Allied Gaming & Entertainment Inc.

Previous wording

The following discussion and analysis of the results of operations and financial condition of Allied Gaming & Entertainment Inc. (the “Company”) as of March 31, 2024 and for the three months ended March 31, 2024 and 2023 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. This discussion and analysis should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2023, which are included in the Form 10-K (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 28, 2024, as amended on Form 10-K/A which was filed on April 29, 2024. 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.

Current wording

The following discussion and analysis of the results of operations and financial condition of Allied Gaming & Entertainment Inc. (the “Company”) as of June 30, 2024 and for the three and six months ended June 30, 2024 and 2023 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. This discussion and analysis should be read in conjunction with the Company’s audited financial statements and related disclosures as of December 31, 2023, which are included in the Form 10-K (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 28, 2024, as amended on Form 10-K/A which was filed on April 29, 2024. 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.

Previous wording

Allied Gaming and Entertainment Inc., along with 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. Under the Allied Esports International subsidiary (“AEI”) we operate global competitive esports properties designed to connect players and fans via a network of connected arenas and creation of original esports content. Esports Arena Las Vegas, LLC subsidiary, operates a flagship gaming arena located at the Luxor Hotel in Las Vegas, Nevada. Meanwhile, Allied Mobile Entertainment subsidiary (“AME”), is dedicated to exploring opportunities in the massive and growing mobile games markets. AME’s ownership of a 40% equity interest in Beijing Lianzhong Zhihe Technology Co. Ltd (“Z-Tech”), a prominent mobile games developer and operator, is engaged in the development and distribution of casual mobile games in Mainland China, solidifies our presence in this lucrative sector. Moreover, our subsidiary Allied Experiential Entertainment (“AEE”), focuses on orchestrating live entertainment events and offers management and consultation service to experiential entertainment venue operation. 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 nurture vibrant communities primarily comprising of Gen Y, Z, and Alpha consumers.

Current wording

Allied Gaming and Entertainment Inc., along with 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. Under the Allied Esports International subsidiary (“AEI”) we operate global competitive esports properties designed to connect players and fans via a network of connected arenas and creation of original esports content. Esports Arena Las Vegas, LLC subsidiary, operates a flagship gaming arena located at the Luxor Hotel in Las Vegas, Nevada. Meanwhile, Allied Mobile Entertainment subsidiary (“AME”), is dedicated to exploring opportunities in the massive and growing mobile games markets. AME’s ownership of a 40% equity interest in Beijing Lianzhong Zhihe Technology Co. Ltd (“ZTech”), a prominent mobile games developer and operator, is engaged in the development and distribution of casual mobile games in Mainland China, solidifies our presence in this lucrative sector. Moreover, our subsidiary Allied Experiential Entertainment (“AEE”), focuses on orchestrating live entertainment events and offers management and consultation service to experiential entertainment venue operation. 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 nurture vibrant communities primarily comprising of Gen Y, Z, and Alpha consumers.

Previous wording

On March 7, 2024, the Company received an initial payment of the Purchase Price of $2 million for the Purchased Shares and entered into a side letter agreement (the “Elite Side Letter Agreement”) with the Purchaser whereby the Purchaser agreed to pay the remaining consideration of $4.597 million within 2 months of the closing along with interest thereon at a simple interest rate of 5% per annum. The remaining consideration is collateralized by a pledge and first priority lien and security interest in 5,107,778 shares of Common Stock of the Purchased Shares issued by the Company to the Purchaser. As of May 15, 2024, the Company has not received the remaining consideration that was due on May 7, 2024. The Company is currently negotiating with the Purchaser a resolution of the unpaid amount.

Current wording

On March 7, 2024, the Company received an initial payment of the Purchase Price of $2 million for the Purchased Shares and entered into a side letter agreement (the “Elite Side Letter Agreement”) with the Purchaser whereby the Purchaser agreed to pay the remaining consideration of $4.597 million within 2 months of the closing along with interest thereon at a simple interest rate of 5% per annum. The remaining consideration was collateralized by a pledge and first priority lien and security interest in 5,107,778 shares of Common Stock of the Purchased Shares issued by the Company to the Purchaser. All obligations under the termination agreement were satisfied as of July 3, 2024.

Previous wording

In-person experience revenues increased by approximately $62 thousand, or 5%, to approximately $1.3 million for the three months ended March 31, 2024 from approximately $1.2 million for the three months ended March 31, 2023. The increase of in-person experience revenues was driven by a $0.1 million increase in sponsorship revenue related to a new naming rights agreement for the HyperX Arena that occurred at the end of the first quarter 2023. In addition, there was a $0.2 million increase in HyperX event revenue for the three months ended March 31, 2024 which was offset by a $0.2 million decrease in truck revenue for the same period.

