UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2020
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: (802) 294-2754; Investor Relations:
949-574-3860
(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 [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted 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 and post such files). Yes
[X] 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
|
[X]
|
|
|
Emerging growth company
|
[X]
|
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 [X]
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 11, 2020, there were 10,460,696 shares of the registrant’s common stock,
$0.001 par value, issued and outstanding.
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
50
|
PART I
ITEM 1. CONDENSED FINANCIAL
STATEMENTS
SUPER LEAGUE GAMING, INC.
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
Current
Assets
|
|
|
|
Cash and cash
equivalents
|
$6,241,000
|
$8,442,000
|
|
Accounts
receivable
|
497,000
|
293,000
|
|
Prepaid expenses
and other current assets
|
1,361,000
|
924,000
|
|
Total current
assets
|
8,099,000
|
9,659,000
|
|
Property and
Equipment, net
|
186,000
|
239,000
|
|
Intangible and
Other Assets, net
|
1,953,000
|
1,984,000
|
|
Goodwill
|
2,565,000
|
2,565,000
|
|
Total
assets
|
$12,803,000
|
$14,447,000
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts payable
and accrued expenses
|
$850,000
|
$853,000
|
|
|
-
|
151,000
|
|
Total current
liabilities
|
850,000
|
1,004,000
|
|
|
|
|
|
|
1,202,000
|
-
|
|
|
|
|
|
|
2,052,000
|
1,004,000
|
|
|
|
|
|
Commitments and
Contingencies (Note 7)
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
Preferred stock,
par value $0.001 per share; 10,000,000 shares authorized; no shares
issued or outstanding
|
-
|
-
|
|
Common stock, par
value $0.001 per share; 100,000,000 shares authorized; 10,460,696
and 8,573,922 shares issued and outstanding as of June 30, 2020 and
December 31, 2019, respectively.
|
20,000
|
18,000
|
|
Additional paid-in
capital
|
106,237,000
|
99,237,000
|
|
Accumulated
deficit
|
(95,506,000)
|
(85,812,000)
|
|
Total
stockholders’ equity
|
10,751,000
|
13,443,000
|
|
Total
liabilities and stockholders’ equity
|
$12,803,000
|
$14,447,000
|
See accompanying notes to condensed financial
statement
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
$324,000
|
$223,000
|
$567,000
|
$472,000
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
116,000
|
113,000
|
233,000
|
187,000
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
208,000
|
110,000
|
334,000
|
285,000
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
Selling, marketing
and advertising
|
1,256,000
|
1,167,000
|
2,529,000
|
2,139,000
|
|
Technology platform
and infrastructure
|
1,685,000
|
1,291,000
|
3,590,000
|
2,453,000
|
|
General and
administrative
|
1,826,000
|
3,157,000
|
3,922,000
|
7,334,000
|
|
Total operating
expenses
|
4,767,000
|
5,615,000
|
10,041,000
|
11,926,000
|
|
|
|
|
|
|
|
NET
OPERATING LOSS
|
(4,559,000)
|
(5,505,000)
|
(9,707,000)
|
(11,641,000)
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
Accrued interest
expense
|
(2,000)
|
-
|
(2,000)
|
(187,000)
|
|
Accretion of debt
discount
|
-
|
-
|
-
|
(2,684,000)
|
|
Beneficial
conversion feature
|
-
|
-
|
-
|
(7,067,000)
|
|
Other
|
1,000
|
-
|
15,000
|
5,000
|
|
Total other income
(expense)
|
(1,000)
|
-
|
13,000
|
(9,933,000)
|
|
|
|
|
|
|
|
NET
LOSS
|
$(4,560,000)
|
$(5,505,000)
|
$(9,694,000)
|
$(21,574,000)
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders - basic and
diluted
|
|
|
|
|
|
Basic and diluted
loss per common share
|
$(0.48)
|
$(0.65)
|
$(1.07)
|
$(3.00)
|
|
Weighted-average
number of shares outstanding, basic and diluted
|
9,548,000
|
8,413,090
|
9,066,000
|
7,199,829
|
See accompanying notes to condensed financial
statements
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
Three Months Ended June 30
|
|
|
|
|
|
|
|
|
Common stock (Shares)
|
|
|
|
|
|
Balance,
beginning of period
|
8,595,742
|
8,368,833
|
8,573,922
|
4,610,109
|
|
Initial
public offering of common stock, net of issuance costs (Note
6)
|
-
|
-
|
-
|
2,272,727
|
|
Issuance
of common stock at $3.50 per share, net of issuance costs (Note
6)
|
1,825,000
|
-
|
1,825,000
|
-
|
|
Automatic
conversion of convertible debt to common stock
|
-
|
-
|
-
|
1,475,164
|
|
Common stock issued for Framerate Acquisition (Note 4)
|
32,936
|
134,422
|
32,936
|
134,422
|
|
Stock-based
compensation
|
7,018
|
-
|
28,838
|
10,833
|
|
Warrant Exercises
|
-
|
66,667
|
-
|
66,667
|
|
Balance, end of period
|
10,460,696
|
8,569,922
|
10,460,696
|
8,569,922
|
|
|
|
|
|
|
|
Common stock (Amount):
|
|
|
|
|
|
Balance,
beginning of period
|
$18,000
|
$18,000
|
$18,000
|
$14,000
|
|
Initial
public offering of common stock, net of issuance costs (Note
6)
|
-
|
-
|
-
|
2,000
|
|
Issuance
