advantageous to us. In addition, if we wish to pursue a sale of the WPT Business to
another purchaser after termination of the Stock Purchase Agreement, the existence of this license may deter another otherwise
interested third party purchaser from pursuing an acquisition of the WPT Business, or reduce the consideration such a party would
be will to pay for it.
The
announcement and pendency of the Sale Transaction, whether or not completed, may adversely affect us.
The
announcement and pendency of the Sale Transaction may adversely affect the trading price of our common stock, our business or
our relationships with clients, customers, suppliers and employees. Third parties may be unwilling to enter into material agreements
with respect to the WPT Business. Additionally, employees working in the WPT Business may become concerned about the future of
the WPT Business, and lose focus or seek other employment. In addition, while the completion of the Sale Transaction is pending,
we may be unable to attract and retain key personnel and our management’s focus and attention and employee resources may
be diverted from operational matters or the exploration of strategic operations for our esports business, including its possible
sale.
The
Stock Purchase Agreement limits our ability to pursue alternatives to the Sale Transaction.
The Stock Purchase Agreement
contains provisions that may make it more difficult for us to sell our entire company or the WPT Business to any party other than Element
Partners, LLC. These provisions include the prohibition on our ability to solicit competing proposals and the requirement that we pay
Buyer a termination fee of $3.45 million if we terminate the Stock Purchase Agreement to enter into a definitive agreement with respect
to a superior proposal. These provisions could make it less advantageous for a third party that might have an interest in acquiring us
or all of or a significant part of the WPT Business to consider or propose an alternative transaction, even if that party were prepared
to pay consideration with a higher value than the consideration to be paid by Buyer. Bally’s Corporation has in the past made unsolicited
proposals to acquire the WPT Business, and the provisions of the Stock Purchase Agreement prohibit us from continuing or initiating new
discussions with Bally’s Corporation, subject to the limited exceptions set forth in the Stock Purchase Agreement.
Risks
Related to us if the Sale Transaction is Completed
Buyer
may not honor all of its obligations under the Stock Purchase Agreement.
Effective
upon any termination of the Stock Purchase Agreement, other than a termination in which Buyer is required to pay a termination
or non-performance fee to us, Buyer (or its affiliate) and Peerless Media Limited, an indirect subsidiary of the Company
that owns intellectual property related to the WPT Business, will enter into a 3-year brand license for Buyer’s (or
its affiliate’s) use of the WPT brand in the territory of Asia for real-money gaming in exchange for revenue-based royalty
payments of 20% of qualifying revenues, and minimum annual guaranteed royalty payments of $4.0 million, $6.0 million
and $8.0 million for the first, second and third years, respectively. Such license will be subject to further customary terms
and conditions, and provide Peerless Media Limited with a $2.0 million buy-out right after the first year. In the event
of any termination of the Stock Purchase Agreement under any circumstance in which the Buyer is required to pay a termination
fee to us, the Company will have the option, but not obligation, to require the Buyer to into such license agreement with Peerless
Media Limited. The form of the agreement governing the license is attached as Exhibit B to the Stock Purchase Agreement. Buyer
may not honor all of its obligations under the Stock Purchase Agreement and the licensing agreement.
The Company will become a company with
cash, investments, and our esports business, which may prove difficult for investors to evaluate our ability to achieve stated business
objectives.
After
the Sale Transaction is completed, we will have disposed of substantially all of our operating assets other than cash, investments
and our esports business. The Company recently announced that its Board of Directors has decided to explore strategic options
for the esports business in order to maximize its value to stockholders, including a possible sale, and the Company has engaged
a financial advisor to assist with the process. If the Company pursues and ultimately completes a sale of the esports business,
we would then become a development stage company with no historic operating results. In that situation we would expect to proceed
(likely under a new name) as a publicly traded holding company focused on using our cash resources to explore opportunities in
online entertainment, including but not limited to, real money gaming and other gaming sectors; however, we do not plan to limit
ourselves to any particular industry or geographic location in its efforts to identify prospective target businesses. Currently,
however, we have no specific merger, asset acquisition, reorganization or other business combination under consideration or contemplation.
We have not, nor has anyone on our behalf, had substantive discussions, formal or otherwise, with respect to such a transaction.
We may be unsuccessful in pursuing acquisition targets, or acquisition targets, if acquired, may not prove to have successful
operations.
We
have no current plans to pay cash dividends on our common stock with the proceeds of the Sale Transaction; as a result, you may
not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We
have no current plans to pay dividends on our common stock with the proceeds of the Sale Transaction. Any future determination
to pay dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number
of factors, including our financial condition, results of operations, capital requirements, contractual, legal, tax and regulatory
restrictions, general business conditions and other factors that our board of directors may deem relevant. As a result, you may
not receive any return on an investment in our common stock unless you sell your common stock for a price greater than that which
you paid for it.
Following
the closing of the Sale Transaction, we will be subject to five-year non-solicitation and non-competition covenants under the
Stock Purchase Agreement, which will limit our ability to operate in poker related fields.
Following
the closing of the Sale Transaction, we will be subject to five-year non-solicitation and non-competition covenants
made in the Stock Purchase Agreement. During such five-year period, we will be prohibited from participating or engaging
in, in any manner or capacity, the Restricted Business, and from soliciting the customers, suppliers or employees of the WPT Business.
For this purpose, the “Restricted Business” means, generally, any business involving variants of the game of poker
specified in the Stock Purchase Agreement and any activities ancillary or related to such variants of poker, including, without
limitation, (i) organizing, hosting, operating, promoting, and/or conducting events relating to poker, (ii) broadcasting
or distributing content relating to such events, (iii) organizing, hosting, operating, promoting, and/or conducting clubs
or organizations related to poker, and (iv) commercializing products and merchandise relating to poker. While we do not believe
these limitations will negatively affect our esports business, these restrictions may adversely impact our future opportunities.
Risks
Related to the Current Business
In
addition to the other information contained in this Report, you should carefully consider each of the risks described below. Until
the close of the Sale Transaction, the Company expects to continue to execute its current business strategy with respect to its
esports and poker-related business. Except as specifically described below, the following discussion of risks related to
the Company does not reflect changes to the Company’s business that may occur if it consummates the Sale Transaction. Allied
Esports International, Inc., together with its subsidiaries, owns and operates the esports-related businesses of AESE, and
are collectively referred to as “Allied Esports.”. Peerless Media Limited, CSI and WPT Enterprises, Inc. operate the
poker-related business of AESE and are collectively referred to herein as “World Poker Tour” or “WPT.”
Allied
Esports Risk Factors
Allied
Esports is subject to risks associated with operating in a rapidly developing industry and a relatively new market.
Many
elements of Allied Esports’ business are unique, evolving and relatively unproven. Its business and prospects depend on
the continuing development of live streaming of competitive esports gaming. The market for esports gaming competition is relatively
new and rapidly developing and is subject to significant challenges. Allied Esports’ business relies upon its ability to
grow and garner an active gamer community, and successfully monetize this community through tournament fees, live event ticket
sales, and advertising and sponsorships. In addition, Allied Esports’ continued growth depends, in part, on its ability
to respond to constant changes in the esports gaming industry, including technological evolution, shifts in gamer trends and demands,
introductions of new games, game publisher intellectual property right practices, and industry standards and practices. While
change in this industry may be inevitable, and Allied Esports will try to adapt its business model as needed to accommodate change
and remain on the forefront of its competitors, Allied Esports may be unsuccessful in doing so and does not provide any guarantees
or assurances of success as the industry continues to evolve.
Allied
Esports may not be able to generate sufficient revenue to achieve profitability.
Allied Esports expects its
operating expenses to increase significantly as it continues to expand its marketing efforts and operations in existing and new geographies
and vertical markets (including its online esports tournament and gaming subscription platform it intends to develop). In addition, Allied
Esports expects to continue to incur significant legal, accounting and other expenses related to being a public company. If its revenue
declines or fails to grow at a rate faster than these increases in operating expenses, it will not be able to achieve profitability in
future periods. As a result, Allied Esports may generate losses. Allied Esports cannot assure you that it will achieve profitability.
Allied
Esports generates a portion of its revenues from advertising and sponsorship. If it fails to attract more advertisers and sponsors
to its live events, tournaments or content, or if advertisers or sponsors are less willing to advertise with or sponsor Allied
Esports, its revenues may be adversely affected.
Allied
Esports generates revenue from advertising and sponsorship, and it expects to further develop and expand its focus on these revenues
in the future. These revenues partly depend on the advertisers’ willingness to advertise in the esports gaming industry. If the
esports gaming advertising and sponsorship market does not continue to grow, or if Allied Esports is unable to capture and retain a sufficient
share of that market, Allied Esports’ ability to achieve profitability may be materially and adversely affected. Furthermore, with
unfavorable economic external factors, sponsors and advertisers may not have enough budget allocations for spending in sponsorship and
advertising in esports, which would also lead to an adverse impact on Allied Esports’ revenue stream.
Allied
Esports’ business model may not remain effective and it cannot guarantee that its future monetization strategies will be
successfully implemented or generate sustainable revenues and profit.
Allied
Esports generates revenues from advertising and sponsorship of its live events, its content, the sale of merchandising, and the
operation of its esports arenas. Allied Esports has generated, and expects to continue to generate, a substantial portion of revenues
using this revenue model in the near term. Although Allied Esports anticipates growth in Allied Esports’ business utilizing
this revenue model, there is no guarantee that growth will continue in the future, and the demand for its offerings may change,
decrease substantially or dissipate, or it may fail to anticipate and serve esports gamer demands effectively. The COVID-19 outbreak
may also continue to cause the demand for our in-person events to reduce and shift demand to online gaming. Allied Esports
may determine to enter into new opportunities to expand its business, including online gaming platforms, which may or may not
be successful. Any such expansions involve additional risks and costs that could materially and adversely affect its business.
The
COVID-19 pandemic has disrupted the long-term growth plans of Allied Esports, and we may not be able to implement and grow our
three-pillar objectives for long-term success in the near future, or event at all.
The
COVID-19 pandemic has caused disruption in our long-term growth plans for Allied Esports, and although our long-term strategy
remains to fully implement the three-pillar strategy, we are currently focused on continuing our in-person experiences at our
current arenas and developing multiplatform content. There is no guarantee that we will be able in the near future or at any point
to be able to expand our in-person experience to arenas beyond those in which we are currently operating or develop a develop
an esports platform.
Allied
Esports’ long-term growth strategy depends on the availability of suitable locations for its proprietary and licensed esports
arenas and its ability to open new locations and operate them profitably.
A
key element of Allied Esports’ long-term growth strategy is to extend its brand by opening additional flagship arenas throughout
the world and licensing the Allied Esports brand to third party esports arena operators, which it believes will provide attractive
returns on investment. However, desirable locations may not be available at an acceptable cost. Opening these additional locations
will depend upon a number of factors, many of which are beyond Allied Esports’ control, including its ability or the ability
of the selected licensee to:
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reach
acceptable agreements regarding the lease of the locations;
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comply
with applicable zoning, licensing, land use and environmental regulations and orders (including those related to social distancing
policies during the COVID-19 pandemic);
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raise
or have available an adequate amount of cash or currently available financing for construction and opening costs;
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timely
hire, train and retain the skilled management and other employees necessary to meet staffing needs;
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negotiate
acceptable terms with any unions representing employees;
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obtain,
for acceptable cost, required permits and approvals, including liquor licenses; and
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efficiently
manage the amount of time and money used to build and open each new location.
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If
Allied Esports succeeds in opening new arenas on a timely and cost-effective basis, it may nonetheless be unable to attract
enough gamers or spectators to the new location (or to existing locations of affiliated arenas) because its entertainment and
menu options might not appeal to them. Failure to do so could have a significant adverse effect on Allied Esports’ overall
operating results.
Allied
Esports has not entered into definitive license agreements with all game publishers that it currently has relationships with,
and it may never do so.
Although
Allied Esports has relationships with many game publishers for tournament event and content experiences involving their respective
intellectual properties and enters into definitive license agreements with such game publishers from time to time, Allied Esports
does not have definitive license agreements in place with all of its game publishers. No assurances can be given as to when or
if it will be able to come to agreeable terms with game publishers for any future license agreements. If Allied Esports is unable
to come to mutually agreeable terms and enter into definitive license agreements with game publishers, game publishers may unilaterally
choose to discontinue its relationship with Allied Esports, thereby preventing Allied Esports from offering tournament event and
content experiences using their game intellectual property. Should game publishers choose not to allow Allied Esports to offer
tournament event and content experiences involving their intellectual property to Allied Esports’ customers, the popularity
of Allied Esports’ tournaments and content may decline, which could materially and adversely affect its results of operations
and financial condition.
Even
if Allied Esports is able to license its brand to third party esports operators, there is a risk that those operators could damage
its brand by operating esports arenas that are not at Allied Esports’ standards of operation.
As
Allied Esports licenses the Allied Esports brand to third party esports arena operators around the world, it will depend on those
operators to run those arenas at a quality level similar to Allied Esports’ owned and operated arenas. Allied Esports’
strategy depends on customers associating the third party esports arenas as part of Allied Esports’ network of affiliated
arenas, which it believes will expand its brand recognition and increase customers, revenue, and growth. If Allied Esports’
affiliate arenas are poorly operated, or if those operators fail to use Allied Esports’ name and branding in a manner consistent
with Allied Esports’ corporate messaging and branding, or if there are safety issues or other negative occurrences at affiliate
arenas, Allied Esports’ name and brand could be significantly damaged, which would make its expansion difficult and materially
adversely affect its results of operations and financial condition.
Allied
Esports’ long-term growth strategy includes deploying additional mobile arenas in the U.S. and Europe to host its tournaments
and events and it must operate them profitably.
A
key element of Allied Esports’ long-term growth strategy is to extend its brand by increasing and adding to its portfolio
of mobile arenas in the U.S. and Europe, as we believe doing so will provide attractive returns on investment. Adding these mobile
arenas will depend upon a number of factors, many of which are beyond Allied Esports’ control, including but not limited
to our ability, or the ability of our licensees, to:
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reach
acceptable agreements regarding the lease or acquisition of the trucks that are the basis of the mobile arenas;
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comply
with applicable zoning, licensing, land use and environmental regulations and orders (including those related to social distancing
policies during the COVID-19 pandemic) and obtain required permits and approvals;
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raise
or have available an adequate amount of cash or currently available financing for construction of the mobile arenas and the related
operational costs;
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timely
hire, train and retain the skilled management and other employees necessary to operate the mobile arenas;
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efficiently
manage the amount of time and money used to build and operate each new mobile arena; and
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manage
the risks of road hazards, accidents, traffic violations, etc. that may impede the operations of the mobile arenas.
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The
nature of hosting esports events exposes Allied Esports to negative publicity or customer complaints, including in relation to,
among other things, accidents, injuries or thefts at the arenas, and health and safety concerns.
Allied
Esports’ business of hosting esports events inherently exposes it to negative publicity or customer complaints as a result
of accidents, injuries or, in extreme cases, deaths arising from incidents occurring at our arenas, including health, safety or
security issues, and quality and service standards. Even isolated or sporadic incidents or accidents may have a negative impact
on Allied Esports’ brand image and reputation, the arenas’ popularity with gamers and spectators or the ability to
host esports events at all.
Allied
Esports’ marketing and advertising efforts may fail to resonate with gamers.
Allied
Esports’ live events, tournaments and competitions are marketed through a diverse spectrum of advertising and promotional
programs such as online and mobile advertising, marketing through websites, event sponsorship and direct communications with the
esports gaming community including via email, blogs and other electronic means. An increasing portion of Allied Esports’
marketing activity is taking place on social media platforms that are either outside, or not totally within, its direct control.
Changes to gamer preferences, marketing regulations, privacy and data protection laws, technology changes or service disruptions
may negatively impact its ability to reach target gamers. Allied Esports’ ability to market its tournaments and competitions
is dependent in part upon the success of these programs.
The
esports gaming industry is competitive, and gamers may prefer competitors’ arenas, leagues, competitions or tournaments
over those offered by Allied Esports.
The esports gaming industry
is competitive. Competitors range from established leagues and championships owned directly, as well as leagues franchised by well-known and
capitalized game publishers and developers, interactive entertainment companies, diversified media companies and emerging start-ups. New
competitors will likely continue to emerge. Many of these competitors may have greater financial resources than Allied Esports. If Allied
Esports’ competitors develop and launch competing arenas, leagues, tournaments or competitions, Allied Esports’ revenue and
margins could decline.
Allied
Esports may not provide events or tournaments with games or titles for which the esports gaming community is interested.
Allied
Esports must attract and retain the popular esports gaming titles in order to maintain and increase the popularity of its live
events, leagues, tournaments and competitions. Allied Esports must identify and license popular games that resonate with the esports
gamer community on an ongoing basis. Allied Esports cannot assure you that it can attract and license popular esports games from
their publishers, and failure to do so would have a material and adverse impact on Allied Esports’ results of operations
and financial conditions.
If
Allied Esports fails to keep its existing gamers engaged, acquire new gamers and expand interest in its live events, leagues, tournaments
and competitions, its business, its ability to achieve profitability and its prospects may be adversely affected.
Allied
Esports’ success depends on its ability to maintain and grow the number of gamers attending its live events, tournaments
and competitions, and keep its gamers and attendees highly engaged. In order to attract, retain and engage gamers and remain competitive,
Allied Esports must continue to develop and expand its live events, leagues, produce engaging tournaments and competitions, and
implement new content formats, technologies and strategies to improve its product offerings. There is no assurance it will be
able to do so.
A
decline in the number of gamers may adversely affect the engagement level of gamers with Allied Esports’ tournament and
entertainment platform under development may reduce our revenue opportunities and have a material and adverse effect on our business,
financial condition and results of operations.
It
is vital to Allied Esports’ operations that its planned online esports tournament and gaming subscriptions platform be responsive
to evolving gamer preferences and offer first-tier esports game content and other services that attracts gamers. Allied Esports
must also keep providing gamers new features and functions to enable superior content viewing and interaction, or the number of
gamers utilizing the platform will likely decline. Any decline in the number of gamers will likely have a material and adverse
effect on our operations.
There
is no guarantee that Allied Esports will be able to complete its planned online esports tournament and gaming subscription platform,
or that such platform once completed will be or remain popular.
Allied
Esports cannot assure you that the online esports tournament and gaming subscription platform it intends to develop will be completed
in a timely manner or, if completed, become popular with gamers to offset the costs incurred to operate and expand it. This will
require substantial costs and expenses. If such increased costs and expenses do not effectively translate into improved gamer
engagement, Allied Esports’ results of operations may be materially and adversely affected.
If
Allied Esports fails to maintain and enhance its brands, its business, results of operations and prospects may be materially and
adversely affected.
Allied
Esports believes that maintaining and enhancing its brands is important for its business to succeed by increasing the number of
gamers and engagement by the esports community. Since Allied Esports operates in a highly competitive market, brand maintenance
and enhancement directly affects its ability to maintain and enhance its market position. As Allied Esports expands, it may conduct
various marketing and brand promotion activities using various methods to continue promoting its brands, but it cannot assure
you that these activities will be successful. In addition, negative publicity, regardless of its veracity, could harm Allied Esports’
brands and reputation, which may materially and adversely affect Allied Esports’ business, results of operations and prospects.
If
Allied Esports fails to anticipate and successfully implement new esports technologies or adopt new business strategies, technologies
or methods, its business may suffer.
Rapid
technology changes in the esports gaming market requires Allied Esports to anticipate, sometimes years in advance, which technologies
it must develop, implement and take advantage of in order to be and remain competitive in the esports gaming market. Allied Esports
has invested, and in the future may invest, in new business strategies including its to-be-developed online esports tournament
and entertainment subscription platform, technologies, products, or games to engage a growing number of gamers and deliver the
best gaming experiences possible. These endeavors involve significant risks and uncertainties, and no assurance can be given that
the technology it adopts and the features it pursues will be successful. If Allied Esports does not successfully implement these
new technologies, its reputation may be materially adversely affected and its financial condition and operating results may be
impacted.
Allied
Esports uses third-party services in connection with its business, and any disruption to these services could result in a disruption
to its business, negative publicity and a slowdown in the growth of its users, materially and adversely affecting its business,
financial condition and results of operations.
