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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2023

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period from _________ to _________

 

Commission File Number 001-38819

 

SUPER LEAGUE GAMING, INC.

(Exact name of small business issuer as specified in its charter)

 

Delaware

 

47-1990734

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

2912 Colorado Ave., Suite #203

Santa Monica, California 90404

(Address of principal executive offices)

 

Company: (213) 421-1920; Investor Relations: 203-741-8811

(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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which

registered

Common Stock, par value $0.001 per share

 

SLGG

 

NASDAQ Capital Market

 

As of August 10, 2023, there were 50,426,199 shares of the registrant’s common stock, $0.001 par value, issued and outstanding.

 



 

 

 

TABLE OF CONTENTS

 

 

Page

   

PART I. FINANCIAL INFORMATION

 
     

Item 1.

Condensed Consolidated Financial Statements

1

     

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

28

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

     

Item 4.

Controls and Procedures

43

   

PART II. OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

44

     

Item 1A.

Risk Factors

44

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45
     

Item 3.

Defaults Upon Senior Securities

45
     

Item 4.

Mine Safety Disclosures

45
     

Item 5.

Other Information

45
     

Item 6.

Exhibits

46

 

 

 
 

 

PART I

 

FINANCIAL INFORMATION

 

ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SUPER LEAGUE GAMING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

June 30,

   

December 31,

 
   

2023

   

2022

 
   

(Unaudited)

         

ASSETS

               
Current Assets                

Cash and cash equivalents

  $ 2,569,000     $ 2,482,000  

Accounts receivable

    5,226,000       6,134,000  

Prepaid expense and other current assets

    1,083,000       1,381,000  

Total current assets

    8,878,000       9,997,000  

Property and Equipment, net

    110,000       147,000  

Intangible assets, net

    16,152,000       20,066,000  

Goodwill

    1,864,000       -  

Total assets

  $ 27,004,000     $ 30,210,000  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current Liabilities                

Accounts payable

  $ 5,755,000     $ 6,697,000  

Accrued contingent consideration

    1,485,000       3,206,000  

Contract liabilities

    269,000       111,000  

Convertible note payable and accrued interest

    -       679,000  

Total current liabilities

    7,509,000       10,693,000  
Accrued contingent consideration – long term     656,000       -  
Warrant liability     1,764,000       -  

Deferred taxes

    -       313,000  

Total liabilities

    9,929,000       11,006,000  
                 
Commitments and Contingencies            
                 
Stockholders’ Equity                

Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; 19,892 and 10,323 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

    -       -  

Common stock, par value $0.001 per share; 100,000,000 shares authorized; 48,334,818 and 37,605,973 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

    57,000       47,000  

Additional paid-in capital

    241,833,000       229,900,000  

Accumulated deficit

    (224,815,000

)

    (210,743,000

)

Total stockholders’ equity

    17,075,000       19,204,000  

Total liabilities and stockholders’ equity

  $ 27,004,000     $ 30,210,000  

 

See accompanying notes to condensed consolidated financial statements

 

-1-

 

 

SUPER LEAGUE GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months

Ended June 30,

   

Six Months

Ended June 30,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

REVENUE

  $ 5,052,000     $ 4,279,000     $ 8,374,000     $ 8,047,000  
                                 

COST OF REVENUE

    2,911,000       2,458,000       4,857,000       4,367,000  
                                 

GROSS PROFIT

    2,141,000       1,821,000       3,517,000       3,680,000  
                                 

OPERATING EXPENSE

                               

Selling, marketing and advertising

    2,956,000       3,001,000       5,606,000       5,735,000  

Engineering, technology and development

    2,246,000       4,570,000       5,202,000       8,780,000  

General and administrative

    2,302,000       2,993,000       4,823,000       5,869,000  

Contingent consideration

    540,000       -       1,008,000       -  

Loss on intangible asset disposal

    2,284,000       -       2,284,000       -  
Total operating expense     10,328,000       10,564,000       18,923,000       20,384,000  
                                 

NET OPERATING LOSS

    (8,187,000

)

    (8,743,000

)

    (15,406,000

)

    (16,704,000

)

                                 

OTHER INCOME (EXPENSE)

