UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
For the quarterly period ended
For the transition period from to _______
Commission file number:
(Exact Name of Registrant as Specified in Its Charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 6, 2023,
ALLIED GAMING & ENTERTAINMENT INC.
Index to Condensed Consolidated Financial Statements
i
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Interest receivable | ||||||||
| Due from affiliate | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Restricted cash | ||||||||
| Property and equipment, net | ||||||||
| Digital assets | ||||||||
| Intangible assets, net | ||||||||
| Deposits | ||||||||
| Operating lease right-of-use asset | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred revenue | ||||||||
| Operating lease liability, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liability, non-current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 5) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Treasury stock, at cost, | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| In-person | $ | $ | $ | $ | ||||||||||||
| Multiplatform content | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| Costs and Expenses: | ||||||||||||||||
| In-person (exclusive of depreciation and amortization) | ||||||||||||||||
| Multiplatform content (exclusive of depreciation and amortization) | ||||||||||||||||
| Selling and marketing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||
| Depreciation and amortization | ( | ) | ||||||||||||||
| Impairment of digital assets | ||||||||||||||||
| Total Costs and Expenses | ||||||||||||||||
| Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense): | ||||||||||||||||
| Other (expense) income, net | ( | ) | ( | ) | ||||||||||||
| Interest income, net | ||||||||||||||||
| Total Other Income (Expense) | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive income: | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Total Comprehensive Income (Loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Earnings (Loss) per Common Share | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted Average Number of Common Shares Outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
| For The Three and Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in | Other Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||
| Balance - January 1, 2023 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Stock options | - | - | ||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Other comprehensive income | - | - | ||||||||||||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Stock options | - | - | ||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Stock options | - | - | ||||||||||||||||||||||||||||||
| Repurchases of common stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | - | ||||||||||||||||||||||||||||||
| Balance - September 30, 2023 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
For The Three and Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in | Other Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||
| Balance - January 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Restricted common stock | - | - | ||||||||||||||||||||||||||||||
| Stock options | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Other comprehensive income | - | - | ||||||||||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Stock options | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance - June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Stock options | - | - | ||||||||||||||||||||||||||||||
| Shares withheld for employee payroll tax | ( | ) | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Non-cash rent expense | ||||||||
| Digital currency received as revenue | ( | ) | ||||||
| Impairment of digital assets | ||||||||
| Net gains on sale of equipment | ( | ) | ||||||
| Expenses paid using digital assets | ||||||||
| Change in fair value of warrant liabilities | ||||||||
| Depreciation and amortization | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Interest receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Deposit returns | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ( | ) | ||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ||||||
| Total Adjustments | ( | ) | ||||||
| Net Cash Used In Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchases of short-term investments | ( | ) | ||||||
| Proceeds from maturing of short-term investments | ||||||||
| Loan to affiliate | ( | ) | ||||||
| Investment in digital assets | ( | ) | ||||||
| Proceeds from sale of equipment | ||||||||
| Purchases of intangibles | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net Cash Provided By (Used In) Investing Activities | ( | ) | ||||||
| Cash Flows From Financing Activities | ||||||||
| Repurchases of common stock | ( | ) | ||||||
| Net Cash Used In Financing Activities | ( | ) | ||||||
| Effect of Exchange Rate Changes on Cash | ( | ) | ( | ) | ||||
| Net Decrease In Cash, Cash Equivalents, And Restricted Cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents, and restricted cash - Beginning of Period | ||||||||
| Cash, cash equivalents, and restricted cash - End of Period | $ | $ | ||||||
| Cash and restricted cash consisted of the following: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| $ | $ | |||||||
| Non-Cash Investing and Financing Activities: | ||||||||
| ROU asset for lease liability | $ | $ | ||||||
| Property and equipment received as deferred revenue | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 – Business Organization and Nature of Operations
Allied Gaming & Entertainment Inc. (“AGAE” and together with its subsidiaries, “the Company”) operates a public esports and entertainment company through its wholly owned subsidiaries Allied Esports International, Inc., (“AEII”), Esports Arena Las Vegas, LLC (“ESALV”), Allied Mobile Entertainment Inc. (“AME”), Allied Mobile Entertainment (Hong Kong) Limited (“AME-HK”), Allied Experiential Entertainment Inc. (“AEE”), and Allied Esports GmbH (“AEG” and together with AEII, AME and ESALV, “Allied Esports”). AEII produces a variety of esports and gaming-related content, including world class tournaments, live and virtual events, and original programming to continuously foster an engaged gaming community. ESALV operates HyperX Arena Las Vegas, the world’s most recognized esports facility. AME is engaged in the development and worldwide distribution of mobile casual games. AEE and AEG are currently inactive.
Note 2 – Significant Accounting Policies
There have been no material changes to the Company’s significant accounting policies as set forth in the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”), filed with the Securities and Exchange Commission (“SEC”) on March 24, 2023, as amended on April 27, 2023 and May 3, 2023, on Forms 10-K/A.