Allied
Esports’ business depends on services provided by, and relationships with, various third parties, including cloud hosting,
server operators, broadband providers, and computing peripheral suppliers, among others. The failure of any of these parties to
perform in compliance with our agreements may negatively impact Allied Esports’ business.
Additionally,
if such third parties increase their prices, fail to provide their services effectively, terminate their service or agreements
or discontinue their relationships with Allied Esports, Allied Esports could suffer service interruptions, reduced revenues or
increased costs, any of which may have a material adverse effect on its business, financial condition and results of operations.
Allied
Esports may not be able to procure the necessary permits and licenses to operate its arenas.
Allied
Esports must obtain certain permits and licenses, including liquor licenses, to operate its arenas. Often these processes can
be expensive and time consuming. There is no guarantee that Allied Esports will be able to obtain such permits and licenses on
a timely or cost-effective basis. Any delays could jeopardize the ability of Allied Esports to operate the arenas and host
events. As a result, Allied Esports’ business could suffer.
Rules
and regulations governing sweepstakes, promotions and giveaways vary by state and country and these rules and regulations could
restrict or eliminate Allied Esports’ ability to generate revenues on its esports gaming platform it intends to develop,
which could materially and adversely impact the viability of this business.
As
part of its esports gaming platform to be developed, Allied Esports intends to offer subscribers the chance to win cash and prizes
when playing esports games and tournaments on the platform. Awarding cash and prizes would require compliance with the laws or
regulations in various states or countries over sweepstakes, promotions and giveaways, which are complex and constantly changing.
Any negative finding of law regarding the characterization of the type of online activity carried out on the esports gaming platform
could limit or prevent Allied Esports’ ability to obtain subscribers in those jurisdictions, which in turn could significantly
impact Allied Esports’ ability to generate revenue. The ability or willingness to work with Allied Esports by payment processors
and other service providers necessary to conduct the esports gaming platform business also may be limited due to such changes
in laws or any perceived negative consequences of engaging in the business of sweepstakes, promotions and giveaways that will
be utilized by the esports gaming platform.
Negotiations
with unionized employees could delay opening or operating Allied Esports’ arenas.
Certain
of Allied Esports’ employees are represented by one or more unions. Allied Esports will need to engage such unions to seek to employ
the services of the employees on mutually acceptable terms. However, Allied Esports cannot guarantee that such negotiations will be timely
concluded to avoid interruption in its tournament schedule, or that such negotiations will ultimately result in an agreement. Any failure
to timely conclude the negotiations could cause a delay in Allied Esports’ ability to timely open arenas or host events. Either
of these events would adversely affect Allied Esports’ ability to achieve profitability.
Allied
Esports’ business is subject to regulation, and changes in applicable regulations may negatively impact its business.
Allied
Esports is subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet.
In addition, laws and regulations relating to user privacy, data collection, retention, electronic commerce, consumer protection,
content, advertising, localization, and information security have been adopted or are being considered for adoption by many jurisdictions
and countries throughout the world. These laws could harm Allied Esports’ business by limiting the products and services
it can offer consumers or the manner in which it offers them. The compliance costs for these laws may increase in the future as
a result of changes in interpretation. Furthermore, Allied Esports’ failure to comply with these laws or the application
of these laws in an unanticipated manner may harm its business and result in penalties or significant legal liability.
Allied Esports’ ability to attract
esports events to its flagship arena may become difficult if the Nevada legislature establishes a Nevada Esports Commission, which could
have a material adverse effect on our operations.
The Nevada state legislature
is currently in its 81st Session and has introduced Senate Bill 165 relating to the creation of the Nevada Esports Commission, which if
passed would be tasked with creating regulations overseeing esports competitions within the State. Such a move is the first of its kind
in the U.S. and would promulgate regulations in areas such as integrity of competition, testing for controlled substances, qualifications
for tournament organizers and participating players. The Bill's intention is to make Nevada a more attractive destination for hosting
esports tournaments. However, game publishers, tournament organizers and players may not look favorably on additional regulatory requirements
that result from the bill, if passed, and it could have a material adverse effect on our ability to attract esports events to Nevada,
and on our operations. To date, Senate Bill 165 has not been passed.
Risks
Related to Allied Esports’ Intellectual Property
Allied
Esports licenses certain brand names under agreements that will expire and may also be subject to claims of infringement of third-party
intellectual property rights.
Allied
Esports has a three-year license with a third party, ending in July 2021, to use the names “Esports Arena Las
Vegas” and “Esports Arena Drive”, which are part of the branding for its Las Vegas flagship esports arena location
and its US-based mobile arena, respectively. Once that license expires, there is no assurance that Allied Esports will be
able to further license those names or purchase them on satisfactory terms. Although Allied Esports intends to market and promote
its esports arenas using intellectual property it owns and controls, there are no assurances that those efforts will be fruitful
and that it will be able to maintain brand awareness once the license expires.
Furthermore,
third parties may claim that Allied Esports has infringed their intellectual property rights. Although Allied Esports takes steps
to avoid violating the intellectual property rights of others, it is possible that third parties still may claim infringement.
Infringement claims against us, whether valid or not, may be expensive to defend and divert the attention of Allied Esports’
management and employees from business operations. Such claims or litigation could require Allied Esports to pay damages, royalties,
legal fees and other costs. Allied Esports also could be required to stop offering, distributing or supporting esports games,
its to-be-developed gaming platform or other features or services which incorporate the affected intellectual property rights,
redesign products, features or services to avoid infringement, or obtain a license, all of which could be costly and harm its
business.
Allied
Esports’ technology, content and brands are subject to the threat of piracy, unauthorized copying and other forms of intellectual
property infringement.
Allied
Esports regards its technology, content and brands as proprietary and takes measures to protect it from infringement. Piracy and
other forms of unauthorized copying and use of technology, content and brands are persistent, and policing is difficult. Further,
the laws of some countries do not protect intellectual property rights to the same extent as the laws of the United States,
or are poorly enforced. Legal protection of Allied Esports’ rights may be ineffective in such countries, which could have
a material adverse effect on its business, financial condition and results of operations.
Allied
Esports may not be able to prevent others from unauthorized use of its intellectual property, which could harm our business and
competitive position.
Allied
Esports regards its registered trademark and pending trademarks, service marks, pending patents, domain names, trade secrets,
proprietary technologies and similar intellectual property as critical to its success. Allied Esports relies on trademark and
patent law, trade secret protection and confidentiality and license agreements with its employees and others to protect its proprietary
rights.
Allied
Esports has invested significant resources to develop its own intellectual property and acquire licenses to use and distribute
the intellectual property of others. Failure to maintain or protect these rights could harm its business. In addition, any unauthorized
use of our intellectual property by third parties may adversely affect its current and future revenues.
Allied
Esports may not be able to develop compelling intellectual property content or secure media content distributors to promote, sell,
and distribute such content, which could harm its business and competitive position.
Allied
Esports intends to produce licensable content from the various live events, tournaments, and its own initiatives and brands to
sell to viewers worldwide. There is no guarantee that it will be able to develop content that is compelling to its targeted customers.
Media and gaming company competitors, many of which are better funded, are also creating content from esports events, and it will
be difficult to create content that stands out and attracts customers. Furthermore, to carry out Allied Esports’ worldwide
distribution plans, film and media distribution partners will be needed and, in the event, Allied Esports is not able to secure
content distributors on terms acceptable to Allied Esports, this will have a significant adverse impact on revenue streams from
the sale or licensing of intellectual property.
Risks
Related to WPT’s Current Business
WPT’s
broadcast agreement with Fox Sports Net (“FSN”) sets a minimum level of distribution that is significantly less than
the current distribution level. If WPT’s current level of distribution is reduced, the reduction could materially and adversely
affect WPT’s results of operations.
Currently,
WPT broadcasts certain of its worldwide Main Tour events throughout the United States on FSN (whose regional sports networks,
or “RSN’s” were purchased by Sinclair Broadcast Group and Entertainment Studios, Inc. (collectively, “Sinclair”),
and they are also available on ClubWPT.com on demand, and on various digital streaming platforms. WPT’s programming agreement
to broadcast the television series does not provide for any license fees to be paid to WPT for the broadcast rights, and contains
a minimum level of distribution. Currently, WPT’s programming is broadcast significantly more frequently that the minimum
threshold under the programming agreement. With no license fee in place for the distribution, WPT benefits from the program’s
distribution and promotion of WPT’s online products (ClubWPT) and generates fees from sponsors by integrating sponsor logos
and other advertising materials into its programs and around the broadcast of the shows through music royalties and distribution
of the shows in other markets. The Season 17 sponsors included Hublot S.A., a luxury watch maker, Rockstar, Inc., an energy drink
company, Baccarat, Inc., a manufacturer and retailer of fine crystal, Faded Spade Poker, LLC, a playing card manufacturer, and
Zynga Inc., a social gaming operator. If WPT’s level of distribution were reduced by Sinclair, the value of the foregoing
would be significantly reduced and it may be difficult for WPT to find sponsors on terms acceptable to WPT, or at all.
WPT’s
production costs may increase.
In
May 2016, WPT entered into a programming agreement for FSN (now Sinclair) to broadcast Seasons 15 through 18 of the WPT television
series through calendar year 2021 on terms that are similar to the prior programming agreement discussed above. WPT may be required
to pay the cost to produce these shows for Sinclair and depending on the amount of the related revenues it is able to generate,
the lack of license fees could have a material adverse effect on WPT’s financial condition, results of operations and cash
flows.
WPT’s
production of its television show has been halted, and it is not known when production may resume.
Due
to the ongoing COVID-19 pandemic, WPT has been unable to film and produce final tables from some of its previous main tour
events. Although WPT anticipates filming those final tables in 2021, there is no way to predict when or if WPT will be able to
film those final tables. Furthermore, the casino partners from whose events those final tables derive, as well as the players
that are waiting to play such final tables, may decide not to play the final table and split the prize money, or enter into other
arrangements that will make it difficult to film such final tables. If WPT cannot film those final tables, and if its production
of future final tables remain in jeopardy due to COVID-19 or other factors, WPT may not be able to meet its obligations to
the distributors of its content, its sponsors, or its casino partners, which could have a material adverse effect on WPT’s
financial condition and future business prospects.
Sinclair’s
acquisition of FSN could have negative consequences on World Poker Tour.
The
Walt Disney Company (“Disney”) recently acquired 21st Century Fox (“FOX”). Under the
terms of the acquisition, FOX’s non-regional news and sports assets, including FSN, were spun off into a new
company, Fox Corporation (which is commonly referred to as “New Fox”), which remains owned by the prior FOX
shareholders. The Department of Justice required Disney to sell all RSNs obtained as part of the acquisition within ninety
(90) days after the closing of the Disney/FOX acquisition. WPT’s programming agreement with FSN’s owner requires
FSN to ensure WPT’s programming reaches a certain amount of households, which requires FSN’s owner to ensure we
are broadcast on the RSNs. The FSN agreement also has other important broadcast requirements to ensure that WPT’s
programming remains “appointment television” and airs at particular times on both the FSN networks and the RSNs.
The RSNs (including FSN) were ultimately purchased by a joint venture company owned by Sinclair. Although Sinclair purchased
all or substantially all of FOX’s RSNs, it will be difficult to ensure WPT’s programming is carried on all of the
RSNs, or at the times and dates WPT finds desirable. Even though WPT’s FSN programming agreement will remain an
enforceable obligation against Sinclair, there is no assurance that Sinclair will continue to broadcast WPT’s
programming on FSN on terms WPT finds reasonable, if at all. Furthermore, the sale of the RSN’s to Sinclair and the
changes to the FOX and the FSN business could negatively affect WPT’s ability to find other traditional television
network distribution of the WPT shows in the United States. Any reduction or change of WPT’s
distribution footprint has the potential to negatively affect its brand and associated sponsorship, marketing and promotional
efforts.
There
is no assurance that Sinclair will broadcast future seasons of the World Poker Tour, which would materially and adversely affect
WPT’s results of operations.
In
May 2016, WPT entered into an agreement for FSN (now Sinclair) to broadcast Seasons 15 through 18 of the WPT television series
through calendar year 2021. If Sinclair elects to discontinue airing either series and WPT cannot replace its programming agreement
with an agreement with a comparable U.S. broadcaster, it may be difficult for WPT to obtain sponsorship funds, it will be detrimental
to the viability of the WPT brand and, consequently, would have a material adverse effect on WPT’s financial condition,
results of operations and cash flows.
Consumers
shifting to online video on-demand services like Hulu and Netflix and away from cable could have negative consequences on World
Poker Tour.
Historically,
WPT has relied on traditional television network distribution in order to build its brand and generate sponsorship revenue. As
online video on-demand services such as Hulu and Netflix have become increasingly popular compared to traditional cable subscriptions,
WPT has increased its digital distribution. If these “cable-cutting” trends intensify, however, there is no assurance
that WPT can maintain or increase its total distribution and if it cannot, it may be difficult for WPT to obtain sponsorship funds,
it will be detrimental to the viability of the WPT brand and, consequently, it would have a material adverse effect on WPT’s
financial condition, results of operations and cash flows.
The
ClubWPT.com business is currently heavily dependent upon television as a major source for the generation of new monthly subscribers
and WPT continually seeks cost effective online and traditional marketing to generate new subscribers, which if not achieved could
materially and adversely affect its results of operations.
ClubWPT
is the official subscription online poker club of the World Poker Tour. VIP users pay a monthly subscription fee for exclusive
access to full episodes from every past season of the WPT television show, plus magazine access, coupons, and more. Each month,
members can play poker to win a share of cash and prizes, including seats to WPT events. In addition, in January 2019, WPT
added free-to-play (also known as “freemium”) social poker and casino gaming on the platform, whereby free chips
are offered for play, but additional chips can be purchased (there are no cash prizes offered for freemium play). WPT has produced
ClubWPT.com-branded television shows that aired on FSN (such as our “King of the Club” television shows), as
well as incorporating significant branding and advertising of ClubWPT into the WPT television shows to build awareness and drive
traffic to ClubWPT.com. In order for the ClubWPT business (including its freemium offering) to continue as a viable business,
WPT needs to continuously identify cost efficient marketing tools to generate new subscribers for ClubWPT. Traditionally, WPT
has marketed by using its large library of content online as a driver to the platform, or through its social media footprint.
The number of paid subscribers at ClubWPT grew throughout 2019 as a result of a significant promotion by FSN, while daily active
users of our freemium products has increased since we introduced them in January 2019. The number of paid subscribers could
decrease in future quarters due to the lack of current spending on marketing for new players. WPT will need to increase its marketing
and promotion of ClubWPT through alternative means, such as social media, in person at WPT live events, via cross-promotion with
the Allied Esports business, and via other means to ensure ClubWPT remains viable.
WPT’s
reliance on Pala Interactive LLC (“Pala”) as a third-party systems provider is subject to system security risks and
business viability risks that could disrupt services provided to ClubWPT.com customers, and any such disruption could reduce WPT’s
revenue, increase its expenses and harm its reputation.
Experienced
computer programmers and hackers may be able to penetrate Pala’s network security and misappropriate confidential information,
create system disruptions or cause shutdowns. In addition, computer programmers and hackers may be able to develop and deploy
viruses, worms and other malicious software programs that attack their products or otherwise exploit security vulnerabilities
in their products. As a result, WPT could lose its existing or potential customers. Pala is a third-party vendor whose business
is dependent upon the real money gaming and social gaming business environment. Any business interruption or failure by Pala would
directly affect WPT’s online business as WPT would need to find a suitable alternative platform provider.
Rules
and regulations governing sweepstakes, promotions and giveaways vary by state and country and these rules and regulations could
restrict or eliminate WPT’s ability to generate revenues at ClubWPT.com, which could materially and adversely impact the
viability of this business.
Changes
in laws or regulations in various states or countries over sweepstakes, promotions and giveaways or a negative finding of law
regarding the characterization of the type of online activity carried out on ClubWPT.com could result in WPT’s inability
to obtain subscribers in those jurisdictions, which in turn could significantly impact WPT’s ability to generate revenue.
The ability or willingness to work with WPT by payment processors and other service providers necessary to conduct the ClubWPT.com
business also may be limited due to such changes in laws or any perceived negative consequences of engaging in the business of
sweepstakes, promotions and giveaways that are utilized by ClubWPT.com.
WPT’s
success depends in part on our brands and any future brands it may develop, and if the value of its brands were to diminish, its
business would be adversely affected. Licensees of WPT’s brands may diminish the value of its brands.
WPT’s
success depends on its World Poker Tour and Alpha 8 brands, which consist of a portfolio of trademarks, service marks and copyrighted
materials. WPT’s intellectual property portfolio includes, but is not limited to, existing and future episodes of the televised
programming produced in connection with its existing and future brands and certain elements of these episodes, trade names and
other intellectual property rights. In connection with WPT’s branding and licensing operations, WPT entered into agreements
with certain licensors to utilize the WPT brand and intellectual property in connection with mobile, social media and casual games,
horse racing, amateur poker leagues, governmental lottery games, and in-person and online education and training poker workshops.
While specific contractual provisions require that the licensees maintain the quality of WPT’s licensed brands, WPT cannot
be certain that its licensees or their manufacturers and distributors will honor their contractual obligations or that they will
not take other actions that will diminish the value of WPT’s brands prior to its ability to detect and prevent any such
actions.
WPT
may not be able to protect the format of its episodes, its current and future brands and its other proprietary rights.
WPT
is susceptible to others imitating its television show format and other products and infringing on its intellectual property rights.
Litigation may be necessary to enforce WPT’s intellectual property rights and to determine the validity and scope of its
proprietary rights. Any litigation could result in substantial expense, may reduce WPT’s profits and may not adequately
protect its intellectual property rights upon which it is substantially dependent. In addition, the laws of certain foreign countries
do not always protect intellectual property rights to the same extent as the laws of the U.S. Imitation of WPT’s television
show formats and other products or infringement of its intellectual property rights could diminish the value of its brands or
otherwise adversely affect its revenues.
Any
litigation or claims against WPT based upon its intellectual property or other third-party rights, whether or not successful,
could result in substantial costs and harm its reputation. In addition, such litigation or claims could force WPT to do one or
more of the following: to cease exploitation of the WPT television series and related products or portions thereof that violate
the potentially infringed third party rights or intellectual property, which would adversely affect WPT’s revenue; to negotiate
a license from the holder of the intellectual property or other right alleged to have been infringed, which license may not be
available on reasonable terms, if at all; or to modify the WPT television series and related products or portions thereof to avoid
infringing the intellectual property or other rights of a third party, which may be costly and time-consuming or impossible
to accomplish.
Early
termination of WPT’s agreements with member casinos or violation by member casinos of the restrictive covenants contained
in these agreements could negatively affect the size of telecast audiences and lead to declines in the performance of WPT’s
other lines of business.
WPT
entered into written agreements with all of the “member casinos” that host WPT tournament stops. However, any member
casino may elect to withdraw its tournament from the WPT lineup and terminate the agreement by giving WPT notice by a specified
date or, if earlier, a specified length of time before the date of the tournament, which is generally four to six months. While
each agreement remains in effect and, in some cases, for varying periods of time thereafter, the member casino is prohibited from
televising the tournament itself, permitting any third party to televise the tournament or licensing its name, trademarks or likeness
to any other party in conjunction with the telecast of a poker tournament. If a significant number of these member casinos were
to terminate their agreements and/or allow a competing company to telecast their tournaments after their expiration for the restricted
time period, this could result in a decline in WPT’s future telecast audiences, which in turn would lead to declines in
the performance and success of WPT’s other lines of business. If one or more member casinos were to breach the exclusivity
provisions of their contracts with WPT by letting a competing company telecast their tournaments within the restricted time period,
litigation may be necessary to enforce those rights. Any litigation could result in substantial expense.
Refusal
of any gaming commission to register WPT as a non-gaming vendor for its branded casino tournaments could jeopardize the ability
of WPT to continue holding its events at member casinos.
Some
states require WPT to register with the state’s gaming commissions as a non-gaming vendor of the member casino that
runs a WPT-branded tournament. If such gaming commissions refuse to provide the necessary vendor license, the member casino
may not be able to hold WPT’s tournaments, and WPT’s business could suffer.