                               
Change in fair value of warrant liability     1,040,000       -       1,040,000       -  

Interest expense

    (2,000 )     23,000       (43,000

)

    21,000  

Other

    -       -       24,000       1,000  

Total other income (expense)

    1,038,000       23,000       1,021,000

 

    22,000  
                                 

Loss before benefit from income taxes

    (7,149,000

)

    (8,720,000

)

    (14,385,000

)

    (16,682,000

)

                                 

Benefit from income taxes

    313,000       -       313,000       46,000  
                                 

NET LOSS

  $ (6,836,000

)

  $ (8,720,000

)

  $ (14,072,000

)

  $ (16,636,000

)

                                 

Net loss attributable to common stockholders - basic and diluted

                               

Basic and diluted loss per common share

  $ (0.17

)

  $ (0.24

)

  $ (0.36

)

  $ (0.45

)

Weighted-average number of shares outstanding, basic and diluted

    40,494,953       36,946,587       39,113,124       36,893,069  

 

See accompanying notes to condensed consolidated financial statements

 

-2-

 

 

SUPER LEAGUE GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(Unaudited)

 

   

Three Months

   

Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Preferred stock (Shares):

                               

Balance, beginning of period

    12,622       -       10,323       -  

Issuance of Series A-5 preferred stock at $1,000 per share

    -       -       2,299       -  

Issuance of Series AA preferred stock at $1,000 per share

    7,680       -       7,680       -  

Issuance of Series AA-2 preferred stock at $1,000 per share

    1,500       -       1,500       -  

Issuance of Series AA-3 preferred stock at $1,000 per share

    1,025       -       1,025       -  

Issuance of Series AA-4 preferred stock at $1,000 per share

    1,026       -       1,026       -  

Issuance of Series AA-5 preferred stock at $1,000 per share

    550       -       550       -  

Conversion of Series A preferred stock

    (4,511 )     -       (4,511 )     -  

Balance, end of period

    19,892       -       19,892       -  
                                 

Preferred stock (Amount, at Par Value):

                               

Balance, beginning of period

  $ -     $ -     $ -     $ -  

Issuance of Series A-5 preferred stock, $0.001 par value, at $1,000 per share

    -       -       -       -  

Issuance of Series AA preferred stock, $0.001 par value, at $1,000 per share

    -       -       -       -  

Issuance of Series AA-2 preferred stock, $0.001 par value, at $1,000 per share

    -       -       -       -  

Issuance of Series AA-3 preferred stock, $0.001 par value, at $1,000 per share

    -       -       -       -  

Issuance of Series AA-4 preferred stock, $0.001 par value, at $1,000 per share

    -       -       -       -  

Issuance of Series AA-5 preferred stock, $0.001 par value, at $1,000 per share

    -       -       -       -  

Conversion of Series A preferred stock

    -       -       -       -  

Balance, end of period

  $ -     $ -     $ -     $ -  
                                 

Common stock (Shares):

                               

Balance, beginning of period

    37,795,077       36,864,957       37,605,973       36,809,187  

Common stock issued for Melon Acquisition

    1,556,663       -       1,556,663       -  

Common stock issued for Super Biz Acquisition

    987,973       -       987,973       -  

Conversion of Series A preferred stock

    7,995,105       -       7,995,105       -  

Stock-based compensation

    -       121,396       189,104       177,166  

Other

    -       57,425       -       57,425  

Balance, end of period

    48,334,818       37,043,778       48,334,818       37,043,778  
                                 

Common stock (Amount):

                               

Balance, beginning of period

  $ 47,000     $ 46,000     $ 47,000     $ 46,000  

Conversion of Series A preferred stock

    8,000       -       8,000       -  

Stock-based compensation

    -       -       -       -  

Common stock issued for Melon Acquisition

    1,000       -       1,000       -  

Common stock issued for Super Biz Acquisition

    1,000       -       1,000       -  

Balance, end of period

  $ 57,000     $ 46,000     $ 57,000     $ 46,000  
                                 

Additional paid-in-capital:

                               

Balance, beginning of period

  $ 232,539,000     $ 217,042,000     $ 229,900,000     $ 215,943,000  

Issuance of Series A-5 preferred stock at $1,000 per share, net of issuance costs