Basis of Presentation and Principles of Consolidation
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).
5
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
| As of September 30, 2023 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Digital assets | $ | $ | $ | $ | ||||||||||||
| Sponsor warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2022 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Digital assets | $ | $ | $ | $ | ||||||||||||
| Sponsor warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The carrying amounts of the Company’s financial instruments, such as cash equivalents, accounts receivable, short-term investments, interest receivable, due from affiliates, accounts payable, and accrued liabilities approximate fair value due to the short-term nature of these instruments.
Short-term investments consist of certificates of deposit with original maturities of greater than three months but less than or equal to twelve months when purchased.
The Sponsor Warrants are carried at fair value as of September 30, 2023 and December 31, 2022 and are included in accrued expenses on the accompanying condensed consolidated balance sheets. The Sponsor Warrants are valued using level 3 inputs. The fair value of the Sponsor Warrants is estimated using the Black-Scholes option pricing method. Significant level 3 inputs used to calculate the fair value of the Sponsor Warrants include the share price on the valuation date, expected volatility, expected term and the risk-free interest rate.
| Balance, January 1, 2023 | $ | |||
| Change in fair value of sponsor warrants | ||||
| Balance, March 31, 2023 | ||||
| Change in fair value of sponsor warrants | ||||
| Balance, June 30, 2023 | ||||
| Change in fair value of sponsor warrants | ||||
| Balance, September 30, 2023 | $ |
| September 30, | December 31, | |||||||
| Input | 2023 | 2022 | ||||||
| Risk-free rate | % | % | ||||||
| Remaining term in years | ||||||||
| Expected volatility | % | % | ||||||
| Exercise price | $ | $ | ||||||
| Fair value of common stock | $ | $ | ||||||
6
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Net Loss per Common Share
Basic loss per common share is computed by dividing net loss attributable to the Company by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus the impact of common shares, if dilutive, resulting from the potential exercise of outstanding stock options and warrants and vesting of restricted stock awards.
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Denominator (weighted average quantities): | ||||||||||||||||
| Common shares outstanding | ||||||||||||||||
| Less: Unvested restricted shares | ( | ) | ||||||||||||||
| Denominator for basic net loss per share | ||||||||||||||||
| Add: Contingent consideration shares | ||||||||||||||||
| Denominator for fully diluted net loss per share | ||||||||||||||||
| Income (Loss) per common shares | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Equity purchase options | - | |||||||||||||||
| Contingent consideration shares(1) | ||||||||||||||||
Revenue Recognition
To determine the proper revenue recognition method, the Company evaluates each of its contractual arrangements to identify its performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of the Company’s contracts have a single performance obligation because the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and is therefore not distinct. Some of the Company’s contracts have multiple performance obligations, primarily related to the provision of multiple goods or services. For contracts with more than one performance obligation, the Company allocates the total transaction price in an amount based on the estimated relative standalone selling prices underlying each performance obligation.
7
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company recognizes revenue primarily from the following sources:
In-person revenue
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Event Revenue | $ | $ | $ | $ | ||||||||||||
| Sponsorship revenue | ||||||||||||||||
| Food and beverage revenue | ||||||||||||||||
| Ticket and gaming revenue | ||||||||||||||||
| Merchandising revenue | ||||||||||||||||
| Total in-person revenue | $ | $ | $ | $ | ||||||||||||
Event revenues from the rental of the Allied Esports arena and gaming trucks are recognized over the term of the event based on the number of days completed relative to the total days of the event, as this method best depicts the transfer of control to the customer. 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 generates sponsorship revenue from the naming rights of its esports arena which 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.
Multiplatform revenue
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| NFT revenue | $ | $ | $ | $ | ||||||||||||
| Sponsorship revenue | ||||||||||||||||
| Distribution revenue | ||||||||||||||||
| Total multiplatform revenue | $ | $ | $ | $ | ||||||||||||
The Company’s NFT revenue is generated from the sale of non-fungible tokens (NFTs). The Company’s NFTs exist on the Ethereum Blockchain under the Company’s EPICBEAST brand, a digital art collection of 1,958 unique beasts inspired by past and present e-sport games. The Company uses the NFT exchange, OpenSea, to facilitate the sale of NFTs. The Company, through OpenSea, has custody and control of the NFT prior to the delivery to the customer and records revenue at a point in time when the NFT is delivered to the customer and the customer pays. The Company has no obligations for returns, refunds or warranty after the NFT sale.
8
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company earns a royalty
of up to
The Company generates sponsorship revenue from the production and distribution of original content programming over live-streaming services. The Company recognizes sponsorship revenue pursuant to the terms of each individual contract when the Company satisfies the respective performance obligations, which could be recognized at a point in time or over the term of the contract.
The Company’s distribution revenue is generated primarily through the distribution of content to online channels. Any advertising revenue earned by online channels is shared with the Company. The Company recognizes online advertising revenue at the point in time when the advertisements are placed in the video content.