Termination
or impairment of WPT’s relationships with key licensing and strategic partners could adversely affect its revenues and results
of operations.
WPT
has developed relationships with key strategic partners in many areas of its business, including poker tournament event sponsorship,
merchandise licensing, social poker and casino games, corporate sponsorship and international distribution. WPT hopes to derive
significant income from its licensing arrangements and its agreements with its strategic partners are vital to finding these licensing
arrangements. If WPT were to fail to manage its existing licensing relationships, this failure could have a material adverse effect
on its financial condition and results of operations. WPT would also be materially adversely affected if it were to lose rights
under any of its other key contracts or if the counterparty to any of these contracts were to breach its obligations to WPT. WPT
relies on a limited number of contracts under which third parties provide it with services vital to WPT’s business.
These
agreements include WPT’s agreements with:
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FSN
(now Sinclair), pursuant to which Sinclair broadcasts the WPT television series;
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Pala,
who hosts and operates the ClubWPT product;
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Zynga,
Inc., who licenses the WPT brand for use on its social poker platform;
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Partypoker
Live Ltd., who licenses the WPT brand in connection with online and land-based poker tournaments in Europe;
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Hugeous
Mass Media, who maintains WPT’s database of music and collects music royalty revenue for WPT worldwide;
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CaptivePlay
LLC, who licenses the WPT brand in order to operate a social poker product, PlayWPT;
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HongKong
Triple Sevens Interactive Co., Ltd, who licenses the Alpha8 brand to operate a social poker product;
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Rogers
Network and Game TV, for broadcasting in key international territories such as Canada;
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AMC
and Sport 1 & 2, who license rights to broadcast the WPT television series in 10 territories in Eastern Europe;
and
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OTT
(over-the-top) Platforms, specifically PLUTO TV and Samsung, where WPT earns sizeable revenues.
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If
WPT’s relationship with any of these or certain other third parties were to be interrupted, or the services provided by
any of these third parties were to be delayed or deteriorate for any reason without being adequately replaced, WPT’s business
could be materially adversely affected. If WPT is forced to find a replacement for any of these strategic partners, this could
create disruption in its business and may result in reduced revenues, increased costs or diversion of management’s attention
and resources.
In
addition, while WPT has significant control over its licensed products and advertising, WPT does not have operational and financial
control over these third parties, and it has limited influence with respect to the manner in which they conduct their businesses.
If any of these strategic partners experiences a significant downturn in its business or were otherwise unable to honor its obligations
to WPT, WPT’s business could be materially disrupted.
The
loss of the services of Adam Pliska or other key employees or on-air talent, or WPT’s failure to attract key individuals,
could adversely affect its business.
WPT
is highly dependent on the services of Adam Pliska, who currently serves as Chief Executive Officer and President of WPT, as well
as President of the Company.
WPT’s
continued success is also dependent upon retention of other key management executives and upon its ability to attract and retain
employees and on-air talent to implement its corporate development strategy and its branding and licensing efforts. The loss
of some of its senior executives, or an inability to attract or retain other key individuals, could materially adversely affect
WPT. Growth in WPT’s business is dependent, to a large degree, on its ability to retain and attract such employees. WPT
seeks to compensate and provide incentives to its key executives, as well as other employees, through competitive salaries, stock
ownership and bonus plans, but it can make no assurance that these programs will allow WPT to retain key employees or hire new
employees. In addition, WPT’s future success may also be affected by the potential need to replace its key on-air talent.
Any
disputes with the IATSE 700 Editors Union could delay finishing production of shows needing to be delivered to Sinclair or increase
WPT’s costs to produce the shows.
From
time to time, certain of WPT’s employees involved in producing the WPT series are members of IATSE 700 Editors Union, and
WPT renewed its contract with such union in August 2019 for a three-year term. Although WPT has a current union agreement
in place, there is no guarantee that future disagreements with WPT’s unionized employees will not lead to any interruption
in services. Any failure to timely negotiate and/or settle any such disagreements could cause a delay in WPT’s ability to
timely produce the WPT series for Sinclair, and the costs to do so could increase. Either of these events would adversely affect
WPT’s profitability.
WPT’s
quarterly results may fluctuate, which may negatively affect the value of the common stock.
Under
sponsorship agreements for WPT, revenues are recognized as each episode is aired. Therefore, WPT’s quarterly revenue can
fluctuate significantly depending on the number of episodes aired in any one quarter. In addition, the sales of consumer products
that utilize WPT’s licensed intellectual property vary greatly, due to holiday seasons, school schedules and other outside
factors. As a result, WPT’s financial results can be expected to fluctuate significantly from quarter to quarter, leading
to volatility and a possible adverse effect on the market price of the common stock.
Risks
Related to WPT’s Current Industry
WPT’s
television programming may be unable to maintain a sufficient audience for a variety of reasons, many of which are beyond its
control.
Television
production is a speculative business because revenues and income derived from television depend primarily upon the continued acceptance
of that programming by the public, which is difficult to predict. Public acceptance of particular programming is dependent upon,
among other things, the quality of the programming, the strength of networks on which the programming is telecast, the promotion
and scheduling of the programming and the quality and acceptance of competing television programming and other sources of entertainment
and information. Popularity of programming can also be negatively impacted by excessive telecasting of the programming beyond
viewers’ saturation thresholds.
WPT’s
ability to create and sponsor its television programming profitably may be negatively affected by adverse trends that apply to
the television production business generally.
Television
revenues and income may be affected by a number of factors, many of which are not within WPT’s control. These factors include
a general decline in television viewers, pricing pressure in the television advertising industry, strength of the stations on
which its programming is telecast, general economic conditions, increases in production costs and availability of other forms
of entertainment and leisure time activities. Furthermore, as the popularity of streaming content over the Internet increases
and more consumers “cut the cord” and cease watching traditional broadcast television, the audience for WPT’s
programming will be dispersed across multiple platforms and its programming could have less overall impact and watchability. All
of these factors, as well as others, may quickly change and these changes cannot be predicted with certainty. WPT’s future
sponsorship opportunities may also be adversely affected by these changes. Accordingly, if any of these changes were to occur,
the revenues WPT generates from television programming could decline.
A
decline in general economic conditions or the popularity of WPT’s brand of televised poker tournaments could adversely impact
its business.
Because
WPT’s operations are affected by general economic conditions and consumer tastes, its future success is unpredictable. The
demand for entertainment and leisure activities tends to be highly sensitive to consumers’ disposable incomes and thus a
decline in general economic conditions could, in turn, have a material adverse effect on WPT’s business, operating results
and financial condition and the price of the Company’s common stock. An economic decline, including the current economic
decline as a result of the global COVID-19 pandemic, could also adversely affect WPT’s corporate sponsorship business,
sales of its branded merchandise and other aspects of its business.
The
continued popularity of WPT’s type of poker entertainment is vital in maintaining the ability to leverage its brand and
develop products or services that appeal to its target audiences, which, in turn, is important to WPT’s long-term results
of operations. Public tastes are unpredictable and subject to change and may be affected by changes in the political and social
climates of those countries and territories in which WPT operates. A change in public opinion could have a material adverse effect
on WPT’s business, operating results and financial condition and, ultimately, the price of the Company’s common stock.
The
political or social climate regarding gaming and poker could negatively impact WPT’s ability to negotiate future telecast
license arrangements and could negatively impact its chances of renewal.
Although
the popularity of poker, in particular, and gaming, in general, has continued to grow in the U.S. and abroad, gaming has historically
experienced backlash from various constituencies and communities. Currently, the legal operational status of Internet-based casinos
and card rooms remains unclear in some countries. The U.S. government has taken steps to curb activities that it believes constitutes
unlawful online gaming through legislation such as the Unlawful Internet Gambling Enforcement Act of 2006 and through arrests
of off-shore online gaming operators traveling in the U.S. Also, on November 2, 2018, the U.S. Department of Justice
(the “DOJ”) issued an opinion that interprets the federal Wire Act as prohibiting any gambling that crosses state
lines, including non-sports related gambling. This opinion expands the prior opinion issued by the DOJ in 2011 that interpreted
the Wire Act as prohibiting interstate sports gambling only.
Based
on the uncertain regulatory environment surrounding the marketing and promotion of Internet-based casinos and card rooms
to viewers in the U.S., Sinclair has final edit rights to the shows that it broadcasts. Sinclair had indicated that it will only
display the “dot com” names or logos of Internet-based casinos and card rooms in its telecasts that are explicitly
legal in select territories in the United States. However, if Sinclair elects not to allow the display of “dot com”
logos on the WPT show, whether because of the recent DOJ opinion or otherwise, WPT may not be able to attract other Internet-based casino
sponsors or retain existing online card rooms sponsoring WPT’s tour. Additionally, increased regulatory scrutiny on Internet
gambling sites may eliminate these sites as sources of advertising revenue for television networks that exhibit poker-related programming,
thereby potentially impacting the value of such programming to these networks. Additionally, many participants in WPT’s
tournament events are sponsored by Internet-based casino sponsors and existing online card rooms. If such sponsors’
revenues are reduced, they may not be able to sponsor WPT’s tournament participants at the same level or at all, which could
cause WPT’s tournament participation to decline (in terms of numbers and professional players) and the quality and distribution
of our WPT series could suffer.
The
television entertainment market in which WPT operates is highly competitive and competitors with greater financial resources or
marketplace presence may enter this market to WPT’s detriment.
WPT
competes with other poker-related television programming, including ESPN’s coverage of the “World Series of Poker”
and its “World Series of Poker” Circuit Events, among others. These and other producers of poker-related programming
may be well established and may have significantly greater resources than WPT does. Based on the popularity of these poker-related televised
programs, WPT believes that additional competing televised poker programs may currently be in development or may be developed
in the future. WPT’s programming also competes for telecast audiences and advertising revenue with telecasts of mainstream
professional and amateur sports, as well as other entertainment and leisure activities. These competing programs and activities,
and the brands that they build may decrease the popularity of the WPT television series and dilute the WPT’s brand. This
would adversely affect WPT’s operating results and financial condition and, ultimately, the price of the Company’s
common stock.
Risks
Related to the Businesses of Both Allied Esports and WPT
Allied
Esports and WPT have historically operated at a net loss on a consolidated basis, and there is no guarantee that that the consolidated
company will be able to be profitable.
The consolidated operations of Allied Esports and the WPT have resulted
in net losses of $45,058,830 and $16,738,729 for the years ended December 31, 2020 and 2019, respectively. We do not know with any
degree of certainty whether or when the consolidated operations of Allied Esports and the WPT will become profitable. Even if we are able
to achieve profitability in future periods, we may not be able to sustain or increase our profitability in successive periods.
We
have formulated our business plans and strategies based on certain assumptions regarding the acceptance of our business model
and the marketing of our products and services. Nevertheless, our assessments regarding market size, market share, market acceptance
of our products and services and a variety of other factors may prove incorrect. Our future success will depend upon many factors,
including factors beyond our control and those that cannot be predicted at this time.
Forecasts
of our market and market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted
growth, there can be no assurance that our business will grow at similar rates, or at all.
Growth
forecasts included in SEC filings relating to our market opportunities and the expected growth in those markets are subject to
significant uncertainty and are based on assumptions and estimates which may prove to be inaccurate. We also plan to operate in
a number of foreign markets, and a downturn in any of those markets could have a significant adverse effect on our businesses.
Even if these markets meets our size estimate and experiences the forecasted growth, we may not grow our business at a similar
rate, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is
subject to many risks and uncertainties. Accordingly, the forecasts of market growth should not be taken as indicative of our
future growth.
Any
actual or perceived failure by us to comply with our privacy policies or legal or regulatory requirements in one or multiple jurisdictions
could result in proceedings, actions or penalties against us.
Allied
Esports and WPT have implemented various features intended to better comply with applicable privacy and security requirements
in the collection and use of customer data, but these features do not ensure compliance and may not be effective against all potential
privacy and data security concerns. A wide variety of domestic and foreign laws and regulations apply to the collection, use,
retention, protection, disclosure, transfer, disposal and other processing of personal data. These data protection and privacy-related laws
and regulations are evolving and may result in regulatory and public scrutiny and escalating levels of enforcement and sanctions.
Our failure to comply with applicable laws and regulations, or to protect any personal data, could result in enforcement actions
against us, including fines, claims for damages by customers and other affected individuals, damage to our reputation and loss
of goodwill (both in relation to existing customers and prospective customers), any of which could adversely affect our business,
operating results, financial performance and prospects.
Evolving
and changing definitions of personal data and personal information within the EU, the United States and elsewhere may limit
or inhibit our ability to operate or expand our business. In jurisdictions outside of the United States, we may face data
protection and privacy requirements that are more stringent than those in place in the United States. We are at risk of enforcement
actions taken by certain EU data protection authorities until such point in time that we may be able to ensure that all transfers
of personal data to us in the United States from the EU are conducted in compliance with all applicable regulatory obligations,
the guidance of data protection authorities and evolving best practices. The European General Data Protection Regulation (“GDPR”)
may impose additional obligations, costs and risks upon our business. The GDPR may increase substantially the penalties to which
we could be subject in the event of any non-compliance. In addition, we may incur substantial expense in complying with the obligations
imposed by the GDPR and we may be required to make significant changes in our business operations, all of which may adversely
affect our revenues and our business overall.
Loss,
retention or misuse of certain information and alleged violations of laws and regulations relating to privacy and data security,
and any relevant claims, may expose us to potential liability and may require us to expend significant resources on data security
and in responding to and defending such allegations and claims. In addition, future laws, regulations, standards and other obligations,
and changes in the interpretation of existing laws, regulations, standards and other obligations could impair our ability to collect,
use or disclose data relating to individuals, which could increase our costs and impair our ability to maintain and grow our customer
base and increase our revenue.
Allied
Esports and WPT publicly post their privacy policies and practices concerning processing, use and disclosure of the personally
identifiable information provided to them by website visitors. Publication of such privacy policies and other statements published
that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are
found to be deceptive or misrepresentative of actual policies and practices or if actual practices are found to be unfair. Evolving
and changing definitions of what constitutes “Personal Information” and “Personal Data” within the EU,
the United States and elsewhere, especially relating to classification of IP addresses, machine or device identification
numbers, location data and other information, may limit or inhibit our ability to operate or expand our business, including limiting
technology alliance relationships that may involve the sharing of data.
Our
failure to raise additional capital or generate cash flows necessary to pay debt, expand our operations and invest in new business
initiatives in the future could reduce our ability to compete successfully and harm our operating results.
In
the future we need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable
terms, if at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership
interests. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness,
force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we
cannot raise capital on acceptable terms, or at all, we may not be able to, among other things:
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develop
and enhance our products and services;
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continue
to expand our network of arenas;
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hire,
train and retain employees;
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respond
to competitive pressures or unanticipated working capital requirements; or
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pursue
acquisition opportunities.
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Although
we have been able to fund our current working capital requirements through operations, debt and equity financing, there is no
assurance that we will be able to do so in the future. As a result, our auditors have indicated that the above-mentioned conditions
raise substantial doubt about our ability to continue as a going concern.
Our
business depends substantially on the continuing efforts of our executive officers, key employees and qualified personnel, and
our business operations may be severely disrupted if we lose the services of such personnel.
Our
future success depends substantially on the continued efforts of our executive officers and key employees. If one or more of our
executive officers or key employees are unable or unwilling to continue their services with us, we might not be able to replace
them easily, in a timely manner, or at all. Since the esports gaming and poker industry is characterized by high demand and intense
competition for talent, we cannot assure you that we will be able to attract or retain qualified staff or other highly skilled
employees. If any of our executive officers or key employees terminate their services with us, our business may be severely disrupted,
our financial condition and results of operations may be materially and adversely affected and we may incur additional expenses
to recruit, train and retain qualified personnel.
We
may experience security breaches and cyber threats.
We
face cyber risks and threats that could damage, disrupt or allow third parties to gain improper access to our networks and platforms,
supporting infrastructure, intellectual property and other assets. In addition, we rely on technological infrastructure, including
third party cloud hosting and broadband, provided by third party business partners to support the functionality of our platforms
and content distribution. These business partners are also subject to cyber risks and threats. Such cyber risks and threats may
be difficult to detect. The techniques that may be used to obtain unauthorized access or disable, degrade, exploit or sabotage
these networks and gaming platforms change frequently and often are not detected. Our systems and processes and those of our third-party business
partners may not be adequate. Any failure to prevent or mitigate security breaches or cyber risks, or respond adequately to a
security breach or cyber risk, could result in interruptions to our platforms, degrade the gamer/user experiences, cause gamers/users
to lose confidence in our platforms and cease utilizing them, as well as significant legal and financial exposure. This could
harm our business and reputation, disrupt our relationships with partners and diminish our competitive position.
Global
health threats, such as the current COVID-19 pandemic, may adversely affect the operations of our Allied Esports and WPT businesses,
which could have a material adverse effect on our business.
Our
business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak
of the COVID-19 respiratory illness first identified in Wuhan, Hubei Province, China. A significant outbreak of contagious
diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial
markets of many countries, resulting in an economic downturn that could affect demand for our products and services. Specifically,
as a global entertainment company that hosts numerous live events with spectators and participants in destination cities, outbreaks
may cause such people to avoid traveling to our destination cities and attending our events. Sponsors of such events may also
cancel such events as precautionary measures or based on guidelines from local or federal health agencies. As a result of the
COVID-19 pandemic, live events to be hosted by both of our Allied Esports and WPT businesses have been cancelled. Allied
Esports and WPT businesses started conducting live events again on a limited basis in June 2020. However, many other previously
scheduled live events remain indefinitely postponed or have been cancelled. And at this time, we cannot determine the extent that
such outbreak will continue to have on our future operations.
General
Risk Factors
The
market price of shares of our common stock may be volatile, which could cause the value of your investment to decline.
The
market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide
experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political
conditions, could reduce the market price of shares of our common stock regardless of our operating performance. In addition,
our operating results could be below the expectations of public market analysts and investors due to a number of potential factors,
including variations in our quarterly operating results or dividends, if any, to stockholders, additions or departures of key
management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry,
litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement
thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future,
changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors
of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity
about the industries we participate in or individual scandals, and, in response, the market price of shares of our common stock
could decrease significantly. You may be unable to resell your shares of common stock at or above a price you feel is appropriate.
In
the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility
in the overall market and the market price of a company’s securities, securities class action litigation has often
been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion
of our management’s attention and resources.
We
have no current plans to pay cash dividends on our common stock; as a result, you may not receive any return on investment unless
you sell your common stock for a price greater than that which you paid for it.
We
have no current plans to pay dividends on our common stock. Any future determination to pay dividends will be made at the discretion
of our Board of Directors, subject to applicable laws, and will depend on a number of factors, including our financial condition,
results of operations, capital requirements, contractual, legal, tax and regulatory restrictions, general business conditions
and other factors that our Board of Directors may deem relevant. In addition, our ability to pay cash dividends is restricted
by the terms of our debt financing arrangements, and any future debt financing arrangement likely will contain terms restricting
or limiting the amount of dividends that may be declared or paid on our common stock. As a result, you may not receive any return
on an investment in our common stock unless you sell your common stock for a price greater than that which you paid for it.
If
our operating and financial performance in any given period does not meet the guidance that we provide to the public, the market
price of our common stock may decline.
We
may, but are not obligated to, provide public guidance on our expected operating and financial results for future periods. Any
such guidance will be comprised of forward-looking statements subject to the risks and uncertainties described in our public
filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially
in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet any
guidance we provide or the expectations of investment analysts, or if we reduce our guidance for future periods, the market price
of our common stock may decline as well. Even if we do issue public guidance, there can be no assurance that we will continue
to do so in the future.
We
may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy
our obligations under our indebtedness, which may not be successful.
Our
ability to make scheduled interest payments on or to refinance our debt obligations depends on our financial condition and operating
performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative,
regulatory and other factors, some of which are beyond our control. In some cases, we will also be required to obtain the consent
our lenders to refinance material portions of our indebtedness. We cannot assure you that we will maintain a level of cash flows
from operating activities sufficient to permit us to pay the principal, premiums, and interest, if any, on our indebtedness. Some
of our indebtedness is maturing in the near term, and if we are unable to raise sufficient capital or generate cash through our
operations, we will be unable to meet our debt obligations at maturity.