Current wording

In-person experience revenues decreased by approximately $0.4 million, or 28%, to approximately $0.9 million for the three months ended June 30, 2024 from approximately $1.3 million for the three months ended June 30, 2023. The decrease of in-person experience revenues was driven by a $0.4 million decrease in arena and truck event revenue for the three months ended June 30, 2024 resulting from fewer events held during the period.

Previous wording

Casual mobile gaming revenue was $1.1 million for the three months ended March 31, 2024 and $0 for the three months ended March 31, 2023, respectively. The increase in casual mobile games revenue was due to the casual mobile gaming revenue earned as the result of the business combination with Z-Tech on October 31, 2023.

Current wording

Casual mobile gaming revenue was $1.7 million for the three months ended June 30, 2024 and $0.0 million for the three months ended June 30, 2023, respectively. The increase in casual mobile games revenue was due to the casual mobile gaming revenue earned as the result of the business combination with ZTech on October 31, 2023.

Previous wording

In-person costs (exclusive of depreciation and amortization) decreased by approximately $36 thousand, or 5%, to approximately $0. 6 million for the three months ended March 31, 2024 from approximately $0.7 million for the three months ended March 31, 2023. The decrease is the result of the decrease in costs associated with the truck events for the three months ended March 31, 2024 due to fewer truck events held during the period.

Current wording

In-person costs (exclusive of depreciation and amortization) decreased by approximately $0.1 million, or 22%, to approximately $0.5 million for the three months ended June 30, 2024 from approximately $0.6 million for the three months ended June 30, 2023. The decrease is the result of the decrease in costs associated with the arena and truck events for the three months ended June 30, 2024 resulting from fewer events held during the period.

Previous wording

Casual mobile gaming costs (exclusive of depreciation and amortization) were $937 thousand for the three months ended March 31, 2024 and $0 for the three months ended March 31, 2023, respectively. Casual mobile gaming costs consist principally of user acquisition, distribution and player incentive costs incurred by Z-Tech.

Current wording

Casual mobile gaming costs (exclusive of depreciation and amortization) were $1.6 million for the three months ended June 30, 2024 and $0 for the three months ended June 30, 2023, respectively. The recognition of casual gaming costs and expenses began in connection with the business combination with ZTech on October 31, 2023.

Previous wording

Research and development expenses were $195 thousand and $0 for the three months ended March 31, 2024 and 2023, respectively. Research and development expenses consist principally of costs related to the development of new casual mobile games for Z-Tech.

Current wording

Research and development expenses were $174 thousand and $0 for the three months ended June 30, 2024 and 2023, respectively. Research and development expenses consist principally of costs related to the development of new casual mobile games for ZTech.

Previous wording

Selling and marketing expenses decreased by approximately $1 thousand, or 2%, to approximately $54 thousand for the three months ended March 31, 2024 from approximately $55 thousand for the three months ended March 31, 2023.

Current wording

Selling and marketing expenses decreased by approximately $13 thousand, or 19%, to approximately $54 thousand for the three months ended June 30, 2024 from approximately $67 thousand for the three months ended June 30, 2023.

Previous wording

General and administrative expenses increased by approximately $0.3 million, or 12%, to approximately $2.9 million for the three months ended March 31, 2024, from approximately $2.5 million for the three months ended March 31, 2023. The increase in general and administrative expenses resulted primarily from a $0.5 million increase in stock-based compensation related to restricted share awards granted on February 22, 2024, along with a $0.2 million increase in legal and professional fees. These increases were slightly offset by a $0.3 million decrease in payroll and payroll related costs in 2024 due to a decrease in headcount, in addition to a $0.1 million decrease in insurance costs related to D&O insurance that was renewed at a lower cost in August 2023.

Current wording

General and administrative expenses increased by approximately $3.0 million, or 136%, to approximately $5.2 million for the three months ended June 30, 2024, from approximately $2.2 million for the three months ended June 30, 2023. The increase in general and administrative expenses resulted primarily from a $3.0 million increase in legal and professional fees related to a shareholder complaint filed in 2024, a $0.2 million increase in other legal and professional fees, and a $0.1 million increase in stock-based compensation related to restricted share awards granted on February 22, 2024. These increases were slightly offset by a $0.1 million decrease in payroll and payroll related costs in 2024 due to a decrease in headcount, in addition to a $0.2 million decrease in insurance costs related to D&O insurance that was renewed at a lower cost in August 2023.