    -       -       1,919,000       -  

Issuance of Series AA preferred stock at $1,000 per share, net of issuance costs

    6,518,000       -       6,518,000       -  

Issuance of Series AA-2 preferred stock at $1,000 per share, net of issuance costs

    1,370,000       -       1,370,000       -  

Issuance of Series AA-3 preferred stock at $1,000 per share, net of issuance costs

    892,000       -       892,000       -  

Issuance of Series AA-4 preferred stock at $1,000 per share, net of issuance costs

    893,000       -       893,000       -  

Issuance of Series AA-5 preferred stock at $1,000 per share, net of issuance costs

    479,000       -       479,000       -  
Common stock purchase warrants issued to placement agent     (2,804,000 )     -       (2,804,000 )     -  

Common stock issued for Melon Acquisition

    721,000       -       721,000       -  

Common stock issued for Super Biz Acquisition

    547,000       -       547,000       -  

Stock-based compensation

    686,000       1,000,000       1,406,000       2,099,000  

Other

    (8,000 )     8,000       (8,000 )     8,000  

Balance, end of period

  $ 241,833,000     $ 218,050,000     $ 241,833,000     $ 218,050,000  
                                 

Accumulated Deficit:

                               

Balance, beginning of period

  $ (217,979,000

)

  $ (133,208,000

)

  $ (210,743,000

)

  $ (125,292,000

)

Net Loss

    (6,836,000

)

    (8,720,000

)

    (14,072,000

)

    (16,636,000

)

Balance, end of period

  $ (224,815,000

)

  $ (141,928,000

)

  $ (224,815,000

)

  $ (141,928,000

)

Total stockholders equity

  $ 17,075,000     $ 76,168,000     $ 17,075,000     $ 76,168,000  

 

See accompanying notes to condensed consolidated financial statements

 

-3-

 

 

SUPER LEAGUE GAMING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Six Months

Ended June 30,

 
   

2023

   

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net loss

  $ (14,072,000

)

  $ (16,636,000

)

Adjustments to reconcile net loss to net cash used in operating activities:                

Depreciation and amortization

    2,679,000       2,701,000  

Stock-based compensation

    1,532,000       2,099,000  
Change in fair value of warrant liability     (1,040,000 )     -  
Change in fair value of contingent consideration     286,000       -  

Change in fair value of convertible notes

    -       (49,000

)

Amortization of convertible notes discount

    40,000       39,000  

Loss on intangible asset disposal

    2,284,000       -  
Changes in assets and liabilities:                
Accounts receivable     944,000       1,685,000  

Prepaid expense and other current assets

    174,000       49,000  

Accounts payable and accrued expense

    (1,131,000 )     (74,000

)

Accrued contingent consideration     (2,153,000

)

    -  

Contract liabilities

    158,000       (47,000

)

Deferred taxes

    (313,000

)

    (46,000

)

Accrued interest on note payable

    (180,000 )     32,000  

Net cash used in operating activities

    (10,792,000 )     (10,247,000

)

                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Cash paid in connection with Melon Acquisition

    (150,000

)

    -  
Purchase of property and equipment     (8,000

)

    (153,000

)

Purchase of third-party game properties

    -       (500,000

)

Capitalization of software development costs

    (483,000 )     (497,000

)

Acquisition of other intangible assets

    (11,000

)

    (71,000

)

Net cash used in investing activities

    (652,000

)

    (1,221,000

)

                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from issuance of preferred stock, net of issuance costs

    12,070,000       -  

Proceeds from issuance of common stock, net of issuance costs

    -       8,000  

Proceeds from convertible notes, net

    -       4,000,000  

Payments on convertible notes

    (539,000

)

    (4,000

)

Net cash provided by financing activities     11,531,000       4,004,000  
                 

INCREASE/(DECREASE) IN CASH

    87,000       (7,464,000

)

Cash and Cash Equivalents – beginning of period

    2,482,000       14,533,000  

Cash and Cash Equivalents – end of period

  $ 2,569,000     $ 7,069,000  
                 
SUPPLEMENTAL NONCASH INVESTING                
Issuance of common stock in connection with Melon Acquisition   $ 722,000       -  
Issuance of common stock in connection with the payment of Super Biz Contingent Consideration     548,000       -  

 

See accompanying notes to condensed consolidated financial statements

 

-4-

 

SUPER LEAGUE GAMING, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 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.

