UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
From the transition period from _________ to _________
Commission File Number
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(Exact name of small business issuer as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
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(Address of principal executive offices)
Company: (
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 on its corporate web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
Securities registered pursuant to Section 12(b) of the Act:
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As of August 10, 2023, there were
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPER LEAGUE GAMING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, |
December 31, |
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2023 |
2022 |
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(Unaudited) |
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ASSETS |
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Cash and cash equivalents |
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Accounts receivable |
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Prepaid expense and other current assets |
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Total current assets |
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Property and Equipment, net |
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Intangible assets, net |
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Goodwill |
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Total assets |
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
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Accounts payable |
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Accrued contingent consideration |
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Contract liabilities |
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Convertible note payable and accrued interest |
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Total current liabilities |
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| Warrant liability | ||||||||
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Deferred taxes |
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Total liabilities |
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| Commitments and Contingencies |
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| Stockholders’ Equity | ||||||||
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
SUPER LEAGUE GAMING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended June 30, |
Six Months Ended June 30, |
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2023 |
2022 |
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2022 |
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REVENUE |
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COST OF REVENUE |
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GROSS PROFIT |
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OPERATING EXPENSE |
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Selling, marketing and advertising |
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Engineering, technology and development |
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General and administrative |
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Contingent consideration |
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Loss on intangible asset disposal |
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| Total operating expense | ||||||||||||||||
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NET OPERATING LOSS |
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OTHER INCOME (EXPENSE) |
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| Change in fair value of warrant liability | ||||||||||||||||
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Interest expense |
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Other |
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Total other income (expense) |
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Loss before benefit from income taxes |
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Benefit from income taxes |
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NET LOSS |
$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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Net loss attributable to common stockholders - basic and diluted |
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Basic and diluted loss per common share |
$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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Weighted-average number of shares outstanding, basic and diluted |
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See accompanying notes to condensed consolidated financial statements
SUPER LEAGUE GAMING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
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Three Months |
Six Months |
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Ended June 30, |
Ended June 30, |
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2023 |
2022 |
2023 |
2022 |
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Preferred stock (Shares): |
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Balance, beginning of period |
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Issuance of Series A-5 preferred stock at $1,000 per share |
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Issuance of Series AA preferred stock at $1,000 per share |
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Issuance of Series AA-2 preferred stock at $1,000 per share |
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Issuance of Series AA-3 preferred stock at $1,000 per share |
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Issuance of Series AA-4 preferred stock at $1,000 per share |
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Issuance of Series AA-5 preferred stock at $1,000 per share |
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Conversion of Series A preferred stock |
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Balance, end of period |
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Preferred stock (Amount, at Par Value): |
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Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
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Issuance of Series A-5 preferred stock, $0.001 par value, at $1,000 per share |
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Issuance of Series AA preferred stock, $0.001 par value, at $1,000 per share |
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Issuance of Series AA-2 preferred stock, $0.001 par value, at $1,000 per share |
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Issuance of Series AA-3 preferred stock, $0.001 par value, at $1,000 per share |
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Issuance of Series AA-4 preferred stock, $0.001 par value, at $1,000 per share |
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Issuance of Series AA-5 preferred stock, $0.001 par value, at $1,000 per share |
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Conversion of Series A preferred stock |
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Balance, end of period |
$ | $ | $ | $ | ||||||||||||
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Common stock (Shares): |
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Balance, beginning of period |
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Common stock issued for Melon Acquisition |
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Common stock issued for Super Biz Acquisition |
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Conversion of Series A preferred stock |
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Stock-based compensation |
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Other |
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Balance, end of period |
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Common stock (Amount): |
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Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
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Conversion of Series A preferred stock |
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Stock-based compensation |
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Common stock issued for Melon Acquisition |
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Common stock issued for Super Biz Acquisition |
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Balance, end of period |
$ | $ | $ | $ | ||||||||||||
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Additional paid-in-capital: |
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Balance, beginning of period |
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Issuance of Series A-5 preferred stock at $1,000 per share, net of issuance costs |
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Issuance of Series AA preferred stock at $1,000 per share, net of issuance costs |
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Issuance of Series AA-2 preferred stock at $1,000 per share, net of issuance costs |
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Issuance of Series AA-3 preferred stock at $1,000 per share, net of issuance costs |
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Issuance of Series AA-4 preferred stock at $1,000 per share, net of issuance costs |
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Issuance of Series AA-5 preferred stock at $1,000 per share, net of issuance costs |
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| Common stock purchase warrants issued to placement agent | ( |
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Common stock issued for Melon Acquisition |
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Common stock issued for Super Biz Acquisition |
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Stock-based compensation |
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Other |
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Balance, end of period |
$ | $ | $ | $ | ||||||||||||
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Accumulated Deficit: |
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Balance, beginning of period |
$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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Net Loss |
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( |
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( |
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Balance, end of period |
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$ | ( |
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$ | ( |
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Total stockholders’ equity |
$ | $ | $ | $ | ||||||||||||
See accompanying notes to condensed consolidated financial statements
SUPER LEAGUE GAMING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended June 30, |
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2023 |
2022 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
$ | ( |
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$ | ( |
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| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
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Depreciation and amortization |
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Stock-based compensation |
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| Change in fair value of warrant liability | ( |
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| Change in fair value of contingent consideration | ||||||||
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Change in fair value of convertible notes |
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Amortization of convertible notes discount |
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Loss on intangible asset disposal |
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| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
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Prepaid expense and other current assets |
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Accounts payable and accrued expense |
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| Accrued contingent consideration | ( |
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Contract liabilities |
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Deferred taxes |
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( |
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Accrued interest on note payable |
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Net cash used in operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Cash paid in connection with Melon Acquisition |
( |
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| Purchase of property and equipment | ( |
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( |
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Purchase of third-party game properties |
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Capitalization of software development costs |
( |
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Acquisition of other intangible assets |
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( |
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Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of preferred stock, net of issuance costs |
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Proceeds from issuance of common stock, net of issuance costs |
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Proceeds from convertible notes, net |
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Payments on convertible notes |
( |
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( |
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| Net cash provided by financing activities | ||||||||
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INCREASE/(DECREASE) IN CASH |
( |
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Cash and Cash Equivalents – beginning of period |
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Cash and Cash Equivalents – end of period |
$ | $ | ||||||
| SUPPLEMENTAL NONCASH INVESTING | ||||||||
| Issuance of common stock in connection with Melon Acquisition | $ | |||||||
| Issuance of common stock in connection with the payment of Super Biz Contingent Consideration | ||||||||
See accompanying notes to condensed consolidated financial statements
SUPER LEAGUE GAMING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1. |
DESCRIPTION OF BUSINESS |
Super League Gaming, Inc. (Nasdaq: SLGG), (“Super League,” the “Company,” “we,” “us” or “our”) is a leading strategically-integrated publisher and creator of games and experiences across the world’s largest immersive digital platforms. From metaverse gaming powerhouses such as Roblox, Minecraft and Fortnite, to the most popular Web3 environments such as Sandbox and Decentraland, to bespoke worlds built using the most advanced 3D creation tools, Super League’s innovative solutions provide incomparable access to massive audiences who gather in immersive digital spaces to socialize, play, explore, collaborate, shop, learn and create. As a true end-to-end activation partner for dozens of global brands, Super League offers a complete range of development, distribution, monetization and optimization capabilities designed to engage users through dynamic, energized programs. As an originator of new experiences fueled by a network of top developers, a comprehensive set of proprietary creator tools and a future-forward team of creative professionals, Super League accelerates IP and audience success within the fastest growing sector of the media industry.
Super League was incorporated on October 1, 2014 as Nth Games, Inc. under the laws of the State of Delaware and changed its name to Super League Gaming, Inc. on June 15, 2015. We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012, as amended.
On May 30, 2023, the Company filed a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation, as amended (the “Amendment”), increasing the number of authorized shares of Common Stock from
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2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, certain information and footnotes required by U.S. GAAP in annual financial statements have been omitted or condensed in accordance with quarterly reporting requirements of the Securities and Exchange Commission (“SEC”). These interim condensed consolidated financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2022 included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023.
The December 31, 2022 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The condensed consolidated interim financial statements of Super League include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of Super League’s financial position as of June 30, 2023, and results of its operations and its cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the entire fiscal year, or any future period.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
Reclassifications
Certain reclassifications to operating expense line items have been made to prior period amounts for consistency and comparability with the current periods’ condensed consolidated financial statements presentation. These reclassifications had no effect on the reported total operating expense for the periods presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from these estimates. The Company believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, impairment of intangibles, stock-based compensation expense, capitalized internal-use-software costs, accounting for business combinations and related contingent consideration, accounting for convertible debt, including estimates and assumptions used to calculate the fair value of debt instruments, accounting for convertible preferred stock, accounting for warrant liabilities and accounting for income taxes and valuation allowances against net deferred tax assets, require its most difficult, subjective, or complex judgments.
Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred net losses, including noncash charges, of $
The Company had cash and cash equivalents of $
Management’s Plans
The Company experienced significant growth in fiscal year 2023, 2022 and 2021 through organic and inorganic growth activities, including the expansion of our premium advertising inventory and quarter over quarter and year over year increases in recognized revenue across our primary revenue streams. In fiscal year 2023, we focused on the continued expansion of our service offerings and revenue growth opportunities through internal development, collaborations, and through opportunistic strategic acquisitions, as well as management and reduction of operating costs. Management continues to consider alternatives for raising capital to facilitate our growth and execute our business strategy, including strategic partnerships and or other forms of equity or debt financings. Refer to Note 6 for recent equity financing activities.
As further described at Note 6, on March 25, 2022, we entered into a common stock purchase agreement with an institutional investor. Pursuant to the agreement, the Company has the right, but not the obligation, to sell to the investor, and the investor is obligated to purchase, up to $
The Company considers historical operating results, costs, capital resources and financial position, in combination with current projections and estimates, as part of its plan to fund operations over a reasonable period. Management’s considerations assume, among other things, that the Company will continue to be successful implementing its business strategy, that there will be no material adverse developments in the business, liquidity or capital requirements, and the Company will be able to raise additional equity and / or debt financing on acceptable terms. If one or more of these factors do not occur as expected, it could cause a reduction or delay of its business activities, sales of material assets, default on its obligations, or forced insolvency. The accompanying financial statements do not contain any adjustments which might be necessary if the Company were unable to continue as a going concern. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company.
We may continue to evaluate potential strategic acquisitions. To finance such strategic acquisitions, we may find it necessary to raise additional equity capital, incur debt, or both. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption periodically and such volatility and disruption may occur in the future. If we fail to obtain additional financing when needed, we may not be able to execute our business plans which, in turn, would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies.
Revenue Recognition
Revenue is recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. In this regard, revenue is recognized when: (i) the parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations; (ii) the entity can identify each party’s rights regarding the goods or services to be transferred; (iii) the entity can identify the payment terms for the goods or services to be transferred; (iv) the contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract); and (v) it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Transaction prices are based on the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, if any. We consider the explicit terms of the revenue contract, which are typically written and executed by the parties, our customary business practices, the nature, timing, and the amount of consideration promised by a customer in connection with determining the transaction price for our revenue arrangements. Refunds and sales returns historically have not been material.
The Company generates revenue from (i) innovative advertising including immersive game world and experience publishing and in-game media products, (ii) content and technology through the production and distribution of our own, advertiser and third-party content, and (iii) direct to consumer offers, including in-game items, e-commerce, game passes and ticketing and digital collectibles.
The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction and is evaluated on a transaction-by-transaction basis. To the extent the Company acts as the principal, revenue is reported on a gross basis net of any sales tax from customers, when applicable. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service prior to transfer to the customer. Where applicable, the Company has determined that it acts as the principal in all of its media and advertising, publishing and content studio and direct to consumer revenue streams, except in situations where we utilize a reseller partner with respect to direct media and advertising sales arrangements.
Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied.
Media and Advertising
Media and advertising revenue primarily consists of direct and reseller sales of our in-game media and analytics products, influencer marketing sales and sales of programmatic display and video advertising units to third-party advertisers and exchanges. Media and advertising arrangements typically include contract terms for time periods ranging from several days to several weeks in length.
For media and advertising arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the arrangement as we satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Revenue from shorter-term media and advertising arrangements that provide for a contractual delivery or performance date is recognized when performance is substantially complete and/or delivery occurs. Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for shorter-term campaigns.
Publishing and Content Studio
Publishing and content studio revenue consists of revenue generated from immersive game development and custom game experiences within our owned and affiliate game worlds, and revenue generated in connection with our production, curation and distribution of entertainment content for our own network of digital channels and media and entertainment partner channels. We distribute three primary types of content for syndication and licensing, including: (1) our own original programming content, (2) user generated content (“UGC”), including online gameplay and gameplay highlights, and (3) the creation of content for third parties utilizing our remote production and broadcast technology.
For publishing and content studio arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the arrangement as we satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Revenue from shorter-term publishing and content studio arrangements that provide for a contractual delivery or performance date is recognized when performance is substantially complete and/or delivery occurs. Payments are typically due from customers during the term of the arrangement for longer-term campaigns or projects, and once delivery is complete for shorter-term campaigns or projects.
Direct to Consumer
Direct to consumer revenue primarily consists of monthly digital subscription fees, and sales of in-game digital goods. Subscription revenue is recognized in the period the services are rendered. Payments are typically due from customers at the point of sale.
InPvP Platform Generated Sales Transactions. We also generate in-game platform sales revenue from the sale of digital goods, including cosmetic items, durable goods, player ranks and game modes, leveraging the flexibility of the Microsoft Minecraft Bedrock platform, and powered by the InPvP cloud architecture technology platform. Revenue is generated when transactions are facilitated between Microsoft and the end user, either via in-game currency or cash.
Revenue for digital goods sold on the platform is recognized when Microsoft (our partner) collects the revenue and facilitates the transaction on the platform. Revenue for such arrangements includes all revenue generated, bad debt, make goods, and refunds of all transactions managed via the platform by Microsoft. Payments are made to the Company monthly based on the reconciled sales revenue generated.
Revenue was comprised of the following for the periods presented:
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Three Months Ended June 30, |
Six Months Ended June 30, |
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2023 |
2022 |
2023 |
2022 |
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Media and advertising |
$ | $ | $ | $ | ||||||||||||
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Publishing and content studio |
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Direct to consumer |
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| $ | $ | $ | $ | |||||||||||||
For the three and six months ended June 30, 2023,
Contract liabilities represent payments received in advance of providing services under certain contracts and were $
In accordance with ASC 606-10-50-13, the Company is required to include disclosure on its remaining performance obligations as of the end of the current reporting period. Due to the nature of the Company’s contracts with customers, these reporting requirements are not applicable as per ASC 606-10-50-14.
Cost of Revenue
Cost of revenue includes direct costs incurred in connection with the satisfaction of performance obligations under our revenue arrangements including internal and third-party engineering, creative, content, broadcast and other personnel, talent and influencers, internal and third-party game developers, content capture and production services, direct marketing, cloud services, software, prizing, and revenue sharing fees.