If
our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay
investments and capital expenditures, reduce or eliminate the payment of dividends, sell assets, seek additional capital or seek
to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our
scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital
markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require
us to comply with more onerous covenants, which could further restrict our business operations. We may not be able to effect any
such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not
allow us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet
our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets
or operations to attempt to meet our debt service and other obligations. We may not be able to consummate those dispositions or
consummate dispositions at prices that we believe are fair, and the proceeds that we do receive may not be adequate to meet any
debt service obligations then due.
We
incur increased costs and are subject to additional regulations and requirements as a result of being a public company, which
could lower our profits or make it more difficult to run our business.
As
a public company, we incur significant legal, accounting and other expenses that are not incurred by private companies, including
costs associated with public company reporting requirements. We also have incurred and will continue to incur costs associated
with the Sarbanes-Oxley Act, and related rules implemented by the SEC and the Nasdaq Capital Market. The expenses generally
incurred by public companies for reporting and corporate governance purposes have been increasing. We expect these rules and regulations
to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although
we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also may make it more
difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may
be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.
These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board
of Directors, on our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as
a public company, we could be subject to delisting of our common stock on the Nasdaq market, fines, sanctions and other regulatory
action and potentially civil litigation.
Through
its wholly-owned subsidiary Primo Vital Limited, Ourgame International Holdings Limited (“Ourgame”) owns a significant
percentage of our outstanding common stock, enabling it to exert significant influence over our operations and activities, which
may affect the trading price of our common stock.
According
to its SEC filings, Ourgame, through Primo Vital Limited, beneficially owns and controls approximately 35.7% of our outstanding
common stock. Primo Vital Limited is entitled to full voting rights with respect to the shares of common stock that it owns. This
concentrated ownership enables Ourgame to exert significant influence over all matters requiring stockholder votes, including:
the election of directors; mergers, consolidations, acquisitions and other strategic transactions; the sale of all or substantially
all of our assets and other decisions affecting our capital structure; amendments to our Certificate of Incorporation or our bylaws;
and our winding up and dissolution. The interests of Ourgame may not always coincide with our interests or the interests
of our other stockholders, and Ourgame’s influence may delay, deter or prevent acts that would be favored by us or our other
stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control
of the Company. Also, Ourgame may seek to cause us to take courses of action that, in its judgment, could enhance its investments
in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders. As a result,
the market price of our shares could decline. In addition, this concentration of share ownership may adversely affect the trading
price of our shares because prospective investors may perceive disadvantages in owning shares in a company such as our company
with such a significant stockholder.
We
are an “emerging growth company,” and the reduced public company reporting requirements applicable to emerging growth
companies may make our common stock less attractive to investors.
We
qualify as an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company,
we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies
that are not emerging growth companies. These provisions include, but are not limited to: being permitted to have only two years
of audited financial statements and only two years of related selected financial data and management’s discussion and analysis
of financial condition and results of operations disclosure; an exemption from compliance with the auditor attestation requirement
in the assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act;
not being required to comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or
a supplement to the auditor’s report providing additional information about the audit and the financial statements; reduced
disclosure obligations regarding executive compensation arrangements in our periodic reports, registration statements and proxy
statements; and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved. In addition, the JOBS Act permits emerging growth companies
to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.
We intend to take advantage of the exemptions discussed above. As a result, the information we provide will be different than
the information that is available with respect to other public companies. In our SEC filings, we do not include all of the executive
compensation-related information that would be required if we were not an emerging growth company. We cannot predict whether
investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less
attractive as a result, there may be a less active trading market for our common stock, and the market price of our common stock
may be more volatile.
We
will remain an emerging growth company until the earliest of (i) the end of our 2022 fiscal year, (ii) the first fiscal
year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding
three-year period, issued more than $1.00 billion in non-convertible debt securities or (iv) the end of any
fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end
of the second quarter of that fiscal year.
Our
failure to achieve and maintain an effective system of disclosure controls and internal control over financial reporting could adversely
affect our financial position and lower our stock price.
As a public company, we are
subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the rules and regulations of the applicable
listing standards of Nasdaq. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls
and procedures and internal control over financial reporting. Effective internal controls are necessary for us to provide reliable financial
reports. Nevertheless, all internal control systems, no matter how well designed, have inherent limitations. Even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management identified the
following material weaknesses in internal controls as of December 31, 2019, which persist as of December 31, 2020:
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inadequate
internal controls, including inadequate segregation of duties, over the preparation and review
of the consolidated financial statements and untimely annual closings of the books;
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inadequate controls and procedures as they relate
to completeness of information reported by certain third parties that process transactions related to specific revenue streams; and
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inadequate information technology general controls
as it relates to user access and change management.
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As a company with limited
accounting resources, a significant amount of management’s time and attention has been and will be diverted from our business to
work toward compliance with these regulatory requirements. This diversion of management’s time and attention may have a material
adverse effect on our business, financial condition and results of operations.
These material weaknesses
and any significant deficiencies could harm our operating results or cause us to fail to meet our reporting obligations and may result
in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over
financial reporting also could adversely affect the results of periodic management evaluations and any annual independent registered public
accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required
to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control
over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely
have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements,
we may not be able to maintain our common stock listing on Nasdaq.
Increases
in interest rates may cause the market price of our common stock to decline.
While
interest rates are falling and have in recent years been at record low levels, any return to increases in interest rates may cause
a corresponding decline in demand for equity investments. Any such increase in interest rates or reduction in demand for our common
stock resulting from other relatively more attractive investment opportunities may cause the market price of our common stock
to decline.
If
securities or industry analysts do not publish research or reports about our business or publish negative reports, the market
price of our common stock could decline.
The
trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish
about us or our business. If one of more of these analysts ceases coverage of us or fails to publish reports on us regularly,
we could lose visibility in the financial markets, which in turn could cause the market price or trading volume of our common
stock to decline. Moreover, if one or more of the analysts who cover us downgrades our common stock or if our reporting results
do not meet their expectations, the market price of our common stock could decline.
You
will be diluted by the future issuance of common stock, preferred stock, or securities convertible into common or preferred stock,
in connection with our incentive plans, acquisitions, capital raises or otherwise.
Our
amended and restated certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants
and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our Board
of Directors in its sole discretion, whether in connection with acquisitions or otherwise.
In
the future, we expect to obtain financing or to further increase our capital resources by issuing additional shares of our capital
stock or offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity
or shares of preferred stock. Issuing additional shares of our capital stock or other equity securities or securities convertible
into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock
or both. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain
events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference
with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay
dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions
and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. As a result,
holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute
their stockholdings in us.
Additionally,
we have reserved an aggregate of 3,463,305 shares of common stock for issuance under our 2019 Equity Incentive Plan (the
“Incentive Plan”). Any common stock that we issue, including under our Incentive Plan or other equity incentive plans
that we may adopt in the future, would dilute the percentage ownership held by our common stockholders. We have filed an effective
registration statement on Form S-8 under the Securities Act to register shares of our common stock or securities convertible
into or exchangeable for shares of our common stock issued pursuant to our Incentive Plan. Accordingly, shares registered under
such registration statement will be available for sale in the open market upon issuance.
The
Company’s amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, the Court
of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between the Company and its stockholders,
which could limit the Company’s stockholders’ ability to obtain a judicial forum viewed by the stockholders as more
favorable for disputes with the Company or the Company’s directors, officers or employees.
The
Company’s Certificate of Incorporation, as amended, provides that unless the Company consents in writing to the selection
of an alternative forum, the sole and exclusive forum for any stockholder (including a beneficial owner) to bring (i) any
derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary
duty owed by any director, officer or other employee of the Company to the Company or the Company’s stockholders, (iii) any
action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or the Certificate of Incorporation,
as amended, or the Company’s Bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine
shall be the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, another state
court located within the State of Delaware, or if no state court located within the State of Delaware has jurisdiction, the federal
district court for the District of Delaware) in all cases subject to the court’s having personal jurisdiction over the indispensable
parties named as defendants. This exclusive forum provision does not apply to suits brought to enforce a duty or liability created
by the Exchange Act. It could apply, however, to a suit that falls within one or more of the categories enumerated in the exclusive
forum provision and asserts claims under the Securities Act, inasmuch as Section 22 of the Securities Act creates concurrent
jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act
or the rule and regulations thereunder. There is uncertainty as to whether a court would enforce such provision with respect to
claims under the Securities Act, and our stockholders will not be deemed to have waived our compliance with the federal securities
laws and the rules and regulations thereunder.
Any
person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and
consented to these provisions. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim
in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits
against us and our directors, officers and other employees.
If
a court were to find the choice of forum provision contained in our Certificate of Incorporation, as amended, to be inapplicable
or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which
could harm our business, results of operations, and financial condition. Even if we are successful in defending against these
claims, litigation could result in substantial costs and be a distraction to the Company’s management.
Our
Board of Directors’ ability to issue undesignated preferred stock and the existence of anti-takeover provisions may depress
the value of our common stock.
The
Company’s authorized capital includes 1,000,000 shares of undesignated preferred stock. Our Board has the power to
issue any or all of the shares of preferred stock, including the authority to establish one or more series and to fix the powers,
preferences, rights and limitations of such class or series, without seeking stockholder approval, subject to certain limitations
on this power under Nasdaq listing requirements. Further, as a Delaware corporation, we are subject to provisions of the Delaware
General Corporation Law regarding “business combinations.” We may, in the future, consider adopting additional anti-takeover measures.
The authority of our Board to issue undesignated stock and the anti-takeover provisions of Delaware law, as well as any future
anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other
changes in control of our company that are not approved by our Board. As a result, our stockholders may lose opportunities to
dispose of their shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal
and the market price, voting and other rights of the holders of common stock may also be affected.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
The Company’s main offices
are leased and are located at 17877 Von Karman Avenue, Suite 300, Irvine, California, 92614. The Company considers this office space adequate
for its current operations. The initial lease term will expire in 2033, and the Company has two five-year options to renew. On March 10,
2021, WPT entered into an amendment of its lease with Onni Wilshire Courtyard, LLC for its production offices in Los Angeles, which extended
the term of the lease until November 31, 2031, with one five-year option to extend the term.
Item
3. Legal Proceedings
The
Company is involved in various disputes, claims, liens and litigation matters arising out of the normal course of business. While
the outcome of these disputes, claims, liens and litigation matters cannot be predicted with certainty, after consulting with
legal counsel, management does not believe that the outcome of these matters, either individually or collectively, will have a
material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Item
4. Mine Safety Disclosures
Not
applicable.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
Note
1 – Background and Basis of Presentation
Allied
Esports Entertainment Inc., (“AESE” and formerly known as Black Ridge Acquisition Corp, or “BRAC”) was
incorporated in Delaware on May 9, 2017 as a blank check company for the purpose of effecting a merger, share exchange, asset
acquisition, share purchase, recapitalization, reorganization or other similar business combination with one or more businesses
or entities (a “Business Combination”).
Allied
Esports Media, Inc. (“AEM”), a Delaware corporation, was formed in November 2018 to act as a holding company for Allied
Esports International Inc. (“Allied Esports”) and immediately prior to close of the Merger (see below) to also include
Noble Link Global Limited (“Noble Link”). Allied Esports, together with its subsidiaries described below owns and
operates the esports-related businesses of AESE. Noble Link (prior to the AEM Merger) and its wholly owned subsidiaries Peerless
Media Limited, Club Services, Inc. and WPT Enterprises, Inc. operate the poker-related business of AESE and are collectively referred
to herein as “World Poker Tour” or “WPT”. Prior to the Merger, as described below, Noble Link and Allied
Esports were subsidiaries of Ourgame International Holdings Limited (the “Former Parent”).
On
December 19, 2018, BRAC, Noble Link and AEM executed an Agreement and Plan of Reorganization (as amended from time to time, the
“Merger Agreement”). On August 9, 2019 (the “Closing Date”), Noble Link was merged with and into AEM,
with AEM being the surviving entity, which was accounted for as a common control merger (the “AEM Merger”). Further,
on August 9, 2019, a subsidiary of AESE merged with AEM pursuant to the Merger Agreement with AEM being the surviving entity (the
“Merger”). The Merger was accounted for as a reverse recapitalization, and AEM is deemed to be the accounting acquirer.
Consequently, the assets and liabilities and the historical operations that are reflected in these consolidated financial statements
prior to the Merger are those of Allied Esports and WPT. The preferred stock, common stock, additional paid in capital
and earnings per share amount in these consolidated financial statements for the period prior to the Merger have been restated
to reflect the recapitalization in accordance with the shares issued to the Former Parent as a result of the Merger. References
herein to the “Company” are to the combination of AEM and WPT during the period prior to the AEM Merger and are to
AESE and subsidiaries after the Merger.
Allied
Esports operates through its wholly owned subsidiaries Allied Esports International, Inc., (“AEII”), Esports Arena
Las Vegas, LLC (“ESALV”) and ELC Gaming GMBH (“ELC Gaming”). AEII operates global competitive esports
properties designed to connect players and fans via a network of connected arenas. ESALV operates a flagship gaming arena located
at the Luxor Hotel in Las Vegas, Nevada. ELC Gaming operates a mobile esports truck that serves as both a battleground and content
generation hub and also operates a studio for recording and streaming gaming events.
On January 19, 2021, the Company
entered into a stock purchase agreement, as amended on March 19, 2021 and again on March 29, 2021 (the “Stock Purchase Agreement”),
to sell 100% of the capital stock of its wholly-owned subsidiary, Club Services Inc (“CSI”). CSI owns 100% of each of the
legal entities that collectively operate or engage in the Company’s poker-related business. World Poker Tour is an internationally
televised gaming and entertainment company that has been involved in the sport of poker since 2002 and created a television show based
on a series of high-stakes poker tournaments. See Note 4 – Discontinued Operations and Note 17 - Subsequent Events.
As the result of the Company’s
entry into the Stock Purchase Agreement, the Consolidated Balance Sheet as of December 31, 2020, the Consolidated Statement of Operations
for the year ended December 31, 2020 and the Consolidated Statement of Cash Flows for the year ended December 31, 2020, present the results
of World Poker Tour as discontinued operations and present the assets and liabilities of World Poker Tour as held for sale. All prior
periods presented in the Consolidated Balance Sheets, the Consolidated Statements of Operations, and the Consolidated Statements of Cash
Flows discussed herein have been restated to conform to such presentation. See Note 4 – Discontinued Operations.
Note
2 – Going Concern and Management’s Plans
As of December 31, 2020, the
Company had cash of $0.4 million (not including approximately $5.0 million of restricted cash) and a working capital deficit from continuing
operations of approximately $9.9 million. For the years ended December 31, 2020 and 2019, the Company incurred net losses from continuing
operations of approximately $45.8 million and $15.5 million, respectively, and used cash in continuing operations of approximately $5.2
million and $7.6 million, respectively.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As
of December 31, 2020, the Company had convertible debt in the gross principal amount of $2.0 million which matures on February 23,
2022, but will be paid upon the sale of WPT, and senior secured convertible notes in the gross principal amount of approximately
$0.6 million, of which approximately $0.4 million is payable on January 1, 2021, and the remaining $0.2 million is payable on
February 1, 2021, and for which certain payments can be accelerated at the option of the lender (see Note 10 – Convertible
Debt and Convertible Debt, Related Party). As of December 31, 2020, the Company also has a Bridge Note outstanding in the amount of
approximately $1.4 million which matures on February 23, 2022 , but will be paid upon the sale of WPT, (see Note 11 – Bridge
Note Payable) and loans payable in the aggregate amount of $0.9 million, which mature in April 2022 (see Note 12 – Loans
Payable). During January 2021, the Company issued an aggregate 529,383 shares of its common stock in full satisfaction of
approximately $0.6 million and $0.1 million of principal and interest, respectively, owed on the senior secured convertible
notes.
In
March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic
which continues to spread throughout the United States. As a global entertainment company that hosts numerous live events with
spectators and participants in destination cities, the outbreak has caused people to avoid traveling to and attending these events.
Allied Esports’ has cancelled or postponed live events, and before the reopening of Allied Esports’ flagship gaming
arena located at the Luxor Hotel in Las Vegas, Nevada on June 25, 2020 the business was operating online only. The arena is currently
running under a modified schedule and limited capacity (up to 65% capacity depending on the event) for daily play and weekly tournaments.
The Company is continuing to monitor the outbreak of COVID-19 and the related business and travel restrictions, and changes to
behavior intended to reduce its spread, and the related impact on the Company’s operations, financial position and cash
flows, as well as the impact on its employees. Due to the rapid development and fluidity of this situation, the magnitude and
duration of the pandemic and its impact on the Company’s future operations and liquidity is uncertain as of the date of
this report. While there could ultimately be a material impact on operations and liquidity of the Company, at the time of issuance,
the extent of the impact cannot be determined.
The
aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern within one year
after the issuance date of these consolidated financial statements.
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern and
the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements
do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities
that might be necessary should the Company be unable to continue as a going concern.
The Company’s continuation
is dependent upon attaining and maintaining profitable operations and, until that time, raising additional capital as needed, but there
can be no assurance that it will be able to close on sufficient financing. The Company’s ability to generate positive cash flow
from operations is dependent upon generating sufficient revenues. To date, the Company’s operations have been funded by the Former
Parent, as well as through the issuance of convertible debt, and with cash acquired in the Merger. The Company expects to receive cash
in connection with the sale of the WPT business, which is expected to close during the second quarter of 2021 (see Note 1 – Background
and Basis of Presentation, Note 4 – Discontinued Operations and Note 17 – Subsequent Events). The Company cannot provide any
assurances that it will be able to secure additional funding, either from equity offerings or debt financings, on terms acceptable to
the Company, if at all, or that the sale of the WPT business will close as planned. If the Company is unable to obtain the requisite amount
of financing needed to fund its planned operations, including the repayment of convertible debt, it would have a material adverse effect
on its business and ability to continue as a going concern, and it may have to explore the sale of, or curtail or even cease, certain
operations.
Note
3 – Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been derived from the accounting records of AESE and its consolidated subsidiaries.
All significant intercompany balances have been eliminated in the consolidated financial statements. The consolidated financial
statements have been prepared in accordance with U.S. GAAP and pursuant to the accounting rules and regulations of the United
States Securities and Exchange Commission (“SEC”). Expenses that the Former Parent incurred on behalf of WPT and Allied
Esports prior to the Merger were allocated to each entity using specific identification.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Use
of Estimates
Preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the
financial statements. The Company’s significant estimates used in these financial statements include, but are not limited
to, the valuation and carrying amount of goodwill and other intangible assets, accounts receivable reserves, the valuation of
investments, stock-based compensation, warrants and deferred tax assets, as well as the recoverability and useful lives of long-lived
assets, including intangible assets, property and equipment and deferred production costs. Certain of the Company’s estimates
could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably
possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ
from those estimates.
Cash
and Cash Equivalents
All
short-term investments of the Company that have a maturity of three months or less when purchased are considered to be cash equivalents.
There were no cash equivalents as of December 31, 2020 or 2019.
Restricted
Cash
Restricted
cash consists of cash held in an escrow account to be utilized for various approved strategic initiatives and esports event programs
pursuant to an agreement with Brookfield Property Partners. See Note 14 – Commitments and Contingencies, Investment Agreements.
Accounts
Receivable
Accounts
receivable are carried at their contractual amounts. Management establishes an allowance for doubtful accounts based on its historic
loss experience and current economic conditions. Losses are charged to the allowance when management deems further collection
efforts will not produce additional recoveries. As of December 31, 2020 and 2019, there was no bad debt allowance.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation using the straight-line method over their estimated useful lives
once the asset is placed in service. Leasehold improvements are amortized over the lesser of (a) the useful life of the asset;
or (b) the remaining lease term (including renewal periods that are reasonably assured). Expenditures for maintenance and repairs,
which do not extend the economic useful life of the related assets, are charged to operations as incurred, and expenditures which
extend the economic life are capitalized. When assets are retired or otherwise disposed of, the costs and related accumulated
depreciation or amortization are removed from the accounts and any gain or loss on disposal is recognized in the statement of
operations for the respective period.