Revenue recognition
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues Recognized at a Point in Time: | ||||||||||||||||
| Ticket and gaming revenue | $ | $ | $ | $ | ||||||||||||
| NFT revenue | ||||||||||||||||
| Food and beverage revenue | ||||||||||||||||
| Merchandising revenue | ||||||||||||||||
| Distribution revenue | ||||||||||||||||
| Total Revenues Recognized at a Point in Time | ||||||||||||||||
| Revenues Recognized Over a Period of Time: | ||||||||||||||||
| Event revenue | ||||||||||||||||
| Sponsorship revenue | ||||||||||||||||
| Total Revenues Recognized Over a Period of Time | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
The timing of the Company’s
revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior
to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services,
the Company records deferred revenue until the performance obligations are satisfied. As of September 30, 2023 and December 31, 2022,
the Company had contract liabilities of $
As
of September 30, 2023, $
Digital Assets
The Company accepts Ether as a form of payment for NFT sales. The Company accounts for digital assets held as the result of the receipt of Ether, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. The Company has ownership of and control over the digital assets and the Company may use third-party custodial services to secure them. The digital assets are initially recorded at cost and are subsequently remeasured net of any impairment losses incurred since the date of acquisition.
9
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company determines the fair value of its digital assets in accordance with ASC 820, “Fair Value Measurement”, based on quoted prices on the active exchange(s) that the Company has determined is the principal market for Ether (Level 1 inputs). The Company performs an analysis each quarter to identify whether events or changes in circumstances, or decreases in the quoted prices on active exchanges, indicate that it is more likely than not that the Company’s digital assets are impaired. In determining if an impairment has occurred, the Company considers the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then-current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value of such assets.
The impaired digital assets
are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent
increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses
for the same digital assets held. In determining the gain or loss to be recognized upon sale, the Company calculates the difference between
the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales
are recognized within operating expenses in our condensed consolidated statements of operations and comprehensive loss. There were $
| Balance, December 31, 2022 | $ | |||
| Expenses paid using digital assets | ( | ) | ||
| Balance, September 30, 2023 | $ |
Concentration Risks
Financial instruments that
potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, short-term investments,
due from affiliate and trade accounts receivable. The Company holds cash, cash equivalents and short-term investments at major financial
institutions in amounts which often exceed Federal Deposit Insurance Corporation’s insurance limits. As of September 30, 2023, two
customers represented
During the three months ended
September 30, 2023 and 2022,
During the three months ended
September 30, 2023, the Company’s two largest customers accounted for
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
10
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company engages in foreign
currency denominated transactions with customers and suppliers, as well as between subsidiaries with different functional currencies.
Realized losses of $
Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements, other than those disclosed below.
Reclassifications
Certain prior period balances have been reclassified in order to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or loss per share.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Since June 2016, the FASB issued clarifying updates to the new standard including changing the effective date for smaller reporting companies. The guidance is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this ASU on January 1, 2023, using the modified retrospective approach and it did not have a material impact on its condensed 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 our 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 early adopted ASU 2020-06 effective January 1, 2023 which eliminated the need to assess whether a beneficial conversion feature needs to be recognized upon the issuance of new convertible instruments.
Note 3 – Intangible Assets, net
| Intellectual Property | Licenses | Software Development Costs | Total Intangibles | Accumulated Amortization | Total | |||||||||||||||||||
| Balance as of January 1, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Purchases of intangibles | ||||||||||||||||||||||||
| Software development costs | ||||||||||||||||||||||||
| Amortization expense | ( | ) | ( | ) | ||||||||||||||||||||
| Balance as of September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
11
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
On October 31, 2022, the Company
entered into a system development agreement to develop an Allied Gaming membership management system and event organizer system. Pursuant
to the terms of the agreement, the Company has committed to spend an aggregate amount of $
On February 27, 2023, the Company purchased a
five-year exclusive worldwide software license to operate four mobile casual games for $
Note 4 – Accrued Expenses and Other Current Liabilities
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Compensation expense | $ | $ | [1] | |||||
| Event costs | ||||||||
| Legal and professional fees | ||||||||
| Property and franchise tax | ||||||||
| Warrant liabilities | ||||||||
| Other accrued expenses | ||||||||
| Accrued expenses and other current liabilities | $ | $ | ||||||
| (1) |
Note 5 – Commitments and Contingencies
Litigations, Claims, and Assessments
The Company may, from time to time, be involved in various disputes, claims, liens and litigation matters arising out of the normal course of business. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Operating Leases
Allied Esports leases an arena
in Las Vegas, Nevada, for the purpose of hosting Esports activities (the “Las Vegas Lease”). The arena opened to the public