Advertising
Advertising costs include the cost of ad production, social media, print media, marketing, promotions, and merchandising. The Company expenses advertising costs as incurred. Advertising costs are included in selling, marketing and advertising expense in the condensed consolidated statements of operations. Advertising expense for the three and six months ended June 30, 2023 were
Engineering, Technology and Development Costs
Components of our platform are available on a “free to use,” “always on basis,” and are utilized and offered as an audience acquisition tool, as a means of growing our audience, engagement, viewership, players and community. Engineering, technology and development related operating expense includes the costs described below, incurred in connection with our audience acquisition and viewership expansion activities. Engineering, technology and development related operating expense includes (i) allocated internal engineering personnel expense, including salaries, noncash stock compensation, taxes and benefits, (ii) third-party contract software development and engineering expense, (iii) internal use software cost amortization expense, and (iv) technology platform related cloud services, broadband and other platform expense, incurred in connection with our audience acquisition and viewership expansion activities, including tools and product offering development, testing, minor upgrades and features, free to use services, corporate information technology and general platform maintenance and support.
Fair Value Measurements
Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company measures financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs 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 other than quoted prices which are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
Level 3. Unobservable inputs which are supported by little or no market activity and which are significant to the fair value of the assets or liabilities.
Certain assets and liabilities are required to be recorded at fair value on a recurring basis, including derivative financial instruments, contingent consideration and warrant liabilities recorded in accordance with ASC 480, “Distinguishing liabilities from equity,” (“ASC 480”), and convertible notes payable recorded at fair value. As described below, at Note 4, Note 5 and Note 6 contingent consideration, convertible notes payable and warrant liabilities outstanding during the periods presented, respectively, are recorded at fair value. Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. There were no transfers to/from Levels 1, 2, and 3 during the periods presented.
Certain long-lived assets may be periodically required to be measured at fair value on a nonrecurring basis, including long-lived assets that are impaired. The fair value for other assets and liabilities such as cash, restricted cash, accounts receivable, receivables reserved for users, other receivables, prepaid expense and other current assets, accounts payable and accrued expense, and liabilities to customers have been determined to approximate carrying amounts due to the short maturities of these instruments.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to a liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in the statement of operations.
Acquisitions
Acquisition Method. Acquisitions that meet the definition of a business under ASC 805, “Business Combinations,” (“ASC 805”) are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired, liabilities assumed, contractual contingencies, and contingent consideration, when applicable, are recorded at fair value at the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The application of the acquisition method of accounting requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in connection with the allocation of the purchase price consideration to the assets acquired and liabilities assumed. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expense in the condensed consolidated statements of operations.
Cost Accumulation Model. Acquisitions that do not meet the definition of a business under ASC 805 are accounted for as an asset acquisition, utilizing a cost accumulation model. Assets acquired and liabilities assumed are recognized at cost, which is the consideration the acquirer transfers to the seller, including direct transaction costs, on the acquisition date. The cost of the acquisition is then allocated to the assets acquired based on their relative fair values. Goodwill is not recognized in an asset acquisition. Direct transaction costs include those third-party costs that can be directly attributable to the asset acquisition and would not have been incurred absent the acquisition transaction.
Contingent consideration, representing an obligation of the acquirer to transfer additional assets or equity interests to the seller if future events occur or conditions are met, is recognized when probable and reasonably estimable. Contingent consideration recognized is included in the initial cost of the assets acquired, with subsequent changes in the recorded amount of contingent consideration recognized as an adjustment to the cost basis of the acquired assets. Subsequent changes are allocated to the acquired assets based on their relative fair value. Depreciation and/or amortization of adjusted assets are recognized as a cumulative catch-up adjustment, as if the additional amount of consideration that is no longer contingent had been accrued from the outset of the arrangement.
Contingent consideration that is paid to sellers that remain employed by the acquirer and linked to future services is generally considered compensation cost and recorded in the statement of operations in the post-combination period.
Intangible Assets
Intangible assets primarily consist of (i) internal-use software development costs, (ii) domain name, copyright and patent registration costs, (iii) commercial licenses and branding rights, (iv) developed technology acquired, (v) partner, customer, creator and influencer related intangible assets acquired and (vi) other intangible assets, which are recorded at cost (or in accordance with the acquisition method or cost accumulation methods described above) and amortized using the straight-line method over the estimated useful lives of the assets, ranging from to
Software development costs incurred to develop internal-use software during the application development stage are capitalized and amortized on a straight-line basis over the software’s estimated useful life, which is generally years. Software development costs incurred during the preliminary stages of development are charged to expense as incurred. Maintenance and training costs are charged to expense as incurred. Upgrades or enhancements to existing internal-use software that result in additional functionality are capitalized and amortized on a straight-line basis over the applicable estimated useful life.
Impairment of Long-Lived Assets
The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments; and significant decline in our stock price for a sustained period. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.
Other assets of a reporting unit that are held and used may be required to be tested for impairment when certain events trigger interim goodwill impairment tests. In such situations, other assets, or asset groups, are tested for impairment under their respective standards and the other assets’ or asset groups’ carrying amounts are adjusted for impairment before testing goodwill for impairment as described below. For the periods presented herein, management believes that there was no impairment of long-lived assets. There can be no assurance, however, that market conditions or demand for the Company’s products or services will not change, which could result in long-lived asset impairment charges in the future.
Stock-Based Compensation
Compensation expense for stock-based awards is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense, typically on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which is generally two to four years. Compensation expense for awards with performance conditions that affect vesting is recorded only for those awards expected to vest or when the performance criteria are met. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of stock option and common stock purchase warrant awards is estimated on the date of grant utilizing the Black-Scholes-Merton option pricing model. The Company utilizes the simplified method for estimating the expected term for options granted to employees due to the lack of available or sufficient historical exercise data for the Company for the applicable options terms. The Company accounts for forfeitures of awards as they occur. Estimates of expected volatility of the underlying common stock for the expected term of the stock option used in the Black-Scholes-Merton option pricing model are determined by reference to historical volatilities of the Company’s common stock and historical volatilities of similar companies.
Grants of equity-based awards (including warrants) to non-employees in exchange for consulting or other services are accounted for using the grant date fair value of the equity instruments issued.
A condition affecting the exercisability or other pertinent factors used in determining the fair value of an award that is based on an entity achieving a specified share price constitutes a market condition pursuant to ASC 718, “Stock based Compensation,” (“ASC 718”). A market condition is reflected in the grant-date fair value of an award, and therefore, a Monte Carlo simulation model is utilized to determine the estimated fair value of the equity-based award. Compensation cost is recognized for awards with a market condition, provided the requisite service period is satisfied, regardless of whether the market condition is ever satisfied.
Cancellation of an existing equity-classified award along with a concurrent grant of a replacement award is accounted for as a modification under ASC 718, “Stock-based Compensation.” Total compensation cost to be recognized in connection with a modification and concurrent grant of a replacement award is equal to the original grant date fair value plus any incremental fair value, calculated as the excess of the fair value of the replacement award over the fair value of the original awards on the cancellation date. Any incremental compensation cost related to vested awards is recognized immediately on the modification date. Any incremental compensation cost related to unvested awards is recognized prospectively over the remaining service period, in addition to the remaining unrecognized grant date fair value.
On January 1, 2022, the Company issued
In December 2022, the Company issued
Modifications to Equity-Based Awards
On April 30, 2023, the Board of Directors of the Company (the “Board”) approved the cancellation of the
On April 30, 2023, the Board approved the cancellation of certain stock options to purchase an aggregate of
On May 1, 2023, the Board approved the cancellation of options to purchase an aggregate of
Total noncash stock-based compensation expense for the periods presented was included in the following financial statement line items:
|
Three Months |
Six Months |
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|
Ended June 30, |
Ended June 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Sales, marketing and advertising |
$ | $ | $ | |||||||||||||
|
Engineering, technology and development |
||||||||||||||||
|
General and administrative |
||||||||||||||||
|
Total noncash stock compensation expense |
$ | $ | $ | |||||||||||||
Financing Costs
Specific incremental costs directly attributable to a proposed or actual offering of securities are deferred and charged against the gross proceeds of the equity financing. In the event that the proposed or actual equity financing is not completed, or is deemed not likely to be completed, such costs are expensed in the period that such determination is made. Deferred equity financing costs, if any, are included in other current assets in the accompanying condensed consolidated balance sheet. Deferred financing costs totaled $
Convertible Debt
The Company evaluates convertible notes outstanding to determine if those contracts or embedded components of those contracts qualify as derivatives under ASC 815, “Derivatives and Hedging,” (“ASC 815”). ASC 815 requires conversion, redemption options, call options and other features (hereinafter, “Embedded Instruments”) contained in the Company’s convertible debt instruments that meet certain criteria to be bifurcated and separately accounted for as an embedded derivative. In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
In the event that the fair value option election is not made, as described below, the Company evaluates the balance sheet classification for convertible debt instruments issued to determine whether the instrument should be classified as debt or equity, and whether the Embedded Instruments should be accounted for separately from the host instrument. Embedded Instruments of a convertible debt instrument would be separated from the convertible instrument and classified as a derivative liability if the feature, were it a standalone instrument, meets the definition of an “embedded derivative.” Generally, characteristics that require derivative treatment include, among others, when the conversion feature is not indexed to the Company’s equity, or when it must be settled either in cash or by issuing stock that is readily convertible to cash. When a conversion feature meets the definition of an embedded derivative, it is required to be separated from the host instrument and classified as a derivative liability carried on the balance sheet at fair value, with any changes in its fair value recognized currently in the condensed consolidated statements of operations.
Fair Value Option (“FVO”) Election. The Company accounts for certain convertible notes issued, as described at Note 5 under the fair value option election pursuant to ASC 825, “Financial Instruments,” (“ASC 825”) as discussed below. The convertible notes accounted for under the FVO election are each debt host financial instruments containing embedded features which would otherwise be required to be bifurcated from the debt-host and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements under ASC 815. Notwithstanding, ASC 825 provides for the “fair value option” election, to the extent not otherwise prohibited by ASC 825, to be afforded to financial instruments, wherein bifurcation of an embedded derivative is not necessary, and the financial instrument is initially measured at its issue-date estimated fair value and then subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The estimated fair value adjustment, as required by ASC 825, is recognized as a component of other comprehensive income (“OCI”) with respect to the portion of the fair value adjustment attributed to a change in the instrument-specific credit risk, with the remaining amount of the fair value adjustment recognized as other income (expense) in the accompanying condensed consolidated statement of operations. With respect to the note described at Note 5, as provided for by ASC 825, the estimated fair value adjustment is presented in a respective single line item within other income (expense) in the accompanying condensed consolidated statements of operations, since the change in fair value of the convertible notes payable was not attributable to instrument specific credit risk. The estimated fair value adjustment is included in interest expense in the accompanying condensed consolidated statement of operations.
Reportable Segments
The Company utilizes the management approach to identify the Company’s operating segments and measure the financial information disclosed, based on information reported internally to the Chief Operating Decision Maker (“CODM”) to make resource allocation and performance assessment decisions. An operating segment of a public entity has all the following characteristics: (1) it engages in business activities from which it may earn revenue and incur expense; (2) its operating results are regularly reviewed by the public entity’s CODM to make decisions about resources to be allocated to the segment and assess its performance: and (3) its discrete financial information is available. Based on the applicable criteria under the standard, the components of the Company’s operations are its: (1) media and advertising component, including its publishing and content studio component; and (2) the Company’s direct-to-consumer component.
A reportable segment is an identified operating segment that also exceeds the quantitative thresholds described in the applicable standard. Based on the applicable criteria under the standard, including quantitative thresholds, management has determined that the Company has reportable segment that operated primarily in domestic markets during the periods presented herein.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of credit risk are cash equivalents, investments and accounts receivable. The Company places its cash equivalents and investments primarily in highly rated money market funds. Cash equivalents are also invested in deposits with certain financial institutions and may, at times, exceed federally insured limits. The Company has not experienced any significant losses on its deposits of cash and cash equivalents.
Risks and Uncertainties
Concentrations. The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, and vendors whose accounts payable balances individually represented 10% or more of the Company’s total accounts payable, as follows:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
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|
Number of customers > 10% of revenue / percent of revenue |
|
/ |
|
/ |
|
/ |
|
/ |
|||||||||
Revenue concentrations were comprised of the following revenue categories:
|
Three Months |
Six Months |
|||||||||||||||
|
Ended June 30, |
Ended June 30, |
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|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Media and advertising |
% |
% |
% |
% |
||||||||||||
| Publishing and content studio | % |
% |
% |
% |
||||||||||||
|
% |
% |
% |
% |
|||||||||||||
|
June 30, 2023 |
December 31, 2022 |
|||||||||
|
Number of customers > 10% of accounts receivable / percent of accounts receivable |
|
/ |
% |
|
/ |
% | ||||
|
Number of vendors > 10% of accounts payable / percent of accounts payable |
|
/ |
% |
|
/ |
% | ||||
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period. Diluted earnings per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period, including the dilutive effect of common stock equivalents. Potentially dilutive common stock equivalents primarily consist of common stock potentially issuable in connection with the conversion of outstanding convertible notes payable, employee stock options, warrants issued to employees and non-employees in exchange for services and warrants issued in connection with financings. Common stock underlying all outstanding stock options, restricted stock units and warrants, totaling
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized, or if it is determined that there is uncertainty regarding future realization of such assets.
Under U.S. GAAP, a tax position is a position in a previously filed tax return, or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not, based on technical merits, that the position will be sustained upon examination. Tax positions that meet the more likely than not thresholds are measured using a probability weighted approach as the largest amount of tax benefit being realized upon settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments, and which may not accurately forecast actual outcomes. Management believes the Company has no uncertain tax positions for the periods presented.