The
estimated useful lives of property and equipment are as follows:
Computer equipment
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3 - 5 years
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Production equipment
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5 years
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Furniture and Fixtures
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3 - 5 years
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Software
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1 - 5 years
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Gaming Truck
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5 years
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Leasehold Improvements
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10 years
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Intangible
Assets and Goodwill
The
Company’s intangible assets consist of the Allied Esports trademarks, which are being amortized over a useful life of 10
years. Intangible assets with indefinite lives are not amortized but are evaluated at least annually for impairment and more often
whenever changes in facts and circumstances may indicate that the carrying value may not be recoverable.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Impairment
of Long-Lived Assets
The
Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company measures the carrying amount of the asset against the estimated undiscounted
future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of
the asset being evaluated, an impairment loss would be recognized for the amount by which the carrying value of the asset exceeds
its fair value. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life
of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated
amounts.
During the years ended December
31, 2020 and 2019, the Company recognized an impairment of $6,138,631 and $600,000, respectively related to certain investments, $5,595,557
and $0, respectively, related to property and equipment. and during the year ended December 31, 2019 the Company recognized impairment
expense of $330,340 related to deferred production costs, due to management’s determination that the future cash flows from these
assets are not expected to be sufficient to recover their carrying value.
Fair
Value of Financial Instruments
The
Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements
and Disclosures” (“ASC 820”).
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1 - quoted prices in active markets for identical assets or liabilities.
Level
2 - quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level
3 - inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
The
carrying amounts of the Company’s financial instruments, such as accounts receivable, accounts payable and accrued liabilities
approximate fair value due to the short-term nature of these instruments. The Company’s convertible debt approximates fair
value due to its short-term nature and market rate of interest.
Nonrecurring
Fair Value Measurements
Certain
nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments
in certain circumstances, such as when there is evidence of impairment. These fair value measurements are categorized within level
3 of the fair value hierarchy.
The
Company periodically evaluates the carrying value of long-lived assets to be held and used when events or circumstances warrant
such a review. Fair value is determined primarily using anticipated cash flows assumed by a market participant discounted at a
rate commensurate with the risk involved or in the case of nonfinancial assets or liabilities. See “Impairment of Long-Lived
Assets”, above.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Income
Taxes
The
Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included
in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences
between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes
it is more likely than not that the assets will not be realized. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the statements of operations in the period that includes the enactment date.
The
Company recognizes the tax benefit from an uncertain income tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement by examining taxing authorities.
The
Company’s policy is to recognize interest and penalties accrued on uncertain income tax positions in interest expense in
the Company’s statements of operations. As of December 31, 2020 and 2019, the Company had no liability for unrecognized
tax benefits. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.
Commitments
and Contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it
is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Net
Loss per Common Share
Basic
loss per common share is computed by dividing net loss attributable to the Company by the weighted average number of common shares
outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders
by the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive, resulting from the
exercise of outstanding stock options and warrants and the conversion of convertible instruments.
The
following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would
have been anti-dilutive:
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December 31,
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2020
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2019
|
|
Restricted common shares
|
|
|
199,143
|
|
|
|
-
|
|
Options
|
|
|
2,430,000
|
|
|
|
2,480,000
|
|
Warrants
|
|
|
20,091,549
|
|
|
|
18,637,003
|
|
Convertible debt
|
|
|
439,811
|
(1)
|
|
|
1,647,058
|
|
Equity purchase options
|
|
|
600,000
|
|
|
|
600,000
|
|
Contingent consideration shares
|
|
|
269,231
|
|
|
|
3,846,153
|
|
|
|
|
24,029,734
|
|
|
|
27,210,214
|
|
(1)
|
Common stock equivalents associated with convertible debt were calculated based on the fixed conversion price in effect for voluntary holder conversions; however, for certain convertible notes there is a variable conversion price in effect under certain scenarios that is equal to 87% of lowest daily volume weighted average price over the prior ten days, subject to a $0.734 floor price. If the applicable convertible note principal and guaranteed interest were all converted at the floor price, the potentially dilutive shares related to convertible debt would be 1,154,789 shares.
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Revenue
Recognition
On
January 1, 2019, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”).
The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods
or services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment
and estimates may be required within the revenue recognition process than required under previous guidance, including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation.
The
Company adopted ASC 606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect
adjustment, if any, as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company’s
consolidated financial statements as of the date of adoption. As a result, a cumulative-effect adjustment was not required.
To
determine the proper revenue recognition method, the Company evaluates each of its contractual arrangements to identify its performance
obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority
of the Company’s contracts have a single performance obligation because the promise to transfer the individual good or service
is not separately identifiable from other promises within the contract and is therefore not distinct. Some of the Company’s
contracts have multiple performance obligations, primarily related to the provision of multiple goods or services. For contracts
with more than one performance obligation, the Company allocates the total transaction price in an amount based on the estimated
relative standalone selling prices underlying each performance obligation.
The
Company recognizes revenue from continuing operations primarily from the following sources:
In-person
revenue
The
Company’s in-person revenue is comprised of event revenue, sponsorship revenue, merchandising revenue and other revenue.
Event revenue is generated through Allied Esports events held at the Company’s esports properties. Event revenues recognized
from the rental of the Allied Esports arena and gaming trucks are recognized at a point in time when the event occurs. In-person
revenue also includes revenue from ticket sales, admission fees and food and beverage sales for events held at the Company’s
esports properties. Ticket revenue is recognized at the completion of the applicable event. Point of sale revenues, such
as food and beverage, gaming and merchandising revenues, are recognized when control of the related goods are transferred to the
customer.
The
Company also generates sponsorship revenues for naming rights for, and rental of, the Company’s arena and gaming trucks.
Sponsorship revenues from naming rights of the Company’s esports arena and from sponsorship arrangements are recognized
on a straight-line basis over the contractual term of the agreement. The Company records deferred revenue to the extent that payment
has been received for services that have yet to be performed.
In-person
revenue was comprised of the following for the years ended December 31, 2020 and 2019:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Event revenue
|
|
$
|
574,536
|
|
|
$
|
3,544,868
|
|
Sponsorship revenue
|
|
|
1,730,198
|
|
|
|
2,081,029
|
|
Food and beverage revenue
|
|
|
310,826
|
|
|
|
1,158,004
|
|
Ticket and gaming revenue
|
|
|
349,526
|
|
|
|
543,204
|
|
Merchandising revenue
|
|
|
22,209
|
|
|
|
171,014
|
|
Other revenue
|
|
|
1,068
|
|
|
|
244
|
|
Total in-person revenue
|
|
$
|
2,988,363
|
|
|
$
|
7,498,363
|
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Multiplatform
revenue
The
Company’s multiplatform content revenue is comprised of distribution revenue and content revenue. Distribution revenue is
generated primarily through the distribution of content to online channels. Any advertising revenue earned by online channel is
shared with the Company. The Company recognizes online advertising revenue at the point in time when the advertisements are placed
in the video content.
Multiplatform
revenue was comprised of the following for the years ended December 31, 2020 and 2019:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Distribution revenue
|
|
$
|
222,442
|
|
|
$
|
-
|
|
Content revenue
|
|
|
-
|
|
|
|
50,000
|
|
Total multiplatform revenue
|
|
$
|
222,442
|
|
|
$
|
50,000
|
|
The
following table summarizes our revenue recognized under ASC 606 in our consolidated statements of operations:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues Recognized at a Point in Time:
|
|
|
|
|
|
|
|
|
Event revenue
|
|
$
|
574,536
|
|
|
$
|
3,544,868
|
|
Distribution revenue
|
|
|
222,442
|
|
|
|
-
|
|
Food and beverage revenue
|
|
|
310,826
|
|
|
|
1,158,004
|
|
Ticket and gaming revenue
|
|
|
349,526
|
|
|
|
543,204
|
|
Merchandising revenue
|
|
|
22,209
|
|
|
|
171,014
|
|
Content revenue
|
|
|
-
|
|
|
|
50,000
|
|
Other revenue
|
|
|
1,068
|
|
|
|
244
|
|
Total Revenues Recognized at a Point in Time
|
|
|
1,480,607
|
|
|
|
5,467,334
|
|
|
|
|
|
|
|
|
|
|
Revenues Recognized Over a Period of Time:
|
|
|
|
|
|
|
|
|
Sponsorship revenue
|
|
|
1,730,198
|
|
|
|
2,081,029
|
|
Total Revenues Recognized Over a Period of Time
|
|
|
1,730,198
|
|
|
|
2,081,029
|
|
Total Revenues
|
|
$
|
3,210,805
|
|
|
$
|
7,548,363
|
|
The
timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when
revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the
provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.
As
of December 31, 2020, all continuing operations’ performance obligations in connection with contract liabilities included
within deferred revenue on the prior year consolidated balance sheet have been satisfied. The Company expects to satisfy the remaining
performance obligations related to its December 31, 2020 deferred revenue balance within the next twelve months. During the years
ended December 31, 2020 and 2019, there was no revenue recognized from performance obligations satisfied (or partially satisfied)
in previous periods.
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award
on the date of grant. The fair value amount is then recognized over the period during which services are required to be provided
in exchange for the award, usually the vesting period. The estimation of stock-based awards that will ultimately vest requires
judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a
cumulative adjustment in the period that the estimates are revised. The Company accounts for forfeitures as they occur.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Advertising
Costs
Advertising costs from continuing
operations are charged to operations in the year incurred and totaled $97,840 and $470,746 for the years ended December 31, 2020 and 2019,
respectively.
Concentration
Risks
Financial
instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in a financial institution
which, at times, may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits. The Company has not experienced
any losses in such accounts, periodically evaluates the creditworthiness of the financial institutions and has determined the
credit exposure to be negligible.
During
the years ended December 31, 2020 and 2019, 10% and 11%, respectively, of the Company’s revenues from continuing operations
were from customers in foreign countries.
During
the year ended December 31, 2020, the Company’s two largest customers accounted for 41% and 13% of the Company’s consolidated
revenues from continuing operations. During the year ended December 31, 2019, the Company’s largest customer accounted
for 14% of the Company’s consolidated revenues from continuing operations.
As of December 31, 2020, a single
customer represented 74% of the Company’s accounts receivable from continuing operations.
Foreign
Currency Translation
The
Company’s reporting currency is the United States Dollar. The functional currencies of the Company’s operating subsidiaries
are their local currencies (United States Dollar and Euro). Euro-denominated assets and liabilities are translated into the United
States Dollar using the exchange rate at the balance sheet date (1.2264 and 1.1215 at December 31, 2020 and 2019, respectively),
and revenue and expense accounts are translated using the weighted average exchange rate in effect for the period (1.1414 and
1.1194 for the years ended December 31, 2020 and 2019, respectively). Resulting translation adjustments are made directly to accumulated
other comprehensive (loss) income. Losses of $0 and $14,941 arising from exchange rate fluctuations on transactions denominated
in a currency other than the reporting currency for the years ended December 31, 2020 and 2019, respectively, are recognized in
operating results in the consolidated statements of operations. The Company engages in foreign currency denominated transactions
with customers and suppliers, as well as between subsidiaries with different functional currencies.
Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the consolidated financial statements, except as disclosed.
CARES
Act
On
March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).
The CARES Act, amongst other things, includes provisions relating to refundable payroll tax credits, deferment of employer social
security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest
deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Pursuant to Accounting
Standards Codification Topic (“ASC 740”), the Company recognizes the tax effects of new tax legislation upon enactment.
Accordingly, the CARES Act was effective beginning in the quarter ended March 31, 2020. The Company does not believe that the
new tax provisions outlined in the CARES Act will have a material impact on the Company’s consolidated financial statements.
Discontinued
Operations
The
assets and liabilities of WPT are classified as “held for sale” as of December 31, 2021 and are reflected in the accompanying
Consolidated Balance Sheets as “Current assets of discontinued operations,” “Assets of discontinued operations
– non-current,” “Current liabilities of discontinued operations” and “Liabilities of discontinued
operations – non-current.” The results of operations of WPT are included in “Income (loss) from discontinued
operations, net of tax provision” in the accompanying Consolidated Statements of Operations and Comprehensive Loss. For
comparative purposes, all prior periods presented have been reclassified to reflect the classifications on a consistent basis.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Reclassifications
Certain
prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect
on previously reported results of operations or loss per share.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” ASU
2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize
in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing
its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to
make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition,
lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified
retrospective approach. This amendment will be effective for private companies and emerging growth companies for fiscal years
beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The FASB issued
ASU No. 2018-10 “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11 “Leases (Topic 842) Targeted
Improvements” in July 2018, and ASU No. 2018-20 “Leases (Topic 842) - Narrow Scope Improvements for Lessors”
in December 2018. ASU 2018-10 and ASU 2018-20 provide certain amendments that affect narrow aspects of the guidance issued in
ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an additional (and optional) transition method of
adoption, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact
that this guidance will have on its consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326)” and also issued subsequent
amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively Topic 326). Topic 326 requires
the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing
incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates.
The Company will be required to adopt the provisions of this ASU on January 1, 2023, with early adoption permitted for certain
amendments. Topic 326 must be adopted by applying a cumulative effect adjustment to retained earnings. The adoption of Topic 326
is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
In
March 2019, the FASB issued ASU 2019-02, which aligns the accounting for production costs of episodic television series with the accounting
for production costs of films. In addition, ASU 2019-02 modifies certain aspects of the capitalization, impairment, presentation and
disclosure requirements in Accounting Standards Codification (“ASC”) 926-20 and the impairment, presentation and disclosure
requirements in ASC 920-350. This ASU must be adopted on a prospective basis and is effective for annual periods beginning after December
15, 2020, including interim periods within those years, with early adoption permitted. The Company is currently evaluating the impact
that this pronouncement will have on its consolidated financial statements.
In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments - Credit
Losses (Topic 326) and Leases (Topic 842) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update
to SEC Section on Effective Date (“ASU 2020-02”) which provides clarifying guidance and minor updates to ASU No. 2016-13 –
Financial Instruments – Credit Loss (Topic 326) (“ASU 2016-13”) and related to ASU No. 2016-02 - Leases (Topic 842).
ASU 2020-02 amends the effective date of ASU 2016-13, such that ASU 2016-13 and its amendments will be effective for the Company for interim
and annual periods in fiscal years beginning after December 15, 2022. The adoption of ASU 2016-13 is not expected to have a material impact
on the Company’s consolidated financial statements or disclosures.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity, to clarify the accounting for certain financial instruments with characteristics of liabilities
and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible
preferred stock by removing the cash conversion model and the beneficial conversion feature model. Limiting the accounting models
will result in fewer embedded conversion features being separately recognized from the host contract. Convertible instruments
that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely
related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative
accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in-capital.
In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The ASU also
revises the derivative scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent
events. The amendments in this update are effective for the Company in fiscal years beginning after December 15, 2023, and interim
periods within those fiscal years. Early adoption will be permitted, but no earlier than for fiscal years beginning after December
15, 2020. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
Recently
Adopted Accounting Pronouncements
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. The new guidance simplifies the accounting for goodwill impairment by eliminating Step 2 of the goodwill
impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair
value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value
of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair
value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current
guidance, which calculates the carrying value in excess of the reporting unit’s fair value. This standard was adopted on
January 1, 2020 and did not have a material impact on the Company’s consolidated financial statements or disclosures.
In
July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments
provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive
Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from
Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations
– Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10), and Fair Value Measurement –
Overall (Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December
15, 2019. This standard was adopted on January 1, 2020 and did not have a material impact on the Company’s consolidated
financial statements or disclosures.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement” (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements
associated with fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits.
The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the
most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively
to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December
15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This standard
was adopted on January 1, 2020 and did not have a material impact on the Company’s consolidated financial statements or disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes
– Simplifying the Accounting for Income Taxes. The new guidance simplifies the accounting for income taxes by removing several exceptions
in the current standard and adding guidance to reduce complexity in certain areas, such as requiring that an entity reflect the effect
of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment
date. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020,
with early adoption permitted. The Company early adopted this standard on October 1, 2020 and it did not have a material impact on the
Company’s consolidated financial statements or disclosures.
Note 4 – Discontinued Operations
Transaction
During 2021, AESE entered into the
Stock Purchase Agreement to sell the equity interests of its subsidiaries that own and operate its WPT business (the “Sale
Transaction”), subject to shareholder and regulatory approvals, for a total purchase price of $105 million. This base purchase price
will be adjusted to reflect the amount of CSI’s cash, indebtedness (other than indebtedness related to an outstanding $685,300 Paycheck
Protection Program loan) and accrued and unpaid transaction expenses as of the closing of the Sale Transaction. Management committed to
a plan to sell the WPT business prior to December 31, 2020. Accordingly, the WPT business has been recast as discontinued operations,
and the assets and liabilities of WPT are classified as held for sale. See Note 1 – Background and Basis of Presentation and Note
17 – Subsequent Events.
In reaching its decision
to enter into the Stock Purchase Agreement, the Company’s Board of Directors, in consultation with management as well as its financial
and legal advisors, considered a number of factors, including the risks and challenges facing the WPT business in the future as compared
to the opportunities available to the WPT business in the future, and the availability of strategic alternatives. After careful consideration,
the Board of Directors unanimously approved the Stock Purchase Agreement and determined that the Sale Transaction is in the best interests
of the Company and its stockholders, and that the Sale Transaction and the Stock Purchase Agreement reflect the highest value for the
WPT business reasonably attainable for the Company’s stockholders.
About
WPT
WPT
is an internationally televised gaming and entertainment company with brand presence in land-based tournaments, television, online
and mobile applications. WPT has been involved in the sport of poker since 2002 and created a television show based on a series
of high-stakes poker tournaments. WPT has broadcasted globally in more than 150 countries and territories and its shows are sponsored
by established brands in many areas, including watches, crystal, playing cards and online social poker operators. WPT also operates
ClubWPT.com, a subscription-based site that offers its members inside access to the WPT content database, as well as sweepstakes-based
poker product that allows members to play for real cash and prizes in 36 states and territories across the United States and 4
foreign countries. WPT also participates in strategic brand licensing, partnership, and sponsorship opportunities.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Results
of Discontinued Operations
Results and net income (loss)
from discontinued operations are as follows, reflecting the results and net income (loss) of the WPT business:
|
|
For the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
20,149,042
|
|
|
$
|
18,523,632
|
|
Operating costs and expenses
|
|
|
19,425,951
|
|
|
|
19,709,567
|
|
Income (loss) from operations
|
|
|
723,091
|
|
|
|
(1,185,935
|
)
|
Other income (expense)
|
|
|
2,417
|
|
|
|
(97,467
|
)
|
Net income (loss) from discontinued operations, before tax
|
|
|
725,508
|
|
|
|
(1,283,402
|
)
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
Income (loss) from discontinued operations, net of tax provision
|
|
$
|
725,508
|
|
|
$
|
(1,283,402
|
)
|
Assets and liabilities held
for sale as of December 31, 2020 are classified as current because the Sale Transaction is expected to close during 2021. The details
are as follows:
Assets
|
|
|
|
Cash
|
|
$
|
3,633,292
|
|
Accounts receivable
|
|
|
1,804,627
|
|
Prepaid expenses and other assets
|
|
|
289,968
|
|
Property and equipment, net
|
|
|
1,674,355
|
|
Goodwill
|
|
|
4,083,621
|
|
Intangible assets, net
|
|
|
12,305,887
|
|
Deposits
|
|
|
79,500
|
|
Deferred production costs
|
|
|
12,058,592
|
|
Due from affiliates
|
|
|
9,433,975
|
|
Current assets held for sale
|
|
$
|
45,363,817
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
211,228
|
|
Accrued expenses and other liabilities
|
|
|
3,804,301
|
|
Accrued interest
|
|
|
4,224
|
|
Deferred revenue
|
|
|
1,970,668
|
|
Deferred rent
|
|
|
2,493,526
|
|
Loans payable (1)
|
|
|
685,300
|
|
Current liabilities held for sale
|
|
$
|
9,169,247
|
|
|
(1)
|
Represents principal balance of PPP Loan. On January 26,
2021, WPT received notice from its lender that the entirety of the $685,300 of outstanding principal of the PPP Loan was forgiven.
|
Assets and liabilities held for sale as of December 31, 2019 are as
follows:
Assets
|
|
|
|
Cash
|
|
$
|
5,163,156
|
|
Accounts receivable
|
|
|
1,491,939
|
|
Prepaid expenses and other current assets
|
|
|
283,143
|
|
Current assets held for sale
|
|
|
6,938,238
|
|
Property and equipment, net
|
|
|
2,470,293
|
|
Goodwill
|
|
|
4,083,621
|
|
Intangible assets, net
|
|
|
14,755,867
|
|
Deposits
|
|
|
79,500
|
|
Deferred production costs
|
|
|
10,962,482
|
|
Due from affiliates
|
|
|
3,375,875
|
|
Non-current assets held for sale
|
|
|
35,727,638
|
|
Total assets held for sale
|
|
$
|
42,665,876
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
748,118
|
|
Accrued expenses and other current liabilities
|
|
|
2,776,256
|
|
Deferred revenue
|
|
|
3,762,221
|
|
Current liabilities held for sale
|
|
|
7,286,595
|
|
Deferred rent
|
|
|
1,230,224
|
|
Non-current liabilities held for sale
|
|
|
1,230,224
|
|
Total liabilities held for sale
|
|
$
|
8,516,819
|
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note
5 – Reverse Merger and Recapitalization
As
described in Note 1 – Background and Basis of Presentation above, on the Closing Date, the AEM Merger and the Merger took
place. All of AEM capital stock outstanding immediately prior to the merger was exchanged for (i) 11,602,754 shares of AESE common
stock, (ii) warrants for the purchase of 3,800,003 shares of AESE common stock with an exercise price of $11.50 per share, and
(iii) 3,846,153 contingent shares (“Contingent Consideration Shares”). If any holder elects to convert their
Bridge Note into common stock, they would be entitled to receive Contingent Consideration Shares equal to the product of (i) 3,846,153
shares, multiplied by (ii) that holder’s investment amount, divided by (iii) $100,000,000, if at any time within five years
after the August 9, 2019 closing date, the last exchange-reported sale price of common stock trades at or above $13.00 for thirty
(30) consecutive calendar days.