of common stock at $3.50 per share, net of issuance costs (Note
6)
|
2,000
|
-
|
2,000
|
-
|
|
Automatic
conversion of convertible debt to common stock
|
-
|
-
|
-
|
2,000
|
|
Balance, end of period
|
$20,000
|
$18,000
|
$20,000
|
$18,000
|
|
|
|
|
|
|
|
Additional paid-in-capital:
|
|
|
|
|
|
Balance,
beginning of period
|
$99,914,000
|
$94,351,000
|
$99,237,000
|
$48,325,000
|
|
Initial
public offering of common stock, net of issuance costs (Note
6)
|
-
|
-
|
-
|
22,456,000
|
|
Issuance
of common stock at $3.50 per share, net of issuance costs (Note
6)
|
5,951,000
|
-
|
5,951,000
|
-
|
|
Automatic
conversion of convertible debt to common stock
|
-
|
-
|
-
|
13,791,000
|
|
Beneficial
conversion feature
|
-
|
-
|
-
|
7,067,000
|
|
Common
stock issued for Framerate Acquisition (Note 4)
|
-
|
1,000,000
|
-
|
1,000,000
|
|
Framerate
Earn-Out (Note 4)
|
-
|
454,000
|
-
|
454,000
|
|
Stock-based
compensation
|
372,000
|
1,773,000
|
1,049,000
|
4,485,000
|
|
Warrant
Exercises
|
-
|
20,000
|
-
|
20,000
|
|
Balance, end of period
|
$106,237,000
|
$97,598,000
|
$106,237,000
|
$97,598,000
|
|
|
|
|
|
|
|
Accumulated Deficit:
|
|
|
|
|
|
Balance,
beginning of period
|
$(90,946,000)
|
$ (71,202,000)
|
$(85,812,000)
|
$(55,133,000)
|
|
Net
Loss
|
(4,560,000)
|
(5,505,000)
|
(9,694,000)
|
(21,574,000)
|
|
Balance,
end of period
|
(95,506,000)
|
(76,707,000)
|
(95,506,000)
|
(76,707,000)
|
|
Total stockholders’ equity
|
$10,751,000
|
$20,909,000
|
$10,751,000
|
$20,909,000
|
See accompanying notes to condensed financial
statements
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six Months
Ended June 30,
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
$(9,694,000)
|
$(21,574,000)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
854,000
|
485,000
|
|
Stock-based
compensation
|
1,099,000
|
4,529,000
|
|
Amortization
of discount on convertible notes
|
-
|
2,684,000
|
|
Beneficial
conversion feature
|
-
|
7,067,000
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(204,000)
|
33,000
|
|
Prepaid
expenses and other current assets
|
(484,000)
|
(598,000)
|
|
Accounts
payable and accrued expenses
|
(5,000)
|
284,000
|
|
Deferred
revenue
|
(151,000)
|
20,000
|
Accrued
interest on convertible notes
|
-
|
187,000
|
|
Net cash used in operating activities
|
(8,585,000)
|
(6,883,000)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Cash
paid for acquisition of Framerate (Note 4)
|
-
|
(1,491,000)
|
|
Purchase
of property and equipment
|
(6,000)
|
(33,000)
|
|
Capitalization
of software development costs
|
(691,000)
|
(560,000)
|
Acquisition
of other intangible assets
|
(72,000)
|
(105,000)
|
|
Net cash used in investing activities
|
(769,000)
|
(2,189,000)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
from issuance of common stock, net of issuance costs (Note
6)
|
5,953,000
|
22,458,000
|
|
Proceeds
from note payable (Note 5)
|
1,200,000
|
-
|
Proceeds
from common stock purchase warrant exercises
|
-
|
20,000
|
|
Net cash provided by financing activities
|
7,153,000
|
22,478,000
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH
|
(2,201,000)
|
13,406,000
|
Cash –
beginning of
period
|
8,442,000
|
2,774,000
|
|
Cash – end of period
|
$6,241,000
|
$16,180,000
|
|
|
|
|
|
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES
|
|
|
Automatic conversion of convertible
debt to common stock
|
$-
|
$13,793,000
|
Issuance of common stock for Framerate
Acquisition (Note 4)
|
$245,000
|
$1,000,000
|
See accompanying notes to condensed financial
statements
|
1.
|
DESCRIPTION OF BUSINESS
|
Super League Gaming, Inc. (“Super League,” the
“Company,” “we” or
“our”) is a global leader in the mission to
bring live and digital esports entertainment and experiences
directly to everyday competitive gamers around the world. Utilizing
our proprietary technology platform, Super League operates physical
and digital experiences in partnership with publishers of top-tier
game titles and owners/operators of a distributed footprint of
venues, a network of digital social and viewing channels, and an
association/organization of city-based amateur gaming clubs and
teams. The Super League Network features multiple forms
of content celebrating the love of play via social media, live
streaming and video-on-demand, along with continuous gameplay and
leaderboards. Inside our network is Framerate, a large independent
social video esports network powered by user-generated highlight
reels, and our exclusive proprietary platform Minehut,
providing a social and gameplay forum for the avid Minecraft
community. Super League is committed to supporting the development
of local, grassroots player communities, while providing a global,
scalable infrastructure for esports competition and engagement. We
address a wide range of gamers across game titles, ages and skill
levels, and also a wide range of content-capture beyond gameplay.