During the three months ended June 30, 2023, the Company assigned the intangible assets originally acquired in connection with the Company’s acquisition of Bannerfy in fiscal year 2021, to the original sellers, as described at Note 3. The Bannerfy Acquisition was treated for tax purposes as a nontaxable transaction and, as such, the historical tax bases of the acquired assets and assumed liabilities, net operating losses, and other tax attributes of Bannerfy carried over, with no step-up to fair value of the underlying tax bases of the acquired net assets. The acquisition method of accounting included the establishment of a net deferred tax liability resulting from book tax basis differences related to assets acquired and liabilities assumed on the date of acquisition. When an acquisition of a group of assets is purchased in a transaction that is not accounted for as a business combination under ASC 805, a difference between the book and tax bases of the assets arises. ASC 740, “Income Taxes,” (“ASC 740”) required the use of simultaneous equations to determine the assigned value of the asset and the related deferred tax asset or liability. As a result of the disposal of the Bannerfy intangible assets, the Company fully amortized the related remaining net deferred tax liability, resulting in a $
Recent Accounting Guidance
Recent Accounting Pronouncements – Adopted. In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers, in order to align the recognition of a contract liability with the definition of a performance obligation. This standard is effective for the Company beginning in the first quarter of fiscal year 2023. The adoption of the new accounting standard did not have a material impact on the condensed consolidated balance sheets or statements of operations for the periods presented herein.
| 3. |
INTANGIBLE AND OTHER ASSETS |
Intangible and other assets consisted of the following for the periods presented:
|
June 30, |
December 31, |
|||||||
|
2023 |
2022 |
|||||||
|
Partner and customer relationships |
$ | $ | ||||||
|
Capitalized software development costs |
||||||||
|
Capitalized third-party game property costs |
||||||||
|
Developed technology |
||||||||
|
Influencers/content creators |
||||||||
|
Trade name |
||||||||
|
Domain |
||||||||
|
Copyrights and other |
||||||||
|
Less: accumulated amortization |
( |
) |
( |
) |
||||
|
Intangible and other assets, net |
$ | $ | ||||||
Intangible assets at June 30, 2023 reflected in the table above includes the intangible assets acquired in connection with the Melon Acquisition totaling $
Amortization expense included in operating expense for the three and six months ended June 30, 2023 totaled $
During the three months ended June 30, 2023, the Company assigned the intangible assets originally acquired in connection with the Company’s acquisition of Bannerfy in fiscal year 2021, to the original sellers. The assets were disposed of in connection with management’s review of operations and decision to allocate resources elsewhere. As a result, the Company recorded a write-off of net developed technology related intangible assets acquired in connection with the acquisition of Bannerfy totaling $
The Company expects to record amortization of intangible assets for the year ending December 31, 2023 and future fiscal years as follows:
|
For the years ending December 31, |
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|
2023 remaining |
||||
|
2024 |
||||
|
2025 |
||||
|
2026 |
||||
|
2027 |
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|
Thereafter |
||||
| $ |
|
4. |
ACQUISITIONS |
Acquisition of Melon, Inc.
On May 4, 2023 (“Melon Acquisition Date”), Super League entered into an Asset Purchase Agreement (the “Melon Purchase Agreement”) with Melon, Inc., a Delaware corporation (“Melon”), pursuant to which the Company acquired substantially all of the assets of Melon (the “Melon Assets”) (the “Melon Acquisition”). The consummation of the Acquisition (the “Melon Closing”) occurred simultaneously with the execution of the Purchase Agreement. Melon is a development studio building innovative virtual worlds in partnership with powerful consumer brands across music, film, TV, sports, fashion and youth culture. The acquisition of Melon further strengthens the Company’s position as a one-stop solutions provider and strategic operating partner for brands and businesses seeking to expand and activate communities throughout the gaming metaverse.
At the Melon Closing, the Company paid an aggregate total of $
Pursuant to the terms and subject to the conditions of the Purchase Agreement, up to an aggregate of $
Additionally, pursuant to the Melon Purchase Agreement, the Company entered into employment agreements with two former key Melon employees (“Key Melon Employees”), pursuant to which the Key Melon Employees were granted inducement awards consisting of restricted stock unit awards (“RSUs”) to acquire an aggregate of
The Acquisition was approved by the board of directors of each of the Company and Melon, and was approved by the sole stockholder of Melon.
In accordance with the acquisition method of accounting, the financial results of Super League presented herein include the financial results of Melon subsequent to the Melon Closing Date. Disclosure of revenue and net loss for Melon on a stand-alone basis for the three and six months ended June 30, 2023 is not practical due to the integration of Melon activities, including sales, products, advertising inventory, resource allocation and related operating expense, with those of the consolidated Company upon acquisition, consistent with Super League operating in one reporting segment.
The Company determined that the Melon Acquisition constitutes a business acquisition as defined by ASC 805. Accordingly, the assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition, totaling approximately $
The following table summarizes the determination of the fair value of the purchase price consideration paid in connection with the Melon Acquisition:
|
Cash consideration at closing |
$ | |||||||
|
Equity consideration at closing – shares of common stock |
||||||||
|
Super League closing stock price per share on the Melon Closing Date |
$ | |||||||
|
Fair value of equity consideration issued at closing |
$ | |||||||
|
Fair value of contingent consideration at closing |
||||||||
|
Fair value of total consideration issued at closing |
$ |
The purchase price allocation was based upon a preliminary estimate of the fair value of the assets acquired and the liabilities assumed by the Company in connection with the Melon Acquisition, as follows:
|
Amount |
||||
|
Assets Acquired and Liabilities Assumed: |
||||
|
Accounts receivable and other assets |
$ | |||
|
Liabilities assumed |
( |
) |
||
|
Identifiable intangible assets |
||||
|
Identifiable net assets acquired |
||||
|
Goodwill |
||||
|
Total purchase price |
$ | |||
The following table presents details of the fair values of the acquired intangible assets of Melon:
|
Estimated Useful Life (in years) |
Amount |
|||||||
|
Developed technology |
$ | |||||||
|
Developer relationships |
||||||||
|
Customer relationships |
||||||||
|
Trade names / trademarks |
||||||||
|
Total intangible assets acquired |
$ | |||||||
Contingent consideration is recorded as a liability in the accompanying condensed consolidated balance sheets in accordance with ASC 480, which requires freestanding financial instruments where the company must or could settle the obligation by issuing a variable number of its shares, and the obligation's monetary value is based solely or predominantly on variations in something other than the fair value of the company's shares, to be recorded as a liability at fair value and re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. The estimated fair value of the Melon Contingent Consideration was $
Aggregated amortization expense for the three months ended June 30, 2023, related to intangible assets acquired in connection with the Melon Acquisition, totaled $
Management is primarily responsible for determining the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed as of the Melon Closing Date. Management considered a number of factors, including reference to a preliminary independent analysis of estimated fair values solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The analysis included a preliminary discounted cash flow analysis which estimated the future net cash flows expected to result from the respective assets acquired as of the Melon Closing Date. A discount rate consistent with the risks associated with achieving the estimated net cash flows was used to estimate the present value of future estimated net cash flows. The Company is in the process of finalizing the estimates and assumptions developed in connection with the independent analysis of estimated fair values of intangible assets acquired solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. Any adjustments to the fair values of intangibles assets acquired, or estimates of economic useful lives of the intangible assets acquired, could impact the carrying value of those assets and related goodwill, as well as the estimates of periodic amortization of intangible assets acquired to be reflected in the statement of operations.
The fair values of the acquired intangible assets, as described above, was determined using the following methods:
|
Description |
Valuation Method Applied |
Valuation Method Description |
Assumptions |
|||
|
Customer relationships |
Multi-Period Excess Earnings Method “MPEE”) under the Income Approach |
MPEEM is an application of the DCF Method, whereby revenue derived from the intangible asset is estimated using the overall business revenue, adjusted for attrition, obsolescence, cost of goods sold, operating expense, and taxes. Required returns attributable to other assets employed in the business are subtracted. The “excess” earnings are attributable to the intangible asset, and are discounted to present value at a rate of return to estimate the fair value of the intangible asset. |
Discount rate: 30.0%; Forecast period: 6.7 years; Attrition Rate: 30.0%. |
|||
|
Trade names / trademarks |
Relief-from-Royalty Method under the Income Approach |
Under the Relief-from-Royalty method, the royalty savings is calculated by estimating a reasonable royalty rate that a third-party would negotiate in a licensing agreement. Such royalties are most commonly expressed as a percentage of total revenue involving the technology. |
Forecast period: 8.0 months; Royalty Rate: 1.0%; Discount Rate: 30.0%. |
|||
|
Non-Compete agreements |
Differential Cash Flows |
The Differential Cash Flows Approach is a version of the income approach that values an intangible asset as the present value of the cash flows that a company would lose if they did not have the asset in place. The differential cash flow is calculated as the difference between the cash flow assuming competition and the cash flow without competition. |
Competition Probability: 30.0%; Revenue impact: 20.0%; Discount Rate: 30.0%; Term 2.16 years. |
|||
|
Developed technology |
Replacement Cost Method |
In the Replacement Cost Method, value is estimated by determining the current cost of replacing an asset with one of equivalent economic utility. The premise of the approach is that a prudent investor would pay no more for an asset than the amount for which the utility of the asset could be replaced. |
Rate of Return: 30.0%; Discount rate: 30.0%; Replacement period: 3.0 months. |
|||
For tax purposes, consistent with the accounting for book purposes, the Melon Closing Consideration was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess purchase price allocated to goodwill. As a result, no deferred tax assets or liabilities were recorded with the acquisition and all of the goodwill is expected to be deductible for tax purposes.
The following unaudited pro forma combined results of operations for the periods presented are provided for illustrative purposes only. The unaudited pro forma combined statements of operations for the three and six months ended June 30, 2023 and 2022, assume the acquisition occurred as of January 1, 2022. The unaudited pro forma combined financial results do not purport to be indicative of the results of operations for future periods or the results that actually would have been realized had the entities been a single entity during these periods.
|
Three Months Ended |
Six Months Ended |
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|
June 30, |
June 30, |
|||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||
|
Revenue |
$ |
|
$ |
|
$ |
|
$ |
|
||||
|
Net Loss |
( |
) |
( |
) |
( |
) |
( |
) | ||||
Pro forma adjustments primarily relate to the amortization of identifiable intangible assets acquired over the estimated economic useful life as described above, the exclusion of nonrecurring transaction costs, the exclusion of depreciation related to tangible and intangible assets of Melon existing immediately prior to the Melon Acquisition Date, and adjustments related to administrative redundancies.
Acquisition of Super Biz – Contingent Consideration
On October 4, 2021 (“Super Biz Closing Date”), the Company entered into an Asset Purchase Agreement (the “Super Biz Purchase Agreement”) with Super Biz Co. and the founders of Super Biz (the “Founders”), pursuant to which the Company acquired (i) substantially all of the assets of Super Biz (the “Super Biz Assets”), and (ii) the personal goodwill of the Founders regarding Super Biz’s business, (the “Super Biz Acquisition”). The consummation of the Super Biz Acquisition (the “Super Biz Closing”) occurred simultaneously with the execution of the Super Biz Purchase Agreement on the Super Biz Closing Date.
Pursuant to the terms and subject to the conditions of the Super Biz Purchase Agreement, up to an aggregate amount $
The Company hired the Founders of Super Biz in connection with the Super Biz Acquisition. Pursuant to the provisions of the Super Biz Purchase Agreement, in the event that a Founder ceases to be an employee during any of the Super Biz Earn Out Periods, as a consequence of his resignation without good cause, or termination for cause, the Super Biz Contingent Consideration will be reduced by one-half (
The change in accrued Super Biz Contingent Consideration, including the change in fair value measured using Level 1 inputs, as described at Note 2, and the related income statement impact for the periods presented was comprised of the following:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Beginning balance |
$ | $ | $ | $ | ||||||||||||
|
Change in fair value |
( |
) |
||||||||||||||
|
Current period accrued contingent consideration |
||||||||||||||||
|
Contingent consideration payments(2) |
( |
) |
( |
) |
||||||||||||
|
Accrued contingent consideration |
$ | (1) | $ | $ | (1) | $ | ||||||||||
|
(1) |
|
|
(2) |
|
|
5. |
NOTE PAYABLE |
Convertible Notes Payable at Fair Value
On May 16, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”) with three institutional investors (collectively, the “Note Holders”) providing for the sale and issuance of a series of senior convertible notes in the aggregate original principal amount of $
In addition, the Company was required to redeem all or a portion of the Notes under certain circumstances, and, in the event (A) the Company sold Company common stock pursuant to the March 25, 2022 Purchase Agreement, described below, or (B) consummated a subsequent equity financing, then the Note Holders had the right, but not the obligation, to require the Company to use
The Notes were issued with an original issue discount of $
The Company elected to utilize the FVO to account for the Notes, which are included in current liabilities at December 31, 2022.
At December 31, 2022, the remaining principal balance of the Notes totaled $
|
6. |
STOCKHOLDERS’ EQUITY AND EQUITY-LINKED INSTRUMENTS |
Convertible Preferred Stock Issuances
Series AA Convertible Preferred Financing
On the dates set forth in the table below, we entered into subscription agreements with accredited investors in connection with the sale of an aggregate of
|
Date |
Series Design- ation |
Conversion Price |
Shares |
Gross Proceeds |
Fees |
Net Proceeds |
Conversion Shares |
Placement Agent Warrants (1) |
|||||||||||||||||||||
|
April 19, 2023 |
Series AA |
$ | $ | $ | $ | ||||||||||||||||||||||||
|
April 20, 2023 |
Series AA-2 |
$ | |||||||||||||||||||||||||||
|
April 28, 2023 |
Series AA-3 |
$ | |||||||||||||||||||||||||||
|
May 5, 2023 |
Series AA-4 |
$ | |||||||||||||||||||||||||||
|
May 26, 2023 |
Series AA-5 |
$ | |||||||||||||||||||||||||||
|
Total |
$ | $ | $ | ||||||||||||||||||||||||||
|
(1) |
|
In connection with the Series AA Offerings, the Company filed Certificates of Designation of Preferences, Rights and Limitations of the Series AA Preferred Stock (the “Series AA Certificates of Designation”) with the State of Delaware.
Each share of Series AA Preferred is convertible at the option of the holder, subject to certain beneficial ownership limitations and primary market limitations as set forth in each Series AA Certificates of Designation, into such number of shares of the Company’s common stock equal to the number of Series AA Preferred to be converted, multiplied by the stated value of $1,000 (the “AA Stated Value”), divided by the applicable conversion price (refer to table above), subject to adjustment in the event of stock splits, stock dividends, and similar transactions. The conversion price is equal to the “Minimum Price,” as defined in NASDAQ Rule 5635(d)(1)). In addition, subject to beneficial ownership and primary market limitations, on the one year anniversary of the respective filing date, the Company may, in its discretion, convert (y)
The Series AA Preferred shall vote together with the common stock on an as-converted basis, and not as a separate class, subject to the primary market limitations, except that holders of Series AA Preferred shall vote as a separate class with respect to (a) amending, altering, or repealing any provision of the Series AA Certificates of Designation in a manner that adversely affects the powers, preferences or rights of the Series AA Preferred, (b) increasing the number of authorized shares of Series AA Preferred, (c) authorizing or issuing an additional class or series of capital stock that ranks senior to or pari passu with the Series AA Preferred with respect to the distribution of assets on liquidation, (d) authorizing, creating, incurring, assuming, guaranteeing or suffering to exist any indebtedness for borrowed money of any kind outside of accounts payable in the ordinary course of business, (e) entering into any agreement with respect to the foregoing; or (f) approving the issuance of common stock below the Conversion Price Floor (as defined in the AA Certificate of Designations). In addition, no holder of Series AA Preferred shall be entitled to vote on any matter presented to the Company’s stockholders relating to approving the conversion of such holder’s Series AA Preferred into an amount in excess of the primary market limitations. Upon any dissolution, liquidation or winding up, whether voluntary or involuntary, holders of Series AA Preferred (together with any Parity Securities (as defined in the Series AA Certificate of Designations)) will be entitled to first receive distributions out of the Company’s assets in an amount per share equal to the AA Stated Value plus all accrued and unpaid dividends, whether capital or surplus before any distributions shall be made on any shares of common stock (after the payment to any senior security, if any).