On
the Closing Date, pursuant to the Merger Agreement, in order to extinguish amounts owed to the Former Parent by WPT and Allied
Esports in the aggregate amount of $32,672,622, AESE (i) repaid $3,500,000 of the amount due to the Former Parent in cash, (ii)
assumed $10,000,000 principal of the convertible debt obligations of the Former Parent plus $992,877 of related accrued interest,
(iii) issued 2,928,679 shares of the Company’s common stock to the Former Parent with no limitations or encumbrances on
sale and (iii) transferred 600,000 shares of the Company’s common stock to the Former Parent which was subject to a lockup
period for one year from the Closing Date.
In
connection with the Merger, the Company issued an aggregate of 11,492,999 shares of common stock, including 3,528,679 shares issued
in satisfaction of amount owed to the Former Parent as described above, and 7,964,320 shares of common stock issued to BRAC shareholders
prior to the Merger, but which are deemed to be issued by the Company on the Closing Date as a result of the reverse recapitalization.
Note
6 – Other Assets
The
Company’s other assets consist of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Investment in ESA
|
|
$
|
-
|
|
|
$
|
1,138,631
|
|
Investment in TV Azteca
|
|
|
-
|
|
|
|
3,500,000
|
|
|
|
$
|
-
|
|
|
$
|
4,638,631
|
|
As
of December 31, 2020, the Company owns a 25% non-voting membership interest in Esports Arena, LLC (“ESA”) and ESA’s
wholly owned subsidiary. The investment is accounted for as a cost method investment since the Company does not have the ability
to exercise significant influence over the operating and financial policies of ESA.
During
January 2019, the Company contributed $1,238,631 to ESA, in order to fulfill the remainder of its funding commitment to ESA. The
Company recognized an immediate impairment of $600,000 related to this funding. During June 2020, the Company recorded an additional
impairment charge in the amount of $1,138,631, related to its investment in ESA.
The
Company paid $3,500,000 to TV Azteca, S.A.B. DE C.V., a Grupo Salinas company (“TV Azteca”) in August 2019, and on
March 4, 2020 the Company paid an additional $1,500,000 to TV Azteca in connection with a Strategic Investment Agreement with
TV Azteca in order to expand the Allied Esports brand into Mexico. During December 2020, the Company recorded an impairment charge
in the amount of $5,000,000, related to the investment in TV Azteca (See Note 14 – Commitments and Contingencies, Investment
Agreements).
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note
7 – Property and Equipment, net
Property
and equipment consist of the following:
|
|
As of
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Software
|
|
$
|
-
|
|
|
$
|
796,546
|
|
Office equipment
|
|
|
868,309
|
|
|
|
776,250
|
|
Computer equipment
|
|
|
495,643
|
|
|
|
484,643
|
|
Esports gaming truck
|
|
|
1,222,406
|
|
|
|
1,222,406
|
|
Furniture and fixtures
|
|
|
654,058
|
|
|
|
652,882
|
|
Production equipment
|
|
|
7,841,985
|
|
|
|
7,876,423
|
|
Leasehold improvements
|
|
|
4,645,760
|
|
|
|
12,622,010
|
|
|
|
|
15,728,161
|
|
|
|
24,431,160
|
|
Less: accumulated depreciation and amortization
|
|
|
(6,452,432
|
)
|
|
|
(6,347,146
|
)
|
Property and equipment, net
|
|
$
|
9,275,729
|
|
|
$
|
18,084,014
|
|
During the years ended December
31, 2020 and 2019, depreciation and amortization expense amounted to $3,605,539 and $3,548,810, respectively. During the year ended December
31, 2020, the Company recorded impairment expense of $5,595,557 related to its property and equipment.
Note
8 – Intangible Assets, net
Intangible
assets consist of the following:
|
|
Intellectual Property
|
|
|
Accumulated Amortization
|
|
|
Total
|
|
Balance as of January 1, 2019
|
|
$
|
32,080
|
|
|
$
|
(2,406
|
)
|
|
$
|
29,674
|
|
Purchases of intangibles
|
|
|
4,335
|
|
|
|
-
|
|
|
|
4,335
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2019
|
|
|
36,415
|
|
|
|
(2,406
|
)
|
|
|
34,009
|
|
Purchases of intangibles
|
|
|
750
|
|
|
|
-
|
|
|
|
750
|
|
Amortization expense
|
|
|
-
|
|
|
|
(3,941
|
)
|
|
|
(3,941
|
)
|
Balance as of December 31, 2020
|
|
$
|
37,165
|
|
|
$
|
(6,347
|
)
|
|
$
|
30,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining amortization period at December 31, 2020 (in years)
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized on
a straight-line basis over the shorter of their license periods or estimated useful lives ranging from two to ten years. During
the years ended December 31, 2020 and 2019, amortization expense amounted to $3,941 and $0, respectively.
Estimated
future amortization expense is as follows:
Years Ended
December 31,
|
|
|
|
2021
|
|
|
3,991
|
|
2022
|
|
|
3,991
|
|
2023
|
|
|
3,991
|
|
2024
|
|
|
3,991
|
|
2025
|
|
|
3,991
|
|
Thereafter
|
|
|
10,863
|
|
|
|
$
|
30,818
|
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note
9 – Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Compensation expense
|
|
$
|
1,010,734
|
(1)
|
|
$
|
459,420
|
|
Rent
|
|
|
148,919
|
|
|
|
68,182
|
|
Event costs
|
|
|
26,926
|
|
|
|
112,963
|
|
Legal and professional fees
|
|
|
307,135
|
|
|
|
154,474
|
|
Unclaimed player prizes
|
|
|
45,171
|
|
|
|
4,599
|
|
Other accrued expenses
|
|
|
268,751
|
|
|
|
170,135
|
|
Other current liabilities
|
|
|
179,381
|
|
|
|
262,168
|
|
|
|
$
|
1,987,017
|
|
|
$
|
1,231,941
|
|
|
(1)
|
Accrued compensation expense includes approximately $571,000 which is payable to the employees of the Company’s continuing operations for their 2020 services, contingent upon the closing of the sale of WPT. See Note 14 – Commitments and Contingencies, 2020 Cash Bonus Payments.
|
Note
10 – Convertible Debt and Convertible Debt, Related Party
Convertible
Bridge Notes and Convertible Bridge Notes, Related Party
On
May 15, 2019, Noble Link issued a series of secured convertible promissory notes (the “Noble Link Notes”) whereby
investors provided Noble Link with $4 million to be used for the operations of Allied Esports and WPT, of which one Noble Link
Note in the amount of $1 million was issued to the wife of a related party who formerly served as co-CEO of the Former Parent
and a Director of Noble Link. Pursuant to the original terms of the Noble Link Notes, the Noble Link Notes accrued annual interest
at 12%; provided that no interest would be payable in the event the Noble Link Notes were converted into AESE common stock, as
described below. The Noble Link Notes were due and payable on the first to occur of (i) the one-year anniversary of the issuance
date, or (ii) the date on which a demand for payment was made during the time period beginning on the Closing Date and ending
on the date that was three (3) months after the Closing Date. As security for purchasing the Noble Link Notes, the investors received
a security interest in Allied Esports’ assets (second to any liens held by the landlord of the Las Vegas arena for property
located in that arena), as well as a pledge of the equity of all of the entities comprising WPT, and a guarantee of the Former
Parent and BRAC. Upon the closing of the Merger, the Noble Link Notes were convertible, at the option of the holder, into shares
of AESE common stock at $8.50 per share. On August 5, 2019, the Noble Link Notes were amended pursuant to an Amendment and Acknowledgement
Agreement as described below.
Pursuant
to the Merger Agreement, on the Closing Date, in addition to the $4 million of Noble Link Notes, AESE assumed $10,000,000 of the
convertible debt obligations of the Former Parent (the “Former Parent Notes”; see Note 5 - Reverse Merger and Recapitalization),
such that the aggregate indebtedness of the Company pursuant to the Noble Link Notes and the Former Parent Notes (collectively,
the “Bridge Notes”) is $14 million. The Bridge Notes bear interest at 12% per annum. Pursuant to the Amendment and
Acknowledgement agreement discussed below, the Former Parent Notes are also secured by all property and assets owned by AESE and
its subsidiaries. No interest is payable in connection with the Notes if the Notes are converted into shares of AESE common
stock.
Pursuant
to an Amendment and Acknowledgement Agreement dated August 5, 2019 (the “Amendment and Acknowledgement Agreement”),
the Bridge Notes were amended such that the Bridge Notes matured on August 23, 2020 (the “Maturity Date”). The Bridge
Notes were convertible into shares of AESE common stock at any time between the Closing Date and the Maturity Date at a conversion
price of $8.50 per share. Further, the minimum interest to be paid under each Note shall be the greater of (a) 18 months of accrued
interest at 12% per annum; or (b) the sum of the actual interest accrued plus 6 months of additional interest at 12% per annum. In
the event of default, the Bridge Notes shall become immediately due and payable upon the written notice of the holder.
Pursuant
to the note purchase agreements entered into by the purchasers of the Bridge Notes (the “Noteholders” and such agreements,
the “Note Purchase Agreements”), upon the consummation of the Merger, each Noteholder received a five-year warrant
to purchase their proportionate share of 532,000 shares of AESE common stock at an exercise price of $11.50 per share. In addition,
pursuant to the Note Purchase Agreements, Noteholders are each entitled to their proportionate share of 3,846,153 shares of AESE
common stock if such Noteholder’s Note is converted into AESE common stock and, at any time within five years after the
date of the closing of the Mergers, the last exchange-reported sale price of AESE common stock is at or above $13.00 for thirty
(30) consecutive calendar days (the “Contingent Consideration”). The relative fair value of the warrants and
the Contingent Consideration of $114,804 and $152,590, respectively, was recorded as debt discount and additional paid in capital.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On
April 29, 2020, the Company and a holder of a $5,000,000 Bridge Note (the “Noteholder”), entered into a Secured Convertible
Note Modification and Conversion Agreement (the “Amendment 1”), pursuant to which the Noteholder converted $2,000,000
of the principal amount of its $5,000,000 Bridge Note into 1,250,000 shares of the Company’s common stock at a reduced conversion
price of $1.60 per share. On May 22, 2020, the Company and the Noteholder entered into a Secured Convertible Note Modification
and Conversion Agreement No. 2 (“Amendment 2”), pursuant to which the remaining principal amount of the $5,000,000
Bridge Note ($3,000,000) was converted into 2,142,857 shares of the Company’s common stock at a reduced conversion price
of $1.40 per share. Further, pursuant to Amendment 1 and Amendment 2, interest on the $5,000,000 principal owed to the Noteholder
prior to conversion will continue to accrue through the maturity date as if the principal amount had not been converted. Minimum
accrued interest payable pursuant to Amendment 2 in the amount of $1,421,096 (the “Accrued Interest”) is payable on
or before the maturity date. No Contingent Consideration Shares were issued in connection with the conversion since the requirements
for issuance were not met.
On
June 8, 2020, the Company and the Noteholder entered into Secured Convertible Note Modification Agreement No. 3 (“Amendment
3” and together with Amendment 1 and Amendment 2, the “Amendments”). Pursuant to Amendment 3, the Accrued Interest
was converted into principal under the Noteholder’s Bridge Note (the “Amended Bridge Note”). See Note 11 - Bridge
Note Payable for additional details.
The
Company recorded a conversion inducement charge of $5,247,531 as a result of the Amendments, consisting of $4,998,845 representing
the value of common stock issued upon conversion in excess of the common stock issuable under the original terms of the $5,000,000
Bridge Note, and $248,686, representing the excess of minimum interest payable pursuant to Amendment 3 over the interest payable
pursuant to the original terms of the $5,000,000 Bridge Note.
On June 8, 2020, the Company
paid cash of $8,670,431 in satisfaction of principal in the amount of $7,000,000 and interest in the amount of $1,670,431 owed in connection
with other Bridge Notes. Further, on June 8, 2020, the Company and the holders (the “Extending Bridge Noteholders”) of the
two remaining Bridge Notes outstanding in the aggregate principal amount of $2,000,000 (together, the “Extended Bridge Notes”),
of which principal in the amount of $1,000,000 is owed to the spouse of the Company’s Chief Executive Officer (“CEO”)
and Director, entered into a Secured Convertible Note Modification (Extension) Agreement with the Company (together, the “Bridge
Note Extensions”) pursuant to which, among other things, the Extending Bridge Noteholders agreed to extend the maturity date of
their respective Extended Bridge Notes until February 23, 2022. Interest on the Extended Bridge Notes will continue to accrue at 12.0%
per year and may be prepaid without penalty. The remaining provisions of the Extended Bridge Notes remain unchanged and in effect. The
Extended Bridge Notes are secured by the WPT business. Accordingly, it will be necessary to pay-off the Extended Bridge Notes and the
related interest payable upon the closing of the Sale Transaction. Hence, the Extended Bridge Notes and the related accrued interest have
been classified as current liabilities as of December 31, 2020.
On
August 13, 2020, the Company paid in cash an aggregate of $425,096 related to interest payable on the Extended Bridge Notes, such that
the balance of principal and interest outstanding under the Extended Bridge Notes as of December 31, 2020 is $2,000,000 and $85,870,
respectively.
The
Company recorded interest expense of $1,433,054 (including amortization of debt discount of $ $166,384) related to the Convertible
Bridge Notes and the Extended Bridge Notes during the year ended December 31, 2020 and recorded interest expense of $1,081,401
(including amortization of debt discount of $101,011 and excluding interest of $115,726 recorded on the books of WPT and included
in net income (loss from discontinued operations), respectively, during the year ended December 31, 2019. As of December 31, 2020,
all debt discount on the Convertible Bridge Notes and Extended Bridge Notes has been fully amortized.
Senior
Secured Convertible Notes
On
June 8, 2020, pursuant to a securities purchase agreement (the “Purchase Agreement”) between the Company and certain
accredited investors (the “Investors”), the Company issued two senior secured convertible notes (the “Senior
Notes”) with an aggregate principal balance of $9,600,000 and immediately vested five-year warrants to purchase an aggregate
1,454,546 shares of common stock at an exercise price of $4.125 per share for net cash proceeds of $9,000,000. The Senior Notes
are secured by the assets of the Company, bear interest at 8% per annum and mature on June 8, 2022, with an aggregate of $1,536,000
of interest guaranteed to be paid to the Investors. The Purchase Agreement contains customary representations and warranties,
and the Company agreed it would not take on additional debt from third parties without the Investors’ written approval,
subject to certain exceptions for ordinary course trade debt. The Company also agreed to use 35% of the proceeds from future financings
in excess of $3 million (or $5 million if approved by the Investors) to pay down the outstanding balance on the Loan. The Company
reserves its rights under the Purchase Agreement to consummate, subject to certain exceptions, a debtor or equity offering of
up to $5 million in the future.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The
Senior Notes’ principal and two years of interest are payable in equal monthly installments (the “Monthly Redemption
Payment”), commencing on August 7, 2020. Each Monthly Redemption Payment may be paid at the Company’s option in cash,
or in shares of common stock (the “Stock Settlement Option”) at a price equal to 87% of the lowest daily volume weighted
average price in the 10 days prior to the scheduled payment date (the “Stock Settlement Price”), provided that (i)
the Company gives thirty days written irrevocable notice prior to the Monthly Redemption Payment (the “Monthly Redemption
Notice”), (ii) all amounts due have been paid timely, (iii) there are sufficient number of authorized shares available to
be issued, (iv) the Investors do not possess any material non-public information at the time the Company issues the common stock,
and (v) the Company’s shares have met certain minimum volume and closing price thresholds. The Stock Settlement Price cannot
be lower than $0.734 per share. Monthly Redemption Payments paid in cash require the payment of a 10% premium in addition to the
monthly installment.
Each
Investor may accelerate up to four Monthly Redemption Payments in any calendar month and may elect to have such accelerated Monthly
Redemption Payments paid in shares of the Company’s common stock at the Stock Settlement Price of the contemporaneous or
immediately prior Monthly Redemption Payment, instead of in cash.
The
Senior Notes are convertible at each Investor’s option, in whole or in part, and from time to time, into shares of the Company’s
common stock (the “Holder Conversion Option” and together, with the Stock Settlement Option, the “ECOs”)
at $3.30 per share (subject to adjustment to convert at the same price as any subsequent issuances of Company common stock at
a lower issuance price, subject to certain exceptions) (the “Holder Conversion Price”); provided, however, that the
parties may not affect any such conversion that would result in an Investor (together with its affiliates) owning in excess of
4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the conversion
(the “Beneficial Ownership Limitation”). Each Investor, upon notice to the Company, may elect to increase or decrease
its Beneficial Ownership Limitation, provided that the Beneficial Ownership Limitation may not exceed 9.99%. The Company determined
that the ECOs contained a beneficial conversion feature (“BCF”) in the amount of $523,636, which was credited to additional
paid in capital.
Upon
the issuance of the Senior Notes, the Company recorded a debt discount at issuance in the aggregate amount $6,296,556, consisting
of (i) the $600,000 difference between the aggregate principal amount of the Senior Notes and the cash proceeds received, (ii)
the relative fair value of the warrants of $1,205,959 (which were credited to additional paid in capital), (iii) two years’
guaranteed interest of $1,536,000 (credited to interest payable), (iv) the BCF of $523,636 (credited to additional paid in capital),
(v) non-cash interest in the amount of $1,664,000, representing the difference between the anticipated issuance date fair value
of common stock issued and the Stock Settlement Price, for Monthly Redemption Payments (credited to interest payable), and (vi)
financing costs of $766,961. The debt discount is being amortized using the effective interest method over the term of the Senior
Notes. During year ended December 31, 2020, the Company recorded amortization of debt discount of $2,854,649, related to the Senior
Notes, and recorded an extinguishment loss of $3,438,261 in connection with the extinguishment of Senior Notes resulting from
accelerated Monthly Redemption Payments. Debt discount in the amount of $3,646 remains to be amortized as of December 31, 2020.