This positions Super League as more than a tournament operator; we
are a lifestyle and media company focused on capturing, generating,
aggregating and distributing content across the genre of all things
esports.
We are
an “emerging growth company” as defined by the
Jumpstart Our Business Startups Act of 2012, as
amended.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The
accompanying condensed 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 financial statements should be read
in conjunction with our audited financial statements for the year
ended December 31, 2019 included in our Annual Report on Form 10-K
for the year ended December 31, 2019, filed with the SEC on March
23, 2020.
The
condensed 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, 2020, 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, 2020 are not necessarily indicative of
the results to be expected for the entire fiscal year.
Reclassifications
Certain reclassifications to operating expense line items have been
made to prior year amounts for consistency and comparability with
the current year’s financial statements presentation. These
reclassifications had no effect on the reported total operating
expenses 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 revenues and expenses 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, the valuation of common stock purchase
warrants (hereinafter, “warrants”), stock-based
compensation expense, accounting for business combinations, and
valuation allowances against net deferred tax assets, require its
most difficult, subjective or complex judgments.
Going Concern
The accompanying interim condensed 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. As presented in the
financial statements, the Company incurred net losses of $9.7
million and $21.6 million during the six months ended June 30, 2020
and 2019, respectively, and had an accumulated deficit of $95.5
million as of June 30, 2020. Total noncash charges included in
accumulated deficit since inception, primarily related to noncash
stock compensation, restricted stock units issued in connection
with a license agreement, amortization of the discount on
convertible debt and in-kind advertising expense, totaled
approximately $36.0 million. For the six months ended June 30, 2020
and 2019, noncash expenses (excluding depreciation and amortization
of fixed and intangible assets, respectively) included in net loss,
primarily comprised of stock-based compensation and noncash
interest charges (2019 period only), totaled $1.1 million and $14.5
million, respectively. For the six months ended June 30, 2020 and
2019, net cash used in operating activities totaled $8.6 million
and $6.9 million, respectively.
As of June 30, 2020, the Company had cash and cash equivalents of
approximately $6.2 million. The Company has used and will continue
to use significant capital for the growth and development of its
business. The Company’s management expects operating losses
to continue in the near term in connection with the pursuit of its
strategic objectives. As such, management believes its current cash
position, absent receipt of additional capital either from
operations or that may be available from future issuance(s) of
common stock or debt financings, is not sufficient to fund our
planned operations for the twelve months following the issuance of
these financial statements. As a result, our current financial
condition raises substantial doubt about our ability to continue as
a going concern.
We are focused on expanding our service offerings and revenue
growth opportunities through internal development, collaborations,
and through one or more strategic acquisitions. Management is
currently exploring several alternatives for raising capital to
facilitate our growth and execute our business strategy, including
strategic partnerships or other forms of equity or debt
financings.
The Company considers historical operating results, 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, if necessary, the Company will be able to raise
additional equity 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.
Recent Financing Activities
As described at Note 5, on May 4, 2020, the Company entered
into a potentially forgivable loan from the U.S. Small Business
Administration (“SBA”) resulting in net proceeds of
approximately $1.2 million pursuant to the Paycheck Protection
Program enacted by Congress under the CARES Act administered by the
SBA.
As described at Note 6, in May 2020, the Company issued 1,825,000
shares of common stock at a price of $3.50 per share, raising
aggregate net proceeds of approximately $6.0 million, after
deducting placement agent fees of $319,000 and other offering
expenses totaling $116,000, pursuant to a registered direct
offering. The net proceeds are for working capital and other
general corporate purposes, including sales and marketing
activities, product development and capital expenditures. We may
also use a portion of the net proceeds for the acquisition of, or
investment in, technologies, solutions or businesses.
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.
Super League generates revenues and related cash flows from (i)
sponsorships and advertising, including third-party content
sales and (ii) direct to consumer
offers including tournament fees for participation in our physical
and online multiplayer gaming experiences, digital subscriptions
and merchandise sales.
Sponsorships and
Advertising:
The Company generates sponsorship revenues primarily from sales of
various forms of sponsorships and promotional campaigns for its
online gameplay and content platforms and from sponsorship at its
in-person esports experiences. These revenue arrangements may
include: exclusive or non-exclusive title sponsorships, marketing
benefits, official product status exclusivity, product visibly and
additional infrastructure placement, social media rights (including
rights to create and post social content and clips), rights to
on-screen activations and promotions, display material rights,
media rights, hospitality and tickets and merchandising
rights.
Sponsorship revenues also include revenues pursuant to arrangements
with brand and media partners, retail venues, game publishers and
broadcasters that allow our partners to run amateur esports
experiences, and or capture specifically curated gameplay content
that is customized for our partners’ distribution channels,
leveraging the flexibility of, and powered by the Super League
gaming and content technology platform.
Sponsorship arrangements typically include contract terms for time
periods ranging from several weeks or months to multi-year
arrangements.
We also
generate content through digital and physical experiences that
offer opportunities for generating advertising revenue on our
proprietary digital channels. In addition, we license our content
to third parties seeking esports content for their own distribution
channels.
For
sponsorship arrangements that include performance obligations
satisfied over time, customers typically simultaneously receive and
consume the benefits under the agreement as the Company satisfies
its 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). Payments are typically due from customers during
the term of the arrangement.