Holders of the Series AA Preferred will be entitled to receive dividends, subject to the beneficial ownership and primary market limitations, payable in the form of that number of shares of common stock equal to
Pursuant to the Subscription Agreements, purchasers that (a) previously held shares of the Company’s Series A Preferred Stock, par value $0.001 per share, or (b) purchased at least $
Pursuant to the Series AA Certificate of Designations: (i) for as long as Series AA Preferred remains outstanding and subject to certain carveouts as described in the Series AA Certificates of Designations, if the Company conducts an offering at a price per share less than the then current conversion price (the “Future Offering Price”) consisting of common stock, convertible or derivative instruments, and undertaken in an arms-length third party transaction, then in such event the conversion price of the Series AA Preferred shall be adjusted to the greater of: (a) the Future Offering Price and (b) the Conversion Price Floor; and (ii) if as of the 24-month anniversary date of April 19, 2023, the VWAP (as defined in the Series AA Certificates of Designation) for the five trading days immediately prior to such 24-month anniversary date is below the then current conversion price, the holder will receive a corresponding adjustment to the then conversion price, such adjustment not to exceed the Conversion Price Floor.
The Company and the investors in the Offering also executed a registration rights agreement (the “AA Registration Rights Agreement”), pursuant to which the Company filed a registration statement on Form S-3 (File No. 333-273282), covering the resale of the shares of common stock issuable upon conversion of the Series AA Preferred, which was declared effective on August 1, 2023.
The Company sold the shares of Series AA Preferred pursuant to a placement agency agreement (the “Series AA Placement Agency Agreement”) with a registered broker dealer, which acted as the Company’s exclusive placement agent (the “Series AA Placement Agent”) for the Offering. Pursuant to the terms of the Series AA Placement Agency Agreement, in connection with the closings of the Series AA Offerings, the Company paid the Series AA Placement Agent aggregate cash fees, and non-accountable expense allowances as disclosed in the table above, and will issue to the Series AA Placement Agent or its designees warrants (the “Series AA Placement Agent Warrants”) to purchase shares of common stock as disclosed in the table above at the conversion prices disclosed above. The Series AA Placement Agent shall also earn fees and be issued additional Series AA Placement Agent Warrants with respect to any securities issued pursuant to the Additional Investment Rights. The Company also granted the Series AA Placement Agent the right of first refusal, for a twelve (12) month period after the final closing of the Offering, to serve as the Company’s lead or co-placement agent for any private placement of the Company’s securities (equity or debt) that is proposed to be consummated with the assistance of a registered broker dealer.
The securities to be issued in the Offering are exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder because, among other things, the transaction did not involve a public offering, the investors are accredited investors, the investors are purchasing the securities for investment and not for resale and the Company took appropriate measures to restrict the transfer of the securities. The securities have not been registered under the Securities Act and may not be sold in the United States absent registration or an exemption from registration.
Series A Convertible Preferred Financing
On the dates set forth in the table below, we entered into subscription agreements with accredited investors in connection with the sale of an aggregate of
|
Date |
Series Design- ation |
Conversion Price |
Shares |
Gross Proceeds |
Fees |
Net Proceeds |
Conversion Shares |
Placement Agent Warrants (1) |
|||||||||||||||||||||
|
November 22, 2022 |
Series A |
$ | $ | $ | $ | ||||||||||||||||||||||||
|
November 28, 2022 |
Series A-2 |
$ | |||||||||||||||||||||||||||
|
November 30, 2022 |
Series A-3 |
$ | |||||||||||||||||||||||||||
|
December 22, 2022 |
Series A-4 |
$ | |||||||||||||||||||||||||||
|
January 31, 2023 |
Series A-5 |
$ | |||||||||||||||||||||||||||
|
Total – as of June 30, 2023 |
$ | $ | $ | ||||||||||||||||||||||||||
|
(1) |
|
Use of net proceeds from the Series A Offerings for the periods presented include the repayment of certain indebtedness and working capital and general corporate purposes, including sales and marketing activities and product development. As disclosed at Note 5, in the event the Company consummated a subsequent equity financing during the term of the Notes, the Company was required, at the option of the Note Holders, to use
On the respective effective dates, the Company filed certificates of designation of preferences, rights and limitations of the Series A Preferred with the State of Delaware, respectively.
Each share of Series A Preferred is convertible at the option of the holder, subject to certain beneficial ownership limitations and primary market limitations as set forth in each Series A Certificate of Designation, into such number of shares of the Company’s common stock, equal to the number of Series A Preferred to be converted, multiplied by the stated value of $
During the applicable periods presented, conversions of Series A Preferred stock into shares of the Company’s common stock were comprised of the following:
|
Conversion Date |
Series Designation |
Conversion Price |
Preferred Shares Converted |
Conversion Shares – Common Stock |
|||||||||
|
06/13/2023 |
Series A |
$ | |||||||||||
|
06/14/2023 |
Series A-2 |
$ | |||||||||||
|
06/21/2023 |
Series A-3 |
$ | |||||||||||
|
06/26/2023 |
Series A-4 |
$ | |||||||||||
|
06/29/2023 |
Series A-5 |
$ | |||||||||||
|
Totals |
|||||||||||||
The Series A Preferred shall vote together with the common stock on an as-converted basis, and not as a separate class, subject to the primary market limitations, except that holders of Series A Preferred shall vote as a separate class with respect to (a) amending, altering, or repealing any provision of the Series A Certificate of Designation in a manner that adversely affects the powers, preferences or rights of the Series A Preferred, (b) increasing the number of authorized shares of Series A Preferred, (c) authorizing or issuing an additional class or series of capital stock that ranks senior to or pari passu with the Series A Preferred with respect to the distribution of assets on liquidation, (d) authorizing, creating, incurring, assuming, guaranteeing or suffering to exist any indebtedness for borrowed money of any kind in excess of $
Holders of the Series A Preferred will be entitled to receive dividends, subject to the beneficial ownership and primary market limitations, payable in the form of that number of shares of common stock equal to
The Company and the investors in the Series A Offerings also executed a registration rights agreement (the “Registration Rights Agreement”), pursuant to which the Company filed registration statement on Form S-3 (File No. 333-271424), covering the resale of the shares of common stock issuable upon conversion of the Series A Preferred, which was declared on June 5, 2023.
The Company sold the shares of Series A Preferred pursuant to a Placement Agency Agreement (the “Placement Agency Agreement”) with a registered broker dealer, which acted as the Company’s exclusive placement agent (the “Placement Agent”) for the Series A Offerings.
Pursuant to the terms of the Placement Agency Agreement, we agreed to pay to the Placement Agent at each Closing a cash fee equal to
The securities issued in the Series A Offerings are exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder because, among other things, the transaction did not involve a public offering, the investors were accredited investors, the investors purchased the securities for investment and not for resale and the Company took appropriate measures to restrict the transfer of the securities. The securities have not been registered under the Securities Act and may not be sold in the United States absent registration or an exemption from registration.
Placement Agent Warrants
The Placement Agent Warrants issued in connection with the Series A Preferred and the Series AA Preferred, described above, include provisions that are triggered in the event of the occurrence of a Fundamental Transaction, as defined in the underlying warrant agreement, which contemplates the potential for certain transactions that result in a third-party acquiring more than 50% of the outstanding shares of common stock of the Company for cash or other assets. Given the existence of multiple classes of voting stock for the Company, as described above, the Fundamental Transaction provisions in the warrant agreements could result in a 50% or more change in ownership of outstanding common stock, without a 50% change in voting interests. As such, the Placement Agent Warrants are not eligible for the scope exception under ASC 815, and therefore, the fair value of the Placement Agent Warrants are recorded as a liability at fair value on the condensed consolidated balance sheet and re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations.
The fair value and change in the fair value of the warrant liability, measured using Level 3 inputs, and the related income statement impact for the periods presented was comprised of the following:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Beginning balance |
$ | $ | $ | $ | ||||||||||||
|
Initial fair value of warrant liability – grant date |
||||||||||||||||
|
Change in fair value |
( |
) |
( |
) |
||||||||||||
|
Fair value of warrant liability at June 30, 2023 |
$ | $ | $ | $ | ||||||||||||
The fair value of the Placement Agent Warrants was estimated using the Black-Scholes-Merton option pricing model and the following weighted-average assumptions for the applicable dates presented:
|
June 30, |
||||||||||
|
Grant Date |
2023 |
|||||||||
|
Expected Volatility |
|
|
|
|
||||||
|
Risk–free interest rate |
|
|
|
|
||||||
|
Dividend yield |
|
|
|
|
||||||
|
Expected life of options (in years) |
- |
|
- |
|
||||||
Common Stock Purchase Agreement
On March 25, 2022, we entered into a common stock purchase agreement (the “Purchase Agreement”) with Tumim Stone Capital, LLC (“Tumim”). Pursuant to the Purchase Agreement, the Company has the right, but not the obligation, to sell to Tumim, and Tumim is obligated to purchase, up to $
The Purchase Agreement initially precludes the Company from issuing and selling more than
From and after the initial satisfaction of the conditions to the Company’s right to commence sales of common stock to Tumim (such event, the “Commencement,” and the date of initial satisfaction of all such conditions, the “Commencement Date”), the Company may direct Tumim to purchase shares of common stock at a purchase price per share equal to 95% of the average daily dollar volume-weighted average price for the common stock during the three consecutive trading day period immediately following the date on which the Company delivers to Tumim a notice for such purchase. The Company will control the timing and amount of any such sales of common stock to Tumim. Actual sales of shares of common stock to Tumim will depend on a variety of factors to be determined by the Company from time to time, including, among other things, market conditions, the trading price of the common stock, and determinations by the Company as to the appropriate sources of funding for the Company and its operations.
The Commencement Date of the Tumim Offering was March 25, 2022. Unless earlier terminated, the Purchase Agreement will automatically terminate upon the earliest of (i) the expiration of the 18-month period following the Commencement Date, (ii) Tumim’s purchase or receipt of the Total Commitment worth of common stock, or (iii) the occurrence of certain other events set forth in the Purchase Agreement. The Company has the right to terminate the Purchase Agreement at any time after Commencement, at no cost or penalty, upon five trading days’ prior written notice to Tumim. Tumim has the right to terminate the Purchase Agreement upon five trading days’ prior written notice to the Company, but only upon the occurrence of certain events set forth in the Purchase Agreement.
Use of proceeds from any Tumim Offerings includes working capital and general corporate purposes, including sales and marketing activities, product development and capital expenditures. The Company may also use a portion of the net proceeds to acquire or invest in complementary businesses, products and technologies. The Purchase Agreement contains customary representations, warranties and agreements by the Company, as well as customary indemnification obligations of the Company.
|
7. |
SUBSEQUENT EVENTS |
Roblox Partner Program
On August 2, 2023, we announced that Super League joined the Roblox (NYSE: RBLX) Partner Program. As an early mover in building and distributing creative and impactful programs for brands, in partnership with hundreds of top Roblox developers, joining the Roblox Partner Program will allow Super League to elevate its offerings to include the official Roblox advertising system with Immersive Ads. The added capabilities augment Super League’s powerful end-to-end, innovative solutions, enabling brands to reach the highly engaged audience on Roblox, a global immersive platform where over 66 million people connect and communicate daily.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
References in this Quarterly Report on Form 10-Q to “Super League Gaming, Inc.” “Company,” “we,” “us,” “our,” or similar references mean Super League Gaming, Inc. References to the “SEC” refer to the U.S. Securities and Exchange Commission.
Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this interim report. Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” included Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as in Item II, Part 1A of this Quarterly Report on Form 10-Q (this “Report”). Readers are cautioned not to place undue reliance on these forward-looking statements.
Overview
Super League Gaming, Inc. is a leading strategically-integrated publisher and creator of games and experiences across the world’s largest immersive digital platforms. From metaverse gaming powerhouses such as Roblox, Minecraft and Fortnite, to the most popular Web3 environments such as Sandbox and Decentraland, to bespoke worlds built using the most advanced 3D creation tools, Super League’s innovative solutions provide incomparable access to massive audiences who gather in immersive digital spaces to socialize, play, explore, collaborate, shop, learn and create. As a true end-to-end activation partner for dozens of global brands, Super League offers a complete range of development, distribution, monetization and optimization capabilities designed to engage users through dynamic, energized programs. As an originator of new experiences fueled by a network of top developers, a comprehensive set of proprietary creator tools and a future-forward team of creative professionals, Super League accelerates IP and audience success within the fastest growing sector of the media industry.
We generate revenue from (i) innovative advertising including immersive game world and experience publishing and in-game media products, (ii) direct to consumer offers, including in-game items, e-commerce, game passes and ticketing and digital collectibles, and (iii) content and technology through the production and distribution of our own, advertiser and third-party content. We operate in one reportable segment to reflect the way management and our chief operating decision maker review and assess the performance of the business.
Executive Summary
Revenue for the three and six months ended June 30, 2023 totaled $5.1 million and $8.4 million, reflecting increases of 18% and 4%, respectively, compared to the comparable prior year periods. Excluding product design and software development kit related revenue totaling $919,000 recognized during the six months ended June 30, 2022, total revenue for the six months ended June 30, 2023 increased $1.2 million, or 17% compared to the comparable prior year period. Cost of revenue for the three and six months ended June 30, 2023 was $2.9 million and $4.9 million, respectively, compared to $2.5 million and $4.4 million, respectively, in the comparable prior year periods. As a percent of revenue, gross profit for the three and six months ended June 30, 2023 was 42% and 42%, respectively, compared to 43% and 46%, respectively, for the prior year comparable periods, primarily reflecting the impact of lower cost product design and software development kit related revenue recognized during the six months ended June 30, 2022.
Total operating expense for the three and six months ended June 30, 2023 decreased to $10.3 million and $18.9 million, compared to $10.6 million and $20.4 million, respectively, in the comparable prior year periods, reflecting decreases in cloud services and other technology platform costs and decreases in personnel, marketing and other corporate costs, resulting from ongoing cost reduction and optimization activities. Excluding noncash stock compensation and amortization expense, operating expense for the three and six months ended June 30, 2023 was $6.0 million and $12.5 million, respectively, reflecting a 28% and 20% reduction in operating expense, respectively, compared to the comparable prior year periods.
On a GAAP-basis, which includes the impact of significant noncash amortization and stock compensation charges summarized below, net loss for the three months ended June 30, 2023 was $6.8 million or $(0.17) per share, compared to a net loss of $8.7 million, or $(0.24) per share, in the comparable prior year period. On a GAAP-basis net loss for the six months ended June 30, 2023 was $14.1 million or $(0.36) per share, compared to a net loss of $16.6 million, or $(0.45) per share, in the comparable prior year period.