 

 

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 $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.

 

The Company had cash and cash equivalents of $2.6 million and $2.5 million as of June 30, 2023 and December 31, 2022, 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, preferred stock and / 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 the threat 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, “Going Concern,” (“ASC 205”).

 

Managements 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 $10,000,000 of newly issued shares of the Company’s common stock, from time to time during the term of the agreement, subject to certain limitations and conditions.

 

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:

 

   

Three Months

Ended June 30,

   

Six Months

Ended June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Media and advertising

  $ 3,634,000     $ 3,518,000     $ 5,302,000     $ 5,374,000  

Publishing and content studio

    1,030,000       288,000       2,301,000       1,693,000  

Direct to consumer

    388,000       473,000       771,000       980,000  
    $ 5,052,000     $ 4,279,000     $ 8,374,000     $ 8,047,000  

 

For the three and six months ended June 30, 2023, 35% and 32% of revenue was recognized at a single point in time, and 65% and 68% of revenue was recognized over time, respectively. For the three and six months ended June 30, 2022, 43% and 33% of revenue was recognized at a single point in time, and 57% and 67% of revenue was recognized over time, respectively.

 

Contract liabilities represent payments received in advance of providing services under certain contracts and were $76,000 at December 31, 2021, $111,000 at December 31, 2022 and $269,000 at June 30, 2023. Revenue recognized in the three and six months ended June 30, 2023 relating to contract liabilities as of December 31, 2022 were $0 and $82,000, respectively. Revenue recognized in the three and six months ended June 30, 2022 relating to contract liabilities as of December 31, 2021 were $44,000 and $47,000, respectively.

 

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 13,000 and $22,000, respectively. Advertising expense for the three and six months ended June 30, 2022 were $134,000 and $284,000, respectively.

 

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 3 to 10 years.

 

 

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.

 

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 1,350,000 performance stock units (“PSUs”) under the Company’s 2014 Amended and Restated Stock Option and Incentive Plan, which vest in five equal increments of 270,000 PSUs, based on satisfaction of the following vesting conditions during the three-year period commencing on January 1, 2022: (i) the Company’s stock price equaling $4.75 per share based on 60-day volume weighted average price (“VWAP”); (ii) the Company’s stock price equaling $6.00 per share based on 60-day VWAP; (iii) the Company’s stock price equaling $7.00 per share based on 60-day VWAP; (iv) the Company’s stock price equaling $8.00 per share based on 60-day VWAP; and (v) the Company’s stock price equaling $9.00 per share based on 60-day VWAP. 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.

 

 

In December 2022, the Company issued 500,000 warrants to a third-party for nonemployee investor relations services. The warrants have an exercise price of $0.67, a grant date fair value of $0.50, vest in twelve equal monthly installments commencing on the grant date and expire five years from the grant date. Compensation expense included in the condensed consolidated statement of operations for the three and six months ended June 30, 2023 totaled $62,000 and $124,000, 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 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 Company’s 2014 Amended and Restated Employee Stock Option and Incentive Plan (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 its 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 award 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.

 

 

Total noncash stock-based compensation expense for the periods presented was included in the following financial statement line items:

 

   

Three Months

   

Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Sales, marketing and advertising

  $ 236,000     $ 251,000     $ 400,000       481,000  

Engineering, technology and development

    102,000       74,000       191,000       263,000  

General and administrative

    411,000       675,000       941,000       1,355,000  

Total noncash stock compensation expense

  $ 749,000     $ 1,000,000     $ 1,532,000       2,099,000  

 

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 $282,000 and $349,000 as of June 30, 2023 and December 31, 2022, respectively.