Revenue for sponsorship arrangements for one-off branded
experiences and/or the development of content tailored specifically
for the Company’s partners’ distribution channels that
provide for a contractual delivery or performance date, is
recognized when performance is substantially complete and or
delivery occurs.
For
advertising and third-party content 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).
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.
Direct to
Consumer:
Direct to consumer revenues include online and physical tournament
fees, digital subscriptions, digital goods and merchandise. Revenue
from single experiences is recognized when the experience occurs.
Revenue from multi-week packages is recognized over time as the
multi-week experiences occur based on estimates of the progress
toward complete satisfaction of the applicable offer and related
performance obligations. Subscription revenue is recognized over
the applicable subscription term. Payments are typically due from
customers at the point of sale.
Revenue
billed or collected in advance is recorded as deferred revenue
until the event occurs or until applicable performance obligations
are satisfied, as described above.
Revenue
was comprised of the following for the periods
presented:
|
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
Sponsorships and
advertising
|
$285,000
|
$220,000
|
$513,000
|
$458,000
|
|
Direct to
Consumer
|
39,000
|
3,000
|
54,000
|
14,000
|
|
|
$324,000
|
$223,000
|
$567,000
|
$472,000
|
For the
three and six months ended June 30, 2020, 46% and 35% of revenues
were recognized at a single point in time, and 54% and 65% of
revenues were recognized over time, respectively. For the three and six months ended June 30, 2019,
35% and 55% of revenues were recognized at a point in time, and 65%
and 45% of revenues were recognized over time,
respectively.
Cost of Revenues
Cost of
revenues includes direct costs incurred in connection with the
production of Super League’s in-person and online gaming and
content events and activities, including venue rental, venue
entertainment, licenses, direct marketing, prizing, talent and
contract services.
Advertising
Gaming
experience and Super League brand related 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 expenses in the accompanying statements
of operations. Advertising expenses for the three and six months
ended June 30, 2020 were $20,000 and $87,000, respectively.
Advertising expenses for the three and six months ended June 30,
2019 were $54,000 and $84,000, respectively.
Technology Platform and Infrastructure Costs
Technology
platform and infrastructure costs include (i) allocated personnel
costs, including salaries, noncash stock compensation, taxes and
benefits related to our internal software developers and engineers,
employed by Super League, engaged in the operation, maintenance,
management, administration, testing and enhancement of our
proprietary gaming and content technology platform, (ii)
third-party contract software development and engineering resources
engaged in developing and enhancing our proprietary gaming and
content technology platform (iii) the amortization of capitalized
internal use software costs, and (iv) technology platform related
cloud services and broadband costs.
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 and (iv) other
intangible assets, which are recorded at cost and amortized using
the straight-line method over the estimated useful lives of the
assets, ranging from three 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. If the cost basis of a long-lived
asset is greater than the projected future undiscounted net cash
flows from such asset, an impairment loss is recognized. Impairment
losses are calculated as the difference between the cost basis of
an asset and its estimated fair value. Management believes that
there was no impairment of long-lived assets for the periods
presented herein. 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.
Noncash stock-based compensation expense for the periods presented
was comprised of the following:
|
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
Stock
options
|
$122,000
|
$1,339,000
|
$435,000
|
$2,631,000
|
|
Warrants
|
60,000
|
367,000
|
282,000
|
1,654,000
|
|
Restricted
stock units
|
190,000
|
85,000
|
333,000
|
236,000
|
|
Earn-out
compensation expense
|
25,000
|
8,000
|
49,000
|
8,000
|
|
Total
noncash stock compensation expense
|
$397,000
|
$1,799,000
|
$1,099,000
|
$4,529,000
|
Noncash stock-based compensation expense for the periods presented
was included in the following financial statement line
items:
|
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
Sales,
marketing and advertising
|
$197,000
|
$196,000
|
$395,000
|
$328,000
|
|
Technology platform
and infrastructure
|
59,000
|
27,000
|
148,000
|
24,000
|
|
General and
administrative
|
141,000
|
1,576,000
|
556,000
|
4,177,000
|
|
Total
noncash stock compensation expense
|
$397,000
|
$1,799,000
|
$1,099,000
|
$4,529,000
|
Noncash stock-based compensation expense for the three and six
months ended June 30, 2019 included compensation expense resulting
primarily from the vesting of certain performance-based options and
warrants previously granted to two of the Company’s
executives which vested upon completion of the IPO and the
satisfaction of certain other operational performance metrics.
During the three and six months ended June 30, 2019, 92,000 and
300,000, respectively, of performance-based stock options and
warrants vested, with a weighted-average grant date fair value of
$8.50 resulting in noncash stock compensation expense of $779,000
and $2,549,000, during the three six months ended June 30, 2019,
respectively. The fair value of these equity awards was estimated
on October 31, 2018, their original grant date, using the Black
Scholes-Merton option pricing model and the following
weighted-average assumptions: (i) volatility of 93%, (ii)
risk-free interest rate of 3.0%, and (iii) expected term
of 6.5 years.
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:
For the three and six months ended June 30, 2020, six customers
accounted for 84% and four customers accounted for 61% of revenues,
respectively. For the three and
six months ended June 30, 2019, four customers accounted for 98%
and 89% of revenues, respectively. At June 30, 2020, four
customers accounted for 84% of accounts receivable. At December 31,
2019, one customer accounted for 70% of accounts receivable. At
June 30, 2020, one vendor accounted for 55% of accounts payable. At
December 31, 2019, one vendor accounted for 21% of accounts
payable.