Previous wording

Other expense, net, of approximately $13 thousand during the three months ended March 31, 2024 compared to $27 thousand of other income recorded for the three months ended March 31, 2023 are the result of realized foreign exchange gains/losses.

Current wording

We recognized other income, net, of approximately $14 thousand during the three months ended June 30, 2024 compared to $11 thousand of other expense recorded for the three months ended June 30, 2023.

Previous wording

Interest income, net, was approximately $859 thousand for the three months ended March 31, 2024 compared to approximately $735 thousand of interest income for the three months ended March 31, 2023. The increase is a result of the interest earned on a short-term investment purchased during the fourth quarter of 2023.

Current wording

Interest income, net, was approximately $1.0 million for the three months ended June 30, 2024 compared to approximately $0.7 million of interest income for the three months ended June 30, 2023. The increase is a result of the interest earned on a short-term investment purchased during the fourth quarter of 2023.

Previous wording

Depreciation and amortization decreased by approximately $0.2 million, or 35%, to approximately $0.4 million for the three months ended March 31, 2024, from approximately $0.6 million for the three months ended March 31, 2023. The decrease was primarily due to the disposal of office equipment and production equipment in 2023 related to the shut-down of our German operations, in addition to assets that became fully depreciated in 2023.

Current wording

Depreciation and amortization decreased by approximately $11 thousand, or 1%, to approximately $0.8 million for the six months ended June 30, 2024, from approximately $0.8 million for the six months ended June 30, 2023. The decrease was primarily due to the disposal of office equipment and production equipment in 2023 related to the winding up of the Germany business, in addition to assets that became fully depreciated in 2023.

Previous wording

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.

Current wording

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. We intend to utilize our credit facilities provided by our financial institutions for investment purposes, including but not limited to fixed interest returns on notes, bonds, and loans to qualified borrowers.

Previous wording

As of March 31, 2024, we had cash of approximately $7.3 million (not including approximately $69.6 million of short-term investments and $5.0 million of restricted cash) and working capital of approximately $67.2 million. For the three months ended March 31, 2024 and 2023, we incurred a net loss of approximately $1.8 million and $1.9 million, respectively, and used cash in operations of approximately $2.2 million and $1.0 million, respectively. During the quarter, we used the proceeds of a $6.4 million short-term bank borrowing to partially fund the acquisition of $14.9 million in equity-linked link notes and other investment products from the same bank.

Current wording

As of June 30, 2024, we had cash and cash equivalents of approximately $33.3 million (not including approximately $54.8 million of short-term investments and $5.0 million of restricted cash) and working capital of approximately $61.8 million. For the six months ended June 30, 2024 and 2023, we incurred a net loss of approximately $5.7 million and $2.6 million, respectively, and used cash in operations of approximately $4.5 million and $3.0 million, respectively.

Previous wording

Cash requirements for our current liabilities include approximately $14.9 million for loans payable, $0.7 million for accounts payable and accrued expenses, and $1.5 million for the current portion of an operating lease liability. Cash requirements for non-current liabilities include approximately $5.2 million for the non-current portion of an operating lease liability. The Company intends to meet these cash requirements from its current cash balance.

Current wording

Cash requirements for our current liabilities include approximately $29.1 million for loans payable, $2.0 million for accounts payable and accrued expenses, and $1.5 million for the current portion of an operating lease liability. Cash requirements for non-current liabilities include approximately $4.8 million for the non-current portion of an operating lease liability. The Company intends to meet these cash requirements from its current cash balance.

Previous wording

On December 13, 2023, AME-HK borrowed 1.3 billion Yen or approximately $9.2 million (USD) under a $10 million credit facility provided by Morgan Stanley Bank Asia Limited (the “Bank”) in connection with the Company’s $40 million investment in 12-month certificates of deposit with the Bank. The credit facility includes term loans, bank overdrafts, margin loans and certain other borrowings. The 12-month term loan is non-interest bearing.

Current wording

On December 13, 2023, AME-HK borrowed 1.3 billion Yen or approximately $9.0 million (USD) under a $10 million credit facility provided by Morgan Stanley Bank Asia Limited (the “Bank”) in connection with the Company’s $40 million investment in 12-month certificates of deposit with the Bank. The credit facility includes term loans, bank overdrafts, margin loans and certain other borrowings. The 12-month term loan is non-interest bearing.