During the second quarter of 2023, we continued to deliver top line growth, including a 52% increase in sequential quarterly revenues and an 18% increase in revenues compared to the prior year quarter. During the quarter we continued to demonstrate the effectiveness of our overall strategy, providing us with increasing opportunities to take a greater share of advertisers’ wallet, as demonstrated by larger deal sizes and continued high repeat customer percentages, and our focus on cost reductions and optimization has positively impacted operating leverage. In addition, we continued to focus on our direct sales force and continued to see increases in sales force effectiveness, as demonstrated by larger total revenue wins for our direct sellers.
During the second quarter of 2023, we continued to work with signature clients like Hamilton and Yas Island where we are delivering immersive experiences that are not just short-term campaigns, but persistent virtual worlds that will continue to change the magnitude of our future revenues and the distribution of our future revenues, more in-line with a recurring revenue model, more forecastable in nature and less like a traditional advertising model. We are a leading scalable, vertically integrated publishing machine across some of today’s largest digital social platforms and a metaverse innovation engine for the future of the immersive web.
LandVault Strategic Partnership
In April 2023, we formed a strategic partnership with LandVault, the largest construction company in the metaverse. This created a unique powerful metaverse alliance ready to provide brands with scalable solutions and bridge the gap between Web2 and Web3. Together, we have already launched programs in the UAE specific to virtual tourism and see significant opportunities in this vertical and others across the greater Gulf Cooperation Council (GCC) countries.
Acquisition of Melon, Inc.
On May 4, 2023, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Melon, Inc., a Delaware corporation (“Melon”), pursuant to which the Company acquired substantially all of the assets of Melon (the “Melon Assets”) (the “Acquisition”). The consummation of the Acquisition (the “Closing”) occurred simultaneously with the execution of the Purchase Agreement. Melon is a development studio building innovative virtual worlds in partnership with powerful consumer brands across music, film, TV, sports, fashion and youth culture. With this acquisition, Super League further strengthens its position as a one-stop solutions provider and strategic operating partner for marquee brands and businesses seeking to expand and activate communities throughout the gaming metaverse.
At the Closing, the Company paid an aggregate total of $900,000 to Melon (the “Closing Consideration”), of which $150,000 was paid in the form of the forgiveness of certain working capital advances paid to Melon in the equivalent amount, and the remaining $750,000 was paid in the form of shares of the Company’s common stock, valued at $0.4818 (the “Closing Share Price”), the VWAP, as quoted on the Nasdaq Capital Market, for the five (5) trading days immediately preceding May 4, 2023.
Pursuant to the terms and subject to the conditions of the Purchase Agreement, up to an aggregate of $2,350,000 (the “Contingent Consideration”) will be payable to Melon in connection with the achievement of certain revenue milestones for the period from the Closing until December 31, 2023 (the “First Earnout Period”) in the amount of $1,000,000, and for the year ending December 31, 2024 (the “Second Earnout Period) in the amount of $1,350,000 (the “Second Earnout Period” and the First Earnout Period are collectively referred to as the “Earnout Periods”). The Contingent Consideration is payable in the form of cash and common stock, with $600,000 of the aggregate Contingent Consideration being payable in the form of cash, and $1,750,000 payable in the form of common stock, valued at the greater of (a) the Closing Share Price, and (b) the volume weighted average price (“VWAP”) for the five trading days immediately preceding the end of each respective Earnout Period.
Additionally, pursuant to the Purchase Agreement, the Company entered into employment agreements with two former key Melon employees (“Key Melon Employees”), pursuant to which the Key Melon Employees were granted inducement awards consisting of restricted stock unit awards (“RSUs”) to acquire an aggregate of 2,075,550 shares of its common stock as described at Note 7 to the condensed consolidated financial statements contained elsewhere herein.
Refer to Note 4 to the condensed consolidated financial statements elsewhere herein for additional information.
Roblox Partner Program
On August 2, 2023, we announced that Super League joined the Roblox (NYSE: RBLX) Partner Program. As an early mover in building and distributing creative and impactful programs for brands, in partnership with hundreds of top Roblox developers, joining the Roblox Partner Program will allow Super League to elevate its offerings to include the official Roblox advertising system with Immersive Ads. The added capabilities augment Super League’s powerful end-to-end, innovative solutions, enabling brands to reach the highly engaged audience on Roblox, a global immersive platform where over 66 million people connect and communicate daily.
Super League was an early mover in the space, enabling extensive third-party distribution for brands on Roblox by providing hundreds of developers in the community with measurement, monetization, and optimization tools. Through the Roblox Partner Program, Super League is evolving its offering by repurposing its previous ad network to solely focus on Roblox’s Immersive Ads product to enable brands to reach audiences at scale. Super League will be integrating Roblox’s Immersive Ads into its growing suite of cross-platform offerings and capabilities inclusive of experience creation, promotion, distribution, and monetization:
|
● |
Highly immersive ad formats for the official Roblox advertising system |
|
|
● |
Bespoke brand integrations into popular experiences |
|
|
● |
Proprietary Pop-Up Shops, interactive characters, and integrated content products |
|
|
● |
First-to-market home grown solution to turn digital in-experience codes into real-world physical redemptions |
|
|
● |
Robust influencer marketing programs |
|
|
● |
In-experience brand lift studies |
|
|
● |
Expert video content creation for Tik Tok, YouTube, and more |
|
|
● |
Metaverse strategy & innovation consulting |
Super League’s inclusion in the Roblox Partner Program, combined with its longstanding dedication to supporting hundreds of Roblox developers with software to help manage and grow their businesses, creates an unparalleled opportunity to achieve massive reach and powerful results for brands. Immediate benefits of being part of the program include access to educational resources and training, along with comprehensive tools, collateral, and insights for brand onboarding and education.
Increase in Authorized Common Stock
On May 30, 2023, the Company filed a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation, as amended (the “Amendment”), increasing the number of authorized shares of Common Stock from 100,000,000 to 400,000,000. The Company’s Board of Directors previously approved the Amendment on March 17, 2023, and the Company obtained the approval of the Amendment by written consent of its stockholders holding greater than 50% of the voting securities of the Company on April 5, 2023.
Delisting Notice
On October 4, 2022, we received a letter (the “Letter”) from the Listing Qualifications Staff of The Nasdaq Stock Market, LLC (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2). The Letter has no immediate effect on the listing of our common stock on the Nasdaq Capital Market.
On April 4, 2023, we received a letter (the “Extension Notice”) from the Listing Qualifications Staff of Nasdaq notifying the Company that Nasdaq has granted the Company a 180-day extension, or until October 2, 2023 (the “Extension Period”), to regain compliance with the requirement for the Company’s common stock, to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). To qualify for this additional 180-day compliance period, the Company met the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, other than the minimum bid price requirement. In addition, the Company was required to notify Nasdaq of its intent to cure the minimum bid price deficiency by effecting a reverse stock split, if necessary.
The Extension Notice has no immediate effect on the continued listing status of the Company’s common stock on the Nasdaq Capital Market. The Company’s listing on the Nasdaq Capital Market remains fully effective.
The Company will continue to monitor the closing bid price of its common stock and seek to regain compliance with the Minimum Bid Price Requirement within the Extension Period. To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for 10 consecutive business days during the 180-day period from April 5, 2022 to October 2, 2023. If the Company does not regain compliance with the Minimum Bid Price Requirement within the Extension Period, Nasdaq will provide written notification to the Company that its common stock will be subject to delisting, at which time the Company may appeal Nasdaq’s delisting determination to a Nasdaq Hearing Panel (the “Panel”). There can be no assurance that, if the Company does need to appeal a Nasdaq delisting determination to the Panel, that such appeal would be successful.
Seasonality
Our revenue fluctuates quarterly and is generally higher in the second half of our fiscal year, with the fourth quarter typically representing our highest revenue quarter each year. Advertising spending is traditionally seasonally strong in the second half of each year, reflecting the impact of seasonal back to school, game release and holiday season advertising spending by brands and advertisers. We believe that this seasonality in advertising spending affects our quarterly results, which generally reflect relatively higher advertising revenue in the second half of each year, compared to the first half of the year.
Consolidated Results of Operations
The following table sets forth a summary of our results of operations for the three and six months ended June 30, 2023 and 2022 (dollars in thousands):
|
Three Months |
Six Months |
|||||||||||||||||||||||||||||||
|
Ended June 30, |
Change |
Ended June 30, |
Change |
|||||||||||||||||||||||||||||
|
2023 |
2022 |
$ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||
|
REVENUE |
$ | 5,052 | $ | 4,279 | $ | 773 | 18 | % | $ | 8,374 | $ | 8,047 | $ | 327 | 4 |
% |
||||||||||||||||
|
COST OF REVENUE |
2,911 | 2,458 | 453 | 18 | % | 4,857 | 4,367 | 490 | 11 |
% |
||||||||||||||||||||||
|
GROSS PROFIT |
2,141 | 1,821 | 320 | 18 | % | 3,517 | 3,680 | (163 |
) |
(4 |
)% |
|||||||||||||||||||||
|
OPERATING EXPENSE |
||||||||||||||||||||||||||||||||
|
Selling, marketing and advertising |
2,956 | 3,001 | (45 |
) |
(1 | )% | 5,606 | 5,735 | (129 |
) |
(2 |
)% |
||||||||||||||||||||
|
Engineering, technology and development |
2,246 | 4,570 | (2,324 |
) |
(51 | )% | 5,202 | 8,780 | (3,578 |
) |
(41 |
)% |
||||||||||||||||||||
|
General and administrative |
2,302 | 2,993 | (691 |
) |
(23 | )% | 4,823 | 5,869 | (1,046 |
) |
(18 |
)% |
||||||||||||||||||||
|
Contingent consideration |
540 | - | 540 | 100 | % | 1,008 | - | 1,008 | 100 |
% |
||||||||||||||||||||||
|
Loss on intangible asset disposal |
2,284 | - | 2,284 | 100 | % | 2,284 | - | 2,284 | 100 |
% |
||||||||||||||||||||||
|
Total operating expense |
10,328 | 10,564 | (236 |
) |
(2 | )% | 18,923 | 20,384 | (1,461 |
) |
(7 |
)% |
||||||||||||||||||||
|
NET LOSS FROM OPERATIONS |
(8,187 |
) |
(8,743 |
) |
(556 |
) |
(6 | )% | (15,406 |
) |
(16,704 |
) |
(1,298 |
) |
(8 |
)% |
||||||||||||||||
|
OTHER INCOME (EXPENSE), NET |
1,038 |
|
23 | 1,015 |
|
N/A | % | 1,021 |
|
22 | 999 |
|
N/A |
% |
||||||||||||||||||
|
Loss before benefit from income taxes |
(7,149 |
) |
(8,720 |
) |
(1,571 |
) |
(18 | )% | (14,385 |
) |
(16,682 |
) |
(2,297 |
) |
(14 |
)% |
||||||||||||||||
|
Benefit from income taxes |
313 | - | 313 | 100 | % | 313 | 46 | 267 | 580 |
% |
||||||||||||||||||||||
|
NET LOSS |
$ | (6,836 |
) |
$ | (8,720 |
) |
$ | (1,884 |
) |
(22 | )% | $ | (14,072 |
) |
$ | (16,636 |
) |
$ | (2,564 |
) |
(15 |
)% |
||||||||||
Comparison of the Results of Operations for the Three and Six Months Ended June 30, 2023 and 2022
Revenue (dollars in thousands)
|
Three Months Ended June 30, |
Change |
Six Months Ended June 30, |
Change |
|||||||||||||||||||||||||||||
|
2023 |
2022 |
$ | % |
2023 |
2022 |
$ | % | |||||||||||||||||||||||||
|
Media and advertising |
$ | 3,634 | $ | 3,518 | $ | 116 | 3 |
% |
$ | 5,302 | $ | 5,374 | $ | (72 |
) |
(1 |
)% |
|||||||||||||||
|
Publishing and content studio |
1,030 | 288 | 742 | 258 |
% |
2,301 | 1,693 | 608 | 36 |
% |
||||||||||||||||||||||
|
Direct to consumer |
388 | 473 | (85 |
) |
(18 |
)% |
771 | 980 | (209 |
) |
(21 |
)% |
||||||||||||||||||||
| $ | 5,052 | $ | 4,279 | $ | 773 | 18 |
% |
$ | 8,374 | $ | 8,047 | $ | 327 | 4 |
% |
|||||||||||||||||
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||||
|
Number of customers > 10% of revenue / percent of revenue |
Two |
/ |
22% |
Two |
/ |
46% |
One |
/ |
11% |
Three |
/ |
36% | ||||||
|
By revenue category: |
||||||||||||||||||
|
Media and advertising |
Two |
/ |
22% |
Two |
/ |
46% |
One |
/ |
11% |
Two |
/ |
25% | ||||||
|
Publishing and content studio |
- | - | - |
One |
/ |
11% | ||||||||||||
Three Months Ended June 30, 2023, Compared to the Three Months Ended June 30, 2022:
|
● |
Total revenue increased $773,000 or 18% to $5.1 million, compared to $4.3 million in the comparable prior year quarter. |
|
● |
Media and advertising revenue increased 3%, to $3.6 million, compared to $3.5 million in the comparable prior year quarter. |
|
● |
Publishing and content studio revenue increased $742,000, or 258%, driven primarily by an increase in game development and immersive experience related revenue, reflecting a 234% increase in average publishing and content studio sales revenue per customer. |
|
● |
Direct to consumer revenue for the three months ended June 30, 2023 decreased $85,000, or 18%, compared to the comparable prior year quarter. Direct to consumer revenue is primarily comprised of revenue generated from our Minehut digital property, which provides Minecraft server hosting services on a subscription basis and other digital goods to the Minecraft gaming community, and direct to consumer in-game platform sales revenue through the sale of digital goods, including cosmetic items, durable goods, player ranks and game modes, within our official Microsoft Minecraft partner gaming servers. Revenue is generated when transactions are facilitated between Microsoft and the end user, either via in-game currency or cash. |
Six Months Ended June 30, 2023, Compared to the Six Months Ended June 30, 2022:
|
● |
Total revenue increased $327,000 or 4% to $8.4 million, compared to $8.0 million in the comparable prior year period. Revenue for the six months ended June 30, 2022 included $919,000 of product design and software development kit related revenue pursuant to a development agreement with a customer. Excluding product design and software development kit related revenue recognized during the six months ended June 30, 2022, total revenue for the six months ended June 30, 2023 increased $1.2 million, or 17% compared to the comparable prior year period. |
|
● |
Total media and advertising revenue was relatively flat for the year to date periods presented. |
|
● |
Publishing and content studio revenue, excluding product design and software development kit related revenue recognized during the six months ended June 30, 2022, increased $1.5 million, or 197%, driven primarily by an increase in game development and immersive experience related revenue, resulting in a 325% increase in average publishing and content studio sales revenue per customer. Publishing and content studio sales revenue for the six months ended June 30, 2022 included $919,000 of product design and software development kit related revenue pursuant to a development agreement with a customer. |
|
● |
Direct to consumer revenue for the six months ended June 30, 2023 decreased $209,000, or 21%, compared to the comparable prior year quarter. Direct to consumer revenue is primarily comprised of revenue generated from our Minehut digital property, which provides Minecraft server hosting services on a subscription basis and other digital goods to the Minecraft gaming community, and direct to consumer in-game platform sales revenue through the sale of digital goods, including cosmetic items, durable goods, player ranks and game modes, within our official Microsoft Minecraft partner gaming servers. Revenue is generated when transactions are facilitated between Microsoft and the end user, either via in-game currency or cash. |
Cost of Revenue
Cost of revenue includes direct costs incurred in connection with the satisfaction of performance obligations under our revenue arrangements including internal and third-party engineering, creative, content, broadcast and other personnel, talent and influencers, internal and third-party game developers, content capture and production services, direct marketing, cloud services, software, prizing, and revenue sharing fees. Cost of revenue fluctuates period to period based on the specific programs and revenue streams contributing to revenue each period and the related cost profile of our physical and digital experiences, media and advertising campaigns and publishing and content studio sales activities occurring each period.