 

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 one 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

 

Number of customers > 10% of revenue / percent of revenue

 

Two

/

22%  

Two

/

46%  

One

/

11%  

Three

/

36%  

 

Revenue concentrations were comprised of the following revenue categories:

 

   

Three Months

   

Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2023

   

2022

   

2023

   

2022

 

Media and advertising

    22

%

    46

%

    11

%

    25

%

Publishing and content studio     - %     -

%

    -

%

    11

%

      22

%

    46

%

    11

%

    36

%

 

 

 

June 30,

2023

 

December 31,

2022

 

Number of customers > 10% of accounts receivable / percent of accounts receivable

Three

/

36 %  

Two

/

25 %  

Number of vendors > 10% of accounts payable / percent of accounts payable

One

/

12 %  

One

/

10 %  

 

 

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 15,757,000 and 6,787,000 at June 30, 2023 and 2022, respectively, have been excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive. Common stock potentially issuable in connection with the conversion of outstanding convertible preferred stock totaling 38,989,000 at June 30, 2023, have been excluded from the computation of diluted loss per share for the three and six months ended June 30, 2023 because the effect of inclusion would have been anti-dilutive.

 

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 $313,000 tax benefit reflected in the condensed consolidated statement of operations for the three and six months ended June 30, 2023.

 

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

  $ 13,566,000     $ 13,376,000  

Capitalized software development costs

    5,745,000       5,262,000  

Capitalized third-party game property costs

    500,000       500,000  

Developed technology

    5,062,000       7,880,000  

Influencers/content creators

    2,559,000       2,559,000  

Trade name

    209,000       189,000  

Domain

    68,000       68,000  

Copyrights and other

    820,000       760,000  
      28,529,000       30,594,000  

Less: accumulated amortization

    (12,377,000

)

    (10,528,000

)

Intangible and other assets, net

  $ 16,152,000     $ 20,066,000  

 

Intangible assets at June 30, 2023 reflected in the table above includes the intangible assets acquired in connection with the Melon Acquisition totaling $510,000, as described at Note 4 below.

 

Amortization expense included in operating expense for the three and six months ended June 30, 2023 totaled $1,316,000 and $2,604,000, respectively. Amortization expense included in operating expense for the three and six months ended June 30, 2022 totaled $1,300,000 and $2,601,000, respectively. Amortization expense included in cost of revenue for the three and six months ended June 30, 2023 totaled $5,000 and $31,000, respectively. Amortization expense included in cost of revenue for the three and six months ended June 30, 2022 totaled $27,000 and $31,000, respectively.

 

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 statement of operations for the three and six months ended June 30, 2023. Developed technology related intangibles asset acquisition costs were reduced $3,069,000, and related accumulated depreciation was reduced $785,000, in connection with the disposal of the intangible asset.

 

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,

       

2023 remaining

    2,432,000  

2024

    4,538,000  

2025

    3,915,000  

2026

    2,653,000  

2027

    1,807,000  

Thereafter

    807,000  
    $ 16,152,000  

 

 

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 $900,000 to Melon (the “Melon Closing Consideration”), of which $150,000 was paid in the form of the forgiveness of certain working capital advances paid in the form of cash to Melon between the dates of April 14, 2023 to May 4, 2023 (prior to the Melon Closing) 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 “Melon Contingent Consideration”) will be payable to Melon in connection with the achievement of certain revenue milestones for the period from the Melon 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 Melon Contingent Consideration is payable in the form of cash and common stock, with $600,000 of the aggregate Melon 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 VWAP for the five trading days immediately preceding the end of each respective Earnout Period.

 

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 2,075,550 shares of the Company’s common stock. The awards were granted pursuant to terms and conditions fixed by the Compensation Committee of the Board and as an inducement material to each new employee entering employment with Super League in accordance with Nasdaq Listing Rule 5635(c)(4). Of the 2,075,550 RSUs: (A) 830,220 of the RSUs will vest in 25 equal monthly installments beginning on May 4, 2023, and on the first of each calendar month, subject to the applicable employee’s continued service with Super League on each such vesting date; and (B) 1,245,330 of the RSUs will vest as follows: (i) 25% will vest upon the achievement of certain net revenue targets for the fiscal year ending December 31, 2024, to be determined by the Board in its discretion; (ii) 25% upon the achievement of certain net revenue targets for the fiscal year ending December 31, 2025, to be determined by the Board in its sole discretion; (iii) 25% upon Super League’s common stock maintaining a minimum closing price of at least $1.50 over a rolling 30 consecutive trading day period, as quoted on the Nasdaq Capital Market; and (iv) 25% upon Super League’s common stock maintaining a minimum closing price of at least $2.50 over a rolling 30 consecutive trading day period, as quoted on the Nasdaq Capital Market. The vesting of the RSUs will accelerate upon a change of control of the Company. In addition, upon (Y) the Company’s termination of the employment of the respective employee without cause, or (Z) the respective employees resignation for good reason, the RSUs will continue to vest as if (Y) or (Z) had not occurred. The RSUs are subject to the terms and conditions of the RSU agreement covering each grant.