Previous wording

On March 8, 2024, the credit facility was increased to $20 million under which, on March 15, 2024, AME-HK borrowed an additional 948.2 million Yen or approximately $6.3 million (USD). This 12-month term loan bears interest at a fixed rate of 0.3% per annum, payable at maturity on March 17, 2025.

Current wording

On March 8, 2024, the credit facility was increased to $20 million under which, on March 15, 2024, AME-HK borrowed an additional 948.2 million Yen or approximately $6.5 million (USD). This 12-month term loan bears interest at a fixed rate of 0.3% per annum, payable at maturity on March 17, 2025.

Previous wording

The table below summarizes cash flows for the three months ended March 31, 2024 and 2023:

Current wording

The table below summarizes cash flows for the six months ended June 30, 2024 and 2023:

Previous wording

Net cash used in operating activities for the three months ended March 31, 2024 and 2023 was approximately $2.1 million and $1.0 million, respectively, representing increased usage of cash of $1.1 million. During the three months ended March 31, 2024 and 2023, the net cash used in operating activities was primarily attributable to the net loss of approximately $1.8 million and $1.9 million, respectively, adjusted for approximately $1.1 million and $0.8 million, respectively, of net non-cash expenses, and approximately ($1.4) million and $0.1 million, respectively, of cash (used in) provided by changes in the levels of operating assets and liabilities.*** ***

Current wording

Net cash used in operating activities for the six months ended June 30, 2024 and 2023 was approximately $4.5 million and $3.0 million, respectively, representing increased usage of cash of approximately $1.5 million. During the six months ended June 30, 2024 and 2023, the net cash used in operating activities was primarily attributable to the net loss of approximately $5.7 million and $2.6 million, respectively, adjusted for approximately $2.0 million and $1.3 million, respectively, of net non-cash expenses, and approximately $0.8 million and $1.7 million, respectively, of cash used in changes in the levels of operating assets and liabilities.*** ***

Previous wording

Net cash used in investing activities for the three months ended March 31, 2024 was approximately $14.5 million, which consisted of $19.6 million used for the purchase of short-term investments and $1.3 million used for the issuance of a short-term loan, partially offset by $6.5 million in proceeds from the maturing of short-term investments.

Current wording

Net cash provided by investing activities for the six months ended June 30, 2024 was approximately $1.7 million, which consisted of approximately $41.6 million in proceeds from the maturing of short-term investments, partially offset by approximately $39.9 million used for the purchase of short-term investments.

Previous wording

Net cash used in investing activities for the three months ended March 31, 2023 was approximately $5.1 million, which consisted primarily of certificate of deposit purchases of $4.5 million and $0.6 million related to the acquisition of the casual mobile games license.

Current wording

Net cash provided by investing activities for the six months ended June 30, 2023 was approximately $14.9 million, which consisted primarily of proceeds from the maturing of certificate of deposits of $20.0 million and approximately $0.1 million in proceeds from the sale of equipment. This was partially offset by $4.5 million of certificate of deposit purchases, approximately $0.6 million related to the acquisition of a mobile games license, and $0.1 million of property and equipment purchases.

Previous wording

Net cash provided by financing activities for the three months ended March 31, 2024 was approximately $7.6 million compared to approximately ($1.5) million of net cash used in financing activities during the three months ended March 31, 2023. Net cash provided by financing activities during the three months ended March 31, 2024 represented proceeds from a short-term loan of $5.6 million and proceeds from the issuance of common stock in a share purchase agreement of $2.0 million. Net cash used in financing activities during the three months ended March 31, 2023 represented the purchase of treasury stock.

Current wording

Net cash provided by financing activities for the six months ended June 30, 2024 was approximately $19.8 million compared to approximately $1.9 million of net cash used in financing activities during the six months ended June 30, 2023. Net cash provided by financing activities during the six months ended June 30, 2024 represented proceeds from a short-term loan of approximately $19.8 million and proceeds from the issuance of common stock in a share purchase agreement of $2.0 million, offset by the $2.0 million return of proceeds upon cancellation of common stock previously issued. Net cash used in financing activities during the six months ended June 30, 2023 represented the purchase of treasury stock.

Previous wording

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.

Current wording

We prepare our condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.

Previous wording

We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are items within our financial statements that require estimation but are not deemed critical, as defined above.

Current wording

We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. We consider accounting for goodwill impairment to be a critical accounting estimate. There are additional items within our financial statements that require estimation but are not deemed critical, as defined above.