Three Months Ended June 30, 2023, Compared to the Three Months Ended June 30, 2022:
|
● |
Cost of revenue increased $453,000, or 18%, relatively consistent with the 18% increase in related revenues for the quarterly periods presented. |
Six Months Ended June 30, 2023, Compared to the Six Months Ended June 30, 2022:
|
● |
Cost of revenue increased $490,000, or 11%, compared to the 4% increase in related revenues for the year to date periods presented. The less than proportionate change in cost of revenue was driven by higher margin product design and software development kit related revenue recognized during the six months ended June 30, 2022, as described above. Excluding product design and software development kit related revenue and related cost of revenue recognized during the six months ended June 30, 2022, total revenue and cost of revenue for the six months ended June 30, 2023 increased 17% and 20%, respectively, compared to the prior year comparable period. |
Operating Expense
Refer to the table summarizing our results of operations for the three and six months ended June 30, 2023 and 2022 above.
Noncash stock-based compensation. Noncash stock-based compensation expense for the periods presented was included in the following operating expense line items (dollars in thousands):
|
Three Months Ended June 30, |
Change |
Six Months Ended June 30, |
Change |
|||||||||||||||||||||||||||||
|
2023 |
2022 |
$ | % |
2023 |
2022 |
$ | % | |||||||||||||||||||||||||
|
Sales, marketing and advertising |
$ | 236 | $ | 251 | $ | (15 |
) |
(6 |
)% |
$ | 400 | $ | 481 | $ | (81 |
) |
(17 |
)% |
||||||||||||||
|
Engineering, technology and development |
102 | 74 | 28 | 38 |
% |
191 | 263 | (72 |
) |
(27 |
)% |
|||||||||||||||||||||
|
General and administrative |
411 | 675 | (264 |
) |
(39 |
)% |
941 | 1,355 | (414 |
) |
(31 |
)% |
||||||||||||||||||||
|
Total noncash stock compensation expense |
$ | 749 | $ | 1,000 | $ | (251 |
) |
(25 |
)% |
$ | 1,532 | $ | 2,099 | $ | (567 |
) |
(27 |
)% |
||||||||||||||
On January 1, 2022, the Company issued 1,350,000 performance stock units (“PSUs”) under the Company’s 2014 Amended and Restated Stock Option and Incentive Plan (the “2014 Plan”), which vest in five equal increments of 270,000 PSUs, based on satisfaction of market based vesting conditions as describe at Note 2 to the condensed consolidated financial statements elsewhere herein. Noncash stock compensation expense related to the PSUs totaled $48,000 and $298,000 for the three and six months ended June 30, 2023, respectively. Noncash stock compensation expense related to the PSUs totaled $564,000 and $1,121,000 for the three and six months ended June 30, 2022, respectively.
Modifications to Equity-Based Awards
On April 30, 2023, the Board of Directors of the Company (the “Board”) approved the cancellation of the 1,350,000 PSUs previously granted to certain executives under the 2014 Plan (as described above). In exchange for the cancelled PSUs, the executives were granted an aggregate of 1,350,000 PSUs, which vest, over a five-year term, upon the Company’s common stock achieving certain VWAP goals as follows: (i) 20% upon achieving a 60-day VWAP of $0.80 per share, (ii) 20% upon achieving a 60-day VWAP of $1.00 per share; (iii) 20% upon achieving a 60-day VWAP of $1.20 per share; (iv) 20% upon achieving a 60-day VWAP of $1.40 per share; and (v) 20% upon achieving a 60-day VWAP of $1.60 per share, in each case, as quoted on the Nasdaq Capital Market (“PSU Modification”). Total incremental compensation cost related to the PSU Modification totaled $540,000 which will be recognized over the implied service period, ranging from .69 years to 1.5 years, calculated in connection with the Monte Carlo simulation model used to determine the fair value of the PSUs immediately before and after the modification. Incremental noncash stock compensation expense related to the PSU Modification recognized during the three and six months ended June 30, 2023 totaled $89,000.
On April 30, 2023, the Board approved the cancellation of certain stock options to purchase an aggregate of 1,179,979 shares of the Company’s common stock previously granted to certain executives and employees under the 2014 Plan, with an average exercise price of approximately $2.82. In addition, the Board approved the cancellation of certain warrants to purchase an aggregate of 522,015 shares of the Company’s common stock previously granted to certain executives and employees, with an average exercise price of approximately $9.99. In exchange for the cancelled options and warrants, certain executives and employees were granted options to purchase an aggregate of 6,100,000 shares of common stock under the 2014 Plan, at an exercise price of $0.49 (the closing price of the Company’s common stock as listed on the Nasdaq Capital Market on April 28, 2023, the last trading day before the approval of the awards), with one-third of the options vesting on the April 30, 2023, the grant date, with the remainder vesting monthly over the thirty-six month period thereafter, subject to continued service (“Executive Grant Modifications”). The exercise of the options under these awards is contingent upon the Company receiving approval from its stockholders to increase the number of shares available under the 2014 Plan, and will be subject to cancellation in the event stockholder approval is not obtained. As such, there was no financial statement impact for the periods presented in connection with this equity award exchange.
On May 1, 2023, the Board approved the cancellation of options to purchase an aggregate of 584,438 shares of the Company’s common stock previously granted to employees under the 2014 Plan, in exchange for newly issued options to purchase an aggregate of 1,356,000 shares of the Company’s common stock under the 2014 Plan, at an exercise price equal to the closing trading price on May 1, 2023, or $0.4905, with a range of zero to one-third of the options vesting on the May 1, 2023, the grant date, dependent upon the tenure of the employee, and the remainder vesting monthly over the forty-eight month period thereafter, subject to continued service (“Employee Grant Modifications”). Unrecognized compensation expense related to the original awards as of the date of the Employee Grant Modifications totaled $960,000 which will be recognized prospectively over the remaining service period of 4 years. Total incremental compensation cost related to the Employee Grant Modifications totaled $449,000, $101,000 of which related to vested awards as of the modification date and was recognized as expense immediately, and $348,000 related to unvested awards which will be recognized prospectively over the remaining service period of 4 years.
Amortization of intangible assets. Amortization expense for the periods presented was included in the following operating expense line items (dollars in thousands):
|
Three Months Ended June 30, |
Change |
Six Months Ended June 30, |
Change |
|||||||||||||||||||||||||||||
|
2023 |
2022 |
$ |
% |
2023 |
2022 |
$ |
% |
|||||||||||||||||||||||||
|
Sales, marketing and advertising |
$ |
531 |
$ |
526 |
$ |
5 |
1 |
% |
$ |
1,057 |
$ |
1,052 |
$ |
5 |
- |
% |
||||||||||||||||
|
Engineering, technology and development |
588 |
573 |
15 |
3 |
% |
1,164 |
1,147 |
17 |
|
1 |
% |
|||||||||||||||||||||
|
General and administrative |
196 |
201 |
(5 |
) |
(2 |
)% |
382 |
403 |
(21 |
) |
(5 |
)% |
||||||||||||||||||||
|
Intangible asset disposal |
2,284 |
- |
2,284 |
100 |
% |
2,284 |
- |
2,284 |
100 |
% |
||||||||||||||||||||||
|
Total amortization expense |
$ |
3,599 |
$ |
1,300 |
$ |
2,299 |
177 |
% |
$ |
4,887 |
$ |
2,602 |
$ |
2,285 |
88 |
% |
||||||||||||||||
During the three months ended June 30, 2023, the Company assigned the intangible assets originally acquired in connection with the Company’s acquisition of Bannerfy in fiscal year 2021, to the original sellers. The assets were disposed of in connection with management’s review of operations and decision to allocate resources elsewhere. As a result, the Company recorded a write-off of net developed technology related intangible assets acquired in connection with the acquisition of Bannerfy totaling $2,284,000, which is included in “Loss on intangible asset disposal” in the accompanying condensed consolidated statements of operations.
Selling, Marketing and Advertising
Three Months Ended June 30, 2023, Compared to the Three Months Ended June 30, 2022:
|
● |
Selling, marketing and advertising expense decreased $45,000, or 1% driven primarily by a decrease in third-party sales consultant and direct and other marketing related costs. |
Six Months Ended June 30, 2023, Compared to the Six Months Ended June 30, 2022:
|
● |
Selling, marketing and advertising expense decreased $129,000, or 2% driven primarily by a decrease in third-party sales consultant and direct and other marketing related costs. |
Engineering, Technology and Development
Components of our platform are available on a “free to use,” “always on basis,” and are utilized and offered as an audience acquisition tool, as a means of growing our audience, engagement, viewership, players and community. Engineering, technology and development related operating expense include the costs described below, incurred in connection with our audience acquisition and viewership expansion activities. Engineering, technology and development related operating expense includes (i) allocated internal engineering personnel expense, including salaries, noncash stock compensation, taxes and benefits, (ii) third-party contract software development and engineering expense, (iii) internal use software cost amortization expense, and (iv) technology platform related cloud services, broadband and other platform expense, incurred in connection with our audience acquisition and viewership expansion activities, including tools and product offering development, testing, minor upgrades and features, free to use services, corporate information technology and general platform maintenance and support. Capitalized internal use software development costs are amortized on a straight-line basis over the software’s estimated useful life.
Three Months Ended June 30, 2023, Compared to the Three Months Ended June 30, 2022:
|
● |
Engineering, technology and development costs decreased $2,324,000, or 51% driven primarily by a decrease in cloud services and other technology platform costs totaling $1,227,000, or 71%, and a decrease in product and engineering personnel costs totaling $1,020,000, or 53%, reflecting the impact of ongoing cost reduction and optimization activities. |
Six Months Ended June 30, 2023, Compared to the Six Months Ended June 30, 2022:
|
● |
Engineering, technology and development costs decreased $3,578,000, or 41% driven primarily by a decrease in cloud services and other technology platform costs totaling $2,088,000, or 58%, and a decrease in product and engineering personnel costs totaling $1,218,000, or 36%, reflecting the impact of ongoing cost reduction and optimization activities. |
General and Administrative
General and administrative expense for the periods presented was comprised of the following (dollars in thousands):
|
Three Months |
Change |
Six Months |
Change |
|||||||||||||||||||||||||||||
|
2023 |
2022 |
$ | % |
2023 |
2022 |
$ | % | |||||||||||||||||||||||||
|
Personnel costs |
$ | 597 | $ | 729 | $ | (132 | ) | (18 |
)% |
$ | 1,187 | $ | 1,304 | $ | (117 | ) | (9 |
)% |
||||||||||||||
|
Office and facilities |
49 | 63 | (14 | ) | (22 |
)% |
105 | 130 | (25 | ) | (19 |
)% |
||||||||||||||||||||
|
Professional fees |
179 | 322 | (143 | ) | (44 |
)% |
477 | 745 | (268 | ) | (36 |
)% |
||||||||||||||||||||
|
Stock-based compensation |
411 | 676 | (265 | ) | (39 |
)% |
941 | 1,356 | (415 | ) | (31 |
)% |
||||||||||||||||||||
|
Depreciation and amortization |
218 | 227 | (9 | ) | (4 |
)% |
427 | 457 | (30 | ) | (7 |
)% |
||||||||||||||||||||
|
Other |
848 | 976 | (128 | ) | (13 |
)% |
1,686 | 1,877 | (191 | ) | (10 |
)% |
||||||||||||||||||||
|
Total general and administrative expense |
$ | 2,302 | $ | 2,993 | $ | (691 | ) | (23 |
)% |
$ | 4,823 | $ | 5,869 | $ | (1,046 | ) | (18 |
)% |
||||||||||||||
A summary of the main drivers of the change in general and administrative expense for the periods presented is as follows:
For the Three Months Ended June 30, 2023, Compared to the Three Months Ended June 30, 2022:
|
● |
Noncash stock compensation expense included in general and administrative expense decreased $265,000, primarily due to a reduction in amortization of noncash stock compensation expense in connection with performance-based stock units granted on January 1, 2022, which vest based on the achievement of certain Company stock price targets, as described at Note 2 to the condensed consolidated financial statements elsewhere herein, and are amortized on an accelerated basis in the earlier periods due to the utilization of a Monte Carlo simulation model to determine the estimated fair value of the equity-based award. |
|
● |
Professional fees costs decreased $143,000 or 44%, primarily due to legal and audit related professional fees incurred in the prior year period in connection with our June 2022 convertible debt financing which were expensed as incurred and a decrease in external legal fees due to the transitioning of the Company’s corporate legal services function from third-party consultant to inhouse. |
|
● |
Other general and administrative expense decreased primarily due to a 35% decrease in Director’s and Officer’s insurance premiums for the 2023-2024 policy period, which covers the period from March 2023 to February 2024, as well as a decrease in travel and entertainment and other general corporate expense. |
For the Six Months Ended June 30, 2023, Compared to the Six Months Ended June 30, 2022:
|
● |
Noncash stock compensation expense included in general and administrative expense decreased $415,000, or 31% primarily due to a reduction in amortization of noncash stock compensation expense in connection with performance-based stock units granted on January 1, 2022, which vest based on the achievement of certain Company stock price targets, as described at Note 2 to the condensed consolidated financial statements elsewhere herein, and are amortized on an accelerated basis in the earlier periods due to the utilization of a Monte Carlo simulation model to determine the estimated fair value of the equity-based award. |
|
● |
Professional fees costs decreased $268,000 or 36%, primarily due to legal and audit related professional fees incurred in the prior year period in connection with our June 2022 convertible debt financing which were expensed as incurred, a decrease in external legal fees due to the transitioning of the Company’s corporate legal services function from third-party consultant to inhouse, and a reduction in complex transaction related audit fees. |
|
● |
Other general and administrative expense decreased primarily due to a 35% decrease in Director’s and Officer’s insurance premiums for the 2023-2024 policy period, which covers the period from March 2023 to February 2024, as well as a decrease in travel and entertainment and other general corporate expense. |
Contingent Consideration
The Company hired the Founders of Super Biz Co. (“Super Biz”) in connection with the acquisition of (i) substantially all of the assets of Super Biz (the “Super Biz Assets”), and (ii) the personal goodwill of the founders of Super Biz (the “Founders”) regarding Super Biz’s business (collectively, the “Super Biz Acquisition”). Pursuant to the provisions of the Asset Purchase Agreement entered into for the Super Biz Acquisition (the “Super Biz Purchase Agreement”), in the event that a Founder ceases to be an employee during the period from the October 4, 2021 (the “Super Biz Closing Date”) until December 31, 2022 and for the fiscal year ending December 31, 2023 (the “Super Biz Earnout Periods”), as a consequence of his resignation without good cause, or termination for cause, the Super Biz Contingent Consideration (See Note 4) will be reduced by one-half (50%) for the respective Super Biz Earn Out Period, if and when earned. Under ASC 805, a contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is considered to be compensation for post-combination services, and not acquisition consideration. As such, the Contingent Consideration, is accounted for as post-combination services and expensed in the period that payment of any amounts of Contingent Consideration is determined to be probable and reasonably estimable. During the year ended December 31, 2022, the Company determined that it was probable that the contingency for the Super Biz Earn Out Periods would be met in accordance with the terms of the Super Biz Purchase Agreement, and the applicable amounts were reasonably estimable. Contingent Consideration is recorded as a liability in the accompanying condensed consolidated balance sheets in accordance with ASC 480, which requires freestanding financial instruments where the company must or could settle the obligation by issuing a variable number of its shares, and the obligation's monetary value is based solely or predominantly on variations in something other than the fair value of the company's shares, to be recorded as a liability at fair value and re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations.