on March 23, 2018 (the “Commencement Date”). Initial lease terms were for minimum monthly payments of $
On July 17, 2023, the Company
leased
The Company also leased office
and production space in Germany, pursuant to a lease dated August 1, 2020 which expired on
12
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company’s aggregate
lease expense incurred during the three months ended September 30, 2023 and 2022 amounted to $
The Company’s aggregate
lease expense incurred during the nine months ended September 30, 2023 and 2022 amounted to $
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows used in operating activities | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations | ||||||||
| Operating leases | $ | $ | ||||||
| Weighted Average Remaining Lease Term (Years) | ||||||||
| Operating leases | ||||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | % | |||||||
| For the Year Ending December 31, | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: amount representing imputed interest | ( | ) | ||
| Present value of lease liability | ||||
| Less: current portion | ( | ) | ||
| Lease liability, non-current portion | $ | |||
Note 6 – Related Party Transactions
On September 24, 2023, AME-HK
advanced Beijing Lianzhong Co., Ltd, a related party (and a subsidiary of AGAE’s largest investor), $
13
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 7 – Stockholders’ Equity
Stock Options
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Remaining | Intrinsic | |||||||||||||
| Options | Price | Term (Yrs) | Value | |||||||||||||
| Outstanding, January 1, 2023 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding, September 30, 2023 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2023 | $ | $ | ||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||
| Weighted | ||||||||||||||
| Outstanding | Average | Exercisable | ||||||||||||
| Exercise | Number of | Remaining Life | Number of | |||||||||||
| Price | Options | In Years | Options | |||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
| $ | ||||||||||||||
For the three months ended
September 30, 2023 and 2022, the Company recorded $
Restricted Common Stock
For the three and nine months
ended September 30, 2022, the Company recorded $
14
ALLIED GAMING & ENTERTAINMENT INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 8 – Employee Retention Credit
The
employee retention credit (“ERC”), as originally enacted through the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”) on March 27, 2020, is a refundable credit against certain employment taxes equal to
During
the three and nine months ended September 30, 2023 and 2022, the Company recognized employee retention credits of approximately $
Note 9 – Subsequent Event
On October 31, 2023, AME - HK completed its acquisition
of a
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statements
The following discussion and analysis of the results of operations and financial condition of Allied Gaming & Entertainment Inc. (the “Company”) as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q and with the Company’s audited financial statements and related disclosures as of December 31, 2022, which are included in our Annual Report on Form 10-K (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 24, 2023, as amended on April 27, 2023 and May 3, 2023. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company and its subsidiaries. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” in our Annual Report, and other factors that we may not know. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements above, to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q.
The Company
Allied Gaming and Entertainment Inc., and its subsidiaries (“AGAE” or the “Company”) is a global experiential entertainment company focused on providing a growing audience of gamers with unique experiences through renowned assets, products, and services. Allied Esports International, Inc. (“Allied”) operates global competitive esports properties designed to connect players and fans via a network of connected arenas. Esports Arena Las Vegas, LLC operates a flagship gaming arena located at the Luxor Hotel in Las Vegas, Nevada. The Company offers a variety of esports and gaming-related content, including world class tournaments, live and virtual entertainment and gaming events, and original programming to continuously foster an engaged gaming community. Allied Esports operates solely through its wholly owned subsidiaries. In December 2022, the Company completed a strategic review of its business operations and announced plans to restructure the existing esports business and expand its focus to include a broader array of entertainment and gaming products and services. Under this plan, the Company intends to pursue multiple channels of opportunities instead of a single significant corporate transaction such as an acquisition of complementary assets or businesses, and it is currently exploring opportunities to leverage its location-based-entertainment expertise with a focus on gaming lifestyle and experiential entertainment, as well as growing its digital footprint and monetization capabilities through mobile gaming.
Allied’s in-person experiences include live events hosted at its flagship arena, HyperX Arena Las Vegas, an affiliate arena with one of its global network of esports arena partners, and its mobile arenas. Allied’s multiplatform content include its partnerships with live streamers, post-produced episodic content, and short-form repackaged content. Allied’s interactive services include strategic partnerships with various content creators, broadcasters, and streaming technology partners to provide interactive streaming experiences with a wide range of influencers.
Our growth depends, in part, on our ability to respond to 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, we will try to adapt our business model as needed to accommodate change and remain on the forefront of our competitors.
Our business plan requires significant capital expenditures, and we expect our operating expenses to increase as we continue to expand our marketing efforts and operations in existing and new geographies as well as new vertical markets (including live influencer events, experiential entertainment, casual mobile gaming, live streaming platforms and channels, interactive content monetization, and online esports tournament and gaming subscription platforms), which we believe will provide attractive returns on investment.