Earnings (Loss) Per Share
Basic
earnings (loss) per share is computed by dividing the income or
loss by the weighted-average number of outstanding shares of common
stock for the applicable period. Diluted earnings per share is
computed by dividing the income or loss by the weighted-average
number of outstanding shares of common stock for the applicable
period, including the dilutive effect of common stock equivalents.
Potentially dilutive common stock equivalents primarily consist of
employee stock options, warrants issued to employees and
non-employees in exchange for services and warrants issued in
connection with financings. All outstanding stock options,
restricted stock units and warrants, totaling 3,886,000 and
4,059,000 at June 30, 2020 and 2019, respectively, have been
excluded from the computation of diluted loss per share because the
effect of inclusion would have been
anti-dilutive.
Recent Accounting Guidance
Recent Accounting Pronouncements - Recently Adopted.
In
January 2017, the FASB issued new guidance that eliminates Step 2
from the goodwill impairment test. Instead, if an entity forgoes a
Step 0 test, that entity will be required to perform its annual or
interim goodwill impairment test by comparing the fair value of a
reporting unit, as determined in Step 1 from the goodwill
impairment test, with its carrying amount and recognize an
impairment charge, if any, for the amount by which the carrying
amount exceeds the reporting unit’s fair value, not to exceed
the total amount of goodwill allocated to the reporting unit. The
Company adopted this new standard effective January 1, 2020. The
adoption of the new standard did not have a material impact on the
Company’s financial position or results of operations for the
current or prior periods.
Recent Accounting Pronouncements – Not Yet
Adopted.
In
February 2016, the FASB issued an ASU that requires lessees to
present right-of-use assets and lease liabilities on the balance
sheet. The new guidance is to be applied using a modified
retrospective approach at the beginning of the earliest comparative
periods in the financial statements and is effective for fiscal
years beginning after December 15, 2021 and early adoption is
permitted. The Company is evaluating the impact that this guidance
will have on its financial position, results of operations and
financial statement disclosures.
In June
2016, the FASB issued guidance on the measurement and recognition
of credit losses on most financial assets. For trade receivables,
loans, and held-to-maturity debt securities, the current probable
loss recognition methodology is being replaced by an expected
credit loss model. For available-for-sale debt securities, the
recognition model on credit losses is generally unchanged, except
the losses will be presented as an adjustable allowance. The
guidance will be applied retrospectively with the cumulative effect
recognized as of the date of adoption. The guidance will become
effective at the beginning of the Company’s first quarter of
the fiscal year ending December 31, 2021 but can be adopted as
early as the beginning of the first quarter of fiscal year ending
December 31, 2020. The Company is currently assessing the impact
that adopting this new accounting guidance will have on its
financial statements and footnote disclosures.
|
3.
|
INTANGIBLE
AND OTHER ASSETS
|
Intangible
and other assets consisted of the following for the periods
presented:
|
|
|
|
|
|
(Unaudited)
|
|
Capitalized
software development costs
|
$2,947,000
|
$2,363,000
|
|
Licenses
|
-
|
340,000
|
|
Trade
name
|
189,000
|
189,000
|
|
Domain
|
68,000
|
68,000
|
|
Copyrights and
other
|
361,000
|
289,000
|
|
|
3,565,000
|
3,249,000
|
|
Less: accumulated
amortization
|
(1,612,000)
|
(1,265,000)
|
|
Intangible and
other assets, net
|
$1,953,000
|
$1,984,000
|
Amortization
expense for the three and six months ended June 30, 2020 totaled
$302,000 and $795,000, respectively. Amortization expense for the
three and six months ended June 30, 2019 totaled $107,000 and
$192,000, respectively. In April 2020,
we amended our arrangement with ggCircuit,
LLC (“ggCircuit”) terminating certain rights and
licenses from a prior agreement, as amended, focused on in-person
play in gaming centers, and securing other rights and licenses from
ggCircuit, focused on online play at home. ggCircuit is an
esports services company that provides
gaming center management software solutions for online play at
home, along with access to a global network of gaming
centers. As a result of the
termination of the rights and licenses related to the prior
arrangement, the Company accelerated the amortization of the
remaining balance related to the prior rights and licenses included
in “Licenses” above, totaling $306,000, and certain
capitalized internal use software development costs totaling
$107,000, which are included in technology platform and
infrastructure expense in the accompanying statement of operations
for the six months ended June 30, 2020.
On June 3, 2019, Super League and SLG Merger Sub, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company
(“Merger Sub”), entered into an agreement and plan of
merger (the “Merger Agreement”) with Framerate, Inc., a
Delaware corporation (“Framerate”), pursuant to which
Framerate merged with and into Merger Sub, with Merger Sub
continuing as the surviving corporation (the
“Acquisition”). The Acquisition was consummated on June
6, 2019 when the certificate of merger of Merger Sub and Framerate
was filed with the Secretary of State of the State of Delaware (the
“Effective Date”). As consideration for the
Acquisition, the Company ratably paid and/or issued to the former
shareholders of Framerate an aggregate of i) $1.5 million paid in
cash and ii) $1.0 million paid by the issuance of a total of
134,422 shares of the Company’s common stock, at a price per
share of $7.4395 (the “Closing Shares”).