The change in accrued Super Biz Contingent Consideration and the related income statement impact for the periods presented was comprised of the following (dollars in thousands):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Beginning balance |
$ | 3,674 | $ | - | $ | 3,206 | $ | - | ||||||||
|
Change in fair value(3) |
(13 |
) |
- | 204 | - | |||||||||||
|
Current period accrued contingent consideration(3) |
471 | - | 722 | - | ||||||||||||
|
Contingent consideration payments(2) |
(3,423 |
) |
- | (3,423 |
) |
- | ||||||||||
|
Accrued contingent consideration |
$ | 709 | (1) | $ | - | $ | 709 | (1) | $ | - | ||||||
|
(1) |
Includes approximately 216,000 shares of common stock valued at $0.38, the closing price of our common stock as of the applicable date. |
|
(2) |
In April 2023, the Company paid accrued contingent consideration related to the Initial Earn Out Period, comprised of $2.9 million of cash payments and payment of 987,973 shares of our common stock valued at $548,000. |
|
(3) |
Reflected in the condensed consolidated statement of operations for the applicable period. |
Other Income (Expense), Net
Change in Fair Value of Warrant Liability
The Placement Agent Warrants issued in connection with the Series A Preferred and the Series AA Preferred include provisions that are triggered in the event of the occurrence of a Fundamental Transaction, as defined in the underlying warrant agreement, which contemplates the potential for certain transactions that result in a third-party acquiring more than 50% of the outstanding shares of common stock of the Company for cash or other assets. Given the existence of multiple classes of voting stock for the Company, as described herein, the Fundamental transaction provisions in the warrant agreements could result in a 50% or more change in ownership of outstanding common stock, without a 50% change in voting interests. As such, the Placement Agent Warrants are not eligible for the scope exception under ASC 480, and therefore, the fair value of the Placement Agent Warrants are recorded as a liability at fair value on the condensed consolidated balance sheet and re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations.
The change in warrant liability and the related income statement impact for the periods presented was comprised of the following:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Beginning balance |
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Initial fair value of warrant liability – grant date |
2,804,000 | - | 2,804,000 | - | ||||||||||||
|
Change in fair value (1) |
(1,040,000 |
) |
- | (1,040,000 |
) |
- | ||||||||||
|
Fair value of warrant liability at June 30, 2023 |
$ | 1,764,000 | $ | - | $ | 1,764,000 | $ | - | ||||||||
|
(1) |
Reflected in the condensed consolidated statement of operations for the applicable period. |
Benefit from Income Taxes
During the three months ended June 30, 2023, the Company assigned the intangible assets originally acquired in connection with the Company’s acquisition of Bannerfy in fiscal year 2021, to the original sellers, as described at Note 3. The Bannerfy Acquisition was treated for tax purposes as a nontaxable transaction and, as such, the historical tax bases of the acquired assets and assumed liabilities, net operating losses, and other tax attributes of Bannerfy carried over, with no step-up to fair value of the underlying tax bases of the acquired net assets. The acquisition method of accounting included the establishment of a net deferred tax liability resulting from book tax basis differences related to assets acquired and liabilities assumed on the date of acquisition. When an acquisition of a group of assets is purchased in a transaction that is not accounted for as a business combination under ASC 805, a difference between the book and tax bases of the assets arises. ASC 740 required the use of simultaneous equations to determine the assigned value of the asset and the related deferred tax asset or liability. As a result of the disposal of the Bannerfy intangible assets, the Company fully amortized the related remaining net deferred tax liability, resulting in a $313,000 tax benefit reflected in the condensed consolidated statement of operations for the three and six months ended June 30, 2023.
Liquidity and Capital Resources
General
Cash and cash equivalents totaled approximately $2.6 million and $2.5 million at June 30, 2023 and December 31, 2022, respectively. The change in cash and cash equivalents for the periods presented reflects the impact of operating, investing and financing cash flow related activities as described below.
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred net losses, including noncash charges, of $14.1 million and $16.6 million for the six months ended June 30, 2023 and 2022, respectively, and had an accumulated deficit of $224.8 million as of June 30, 2023. For the six months ended June 30, 2023 and 2022, net cash used in operating activities totaled $10.8 million and $10.2 million, respectively.
To date, our principal sources of capital used to fund our operations and growth have been the net proceeds received from equity and debt financings. We have and will continue to use significant capital for the growth and development of our business, and, as such, we expect to seek additional capital either from operations or that may be available from future issuance(s) of common stock or debt financings, to fund our planned operations. Accordingly, our results of operations and the implementation of our long-term business strategies have been and could continue to be adversely affected by general conditions in the global economy, including conditions that are outside of our control. The most recent global financial crisis caused by severe geopolitical conditions, including conflicts abroad, and the lingering effects of COVID-19 and threats of other outbreaks, have resulted in extreme volatility, disruptions and downward pressure on stock prices and trading volumes across the capital and credit markets in which we traditionally operate. A severe or prolonged economic downturn could result in a variety of risks to our business and could have a material adverse effect on us, including limiting our ability to obtain additional funding from the capital and credit markets. In management’s judgement, these conditions raise substantial doubt about the ability of the Company to continue as a going concern as contemplated by ASC 205-40.
Management’s Plans
The Company experienced significant growth in fiscal year 2023, 2022 and 2021 through organic and inorganic growth activities, including the expansion of our premium advertising inventory and quarter over quarter and year over year increases in recognized revenue across our primary revenue streams. In fiscal year 2023, we focused on the continued expansion of our service offerings and revenue growth opportunities through internal development, collaborations, and through opportunistic strategic acquisitions, as well as management and reduction of operating costs. Management continues to consider alternatives for raising capital to facilitate our growth and execute our business strategy, including strategic partnerships and or other forms of equity or debt financings. Refer to “Cash Flows from Financing Activities” below for recent financing activities.
The Company considers historical operating results, costs, capital resources and financial position, in combination with current projections and estimates, as part of its plan to fund operations over a reasonable period. Management's considerations assume, among other things, that the Company will continue to be successful implementing its business strategy, that there will be no material adverse developments in the business, liquidity or capital requirements, and the Company will be able to raise additional equity and / or debt financing on acceptable terms. If one or more of these factors do not occur as expected, it could cause a reduction or delay of its business activities, sales of material assets, default on its obligations, or forced insolvency. The accompanying financial statements do not contain any adjustments which might be necessary if the Company were unable to continue as a going concern. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company.
We may continue to evaluate potential strategic acquisitions. To finance such strategic acquisitions, we may find it necessary to raise additional equity capital, incur debt, or both. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption periodically and such volatility and disruption may occur in the future. If we fail to obtain additional financing when needed, we may not be able to execute our business plans which, in turn, would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies.
Cash Flows for the Six Months Ended June 30, 2023 and 2022
The following table summarizes the change in cash balances for the periods presented (dollars in thousands):
|
Six Months Ended June 30, |
||||||||
|
2023 |
2022 |
|||||||
|
Net cash used in operating activities |
$ | (10,792 |
) |
$ | (10,247 |
) |
||
|
Net cash used in investing activities |
(652 |
) |
(1,221 |
) |
||||
|
Net cash provided by financing activities |
11,531 | 4,004 | ||||||
|
Increase/(Decrease) in cash |
87 | (7,464 |
) |
|||||
|
Cash and cash equivalents, at beginning of period |
2,482 | 14,533 | ||||||
|
Cash and cash equivalents, at end of period |
$ | 2,569 | $ | 7,069 | ||||
Cash Flows from Operating Activities.
Net cash used in operating activities during the six months ended June 30, 2023, primarily reflected our net GAAP net loss, net of adjustments to reconcile net GAAP loss to net cash used in operating activities, which included noncash stock compensation charges of $1,532,000, depreciation and amortization charges of $2,679,000, disposal of intangible asset charges of $2,284,000, net changes in fair value of certain liabilities of ($754,000) and net changes in working capital of ($2,501,000). Changes in working capital primarily reflected the impact of the settlement of receivables and payables in the ordinary course and the payment of the cash portion of the Super Biz Contingent Consideration as described above.
Net cash used in operating activities during the six months ended June 30, 2022, primarily reflected our net GAAP loss for the six months ended June 30, 2022, net of adjustments to reconcile net GAAP loss to net cash used in operating activities, which included $2,099,000 of noncash stock compensation charges, depreciation and amortization of $2,701,000 and net changes in working capital of $1,599,000. Changes in working capital primarily reflected the impact of the settlement of receivables and payables in the ordinary course.
Cash Flows from Investing Activities.
Cash flows from investing activities were comprised of the following for the periods presented (dollars in thousands):
|
Six Months Ended June 30, |
||||||||
|
2023 |
2022 |
|||||||
|
Cash paid in connection with Melon Acquisition, net |
(150 |
) |
- | |||||
|
Purchase of property and equipment |
(8 |
) |
(153 |
) |
||||
|
Purchase of third-party game properties |
- | (500 |
) |
|||||
|
Capitalization of software development costs |
(483 |
) |
(497 |
) |
||||
|
Acquisition of other intangible and other assets |
(11 |
) |
(71 |
) |
||||
|
Net cash used in investing activities |
$ | (652 |
) |
$ | (1,221 |
) |
||
Melon Acquisition. On May 4, 2023, we entered into an Asset Purchase Agreement with Melon, pursuant to which the Company acquired substantially all of the assets of Melon, as described above. At the Closing, the Company paid an aggregate total of $900,000 to Melon, of which $150,000 was paid in the form of the forgiveness of certain working capital advances paid to Melon in the equivalent amount, and the remaining $750,000 was paid in the form of shares of the Company’s common stock, valued at the Closing Share Price, as described above.
Anime Battlegrounds X. During the three months ended June 30, 2022, the Company purchased Anime Battlegrounds X, one of the highest rated games on Roblox, from a third-party game developer. Total purchase price of $500,000 was capitalized and amortized to cost of revenue over the applicable useful life of 5 years.
Capitalized Internal Use Software Costs. Software development costs incurred to develop internal-use software during the application development stage are capitalized and amortized on a straight-line basis over the software’s estimated useful life, which is generally three years. Software development costs incurred during the preliminary stages of development are charged to expense as incurred. Maintenance and training costs are charged to expense as incurred. Upgrades or enhancements to existing internal-use software that result in additional functionality are capitalized and amortized on a straight-line basis over the applicable estimated useful life.
Cash Flows from Financing Activities.
Cash flows from financing activities were comprised of the following for the periods presented (dollars in thousands):
|
Six Months Ended June 30, |
||||||||
|
2023 |
2022 |
|||||||
|
Proceeds from issuance of preferred stock, net of issuance costs |
$ | 12,070 | $ | - | ||||
|
Proceeds from convertible notes |
- | 4,000 | ||||||
|
Payments on convertible notes |
(539 |
) |
(4 |
) |
||||
|
Proceeds from issuance of common stock, net |
- | 8 | ||||||
|
Net cash provided by financing activities |
$ | 11,531 | $ | 4,004 | ||||
Convertible Preferred Stock
Series A Convertible Preferred Financing
During the fourth quarter of 2022 and first quarter of 2023, we entered into subscription agreements with accredited investors in connection with the sale of an aggregate of 12,622 shares of newly designated Series A, A-2, A-3, A-4 and A-5 Convertible Preferred Stock, each series having a $0.001 par value and a $1,000 purchase price, hereinafter collectively referred to as “Series A Preferred,” and the individual offerings of Series A Preferred stock hereinafter collectively referred to as the Series A Offerings, as follows:
|
Date |
Series Design- ation |
Conversion Price |
Shares |
Gross Proceeds |
Fees |
Net Proceeds |
Conversion Shares |
Placement Agent Warrants (1) |
|||||||||||||||||||||
|
Fourth Quarter 2022 |
|||||||||||||||||||||||||||||
|
November 22, 2022 |
Series A |
$ | 0.6200 | 5,359 | $ | 5,359,000 | $ | 752,000 | $ | 4,607,000 | 8,644,000 | 1,253,000 | |||||||||||||||||
|
November 28, 2022 |
Series A-2 |
$ | 0.6646 | 1,297 | 1,297,000 | 169,000 | 1,128,000 | 1,952,000 | 283,000 | ||||||||||||||||||||
|
November 30, 2022 |
Series A-3 |
$ | 0.6704 | 1,733 | 1,733,000 | 225,000 | 1,508,000 | 2,585,000 | 375,000 | ||||||||||||||||||||
|
December 22, 2022 |
Series A-4 |
$ | 0.3801 | 1,934 | 1,934,000 | 251,000 | 1,683,000 | 5,088,000 | 738,000 | ||||||||||||||||||||
|
Total – as of December 31, 2022 |
10,323 | 10,323,000 | 1,397,000 | 8,926,000 | 18,269,000 | 2,649,000 | |||||||||||||||||||||||
|
First Quarter 2023 |
|||||||||||||||||||||||||||||
|
January 31, 2023 |
Series A-5 |
$ | 0.5546 | 2,299 | 2,299,000 | 299,000 | 2,000,000 | 4,145,000 | 601,000 | ||||||||||||||||||||
|
Total |
12,622 | $ | 12,622,000 | $ | 1,696,000 | $ | 10,926,000 | 22,414,000 | 3,250,000 | ||||||||||||||||||||
|
(1) – |
Issued on May 26, 2023 upon final closing of the convertible preferred financings. |
Use of net proceeds from the Series A Offering include the repayment of certain indebtedness and working capital and general corporate purposes, including sales and marketing activities and product development.