During
the year ended December 31, 2020, the Company issued 9,678,840 shares of its common stock, as Monthly Redemption Payments in satisfaction
of aggregate amount of $9,018,182 of principal and $1,442,909 of interest payable owed on the Senior Notes as well as $1,563,151
of non-cash interest accrued on the Senior Notes. Of the 9,678,840 shares issued, 7,299,215 shares were issued in connection with
accelerated Monthly Redemption Payments in the aggregate amount of $7,930,182 (representing $6,836,364 and $1,093,818 of principal
and interest, respectively). The Company recorded additional non-cash interest expense in the amount of $1,193,849 in connection
with Monthly Redemption Payments during the year ended December 31, 2020. As of December 31, 2020, gross principal and guaranteed
interest of $581,818 and $93,091, respectively, remained outstanding on the Senior Notes. The balance of non-cash interest accrued
on the Senior Notes is $100,848 as of December 31, 2020. On January 2, 2021, 529,383 shares were issued in full satisfaction of
the remaining principal and interest outstanding on the Senior Notes.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note
11 – Bridge Note Payable
The Bridge Note Payable of
$1,421,096 consists of the Amended Bridge Note (see Note 10 – Convertible Debt and Convertible Debt, Related Party, Convertible
Bridge Notes and Convertible Bridge Notes, Related Party). The Amended Bridge Note matures on February 23, 2022, but will be paid upon the sale of WPT. Interest on the Amended
Bridge Note began to accrue on August 23, 2020 at 12% per annum (increasing to 15% per annum upon an event of default as defined in the
Amended Bridge Note). Principal and interest owed under the Amended Bridge Note is not convertible into shares of the Company’s
common stock. The Bridge Note Payable is secured by the WPT business. Accordingly, it will be necessary to pay-off the Bridge Note Payable
upon the closing of the Sale Transaction. Hence, the Bridge Note Payable and $60,698 of related interest payable have been classified
as current liabilities as of December 31, 2020. During the year ended December 31, 2020, the Company recorded interest expense of $60,698
in connection with the Amended Bridge Note.
Note
12 – Loans Payable
During May 2020, the Company’s
continuing operations received aggregate cash proceeds of $907,129 pursuant to two loans (the “PPP Loans”) provided in connection
with the Paycheck Protection Program (“PPP”) under the CARES Act. The PPP Loans bear interest at 0.98% per annum. Monthly
amortized principal and interest payments begin in July 2021 and the notes mature in April 2022. While the PPP Loans currently have two-year
maturities, the amended law permits the borrower to request five-year maturities from its lenders.
Under the terms of the CARES
Act, as amended by the Paycheck Protection Program Flexibility Act of 2020, the Company’s subsidiaries are eligible to apply for
and receive forgiveness for all or a portion of PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use
of PPP loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs (as defined
under the PPP) and mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance
of employee and compensation levels during the twenty-four week period following the funding of the PPP Loan. The Company intends to use
the proceeds of the PPP Loans solely for Qualifying Expenses. However, no assurance is provided that the Company will be able to obtain
forgiveness of the PPP Loans, in whole or in part.
The Company recorded interest
expense of $6,333 related to the PPP Loans during the year ended December 31, 2020.
Note
13 – Income Taxes
The
Company and its subsidiaries files income tax returns in the United States (federal and California) and Germany.
The U.S. and foreign components
of loss before income taxes from continuing operations were as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
(45,315,394
|
)
|
|
$
|
(15,173,062
|
)
|
Foreign
|
|
|
(468,944
|
)
|
|
|
(282,265
|
)
|
Loss before income taxes from continuing operations
|
|
$
|
(45,784,338
|
)
|
|
$
|
(15,455,327
|
)
|
The income tax provision (benefit)
for the years ended December 31, 2020 and 2019 consists of the following:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(7,159,062
|
)
|
|
|
(7,527,844
|
)
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(681,815
|
)
|
|
|
(716,938
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(63,193
|
)
|
|
|
-
|
|
|
|
|
(7,904,070
|
)
|
|
|
(8,244,782
|
)
|
Change in valuation allowance
|
|
|
7,904,070
|
|
|
|
8,244,782
|
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The
reconciliation of the expected tax expense (benefit) based on the U.S. federal statutory rates for 2020 and 2019, respectively,
with the actual expense is as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
U.S. Federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State taxes, net of federal benefit
|
|
|
6.3
|
%
|
|
|
2.0
|
%
|
Permanent differences
|
|
|
(10.7
|
%)
|
|
|
(0.2
|
%)
|
Statutory rate differential - domestic v. foreign
|
|
|
(0.1
|
%)
|
|
|
(0.2
|
%)
|
Changes in tax rates
|
|
|
1.0
|
%
|
|
|
0.0
|
%
|
Other
|
|
|
0.4
|
%
|
|
|
1.1
|
%
|
Adjustments in deferred taxes
|
|
|
(0.9
|
%)
|
|
|
29.6
|
%
|
Change in valuation allowance
|
|
|
(17.0
|
%)
|
|
|
(53.3
|
%)
|
Total
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
tax effects of temporary differences that give rise to deferred tax assets are presented below:
|
|
As of
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
13,022,657
|
|
|
$
|
8,936,688
|
|
Production costs
|
|
|
274,355
|
|
|
|
231,217
|
|
Investment
|
|
|
2,909,497
|
|
|
|
2,190,138
|
|
Stock-based compensation
|
|
|
387,410
|
|
|
|
56,976
|
|
Capitalized start-up costs
|
|
|
322,793
|
|
|
|
353,651
|
|
Property and equipment
|
|
|
1,022,026
|
|
|
|
-
|
|
Accruals and other
|
|
|
1,252,731
|
|
|
|
547,735
|
|
Gross deferred tax assets
|
|
|
19,191,469
|
|
|
|
12,316,404
|
|
Property and equipment
|
|
|
|
|
|
|
(1,029,005
|
)
|
Net deferred tax assets
|
|
|
19,191,469
|
|
|
|
11,287,399
|
|
Valuation allowance
|
|
|
(19,191,469
|
)
|
|
|
(11,287,399
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of December 31, 2020, the Company had approximately $55,040,000, $14,204,525 and $4,234,582 of federal, state and foreign net operating
loss (“NOL”) carryforwards available to offset against future taxable income. The federal NOL may be carried forward indefinitely.
For state, these NOLs will begin to expire in 2038. For the foreign NOLs, these NOLs can be carried forward indefinitely. The federal
and state NOL carryovers are subject to annual limitations under Section 382 of the U.S. Internal Revenue Code when there is a greater
than 50% ownership change, as determined under the regulations. The Company is not aware of any annual limitations have been triggered.
The Company remains subject to the possibility that a future greater than 50% ownership change could trigger annual limitations on the
usage of NOLs.
The
Company assesses the likelihood that deferred tax assets will be realized. ASC 740, “Income Taxes” requires that a
valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets
will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all
the information available, management believes that uncertainty exists with respect to future realization of its deferred tax
assets and has, therefore, established a full valuation allowance as of December 31, 2020 and 2019.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company’s tax returns
remain subject to examination by various taxing authorities beginning with the tax year ended December 31, 2016. No tax audits were commenced
or were in process during the years ended December 31, 2020 and 2019.
The
Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required
to file. The Company recognizes liabilities for uncertain tax positions based on a two-step process. To the extent a tax position
does not meet a more-likely-than-not level of certainty, no benefit is recognized in the financial statements. If a position meets
the more-likely-than-not level of certainty, it is recognized in the consolidated financial statements at the largest amount that
has a greater than 50% likelihood of being realized upon ultimate settlement. The Company has not recognized any liability related
to uncertain tax provisions as of December 31, 2020 and December 31, 2019.
The
Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company
had no accrual for interest or penalties at December 31, 2020 and December 31, 2019, respectively, and has not recognized interest
and/or penalties during the years then ended as there are no material unrecognized tax benefits. Management does not anticipate
any material changes to the amount of unrecognized tax benefits within in the next 12 months.
The
Company intends to indefinitely reinvest its unremitted earnings in its foreign subsidiaries, and accordingly has not provided
deferred tax liabilities on those earnings. The Company has not determined at this time an estimate of total amount of unremitted
earnings, as it is not practical at this time.
Note
14 – Commitments and Contingencies
Litigations,
Claims, and Assessments
The
Company is involved in various disputes, claims, liens and litigation matters arising out of the normal course of business. While
the outcome of these disputes, claims, liens and litigation matters cannot be predicted with certainty, after consulting with
legal counsel, management does not believe that the outcome of these matters will have a material adverse effect on the Company’s
consolidated financial position, results of operations or cash flows.
On
March 23, 2020, an employee of Allied Esports filed a claim in Los Angeles Superior Court alleging various employment misconduct
against Allied Esports, the Company and an officer of the Company in connection with a competition hosted by Allied Esports. The
claim alleged damages in excess of $3.1 million. The parties agreed to a mediation and all claims asserted against the Company
by the employee for were settled on September 10, 2020 for an amount significantly less than the original claim. The matter is
now closed.
Operating
Leases
Effective
on March 23, 2017, Allied Esports entered into a non-cancellable operating lease for 30,000 square feet of event space in Las
Vegas, Nevada, for the purpose of hosting Esports activities (the “Las Vegas Lease”). As part of the Las Vegas Lease,
Allied Esports committed to build leasehold improvements to repurpose the space for Esports events prior to March 23, 2018, the
day the Arena opened to the public (the “Commencement Date”). Initial lease terms are for minimum monthly payments
of $125,000 for 60 months with an option to extend for an additional 60 months at $137,500 per month. Additional annual tenant
obligations are estimated at $2 per square foot for Allied Esports’ portion of real estate taxes and $5 per square foot
for common area maintenance costs. Lease payments began at the Commencement Date. The aggregate base rent payable over the lease
term will be recognized on a straight-line basis.
On
November 5, 2020, Allied Esports entered into an amendment of its lease of event space in Las Vegas Nevada (the “Amended
Las Vegas Lease”), pursuant to which (i) $299,250 of deferred minimum monthly rent and additional rent due under the lease
for the period from April 1, 2020 through June 3, 2020 must be paid in its entirety by December 31, 2021; (ii) the monthly rent
to be paid for the period from June 25 through December 31, 2020 (the “Rent Relief Period) was reduced to an amount equal
to 20% of gross sales (excluding food sales) at the event space (the “Percentage Rent”), (iii) the initial term of
the lease was extended for two additional months until May 31, 2023, and (iv) the option period to extend the lease was extended
to between April 1, 2022 and September 30, 2022. Pursuant to the Amended Las Vegas Lease, if the aggregate Percentage Rent during
the Rent Relief Period is less than $194,000, Allied Esports must pay the shortfall no later than December 31, 2021. Rent expense
incurred during the rent relief period under the Amended Las Vegas Lease was $200,570.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The
Company’s aggregate rent expense incurred during the years ended December 31, 2020 and 2019 amounted to $1,967,967 and $1,678,775,
respectively, of which $1,390,093 and $1,431,818, respectively, is included within in-person costs and $577,874 and $246,957,
respectively, is included in general and administrative expenses on the accompanying consolidated statements of operations.
The
scheduled future minimum lease payments under the Company’s continuing operations leases are as follows:
Years Ending December 31,
|
|
|
|
2021
|
|
$
|
1,799,250
|
|
2022
|
|
|
1,500,000
|
|
2023
|
|
|
1,575,000
|
|
2024
|
|
|
1,650,000
|
|
2025
|
|
|
1,650,000
|
|
Thereafter
|
|
|
3,987,500
|
|
|
|
$
|
12,161,750
|
|
AESE
is currently the guarantor of WPT’s lease of Irvine, California office space (the “Irvine Lease”). The lease expires
on October 1, 2033. Current base rent pursuant to the Irvine Lease is $41,027 per month, increasing to $58,495 per month over the term
of the lease. It is anticipated that AESE will no longer act as guarantor of the Irvine Lease, effective upon the closing of the Sale
Transaction. See Note 4 – Discontinued Operations.
Investment
Agreements
TV
Azteca Investment
In
June 2019, the Company entered into an exclusive ten-year strategic investment and revenue sharing agreement (the “TV Azteca
Agreement”) with TV Azteca, in order to expand the Allied Esports brand into Mexico. Pursuant to the terms of the TV Azteca
Agreement, as amended, TV Azteca purchased 742,692 shares of AESE common stock for $5,000,000.
In connection with the TV
Azteca Agreement, AESE was to provide $7,000,000 to be used for various strategic initiatives including digital channel development, facility
and flagship construction in Mexico, co-production of Spanish language content, platform socialization, and marketing initiatives. The
Company was entitled to various future revenues generated from the investment. Through December 31, 2020, the Company paid $5,000,000
in connection with the TV Azteca agreement. On July 20, 2020, AESE and TV Azteca entered into an amendment to the TV Azteca Agreement
(the “Azteca Amendment’). The Azteca Amendment provides that, subject to the approval
of the terms of the Azteca Amendment by the our Board of Directors: (i) TV Azteca waives our obligations under the Term Sheet to pay TV
Azteca $1,000,000 on each of March 1, 2021 and March 1, 2022 for various strategic initiatives, and to further invest in and develop an
esports platform for the Mexican market; (ii) we shall waive the 24-month lock-up that prohibits TV Azteca from selling or transferring
the 763,904 shares of our common stock TV Azteca purchased pursuant to the Share Purchase Agreement (the “Purchased Shares”);
(iii) TV Azteca may sell the Purchased Shares in compliance with applicable securities laws, subject to selling at a reasonable market
price and subject to a daily volume cap not to exceed 25% of the our total daily Nasdaq trading volume; and (iv) if TV Azteca sells all
of the Purchased Shares within a three-month period following our Board of Directors approval of the Azteca Amendment, for gross proceeds
of less than $1,600,000, then on March 1, 2021, we shall contribute additional capital to the parties’ strategic alliance pursuant
to the Term Sheet in an amount equal to such shortage. TV Azteca did not sell all of the Purchased Shares within such timeframe and we
are no longer is required to contribute additional capital to the parties’ strategic alliance pursuant to the Term Sheet.
On December 31, 2020, the
Company recognized an impairment of $5,000,000 related to its investment in TV Azteca due to management’s determination that the
future cash flows are not expected to be sufficient to recover the carrying value of this investment.
Simon
Agreement
In
June 2019, the Company entered into an agreement (the “Simon Agreement”) with Simon Equity Development, LLC (“Simon”),
a shareholder of the Company, pursuant to which Allied Esports would conduct a series of mobile esports gaming tournaments and
events at selected Simon shopping malls and online called the Simon Cup, in each of 2019, 2020 and 2021, and would also develop
esports and gaming venues at certain Simon shopping malls in the U.S.
In
connection with the Simon Agreement, AESE placed $4,950,000 of cash into an escrow account to be utilized for various strategic
initiatives including the build-out of branded esports facilities at Simon malls, and esports event programs. On October 22, 2019,
$1,300,000 was released from escrow in order to fund expenses incurred in connection with the 2019 Simon Cup. As of December 31,
2019, the balance in the escrow account was $3,650,000, which is shown as restricted cash on the accompanying consolidated balance
sheet.
The
Simon Agreement and the related Escrow Agreement, as amended, permitted Simon to request the return of any funds remaining in
escrow if the parties did not agree on the 2020 spending plan by March 8, 2020. On March 18, 2020, as the COVID-19 pandemic accelerated
in the United States, Simon notified the escrow agent that the parties had not agreed on a 2020 spending plan and requested the
return of the remaining funds in the escrow account. The escrow agent returned the remaining $3,650,000 to Simon on March 26,
2020. During the year ended December 31, 2020, the Company recorded $3,650,000, of stock-based compensation related to the return
of cash held in escrow, which is reflected in stock-based compensation expense on the accompanying consolidated statements of
operations and comprehensive loss.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The
COVID-19 pandemic has delayed indefinitely the parties’ ability to plan and budget for the 2020 and 2021 esports programming
and esports venues. The parties have agreed to extend the due date under the applicable agreements from March 8, 2020 to January
31, 2021, in order to continue to develop and budget for the annual esports program and esports venues in future years once the
COVID-19 pandemic has ended. As of the date of this document, no additional documents have been drafted or executed between
the Company and Simon, but discussions are ongoing.
Brookfield
Partnership
On
January 14, 2020, the Company issued 758,725 shares of its common stock to BPR Cumulus LLC, an affiliate of Brookfield Property
Partners (“Brookfield”) in exchange for $5,000,000 (the “Purchase Price”) pursuant to a Share Purchase
Agreement (the “Brookfield Agreement”). The Purchase Price was placed into escrow and is to be used by the Company
or its subsidiaries to develop integrated esports experience venues at mutually agreed upon shopping malls owned and/or operated
by Brookfield or any of its affiliates (each, an “Investor Mall”), that will include a dedicated gaming space and
production capabilities to attract and to activate esports and other emerging live events (each, an “Esports Venue”).
To that end, half of the Purchase Price will be released from escrow to the Company upon the execution of a written lease agreement
between Brookfield and the Company for the first Esports Venue, and the other half will be released to the Company upon the execution
of a written lease agreement between Brookfield and the Company for the second Esports Venue. Further, pursuant to the Brookfield
Agreement, the Company must create, produce, and execute three (3) esports events during each calendar year 2020, 2021 and 2022
that will include the Company’s esports truck at one or more Investor Malls at mutually agreed times. The balance held in
escrow as of December 31, 2020 is $5,000,000 and is reflected in restricted cash on the accompanying consolidated balance sheet. As of the
date of this document, no additional documents have been drafted or executed between the Company and Brookfield, but discussions
are ongoing. The parties have agreed not to move forward with any leases until the pandemic has ended but are currently discussing
alternative initiatives while they wait.
Consulting
Agreement
On
August 9, 2019, the Company entered into a consulting services agreement with a related party, Black Ridge Oil & Gas, the
Company’s prior sponsor (“BROG”), pursuant to which BROG provided administration and accounting services to
the Company through December 31, 2019, in exchange for consulting fees in the aggregate of $348,853.
Employment
Agreements
On November 5, 2019, the Company
entered into an employment agreement (the “CEO Agreement”) with the Company’s CEO. The CEO Agreement is effective as
of September 20, 2019. The CEO Agreement provides for a base salary of $300,000 per annum as well as annual incentive bonuses as determined
by the Board of Directors, subject to the attainment of certain objectives. The CEO Agreement provides for severance equal to twelve months
of the CEO’s base salary. In connection with the CEO agreement, the CEO also received 17,668 shares of the Company’s restricted
common stock, with a grant date value of $100,000, which vest one year from date of issuance. Unless terminated for cause, any unvested
equity awards are immediately vested upon termination. The employment agreement expires on August 9, 2022 and may be extended for a period
up to one year upon mutual written agreement by the CEO and the Company at least thirty days prior to expiration.
On
April 24, 2020, the CEO Agreement between the Company and its CEO was amended such that effective May 1, 2020, the CEO’s
annual salary will be reduced by 80% to $60,000 for a six-month period. On September 30, 2020, the CEO Agreement was further amended
such that effective November 1, 2020, the CEO’s annual salary will be $210,000 for a six-month period, and thereafter the
initial annual base salary of $300,000 set forth in the CEO Agreement will be restored.
On
December 31, 2020, the Company and Frank Ng, who serves as Chief Executive Officer and a director of the Company, amended
Mr. Ng’s employment agreement (the “Employment Agreement Amendment”). The Employment Agreement Amendment
provides that Mr. Ng’s annual salary will be $400,000 per year payable in cash, and that the Company may, but is no
longer required to, issue to Mr. Ng any shares of the Company’s common stock as compensation for his services.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2020
Cash Bonus Payments
On December 30, 2020, the
Company’s Board of Directors authorized the payment of an aggregate of approximately $1,245,000 in cash bonus payments to its employees
for services provided during the year 2020, contingent upon the closing of the sale of WPT. Of the aggregate $1,245,000 cash bonuses payable,
approximately $674,000 is payable to the employees of WPT and approximately $571,000 is payable to the employees of the Company’s
continuing operations.
Change
of Control Agreements
On
December 30, 2020, the Company’s Board of Directors authorized the Company to enter into an agreement with the Company’s
CEO which, upon the closing of a transaction that resulted in a change-in-control of WPT, as defined, would obligate the
Company to pay the CEO $1,000,000 upon the earlier of his termination of employment with AESE without cause, as defined, or the
two-year anniversary of the closing of the change-in-control transaction. Payment may be made in either cash or shares
of AESE common stock (valued at the trailing 10-day volume-weighted-average-price prior to the issuance date), at the
Company’s discretion.