Z-Tech Acquisition
On August 16, 2023, AME-HK entered into an Equity Interest Purchase Agreement (the “Purchase Agreement”) with, among others, Beijing Lianzhong Co., Ltd (“Z-Tech”) (the “Seller”) and Beijing Lianzhong Zhihe Technology Co., Ltd. (the “Target Company”), pursuant to which AME-HK agreed to acquire 40% equity interest in the Target Company held by the Seller for a total purchase price of $7,000,000 in cash (the “Acquisition”). Pursuant to the terms of the Purchase Agreement AME-HK has the right to appoint three out of five members of the Board of Directors of the Target Company, and AME-HK also will acquire certain rights held by the Seller as the major shareholder of the Target Company prior to the Acquisition. After the Acquisition, which was completed on October 31, 2023, the Company has become Z-Tech’s largest shareholder.
Z-Tech was founded in Beijing, China in April 2022 and has emerged as a mobile games developer and operator, specializing in the innovation, research, development and operation of premium card and Mahjong casual games. Leveraging advanced in-game advertising strategies, Z-Tech has generated substantial revenue streams and established a premier leisure entertainment platform and community, which further solidifies its connection with customers, enhancing engagement and fostering enduring relationships.
16
Results of Operations
Our operations consist of our esports gaming operations, which take place at global competitive esports properties designed to connect players and fans via a network of connected arenas. Through our subsidiaries, we offer 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, and produce and distribute esports content at our on-site production facilities and studios. At our flagship arena in Las Vegas, Nevada, we provide an attractive facility for hosting corporate events, tournaments, game launches or other events. Additionally, we have a mobile esports arena, which is an 18-wheel semi-trailer that converts into a first class esports arena and competition stage with full content production capabilities and an interactive talent studio.
Results of Operations for the Three Months Ended September 30, 2023 and 2022
| For the | ||||||||||||
| Three Months Ended | ||||||||||||
| September 30, | Favorable | |||||||||||
| (in thousands) | 2023 | 2022 | (Unfavorable) | |||||||||
| Revenues: | ||||||||||||
| In-person | $ | 1,120 | $ | 1,552 | $ | (432 | ) | |||||
| Multiplatform content | - | 14 | (14 | ) | ||||||||
| Total Revenues | 1,120 | 1,566 | (446 | ) | ||||||||
| Costs and Expenses: | ||||||||||||
| In-person (exclusive of depreciation and amortization) | 576 | 1,113 | 537 | |||||||||
| Multiplatform content (exclusive of depreciation and amortization) | - | 31 | 31 | |||||||||
| Selling and marketing expenses | 51 | 54 | 3 | |||||||||
| General and administrative expenses | 894 | 2,398 | 1,504 | |||||||||
| Depreciation and amortization | 239 | (329 | ) | (568 | ) | |||||||
| Loss From Operations | (640 | ) | (1,701 | ) | 1,061 | |||||||
| Other Income (Expense) | ||||||||||||
| Other (expense) income, net | - | 34 | (34 | ) | ||||||||
| Interest income, net | 715 | 25 | 690 | |||||||||
| Net income (loss) | $ | 75 | $ | (1,642 | ) | $ | 1,717 | |||||
Revenues
In-person revenues decreased by approximately $0.4 million, or 28%, to approximately $1.1 million for the three months ended September 30, 2023 from approximately $1.6 million for the three months ended September 30, 2022. The decrease of in-person experience revenues was driven by a $0.5 million decrease in event revenue and a $0.2 million decrease in merchandising revenue. This was slightly offset by a $0.3 million increase in sponsorship revenue related to a new naming rights agreement for our HyperX Arena in Las Vegas.
Multiplatform revenue decreased by approximately $14 thousand for the three months ended September 30, 2023 from $14 thousand for the three months ended September 30, 2022 to $0 for the three months ended September 30, 2023.
Costs and expenses
In-person costs (exclusive of depreciation and amortization) decreased by approximately $0.5 million, or 48%, to approximately $0.6 million for the three months ended September 30, 2023 from approximately $1.1 million for the three months ended September 30, 2022. The decrease corresponds to the decrease in event revenue described above.
Multiplatform costs (exclusive of depreciation and amortization) decreased by approximately $31 thousand, or 100%, to approximately $0 for the three months ended September 30, 2023 from approximately $31 thousand for the three months ended September 30, 2022.
17
Selling and marketing expenses decreased by approximately $3 thousand, or 6%, to approximately $51 thousand for the three months ended September 30, 2023 from approximately $54 thousand for the three months ended September 30, 2022.
General and administrative expenses decreased by approximately $1.5 million, or 63%, to approximately $0.9 million for the three months ended September 30, 2023, from approximately $2.4 million for the three months ended September 30, 2022. The decrease in general and administrative expenses is primarily attributable to (a) a $1.8 million reduction in compensation costs which includes a $1.5 million Employee Retention Credit (“ERC”) and $0.3 million in higher payroll and payroll related costs in 2022 and (b) a $0.2 million reduction in stock-based compensation due to higher costs that occurred in the third quarter of 2022 to correct the vesting of options of a former employee. This was slightly offset by an increase in legal and professional fees of $0.5 million related to merger and acquisition activities in the third quarter of 2023.