 

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 $47,000, were expensed as incurred pursuant to the acquisition method of accounting in accordance with ASC 805. Super League’s preliminary purchase price allocation was based on an evaluation of the appropriate fair values of the assets acquired and liabilities assumed and represents management’s best estimate based on available data. Fair values are determined based on the requirements of ASC 820.

 

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

          $ 150,000  

Equity consideration at closing – shares of common stock

    1,556,663          

Super League closing stock price per share on the Melon Closing Date

  $ 0.4640          

Fair value of equity consideration issued at closing

  $ 722,000       722,000  

Fair value of contingent consideration at closing

            1,350,000  

Fair value of total consideration issued at closing

          $ 2,222,000  

 

 

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

  $ 36,000  

Liabilities assumed

    (188,000

)

Identifiable intangible assets

    510,000  

Identifiable net assets acquired

    358,000  

Goodwill

    1,864,000  

Total purchase price

  $ 2,222,000  

 

The following table presents details of the fair values of the acquired intangible assets of Melon:

 

   

Estimated

Useful Life (in

years)

   

Amount

 

Developed technology

    5     $ 250,000  

Developer relationships

    2       50,000  

Customer relationships

    6       190,000  

Trade names / trademarks

    0.5       20,000  

Total intangible assets acquired

          $ 510,000  

 

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 $1,432,000 at June 30, 2023, resulting in a change in fair value of $82,000, which is included in contingent consideration expense in the accompanying statement of operations for the three and six months ended June 30, 2023. The fair value of the Melon Contingent Consideration on the respective valuation dates was determined utilizing a Monte Carlo simulation model and measured using Level 3 inputs, as described at Note 2. Assumptions utilized in connection with utilization of the Monte Carlo simulation model for the periods presented included risk free interest rates of 4.04 % and 5.14%, volatility rate of 85%, and discount rate of 30%.

 

Aggregated amortization expense for the three months ended June 30, 2023, related to intangible assets acquired in connection with the Melon Acquisition, totaled $23,000. Goodwill represents the excess of the purchase price of the acquired business over the acquisition date fair value of the net assets acquired. Goodwill recorded in connection with the Melon Acquisition is primarily attributable to expected synergies from combining the operations and assets of Super League and Melon, and also includes residual value attributable to the assembled and trained workforce acquired in the acquisition.

 

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

 
 

June 30,

 

June 30,

 
 

2023

 

2022

 

2023

 

2022

 
                 

Revenue

$

5,357,000

 

$

4,900,000

 

$

9,089,000

 

$

9,358,000

 

Net Loss

 

(6,808,000

)

 

(9,752,000

)

 

(14,866,000

)

 

(17,925,000

)

 

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 $11.5 million will be payable to Super Biz and the Founders in connection with the achievement of certain revenue milestones for the period from the Super Biz Closing Date until December 31, 2022 (“Initial Earn Out Period”) and for the fiscal year ending December 31, 2023 (the “Super Biz Contingent Consideration”) (“Super Biz Earn Out Periods”). The Super Biz Contingent Consideration is payable in the form of both cash and shares of the Company’s common stock, in equal amounts, as more specifically set forth in the Super Biz Purchase Agreement.

 

 

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 (50%) for the respective Super Biz Earn Out Periods, 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 Super Biz 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 associated with 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, 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

  $ 3,674,000     $ -     $ 3,206,000     $ -  

Change in fair value

    (13,000

)

    -       204,000       -  

Current period accrued contingent consideration

    471,000       -       722,000       -  

Contingent consideration payments(2)

    (3,423,000

)

    -       (3,423,000

)

    -  

Accrued contingent consideration

  $ 709,000 (1)   $ -     $ 709,000 (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.