Series AA Convertible Preferred Financing
On the dates set forth in the table below, we entered into subscription agreements with accredited investors in connection with the sale of an aggregate of 11,781 shares of newly designated Series AA, AA-2, AA-3, AA-4 and AA-5 Convertible Preferred Stock, each series having a $0.001 par value and a $1,000 purchase price, hereinafter collectively referred to as “Series AA Preferred,” and the individual offerings of Series AA Preferred stock hereinafter collectively referred to as the Series AA Offerings, as follows:
|
Date |
Series Design- ation |
Conversion Price |
Shares |
Gross Proceeds |
Fees |
Net Proceeds |
Conversion Shares |
Placement Agent Warrants (1) |
|||||||||||||||||||||
|
April 19, 2023 |
Series AA |
$ | 0.4715 | 7,680 | $ | 7,680,000 | $ | 966,000 | $ | 6,714,000 | 16,288,000 | 2,285,000 | |||||||||||||||||
|
April 20, 2023 |
Series AA-2 |
$ | 0.5215 | 1,500 | 1,500,000 | 130,000 | 1,370,000 | 2,876,000 | 278,000 | ||||||||||||||||||||
|
April 28, 2023 |
Series AA-3 |
$ | 0.4750 | 1,025 | 1,025,000 | 133,000 | 892,000 | 2,158,000 | 313,000 | ||||||||||||||||||||
|
May 5, 2023 |
Series AA-4 |
$ | 0.4642 | 1,026 | 1,026,000 | 133,000 | 893,000 | 2,210,000 | 320,000 | ||||||||||||||||||||
|
May 26, 2023 |
Series AA-5 |
$ | 0.5300 | 550 | 550,000 | 72,000 | 479,000 | 1,038,000 | 150,000 | ||||||||||||||||||||
|
Total |
11,781 | $ | 11,781,000 | $ | 1,434,000 | $ | 10,348,000 | 24,570,000 | 3,346,000 | ||||||||||||||||||||
|
(1) - |
Issued on May 26, 2023 upon final closing of the convertible preferred financings. |
Use of net proceeds from the Series AA Offerings include working capital and general corporate purposes, including sales and marketing activities and product development.
Convertible Debt. On May 16, 2022, as summarized above and further described at Note 5, the Company entered into a securities purchase agreement with three institutional investors, providing for the sale and issuance of a new series of senior convertible notes in the aggregate original principal amount of $4,320,000, of which 8% is an original issue discount. As of December 31, 2022, the outstanding balance of the Notes and related accrued interest totaled $719,000, which was subsequently paid in full during the three months ended March 31, 2023.
Contractual Obligations and Off-Balance Sheet Commitments and Arrangements
As of June 30, 2023, we had no significant commitments for capital expenditures, nor do we have any committed lines of credit, other committed funding or long-term debt, and no guarantees. As of June 30, 2023 we maintain approximately 3,200 square feet of office space, 1,650 square feet of which is on a month-to-month basis, and 1,550 square feet of which is subject to a two-year lease, commencing on August 1, 2021.
We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our condensed consolidated financial statements included elsewhere herein. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
Contingencies
Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Recent Accounting Pronouncements
Refer to Note 2 to the accompany condensed consolidated financial statements contained elsewhere in this Report.
Critical Accounting Estimates
Our unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these condensed consolidated statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these condensed consolidated financial statements. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023. In addition, refer to Note 2 to the condensed consolidated financial statements included in this Report. The following accounting policies were identified during the current period, based on activities occurring during the current period, as critical and requiring significant judgments and estimates.
Revenue Recognition
Revenue is recognized when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. In this regard, revenue is recognized when: (i) the parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations; (ii) the entity can identify each party’s rights regarding the goods or services to be transferred; (iii) the entity can identify the payment terms for the goods or services to be transferred; (iv) the contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract);and (v) it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Transaction prices are based on the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, if any. We consider the explicit terms of the revenue contract, which are typically written and executed by the parties, our customary business practices, the nature, timing, and the amount of consideration promised by a customer, in connection with determining the transaction price for our revenue arrangements.
We report revenue on a gross or net basis based on management’s assessment of whether we act as a principal or agent in the transaction and is evaluated on a transaction-by-transaction basis. To the extent we act as the principal, revenue is reported on a gross basis net of any sales tax from customers, when applicable. The determination of whether we act as a principal or an agent in a transaction is based on an evaluation of whether we control the good or service prior to transfer to the customer. Where applicable, we have determined that it acts as the principal in all of its media and advertising, publishing and content studio and direct to consumer revenue streams, except in situations where we utilize a reseller partner with respect to direct advertising sales arrangements.
We generate revenue from (i) advertising, serving as a marketing channel for brands and advertisers to reach their target audiences of gamers across our network, (ii) content, curating and distributing esports and gaming-centric entertainment content for our own network of digital channels and media and entertainment partner channels and (iii) direct to consumer offers including digital subscriptions, in-game digital goods, and gameplay access fees.
Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied.
Media and Advertising
Media and advertising revenue primarily consists of direct and reseller sales of our in-game media and analytics products, influencer marketing sales and sales of programmatic display and video advertising units to third-party advertisers and exchanges. Media and advertising arrangements typically include contract terms for time periods ranging from several days to several weeks in length.
For media and advertising arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the arrangement as we satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Revenue from shorter-term media and advertising arrangements that provide for a contractual delivery or performance date is recognized when performance is substantially complete and/or delivery occurs. Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for shorter-term campaigns.
Publishing and Content Studio
Publishing and content studio revenue consists of revenue generated from immersive game development and custom game experiences within our owned and affiliate game worlds, and revenue generated in connection with our production, curation and distribution of entertainment content for our own network of digital channels and media and entertainment partner channels. We distribute three primary types of content for syndication and licensing, including: (1) our own original programming content, (2) user generated content (“UGC”), including online gameplay and gameplay highlights, and (3) the creation of content for third parties utilizing our remote production and broadcast technology.
For publishing and content studio arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the arrangement as we satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Revenue from shorter-term publishing and content studio arrangements that provide for a contractual delivery or performance date is recognized when performance is substantially complete and/or delivery occurs. Payments are typically due from customers during the term of the arrangement for longer-term campaigns or projects, and once delivery is complete for shorter-term campaigns or projects.
Direct to Consumer:
Direct to consumer revenue primarily consists of digital subscription fees, in-game digital goods, and gameplay access fees. Subscription revenue is recognized in the period the services are rendered. Payments are typically due from customers at the point of sale.
Platform Generated Sales Transactions. We also generate in-game platform sales revenue from the sale of digital goods, including cosmetic items, durable goods, player ranks and game modes, leveraging the flexibility of the Microsoft Minecraft Bedrock platform, and powered by the InPvP cloud architecture technology platform. Revenue is generated when transactions are facilitated between Microsoft and the end user, either via in-game currency or cash.
Revenue for digital goods sold on the platform is recognized when Microsoft (our partner) collects the revenue and facilitates the transaction on the platform. Revenue for such arrangements includes all revenue generated, bad debt, make goods, and refunds of all transactions managed via the platform by Microsoft. Payments are made to the Company monthly based on the reconciled sales revenue generated.
We make estimates and judgments when determining whether we will collect substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. We assess the collectability of receivables based on several factors, including past transaction history and the creditworthiness of our customers. If it is determined that collection is not reasonably assured, amounts due are recognized when collectability becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash for transactions where collectability may have been an issue. Management’s estimates regarding collectability impact the actual revenue recognized each period and the timing of the recognition of revenue. Our assumptions and judgments regarding future collectability could differ from actual events and thus materially impact our financial position and results of operations.
Depending on the complexity of the underlying revenue arrangement and related terms and conditions, significant judgments, assumptions and estimates may be required to determine each parties rights regarding the goods or services to be transferred, each parties performance obligations, whether performance obligations are satisfied at a point in time or over time, estimates of completion methodologies, the timing of satisfaction of performance obligations, and the appropriate period or periods in which, or during which, the completion of the earnings process occurs. Depending on the magnitude of specific revenue arrangements, if different judgments, assumptions and estimates are made regarding revenue arrangements in any specific period, our periodic financial results may be materially affected.
Accounting for Business Combinations
Acquisition Method. Acquisitions that meet the definition of a business under ASC 805, “Business Combinations” (“ASC 805”) are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired, liabilities assumed, contractual contingencies, and contingent consideration, when applicable, are recorded at fair value at the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The application of the acquisition method of accounting requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in connection with the allocation of the purchase price consideration to the assets acquired and liabilities assumed. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expense in the condensed consolidated statements of operations. Contingent consideration, if any, is recognized and measured at fair value as of the acquisition date.
Cost Accumulation Model. Acquisitions that do not meet the definition of a business under ASC 805 are accounted for as an asset acquisition, utilizing a cost accumulation model. Assets acquired and liabilities assumed are recognized at cost, which is the consideration the acquirer transfers to the seller, including direct transaction costs, on the acquisition date. The cost of the acquisition is then allocated to the assets acquired based on their relative fair values. Goodwill is not recognized in an asset acquisition. Direct transaction costs include those third-party costs that can be directly attributable to the asset acquisition and would not have been incurred absent the acquisition transaction.
Contingent consideration, representing an obligation of the acquirer to transfer additional assets or equity interests to the seller if future events occur or conditions are met, is recognized when probable and reasonably estimable. Contingent consideration recognized is included in the initial cost of the assets acquired, with subsequent changes in the recorded amount of contingent consideration recognized as an adjustment to the cost basis of the acquired assets. Subsequent changes are allocated to the acquired assets based on their relative fair value. Depreciation and/or amortization of adjusted assets are recognized as a cumulative catch-up adjustment, as if the additional amount of consideration that is no longer contingent had been accrued from the outset of the arrangement.
Contingent consideration that is paid to sellers that remain employed by the acquirer and linked to future services is generally considered compensation cost and recorded in the statement of operations in the post-combination period.
Relaxed Ongoing Reporting Requirements
Upon the completion of our initial public offering, we elected to report as an “emerging growth company” (as defined in the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies,” including but not limited to:
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not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; |
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taking advantage of extensions of time to comply with certain new or revised financial accounting standards; |
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being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and |
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being exempt from the requirement to hold a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. |
We are subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies,” and our stockholders could receive less information than they might expect to receive from more mature public companies.
We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
In the ordinary course of our business, we are not currently exposed to market risk of the sort that may arise from changes in interest rates or foreign currency exchange rates, or that may otherwise arise from transactions in derivatives.
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CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our CEO and our CFO each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
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LEGAL PROCEEDINGS |
None.
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RISK FACTORS |
Except as set forth below, management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2022. In addition to the following risk factors and other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2022 and subsequent reports filed pursuant to the Exchange Act which could materially and adversely affect the Company’s business, financial condition, results of operations, and stock price. The risks described in the Annual Report on Form 10-K and subsequent reports filed pursuant to the Exchange Act are not the only risks facing the Company. Additional risks and uncertainties not presently known to management, or that management presently believes not to be material, may also result in material and adverse effects on our business, financial condition, and results of operations.
We may experience difficulties in integrating the operations of Melon into our business and in realizing the expected benefits of the Acquisition of Melon.
The success of the Acquisition will depend in part on our ability to realize the anticipated business opportunities from combining the operations of the Melon Assets with our business in an efficient and effective manner. The integration process could take longer than anticipated and could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the Acquisition, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of the Melon Assets with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other anticipated benefits resulting from the Acquisition, and our business, results of operations and financial condition could be materially and adversely affected.
The Acquisition will present challenges associated with integrating operations, personnel, and other aspects of the companies and the potential assumption of liabilities that may exist and which may be known or unknown by the Company.
The results of the Company following the Acquisition will depend in part upon the Company’s ability to integrate Melon’s business with the Company’s business in an efficient and effective manner. The Company’s attempt to integrate Melon’s assets into the Company, two companies that have previously operated independently, may result in significant challenges, and the Company may be unable to accomplish the integration smoothly or successfully. In particular, the necessity of coordinating geographically dispersed organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration may require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the Company. In addition, the Company may adjust the way in which Melon or the Company has conducted its operations and utilized its assets, which may require retraining and development of new procedures and methodologies. The process of integrating operations and making such adjustments after the Acquisition could cause an interruption of, or loss of momentum in, the activities of one or more of Company’s or Melon’s businesses and the loss of key personnel. Employee uncertainty, lack of focus, or turnover during the integration process may also disrupt the business of Company. Any inability of management to integrate the operations of the Company and Melon successfully could have a material adverse effect on the business and financial condition of the combined company.
In addition, the Acquisition will subject the Company to contractual or other obligations and liabilities of associated with the Melon Assets, some of which may be unknown. Although the Company and its legal and financial advisors have conducted due diligence on Melon and its business, there can be no assurance that the Company is aware of all obligations and liabilities of Melon related to the Melon Assets. These liabilities, and any additional risks and uncertainties related to Melon’s business and to the Acquisition not currently known to the Company or that the Company may currently be aware of, but that prove to be more significant than assessed or estimated by the Company, could negatively impact the business, financial condition, and results of operations of the combined company following consummation of the Acquisition.
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ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
No unregistered securities were issued during the three months ended June 30, 2023 that were not previously reported.
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ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
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ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
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OTHER INFORMATION |
None.
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EXHIBITS |
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(b) |
Exhibits |
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Exhibit No. |
Description |
Incorporation by Reference |
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3.5 |
Certificate of Designation of Preferences, Rights and Limitations of the Series AA-5 Preferred Stock | Exhibit 3.1 to the Current Report on Form 8-K, filed on June 2, 2023 | ||
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3.6 |
Certificate of Amendment to Super League Gaming, Inc.’s Second Amended and Restated Certificate of Incorporation, as amended | Exhibit 3.2 to the Current Report on Form 8-K, filed on June 2, 2023 | ||
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10.4 |
Form of Placement Agency Agreement | Exhibit 10.1 to the Current Report on Form 8-K, filed on June 2, 2023 | ||
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31.1 |
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31.2 |
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32.1 |
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101.INS |
Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101) |
** Certain portions of this exhibit (indicated by “[*****]”) have been omitted as the Company has determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to the Company if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SUPER LEAGUE GAMING, INC. |
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By |
/s/ Ann Hand |
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Ann Hand Chief Executive Officer (Principal Executive Officer) |
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By |
/s/ Clayton Haynes |
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Clayton Haynes Chief Financial Officer (Principal Financial and Accounting Officer) |
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Date: August 14, 2023 |