Depreciation and amortization increased by approximately $0.5 million, or 173%, to approximately $0.2 million for the three months ended September 30, 2023, from approximately ($0.3) million for the three months ended September 30, 2022. The increase was primarily due to a $1.0 million adjustment for the three months ended September 30, 2022 to correct the amortization of leasehold improvements in prior periods. This was slightly offset by a decrease in depreciation related to production equipment that became fully depreciated on March 31, 2023.
Other income (expense)
We recognized other expense of approximately $0 during the three months ended September 30, 2023 compared to $34 thousand of other income recorded for the three months ended September 30, 2022.
Interest income
Interest income was approximately $716 thousand for the three months ended September 30, 2023 compared to approximately $25 thousand of interest income for the three months ended September 30, 2022. The increase is a result of the interest earned on short-term investments purchased at various times commencing in the fourth quarter of 2022.
Results of Operations for the Nine Months Ended September 30, 2023 and 2022
| For the | ||||||||||||
| Nine Months Ended | ||||||||||||
| September 30, | Favorable | |||||||||||
| (in thousands) | 2023 | 2022 | (Unfavorable) | |||||||||
| Revenues: | ||||||||||||
| In-person | $ | 3,581 | $ | 3,735 | $ | (154 | ) | |||||
| Multiplatform content | 2,001 | 1,401 | 600 | |||||||||
| Total Revenues | 5,582 | 5,136 | 446 | |||||||||
| Costs and Expenses: | ||||||||||||
| In-person (exclusive of depreciation and amortization) | 1,891 | 2,785 | 894 | |||||||||
| Multiplatform content (exclusive of depreciation and amortization) | 1,518 | 1,021 | (497 | ) | ||||||||
| Selling and marketing expenses | 173 | 186 | 13 | |||||||||
| General and administrative expenses | 5,661 | 8,762 | 3,101 | |||||||||
| Depreciation and amortization | 1,030 | 1,288 | 258 | |||||||||
| Impairment of digital assets | - | 164 | 164 | |||||||||
| Loss From Operations | (4,691 | ) | (9,070 | ) | 4,379 | |||||||
| Other Income (Expense) | ||||||||||||
| Other income (expense), net | 16 | (46 | ) | 62 | ||||||||
| Interest income, net | 2,165 | 34 | 2,131 | |||||||||
| Net Loss | $ | (2,510 | ) | $ | (9,082 | ) | $ | 6,572 | ||||
18
Revenues
In-person revenues decreased by approximately $0.2 million, or 4%, to approximately $3.6 million for the nine months ended September 30, 2023 from approximately $3.7 million for the nine months ended September 30, 2022. The decrease of in-person experience revenues was driven by a $0.5 million decrease in event revenue, $0.2 million decrease in food and beverage revenue and a $0.2 million decrease in merchandising revenue all due to a decrease in HyperX Arena events in 2023. This was slightly offset by a $0.7 million increase in sponsorship revenue related to a new naming rights agreement for our HyperX Arena in Las Vegas.
Multiplatform revenue increased by approximately $0.6 million, or 43%, to approximately $2.0 million for the nine months ended September 30, 2023, from approximately $1.4 million for the nine months ended September 30, 2022. The increase in multiplatform revenues is the result of additional revenue generated from Season 2 of Elevated, a live streaming event which had 10 episodes in 2023 compared to 4 episodes in 2022.
Costs and expenses
In-person costs (exclusive of depreciation and amortization) decreased by approximately $0.9 million, or 32%, to approximately $1.9 million for the nine months ended September 30, 2023 from approximately $2.8 million for the nine months ended September 30, 2022. The decrease is a result of a decrease in HyperX Arena events in 2023.
Multiplatform costs (exclusive of depreciation and amortization) increased by approximately $0.5 million, or 49%, to approximately $1.5 million for the nine months ended September 30, 2023 from approximately $1.0 million for the nine months ended September 30, 2022. The increase in multiplatform costs corresponds to the production costs for 10 episodes of Season Two of Elevated which aired in Q2 2023 versus only four episodes in Season One which aired in Q1 of 2022. In addition, in 2022 there was revenue related to the sale of NFTs which had minimal direct costs.
Selling and marketing expenses decreased by approximately $13 thousand, or 7%, to approximately $173 thousand for the nine months ended September 30, 2023 from approximately $186 thousand for the nine months ended September 30, 2022.
General and administrative expenses decreased by approximately $3.1 million, or 35%, to approximately $5.7 million for the nine months ended September 30, 2023, from approximately $8.8 million for the nine months ended September 30, 2022. The decrease in general and administrative expenses resulted from (a) a $1.5 million ERC credit recognized in 2023, (b) a 2022 accrual of $0.7 million for severance costs paid out to the former Chief Executive Officer, (d) $1.0 million in higher payroll and payroll related costs in 2022, and (e) $0.7 million of higher stock-based compensation in 2022 related to the accelerated vesting of options previously granted to the former Chief Executive Officer. These decreases were slightly offset by a $0.8 million increase in legal and professional fees related to various employment and service provider transition matters in addition to merger and acquisition related professional fees in connection with the acquisition of a 40% equity interest in Z-Tech and other strategic investment opportunities.