On December 30, 2020,
the Company’s Board of Directors authorized WPT to enter into agreements with the WPT CEO and General Counsel which, upon the closing
of a transaction that resulted in a change-in-control of WPT, as defined, would obligate WPT to pay the WPT CEO and General Counsel
aggregate lump-sum severance payments of $522,827.
On
December 30, 2020, Company’s Board of Directors approved, subject to a change-in-control of WPT which accelerates
the vesting of AESE option grants held by WPT employees, the extension of the exercise period of the options as follows: (i) the
options to purchase an aggregate of 340,000 shares of AESE common stock held by the WPT CEO and General Counsel may be exercised
until the 10-year anniversary of the issuance date, and (ii) the remaining options to purchase an aggregate of 300,000 shares
of AESE common stock may be exercised until the one-year anniversary of the change-in-control.
Note
16 – Stockholders’ Equity
Amendment
to Company Charter
On
July 27, 2020, the Company filed an Amendment to its Second Amended and Restated Certificate of Incorporation with the Secretary
of State of the State of Delaware to increase the number of shares of common stock currently authorized by the Certificate by
10,000,000 shares, from 65,000,000 shares to 75,000,000 shares.
On
November 4, 2020, the Company filed with the Delaware Secretary of State an amendment to its Second Amended and Restated Certificate
of Incorporation to increase the total number of authorized shares of its common stock from 75,000,000 shares to 100,000,000 shares.
Put
Option Agreement and Exercise
On
February 25, 2020 (the “Effective Date”), the Company entered into a Put Option Agreement (the “Agreement”)
with the Chairman of the Company’s Board of Director (the “Chairman”), pursuant to which the Company has an
option in its discretion, to sell shares of its common stock (the “Option Shares”) to the Chairman for aggregate gross
proceeds of up to $2.0 million, at a purchase price of $1.963 per Option Share, subject to the following limitations:
|
a)
|
The total number of shares that may be issued under the Agreement will be limited to 19.99% of the Company’s outstanding shares on the date the Agreement is signed (the “Exchange Cap”), unless stockholder approval is obtained to issue shares in excess of the Exchange Cap;
|
|
b)
|
The
Company may not issue, and the Chairman may not purchase Option Shares to the extent
that such issuance would result in the Chairman and his affiliates beneficially owning
more than 19.99% of the then issued and outstanding shares of the Company’s common
stock unless (i) such ownership would not be the largest ownership position in the Company,
or (ii) stockholder approval is obtained for ownership in excess of 19.99%;
|
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
c)
|
The
Company may not issue, and the Chairman may not purchase any Option Shares if such issuance
and purchase would be considered equity compensation under the rules of The Nasdaq Stock
Market unless stockholder approval is obtained for such issuance; and
|
|
d)
|
Option Shares are subject to a six-month lock-up period whereby they cannot be sold or transferred.
|
On
March 9, 2020, the Company provided notice to the Chairman that it had elected to exercise the Put Option to sell 1,018,848 Option
Shares at a purchase price of $1.963 per share for total proceeds of $2,000,000. The Option Shares were issued on May 15, 2020.
On September 29, 2020, the Company received proceeds of $21,875 from the Chairman, representing the disgorgement of short swing
profits realized from the sale of shares.
Equity
Purchase Option
Prior
to the Closing Date, BRAC sold an option to purchase up to 600,000 units, exercisable at $11.50 per Unit, in connection with BRAC’s
initial public offering (the “Equity Purchase Option”). Each Unit consisted of one and one-tenth shares of common
stock and a warrant to purchase one share of common stock at $11.50 per share. Effective upon the closing of the Merger, the units
converted by their terms into the shares and warrants, and the option now represents the ability to buy such securities directly
(and not units). The Equity Purchase Option may be exercised on either a cash or a cashless basis, at the holder’s
option, and expires on October 4, 2022. These previously issued BRAC Shares and Warrant Purchase Options are deemed to be issued
in connection with the Merger, as a result of the reverse recapitalization.
A
summary of the Equity Purchase Option activity during the year ended December 31, 2020 is presented below:
|
|
Number of
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Equity
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Purchase
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (Yrs)
|
|
|
Value
|
|
Outstanding, January 1, 2020
|
|
|
600,000
|
|
|
$
|
11.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2020
|
|
|
600,000
|
|
|
$
|
11.50
|
|
|
|
1.8
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2020
|
|
|
600,000
|
|
|
$
|
11.50
|
|
|
|
1.8
|
|
|
$
|
-
|
|
Common
Stock
On
January 14, 2020, the Company issued 758,725 shares of its common stock to an investor in exchange for $5,000,000 (the “Purchase
Price”) pursuant the Brookfield Agreement (see Note 14 – Commitments and Contingencies, Brookfield Partnership).
On
August 6, 2020, the Company issued 50,000 shares of common stock to its Chief Financial Officer. The shares were immediately vested
with no restrictions and had a grant date value of $109,000. On September 24, 2020, the Company issued 14,286 shares of common
stock to the Chairman of the Board of Directors. The common stock was immediately vested with no restrictions and had grant date
value of $20,000.
On
August 7, 2020, the Company issued 217,999 shares of common stock with a grant date value of $474,000 to certain officers and
employees of the Company, in satisfaction of bonus obligations incurred in previous years, which were included in accrued expenses
as of December 31, 2019.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On
April 29, 2020, the Company issued 3,392,857 shares of its common stock valued at $9,998,845 upon the conversion of $5,000,000
debt (see Note 10 – Convertible Debt and Convertible Debt, Related Party, Convertible Bridge Notes and Convertible Bridge
Notes, Related Party).
During
the year ended December 31, 2020, the Company issued 9,678,840 shares of its common stock valued at $13,218,091 for the redemption
of $10,461,191 of debt and accrued interest (see Note 10 – Convertible Debt and Convertible Debt, Related Party, Senior
Secured Convertible Notes).
Equity
Incentive Plan
On
August 9, 2019, the Company’s Equity Incentive Plan (the “Incentive Plan”) was approved by the Company’s stockholders.
The Incentive Plan is administered by the Board of Directors or a committee designated by the Board of Directors to do so. The effective
date of the Incentive Plan was December 19, 2018. The Incentive Plan provides the grant of incentive stock options (“ISOs”),
nonstatutory stock options, stock appreciation rights, restricted common stock awards, restricted common stock unit awards, as well
as other stock-based awards that are deemed to be consistent with the purposes of the plan. There are 3,463,305 shares of common stock
reserved under the Incentive Plan, of which 471,486 shares remain available to be issued as of December 31, 2020.
Stock
Options
A
summary of the option activity during the year ended December 31, 2020 is presented below:
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Weighted
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Weighted
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Average
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Average
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Number of
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Exercise
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Remaining
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Intrinsic
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Options
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Price
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Term (Yrs)
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Value
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Outstanding, January 1, 2020
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2,480,000
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$
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4.34
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9.86
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$
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-
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Granted
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200,000
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2.15
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Exercised
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-
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-
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Expired
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-
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-
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Forfeited
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(250,000
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)
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4.47
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Outstanding, December 31, 2020
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2,430,000
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$
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4.15
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8.92
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$
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-
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Exercisable, December 31, 2020
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557,500
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$
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4.33
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2.84
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$
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-
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Options
outstanding and exercisable as of December 31, 2020 are as follows:
Options Outstanding
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Options Exercisable
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Outstanding
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Weighted Average
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Exercisable
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Exercise
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Number of
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Remaining Life
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Number of
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Price
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Options
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In Years
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Options
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$
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2.11
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80,000
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-
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-
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$
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2.17
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120,000
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-
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-
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$
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4.09
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1,890,000
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2.89
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472,500
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$
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5.66
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340,000
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2.56
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85,000
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2,430,000
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2.84
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557,500
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Effective
June 30, 2020, two of the Company’s directors (the “Resigning Directors”) resigned from their positions as members
of the Company’s Board of Directors. Options for the purchase of an aggregate of 20,000 shares of common stock, with a grant
date value of $43,356, held by the Resigning Directors were modified such that the options will be fully vested on September 20,
2020 and will be exercisable through September 20, 2029. The Company recorded $8,386 of incremental stock-based compensation expense
as a result of the option modification for the year ended December 31, 2020.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On
August 7, 2020, the Company’s Board approved, in connection with its general counsel’s transition to a part-time employee,
the Company’s waiver of any forfeiture of non-vested options in connection with such transition and termination of employment
scheduled for February 2021, such that the options for the purchase of 170,000 shares of common stock (grant date value of $266,733)
held by the Company’s general counsel will continue to vest according to their original vesting schedules and will expire
ninety days after November 21, 2023. The incremental value of the modified option award of $64,093, along with the unamortized
portion of the original award, will be amortized through the termination date in February 2021.
The
option grants described below were issued from the Company’s 2019 Stock Incentive Plan (“Incentive Plan”).
On
September 20, 2019, the Company issued ten-year options for the purchase of 400,000 shares of AESE common stock, pursuant to the
Incentive Plan. The options had an exercise price of $5.66 per share and a 4-year vesting term, with 25% vesting on each anniversary
of the date of grant. The options had an aggregate grant date fair value of $867,120.
On
November 21, 2019, the Company issued ten-year options for the purchase of 2,080,000 shares of AESE common stock, pursuant to
the Incentive Plan. The options had an exercise price of $4.09 per share and a 4-year vesting term, with 25% vesting on each anniversary
of the date of grant. The options had an aggregate grant date fair value of $3,263,551.
On
July 1, 2020, the Company issued ten-year options for the purchase of 80,000 shares of common stock, with a grant date value of
$61,186, to two directors of the Company. The options are exercisable at $2.11 per share and have a 4-year vesting term, with
25% vesting on each anniversary of the date of grant.
On
August 6, 2020, the Company issued ten-year options for the purchase of 120,000 shares of common stock, with an aggregate grant
date value of $97,947 to WPT’s general counsel. The options are exercisable at $2.17 per share and have a 4-year vesting
term with 25% vesting on each anniversary of the date of grant.
The
grant date value of options granted during the year ended December 31, 2020 were calculated using the Black-Scholes option pricing
model, with the following assumptions used:
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For the Years Ended
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December 31,
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2020
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2019
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Risk free interest rate
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0.55 - 0.69%
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1.74 - 1.77%
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Expected term (years)
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6.25
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6.25
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Expected volatility
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38%
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36%
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Expected dividends
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0.00%
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0.00%
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The
weighted average grant date fair value of the stock options granted during the years ended December 31, 2020 and 2019 was approximately
$0.80 and $1.67 per share, respectively.
The
expected term used for options is the estimated period of time that options granted are expected to be outstanding. The Company
utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” option
grants. The Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period
of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry.
The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term
consistent with the expected term of the instrument being valued.
For
the years ended December 31, 2020 and 2019, the Company recorded $1,158,173 and $149,893, respectively, of stock-based compensation
expense related to stock options issued as compensation, of which $214,239 and $22,339, respectively, was included in net income
(loss) of discontinued operations on the accompanying consolidated statements of operations. As of December 31, 2020, there was
$1,884,569 of unrecognized stock-based compensation expense related to the stock options that will be recognized over the weighted
average remaining vesting period of 2.9 years.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Restricted
Common Stock
A
summary of the non-vested restricted common stock activity during the year ended December 31, 2020 is presented below:
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Number of
Restricted Stock
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Weighted Average
Grant Date
Fair Value
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Non-vested balance, January 1, 2020
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80,393
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$
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5.66
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Granted
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199,143
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2.03
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Vested
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(80,393
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)
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5.66
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Forfeited
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-
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-
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Non-vested balance, December 31, 2020
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199,143
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$
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2.03
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The
stock grants described below were issued from the Company’s Incentive Plan.
On
September 20, 2019, the Company issued an aggregate of 80,393 shares of restricted common stock, pursuant to the Incentive Plan,
to certain members of the Board of Directors and Executives. The restricted common stock had an aggregate grant date fair value
of $455,000 and vested on the one-year anniversary of the date of grant. The shares were valued at the trading price of the Company’s
stock on the date of grant.
On
July 1, 2020, the Company issued 18,958 shares of restricted common stock with a grant date value $40,000 to two directors of
the Company. The restricted common stock remains subject to transfer and forfeiture restrictions until the shares vest on the
one-year anniversary of the date of grant.
On
August 7, 2020, the Company issued 50,000 shares of restricted common stock, with an aggregate grant date value of $109,000 to
its Chief Financial Officer (“CFO”). The 50,000 shares of restricted common stock have transfer and forfeiture restrictions
until the shares vest in two equal installments on August 18, 2021 and August 18, 2022.
On
August 7, 2020, the Company issued 94,471 shares of restricted common stock with a grant date value $205,000 to certain officers
and directors. The restricted common stock remains subject to transfer and forfeiture restrictions until the shares vest on the
one-year anniversary of the date of grant.
On
September 24, 2020, the Company issued 35,714 shares of restricted common stock with a grant date value of $50,000 to its CFO.
The restricted common stock remains subject to transfer and forfeiture restrictions until the shares vest on August 18, 2021.
For
the years ended December 31, 2020 and 2019, the Company recorded $588,220 and $127,152, respectively, of stock-based compensation
expense related to restricted stock issued as compensation of which $40,165 and $6,986, respectively, was included in net income
(loss) of discontinued operations on the accompanying statements of operations. As of December 31, 2020, there was $239,779 of
unrecognized stock-based compensation expense related to restricted stock that will be recognized over the weighted average remaining
vesting period of 1.0 years.
Warrants
Prior
to the August 9, 2019 Closing Date of the Merger (see Note 1 – Background and Basis of Presentation), BRAC issued 14,305,000
five-year warrants (the “BRAC Warrants”) for the purchase of the Company’s common stock at $11.50 per share
in connection with BRAC’s initial public offering. These previously issued BRAC Warrants are deemed to be issued in connection
with the Merger, as a result of the reverse recapitalization.
As
of result of the August 9, 2019 Merger, the Company issued to the former owners of Allied Esports and WPT five-year warrants to
purchase an aggregate of 3,800,003 shares of common stock at a price of $11.50 per share and issued five-year warrants for the
purchase of an aggregate of 532,000 shares of common stock to the Noteholders with an exercise price of $11.50 per share.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On
June 8, 2020, the Company issued warrants for the purchase of 1,454,546 shares of common stock at $4.13 per share in connection
with the issuance of Senior Secured Convertible Notes (See Note 10 – Convertible Debt and Convertible Debt, Related Party,
Senior Secured Convertible Notes).
A
summary of warrant activity during the year ended December 31, 2020 is presented below:
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Number of Warrants
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Weighted Average Exercise Price
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Weighted Average Remaining Life in Years
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Intrinsic
Value
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Outstanding, January 1, 2020
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18,637,003
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$
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11.50
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4.6
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$
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-
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Issued
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1,454,546
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4.13
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Exercised
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-
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-
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Cancelled
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-
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-
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Outstanding, December 31, 2020
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20,091,549
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$
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10.97
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3.7
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$
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-
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Exercisable, December 31, 2020
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20,091,549
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$
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10.97
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3.7
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$
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-
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Note
17 – Subsequent Events
Senior
Secured Convertible Notes
On
January 4, 2021, the Company issued 529,383 shares of common stock as redemption payments on the Senior Secured Convertible Notes.
See Note 10 – Convertible Debt and Convertible Debt, Related Party. As of the close of business on January 4, 2021, the
principal and accrued interest associated with the Senior Notes were repaid in full.
Director
Awards
On January 4, 2021, the Company issued to its non-executive directors
an aggregate of 126,584 shares of common stock from its Incentive Plan. The shares were issued for their director services to the
Company.
Restricted Stock
On January 19, 2021, the Company
entered into a Restricted Stock Unit Agreement with its Chief Executive Officer (“CEO”). Pursuant to this agreement, the CEO
received restricted stock units having a stated value equal to $1,000,000, which restricted stock units represent the right to receive
$1,000,000 payable upon the earlier of the two-year anniversary of the closing date of the Sale Transaction (provided that the CEO remains
continuously employed by the Company through such date), or the termination of the CEO’s employment without cause (as defined in
his employment agreement) (as applicable, the “Vesting Date”). At the time of payment, the Company may elect pay the $1,000,000
award in cash or in shares of common stock valued at the fair market value of our common stock on the Vesting Date, or any combination
thereof. All issuances of common stock will be issued from our 2019 Equity Incentive Plan. If payments or benefits provided or to be provided
by the Company or its affiliates to the CEO pursuant to the agreement or otherwise (“Covered Payments”) constitute “parachute
payments” within the meaning of Section 280G of the Internal Revenue Code of 1986 (the “Code”) that would be subject
to the excise tax imposed under Section 4999 of the Code (collectively, the “Excise Tax”), payments to be made under the agreement
will be reduced to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise Tax. On March
22, 2021, the agreement was amended to provide that the Vesting Date would apply after the two-year anniversary of the sale of CSI to
Element Partners, LLC, Bally’s Corporation, or their affiliates (provided that the CEO remains continuously employed by the Company
through such date).
Sale
of WPT
During 2021, the Company entered into the
Stock Purchase Agreement (or “SPA”) whereby CSI (a wholly-owned subsidiary of the Company and the entity that directly
or indirectly owns the legal entities comprising the WPT business) would be sold to Element Partners, LLC (the “Buyer”),
a Delaware limited liability company formed for the purposes of acquiring the WPT business in the Sale Transaction. The Buyer is owned
by an investment fund. See Note 1 – Background and Basis of Presentation and Note 4 – Discontinued Operations.
Allied
Esports Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Pursuant
to the SPA, the Buyer intends to purchase 100% of the outstanding capital stock of CSI for a base purchase price of $105 million.
This base purchase price will be adjusted to reflect the amount of CSI’s cash, indebtedness (other than indebtedness related to
an outstanding $685,300 Paycheck Protection Program loan) and accrued and unpaid transaction expenses as of the closing of the Sale Transaction.
The Buyer remitted a $10.0 million advance payment of the base purchase price to the Seller upon the execution of the SPA and is
required to pay the balance of the base purchase price at the closing of the Sale Transaction.
The SPA contains customary
representations and warranties, covenants and indemnification provisions. The closing of the Sale Transaction is subject to closing conditions,
including the approval of the Sale Transaction by the Company’s stockholders and other customary closing conditions. The Company
intends to consummate the Sale Transaction shortly after obtaining stockholder approval, assuming all other conditions to the completion
of the Sale Transaction have been satisfied or waived by the appropriate parties.
The SPA may be terminated
by Buyer or the Company if the closing of the Sale Transaction has not occurred by September 30, 2021, or upon the occurrence of certain
customary events as set forth in the SPA. Depending on the circumstances surrounding a termination of the SPA, the Buyer may be required
to pay a $10.0 million non-performance fee to the Company, and the Company may be required to pay a $3.45 million termination fee to the
Buyer, and the Company may be required to return to Buyer the $10.0 million advance payment of the purchase price and reimburse Buyer
for up to $1.0 million of its documented out of pocket expenses incurred in connection with the authorization, preparation, negotiation,
execution and performance of the SPA and the Sale Transaction.
Effective upon any termination
of the SPA, other than a termination in which Buyer is required to pay a non-performance fee to the Company, Buyer (or its affiliate)
and Peerless Media Limited, an indirect subsidiary of the Company that owns intellectual property related to the WPT Business, will enter
into a 3-year brand license for Buyer’s (or its affiliate’s) use of the WPT brand in the territory of Asia for real-money
gaming in exchange for revenue-based royalty payments of 20% of qualifying revenues, and minimum annual guaranteed royalty payments of
$4.0 million, $6.0 million and $8.0 million for the first, second and third years, respectively. Such license will be subject to further
customary terms and conditions and provide Peerless Media Limited with a $2.0 million buy-out right after the first year. In the event
of any termination of the Stock Purchase Agreement under any circumstance in which the Buyer is required to pay a termination fee to us,
the Company will have the option, but not the obligation, to require the Buyer to enter into such license agreement with Peerless Media
Limited.
On
January 26, 2021, WPT received notice from its lender that the entirety of the $685,300 of outstanding principal of its PPP Loan, which
is included in current liabilities held for sale on the accompanying balance sheets, was forgiven.