 

 

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 $4,320,000, of which 8% is an original issue discount (“OID”) (each, a “Note,” and, collectively, the “Notes,” and such financing, the “Note Offering”). The Notes accrued interest at a guaranteed annual rate of 9% per annum, were set to mature 12 months from the date of issuance, and were convertible at the option of the Note Holders into that number of shares of the Company’s common stock, equal to the sum of the outstanding principal balance, accrued and unpaid interest, and accrued and unpaid late charges (the “Conversion Amount”), divided by $4.00 (the “Conversion Price”), subject to adjustment upon the occurrence of certain events as more specifically set forth in the Note, as amended. In the event of the occurrence of an event of default, the Note Holders may, at the Note Holder’s option, convert all, or any part of, the Conversion Amount into shares of common stock at 90% of the lowest volume weighted average price of the ten trading days preceding the date for which the price is being calculated.

 

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 50% of the gross proceeds raised from such sale to redeem all or any portion of the Conversion Amount then remaining under the Notes, in cash, at a price equal to the Conversion Amount being redeemed.

 

The Notes were issued with an original issue discount of $320,000, or 8%, which was recorded as an adjustment to the carrying amount of the Notes. The original issue discount was amortized using the interest method over the contractual term of the Notes and reflected as interest expense in the statement of operations. At December 31, 2022, the balance of the original issue discount was $40,000, which is included in “Convertible note payable and accrued interest” in the accompanying condensed consolidated balance sheet. Total amortization of original issue discount for the three and six months ended June 30, 2023 was $0 and $40,000, respectively.

 

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 $539,000, and accrued interest totaled $180,000, both of which were paid in full during the three months ended March 31, 2023. As of March 31, 2023, all amounts of principal and interest under the Notes were fully paid, resulting in a Convertible note payable and accrued interest balance of $0.

 

 

 

6.

STOCKHOLDERSEQUITY 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 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, effective as of the applicable closing date, upon final closing of the Series AA Preferred Stock offering.

 

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) 50% of the outstanding shares of Series AA Preferred if the VWAP of the Company’s common stock over the previous ten days as reported on the NASDAQ Capital Market (the “Series AA VWAP”), equals at least 250% of the Conversion Price, or (z) 100% of the outstanding shares of Series AA Preferred if the Series AA VWAP equals at least 300% of the respective conversion price.

 

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 20% of the shares of common stock underlying the Series AA Preferred then held by such holder on the 12 and 24 month anniversaries of the respective filing date. In addition, subject to the beneficial ownership and primary market limitations, holders of Series AA Preferred will be entitled to receive dividends equal, on an as-if-converted to shares of common stock basis, and in the same form as dividends actually paid on shares of the common stock when, as, and if such dividends are paid on shares of the common stock. Notwithstanding the foregoing, to the extent that a holder’s right to participate in any dividend in shares of common stock to which such holder is entitled would result in such holder exceeding the beneficial ownership and primary market limitations, then such holder shall not be entitled to participate in any such dividend to such extent and the portion of such shares that would cause such holder to exceed the beneficial ownership and primary market limitations shall be held in abeyance for the benefit of such holder until such time, if ever, as such holder’s beneficial ownership thereof would not result in such holder exceeding the beneficial ownership and primary market limitations.

 

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 $3.5 million in shares of Series AA Preferred (subject to the acceptance of such lesser amounts in the Company’s sole discretion), shall have the right to purchase shares of a newly designated series of Preferred Stock of the Company containing comparable terms as the Series AA Preferred (the “Additional Investment Right”) from the date of each respective closing through the date that is 18 months thereafter as follows: (i) such investor may purchase an additional dollar amount equal to its initial investment amount at $1,000 per share (the “AA Original Issue Price”), with a conversion price equal to the conversion price in effect on the date of original purchase; and (ii) such investor may purchase an additional dollar amount equal to its initial investment amount at the AA Original Issue Price, with a conversion price equal to 125% of the respective conversion price in effect on the date of original purchase.

 

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