Depreciation and amortization decreased by approximately $0.3 million, or 20%, to approximately $1.0 million for the nine months ended September 30, 2023, from approximately $1.3 million for the nine months ended September 30, 2022. The decrease was primarily due to production equipment of approximately $7.0 million that became fully depreciated on March 31, 2023. The decrease also includes the amortization of leasehold improvements that occurred in the second quarter of 2022 that was corrected as an out-of-period adjustment in the third quarter of 2022.
Impairment in digital assets decreased to $0 for the nine months ended September 30, 2023, compared to $164 thousand for the nine months ended September 30, 2022. The impairment loss during 2022 was the result of the market price on active exchanges going below the carrying value of the digital assets. The market price has not gone below the carrying value of the digital assets during the nine months ended September 30, 2023.
Other income (expense)
We recognized other income of approximately $16 thousand during the nine months ended September 30, 2023 compared to $46 thousand of other expense recorded for the nine months ended September 30, 2022.
Interest income
Interest income was approximately $2.2 million for the nine months ended September 30, 2023 compared to approximately $34 thousand of interest income for the nine months ended September 30, 2022. The increase is a result of the interest earned on short-term investments purchased at various times commencing in the fourth quarter of 2022.
19
Liquidity and Capital Resources
The following table summarizes our total current assets, current liabilities and working capital at September 30, 2023 and December 31, 2022, respectively:
| September 30, | December 31, | |||||||
| (in thousands) | 2023 | 2022 | ||||||
| Current Assets | $ | 76,426 | $ | 82,377 | ||||
| Current Liabilities | $ | 2,525 | $ | 3,298 | ||||
| Working Capital | $ | 73,901 | $ | 79,079 | ||||
Our primary sources of liquidity and capital resources are cash and short-term investments on the balance sheet and funds that can be raised through debt or equity financing.
As of September 30, 2023, we had cash of approximately $10.4 million (not including approximately $60.0 million of short-term investments and $5.0 million of restricted cash) and working capital of approximately $73.9 million. For the nine months ended September 30, 2023 and 2022, we incurred a net loss of approximately $2.5 million and $9.1 million, respectively, and used cash in operations of approximately $4.6 million and $8.6 million, respectively.
Cash requirements for our current liabilities include approximately $0.8 million for accounts payable and accrued expenses. Cash requirements for current and non-current lease obligations are approximately $8.1 million, including $1.0 million imputed interest. The Company intends to meet these cash requirements from its current cash balance. As of September 30, 2023, the Company had no material commitments for capital expenditures. As part of our previously announced plan to pursue strategic transactions to enhance our financial performance, we expect to use a portion of our cash reserve for the acquisition of or investment in complementary businesses and assets, to the extent such opportunities are available. Such cash reserves include $3.5 million to complete the acquisition of Beijing Lianzhong Zhihe Technology Co., Ltd. We believe our current cash on hand is sufficient to meet our operating and capital requirements for at least the next twelve months from the date these financial statements are issued. Based on our current operating plan, we believe we will be able to fund future requirements from positive operating cash flows.
Cash Flows from Operating, Investing and Financing Activities
The table below summarizes cash flows for the nine months ended September 30, 2023 and 2022:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (in thousands) | 2023 | 2022 | ||||||
| Net cash (used in) provided by | ||||||||
| Operating activities | $ | (4,599 | ) | $ | (8,552 | ) | ||
| Investing activities | $ | 5,918 | $ | (48 | ) | |||
| Financing activities | $ | (2,051 | ) | $ | - | |||
Net Cash Used in Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2023 and 2022 was approximately $4.6 million and $8.6 million, respectively, representing decreased usage of cash of $4.0 million. During the nine months ended September 30, 2023 and 2022, the net cash used in operating activities was primarily attributable to the net loss of approximately $2.5 million and $9.1 million, respectively, adjusted for approximately $1.9 million and $2.7 million, respectively, of net non-cash expenses, and approximately ($4.0) million and ($2.2) million, respectively, of cash used to fund changes in the levels of operating assets and liabilities.
Net Cash Used in Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2023 was approximately $5.9 million, which consisted primarily of proceeds from the maturing of certificate of deposits of $30.0 million and $0.1 million in proceeds from the sale of equipment. This was slightly offset by $20.0 million of certificate of deposit purchases, $0.1 million of property and equipment purchases, $0.6 million related to the acquisition of a mobile games license, and $3.5 million in a loan to an affiliate.
Net cash used in investing activities for the nine months ended September 30, 2022 was approximately $48 thousand, which consisted primarily of approximately $7 thousand of cash used for the purchases of property and equipment and approximately $41 thousand of cash used for the investment in digital assets.
