All In FutureTech Alliance, Inc.: Form 10-Q for the period ended Mar 31, 2024

Cautionary Statements

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.

The Company

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.

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 includes its partnerships with live streamers, post-produced episodic content, and short-form repackaged content. Allied’s casual mobile gaming includes contractual relationships with various advertising service providers for advertisements within the Company’s casual mobile games.

Our growth depends, in part, on our ability to adapt to technological advancements, shifts in gamer trends and demands, introductions of new games, evolving intellectual property practices among game publishers, the fusion of gaming and music and industry standards and practices. While change in this industry may be inevitable, we are committed to flexibly adjusting our business model as necessary to accommodate such shifts and maintain a leading position among 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, top artist events and concerts, 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.

Corporate Developments

Elite Fun Entertainment Co., Ltd. Strategic Investment

On December 28, 2023, the Company entered into a Share Purchase Agreement (the “Elite Purchase Agreement”) with Elite Fun Entertainment Co., Ltd. (the “Purchaser”), pursuant to which the Purchaser agreed to purchase 7,330,000 shares of Common Stock at a purchase price of $0.90 per share (the “Purchased Shares”) for a total purchase price of $6,597,000. The Purchased Shares represented less than 20% of the total issued and outstanding shares of the Company prior to the closing of the transaction.

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.

Results of Operations

Our operations consist of our esports gaming operations, casual mobile games and live entertainment events organizing. Our esports gaming operations 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 a diverse range of events, including corporate events, tournaments, game launches, and brand activation. Furthermore, we boast a mobile esports arena, an 18-wheel semi-trailer, which seamlessly transforms into a top-tier esports arena and competition stage or a dynamic live show arena complete with full content production capabilities and an interactive talent studio.

Results of Operations for the Three Months Ended March 31, 2024 and 2023

(in thousands)

Revenues

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.

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.

Costs and expenses

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.

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.

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.

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.

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.

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.

Other income (expense), net

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.

Interest income, net

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.

Liquidity and Capital Resources

The following table summarizes our total current assets, current liabilities and working capital at March 31, 2024 and December 31, 2023, respectively:

(in thousands)

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 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.

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.

Credit Facility

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.

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.

Cash Flows from Operating, Investing and Financing Activities

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

(in thousands)

Net Cash Used in Operating Activities

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.

Net Cash Provided By (Used In) Investing Activities

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.

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.

Net Cash Provided By (Used In) Financing Activities

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.

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 Estimates

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.

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.

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 March 31, 2024. 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 effective as of March 31, 2024 to ensure that the information required to be disclosed in our Exchange Act reports was recorded, processed, summarized and reported on a timely basis.

Inherent Limitations on Effectiveness of Controls

Even assuming the effectiveness of our controls and procedures, our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error or all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. In general, our controls and procedures are designed to provide reasonable assurance that our control system’s objective will be met, and our principal executive officer and principal financial officer has concluded that our disclosure controls and procedures are effective at the reasonable assurance level. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls in future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2024, 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.

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 Form 10-K for the year ended December 31, 2023 and our other public filings, which could materially affect our business, financial condition or future results. There have been no material changes from risk factors previously disclosed in “Risk Factors” in such Form 10-K in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 28, 2024, as amended by the Form 10-K/A filed on April 29, 2024.