In addition to the issuance of the Closing Shares, the Merger
Agreement provides for the issuance of up to an additional $980,000
worth of shares of the Company’s common stock at the same
price per share as the Closing Shares (the “Earn-Out
Shares”) in the event Framerate achieves certain
performance-based milestones during the two-year period following
the closing of the Acquisition, or June 6, 2021 (the
“Earn-Out”). One-half of the Earn-Out Shares will be
issuable on the one-year anniversary of the Effective Date, and the
remaining one-half will be issuable on the second anniversary of
the Effective Date. The fair value of the Earn-Out on the Effective
Date was estimated to be $454,000. In June 2020, we issued an
additional 32,936 shares of our common stock to the former
shareholders of Framerate in connection with the achievement of
certain components of the year-one earn-out related performance
milestones.
The Company has determined that the Acquisition constitutes a
business acquisition as defined by Accounting Standards
Codification (“ASC”) 805, Business
Combinations. 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 were expensed as
incurred pursuant to the purchase 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 and represents management’s best
estimate based on available data. Fair values are determined based
on the requirements of ASC 820, Fair Value Measurements and
Disclosures (“ASC
820”).
The Company hired the former Chief Executive of Framerate
(“Framerate Executive”), who was also a selling
shareholder of Framerate. Pursuant to the provisions of the
Earn-Out included in the Merger Agreement, in the event that the
Framerate Executive is terminated for cause or resigns from his
employment with the Company at any time on or before the second
anniversary of the Effective Date, and any such resignation is
without “Good Reason” as such term is defined in his
employment agreement, then the maximum amount of any portion of the
Earn-Out that has not yet been earned as of the date of resignation
shall be reduced by 44.0164%. 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 approximately 44% of the estimated fair value of the
Earn-Out, or $200,000 is accounted for as deferred compensation
expense and being amortized in the statement of operations over the
two-year period ending on the second anniversary of the Effective
date. Expense related to the portion of the Earn-Out treated as
compensation expense for the three and six months ended June 30,
2019 was $8,000. The portion of the Earn-Out included as
consideration was $254,000.
The
Earn-Out arrangement does not meet the liability classification
criteria outlined in ASC 480, “Distinguishing Liabilities
from Equity,” and is both (i) indexed to the Company’s
own shares and (ii) classified in shareholders’ equity in the
accompanying condensed balance sheet. Equity-classified contingent
consideration is measured initially at fair value on the
acquisition date and is not remeasured subsequent to initial
recognition. As such, the initial value recognized for the Earn-Out
on the acquisition date is not adjusted for changes in the fair
value of the Earn-Out as of any future settlement date. Subsequent
differences between the estimated fair value of the Earn-Out
recorded at the acquisition date and the actual amount of Earn-Out
paid based on actual performance will be reflected as a charge or
credit, as applicable, in the statement of operations.
The following table summarizes the fair value of purchase price
consideration paid to acquire Framerate:
|
|
|
|
Cash
consideration at closing
|
$1,515,000
|
|
Equity
consideration at closing
|
1,000,000
|
|
Fair value of
Earn-Out shares
|
254,000
|
|
Total
|
$2,769,000
|
The purchase price allocation is based upon an estimate of the fair
value of the assets acquired and the liabilities assumed by the
Company in connection with the acquisition of Framerate, as
follows:
|
|
|
|
Accounts
receivable
|
$15,000
|
|
Intangible Assets -
Trade name
|
189,000
|
|
Goodwill
|
2,565,000
|
|
Total
purchase price
|
$2,769,000
|
The Acquisition was treated for tax purposes as a nontaxable
transaction and as such, the historical tax bases of the acquired
assets, net operating losses, and other tax attributes of Framerate
will carryover. As a result, no new goodwill for tax purposes was
be created in connection with the Acquisition as there is no
step-up to fair value of the underlying tax bases of the acquired
net assets.
5. NOTE
PAYABLE
Long-Term
Note Payable
On May
4, 2020, the Company entered into a potentially forgivable loan
from the SBA resulting in net proceeds of $1,200,047 pursuant to
the Paycheck Protection Program (“PPP”) enacted by
Congress under the CARES Act administered by the SBA (the
“PPP Loan”). To facilitate the PPP Loan, the Company
entered into a Note Payable Agreement with South Porte Bank as the
lender (the “Lender”) (the “PPP Loan
Agreement”).
The PPP Loan provides for working capital to the Company and will
mature on May 4, 2022. However, under the CARES Act and the PPP
Loan Agreement, all payments of both principal and interest will be
deferred until at least December 4, 2020. The PPP Loan will accrue
interest at a rate of 1.00% per annum, and interest will continue
to accrue throughout the period the PPP Loan is outstanding, or
until it is forgiven. The Company will be eligible to apply for
forgiveness of all loan proceeds used to pay payroll costs and
other qualifying expenses during the eight-week period following
receipt of the loan, provided that the Company maintained its
employment and compensation within certain parameters during such
period. Any amounts forgiven will not be included in the
Company’s taxable income. As specifically intended under the
program, the PPP Loan, together with our cost savings initiatives,
helped us to continue operations without salary reductions, layoffs
or furloughs, during this challenging and uncertain economic
environment created by the COVID-19 pandemic.