20
Net Cash Used in Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023 was approximately $2.1 million compared to $0 for the nine months ended September 30, 2022 which is driven solely by the repurchase of treasury stock.
Off-Balance Sheet Arrangements
The Company does not engage in any off-balance sheet financing activities, nor does the Company have any interest in entities referred to as variable interest entities.
Critical Accounting Policies and Estimates
Refer to our Annual Report for the year ended December 31, 2022, filed with the SEC on March 24, 2023, as amended on April 27, 2023 and May 3, 2023, on Forms 10-K/A, and Note 2 to the condensed consolidated financial statements of this Quarterly Report on Form 10-Q, for a discussion of our critical accounting policies and use of estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Effectiveness of Disclosure Controls and Procedures
Our management, under the direction of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2023. Based on this evaluation our management, including the Company’s Chief Executive Officer and Chief Financial Officer, has concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2023 to ensure that the information required to be disclosed in our Exchange Act reports was recorded, processed, summarized and reported on a timely basis, primarily due to the material weakness in internal control over financial reporting as discussed below.
Despite not conducting a formal assessment regarding internal control over financial reporting, management identified the following material weaknesses as of December 31, 2022, which persisted as of September 30, 2023:
| ● | inadequate segregation of duties resulting from limited accounting staff and resources; and | |
| ● | inadequate information technology general controls as it relates to user access and change management. |
Our management, under the oversight of our Audit Committee, and in consultation with outside advisors, continues to evaluate and implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated. These remediation measures include but are not limited to: (i) reorganizing roles and responsibilities to address segregation of duties issues, (ii) evaluating and implementing enhanced process controls around user access and change management; and (iii) monitoring and conducting regular assessment of the effectiveness of internal controls.
We believe the above actions will be effective in remediating the material weakness described above and we will continue to devote time and attention to these remedial efforts. However, as we continue to evaluate and take actions to improve our internal controls over financial reporting, we may take additional actions to address control deficiencies or modify certain of the remediation measures described above. Our remediation efforts will not be considered complete until the applicable controls operate for a sufficient period and our management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2023, there were no changes in our internal control over financial reporting that have affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” in the Company’s Annual Report for the year ended December 31, 2022 and our other public filings, which could materially affect our business, financial condition or future results. Except as provided below, there have been no material changes from risk factors previously disclosed in “Risk Factors” in such Annual Report for the year ended December 31, 2022, filed with the SEC on March 24, 2023, as amended.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 11, 2022, our Board of Directors (the “Board”) authorized a stock repurchase program under which we are authorized to repurchase up to $10 million of our outstanding shares of common stock through November 17, 2024. The manner, timing and amount of any purchase will be based on an evaluation of market conditions, stock price and other factors. Repurchases under the program will be made in open market transactions in compliance with the SEC Rule 10b-18 and federal securities laws. The stock repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be extended, suspended or discontinued at any time at the Company’s discretion. The stock repurchase will be funded using the Company’s working capital.
The following table provides information with respect to repurchases made under the stock repurchase program for the quarter ended September 30, 2023:
| Approximate | ||||||||||||||||
| Total Number | Dollar | |||||||||||||||
| of Shares | Value of | |||||||||||||||
| Purchased as | Shares that | |||||||||||||||
| Part of | May be | |||||||||||||||
| Total Number | Publicly | Purchased | ||||||||||||||
| of Shares | Average Price | Announced | Under | |||||||||||||
| (or Units) | Paid Per | Plans or | the Plans or | |||||||||||||
| Period | Purchased | Share (Unit) | Program | Programs (1) | ||||||||||||
| July 1, 2023 to July 31, 2023 | 21,411 | $ | 1.01 | 21,411 | $ | 7,492,726 | ||||||||||
| August 1, 2023 to August 31, 2023 | 150,110 | $ | 0.93 | 150,110 | $ | 7,350,152 | ||||||||||
| September 1, 2023 to September 30, 2023 | 11,500 | $ | 1.00 | 11,500 | $ | 7,338,263 | ||||||||||
| (1) | On November 11, 2022, the Board of Directors authorized a stock repurchase program under which the Company was authorized to repurchase up to $10 million of the Company’s common stock through November 17, 2024. |
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
To the best of the Company’s knowledge during the fiscal quarter ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) of the Securities Exchange Act) of the Company adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements.
ITEM 6. EXHIBITS.
| Exhibit | Description | |
10.1 |
||
| 31.1* | Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a) | |
| 31.2* | Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a) | |
| 32.1* | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 | |
| 32.2* | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALLIED GAMING & ENTERTAINMENT INC. | ||
| Dated: November 9, 2023 | By: | /s/ Yinghua Chen |
| Yinghua Chen, Chief Executive Officer, (Principal Executive Officer) | ||
| Dated: November 9, 2023 | By: | /s/ Roy Anderson |
| Roy Anderson, Chief Financial Officer (Principal Financial Officer) | ||
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