The PPP
Loan is accounted for as a financial liability in accordance with
FASB ASC 470, “Debt” and interest is accrued in
accordance with the interest method. Additional interest is not
imputed at a market rate pursuant to a scope exception for interest
rates prescribed by governmental agencies under the applicable
guidance.
The
proceeds from the PPP Loan are recorded as a long-term liability on
the balance sheet until either (1) the loan is, in part or wholly,
forgiven and the company has been “legally released” or
(2) the Company pays off the loan to the creditor. Once the loan
is, in part or wholly, forgiven, and legal release is received, the
Company will reduce the liability by the amount forgiven and record
a gain on extinguishment in the statement of operations in the
period of extinguishment.
Financing
Activities
Equity Financing. In May 2020,
the Company issued 1,825,000 shares of common stock at a price of
$3.50 per share, raising aggregate net proceeds of approximately
$6.0 million, after deducting placement agent fees of $319,000 and
other offering expenses totaling $116,000. The offering was made
pursuant to an effective shelf registration statement on Form S-3
previously filed with the U.S. Securities and Exchange
Commission. We intend to use the net proceeds from this
offering for working capital and other general corporate
purposes, including sales and marketing activities, product
development and capital expenditures. We may also use a portion of
the net proceeds for the acquisition of, or investment in,
technologies, solutions or businesses.
Initial Public Offering. On
February 27, 2019, Super League completed its IPO of its common
stock, pursuant to which the Company issued and sold an aggregate
of 2,272,727 shares of common stock at $11.00 per share, raising
aggregate net proceeds of $22,458,000 after deducting underwriting
discounts, commissions and offering costs of
$2,542,000.
|
7.
|
COMMITMENTS AND CONTINGENCIES
|
In
April 2020, the Company entered into a directors and officers
insurance premium finance agreement totaling $2.3 million, with a
down payment of $1.0 million due in April 2020, and seven equal
installment payments due thereafter. The finance agreement has an
interest rate of approximately 4%.
The
Company evaluated subsequent events for their potential impact on
the financial statements and disclosures through the date the
financial statements were available to be issued and determined
that no subsequent events occurred that were reasonably expected to
impact the financial statements presented herein.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
References in this Quarterly Report on Form 10-Q to “Super
League Gaming, Inc.” “Company,” “we,”
“us,” “our,” or similar references mean
Super League Gaming, Inc. References to the “SEC” refer
to the U.S. Securities and Exchange Commission.
Forward-Looking Statements
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction with
our condensed financial statements and the related notes included
elsewhere in this interim report. Our condensed financial
statements have been prepared in accordance with U.S. GAAP. The
following discussion and analysis contains forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), including, without limitation,
statements regarding our expectations, beliefs, intentions or
future strategies that are signified by the words
“expect,” “anticipate,”
“intend,” “believe,” or similar language.
All forward-looking statements included in this document are based
on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our
business and financial performance are subject to substantial risks
and uncertainties. Actual results could differ materially from
those projected in the forward-looking statements. In evaluating
our business, you should carefully consider the information set
forth under the heading “Risk Factors” included in Item
II, Part 1A of this Quarterly Report on Form 10-Q (this
“Report”). Readers are cautioned not to place undue
reliance on these forward-looking statements.
Overview
We are a global leader in the mission to bring live and digital
esports entertainment and experiences directly to everyday
competitive gamers around the world. Utilizing our proprietary
technology platform, Super League operates physical and digital
experiences in partnership with publishers of top-tier game titles
and owners/operators of a distributed footprint of venues, a
network of digital social and viewing channels, and an
association/organization of city-based amateur gaming clubs and
teams. The Super League Network features multiple forms
of content celebrating the love of play via social media, live
streaming and video-on-demand, along with continuous gameplay and
leaderboards. Inside our network is Framerate, a large independent
social video esports network powered by user-generated highlight
reels, and our exclusive proprietary platform Minehut,
providing a social and gameplay forum for the avid Minecraft
community. Super League is committed to supporting the development
of local, grassroots player communities, while providing a global,
scalable infrastructure for esports competition and engagement. We
address a wide range of gamers across game titles, ages and skill
levels, and also a wide range of content-capture beyond gameplay.
This positions Super League as more than a tournament operator; we
are a lifestyle and media company focused on capturing, generating,
aggregating and distributing content across the genre of all things
esports.
Executive Summary
We
believe Super League is on the leading edge of the rapidly growing
competitive video gaming industry, which has become an established
and vital part of the entertainment landscape. We believe there is
a significant opportunity for the world of mainstream competitive
players who want their own esports experience. These amateur gamers
are players who enjoy the competition, the social interaction and
community, and the entertainment value associated with playing and
watching others play.
Super
League is a critically important component in providing the
infrastructure for mainstream esports that is synergistic and
accretive to the greater esports ecosystem. Over the past five
years, we believe we have become the preeminent brand for amateur
esports by providing a proprietary software platform that allows
our gamers to compete, socialize and spectate premium amateur
esports gameplay and entertainment, both physically and digitally
online. Not only do we offer premium amateur esports leagues and
community, but we are able to leverage our derivative gameplay
content to become a comprehensive amateur esports content
network.
The
fundamental drivers of our business model and monetization strategy
are creating deep community engagement through our highly
contextualized, local experiences that, when coupled with the
critical mass of our large digital audiences, provides the depth
and volume for premium content and offer monetization
differentiated from a more traditional, commoditized advertising
model. The combination of our physical venue network and digital
programming channels, with Super League’s technology platform
at the hub, creates the opportunity for not just a share of the
player’s wallet, but also the advertiser’s wallet. We
do this by offering brand sponsors and advertisers a premium
marketing channel to reach elusive Generation Z and Millennial
gamers and offering players ways to access exclusive tournaments,
rewards and programming through our Super League consumer
subscription offer and other consumer offerings.
In the
first half of 2020, management continued to focus on monetization
with respect to our two primary revenue categories: (1)
sponsorships and advertising revenues, or the monetization of our
content, and (2) direct to consumer revenues, or gamer
monetization. In addition to the significant increase in engagement
described below, we continued our focus on our premium advertising
model for future monetization of our rapidly growing advertising
inventory and expanded our direct sales team to facilitate
delivery; continued to focus on monetization of the gamer through
direct-to-consumer offers, including the planned relaunching of a
monthly subscription offer that is purely digital in response, in
part, to the impact of the ongoing COVID-19 pandemic and the launch
of the early stages of a micro-transaction marketplace; and, we
began to unlock new ways that our content production technology can
extend beyond esports into traditional sports and other
entertainment formats representing potential new revenue
opportunities in future periods.
Super League Gaming has experienced its strongest
period of audience growth during the challenging time of the
COVID-19 pandemic, marked by the reaching of a key 2020 milestone
in July 2020; reaching one billion video views and
impressions year-to-date. This represents more than a 700%
increase over the full fiscal year of 2019, during which we
achieved a total of 120 million views.
The
ability to generate one billion views in year to date 2020 is a key
proof point of not only the compelling attractiveness of Super
League’s content, but also to the variety we are able to
offer. We have established ourselves as a leading publisher of user
generated gaming highlights within our Framerate social video
network, and we produce 11 general and game title-specific channels
that, together, deliver tens of millions of video views per month.
This includes three original shows on Snapchat, five TikTok
channels, and three Instagram channels, with more to
come.
During
the first half of 2020, we experienced a significant increase in
new users, gamer engagement, and gameplay hours across all of our
platforms. We believe a driver of the increase was, to a certain
extent, the current period of social distancing and mandatory
shelter in place orders stemming from the COVID-19 pandemic, during
which passionate video gamers around the world are seeking a
competitive outlet, seeking to connect with others around the games
they love and are turning to esports and other online gaming
communities to fill the void. We also believe that a driver of the
increase is the fact that esports is mainstream, which was the case
prior to COVID-19. These increases are accelerating our growth
plans, and are increasing our opportunities for
monetization.
Super
League’s video content business is also accelerating on an
additional path through the advancement of Super League’s
proprietary live content capture and broadcast system, which
includes patented technology and fully remote, innovative workflows
operated by SuperLeagueTV, a completely virtual studio. Endemic and
non-endemic brands and partners have sought out Super League to
provide premium, TV-quality production services across a multitude
of live streamed events. During 2020, within gaming alone,
broadcasts have spanned an impressive mix of game titles including
Minecraft, APEX Legends, NBA2K, PUBG Mobile, the World Golf Tour
and more.
In response to the COVID-19 pandemic and the related uncertainty,
advertisers and sponsors across the board inevitably paused to
reset their marketing strategies. The impact on Super League in the
first half of 2020 was the deferral of some of these programs and
related revenues to future periods. We did not experience any
cancellations of existing programs. For example, our partnership
with Tencent and OnePlus, bringing PUBG mobile tournaments to life
proceeded as planned, just from the comfort and safety of
players’ homes, online, as opposed to in-person. The majority
of our gameplay hours and other engagement occurs digitally,
online, so while our “in real life” gaming is a premium
and important aspect of our brand, the shift away from retail
locations is not expected to have a significant impact on our
overall business model over time, which is largely digitally
focused.
Key Performance Indicators.
We
focus on three key performance indicators (“KPIs”), as
outlined below, to assess our progress and drive revenue growth,
which is also a key performance indicator. As of the end of the second quarter of 2020, we
significantly outperformed several of the KPI goals we established
at the beginning of 2020, as
follows:
|
●
|
Registered Users: We ended fiscal 2019 with approximately
980,000 registered users. During the six months ended June 30,
2020, we increased our registered users by approximately 100%, to
1.96 million registered users. Registered users represent more
gamers from whom we can gather user generated content and convert
into subscribers and/or upsell into other paid offers.
|
|
●
|
Engagement Hours: As of June 30, 2020, including our live
gaming experiences and our expanding digital gameplay channels, we
generated approximately 30.5 million hours of gameplay and other
engagement, as compared to approximately 15.0 million full year
2019 gameplay and other engagement hours. We continue to focus on
ways we can repackage and distribute this significant derivative
content library for further monetization.
|
|
●
|
Views and Impressions: We generated 808.5 million views and
impressions during the six months ended
June 30, 2020, compared to our full-year 2019 views of 120.0
million, representing an approximately 600% increase over full year
2019 views. Additionally, as described above we reached a key 2020
milestone in July 2020, reaching one billion video
views and impressions as of July 2020. This continued growth
in views results in the exponential growth of our monetizable
advertising inventory. Additionally, our growth in views continues
to be achieved largely via user generated content submitted to us
by our community, significantly limiting the production cost and
overall investment required to achieve the continued growth in our
viewership.
|
Impact of COVID-19 Pandemic
Actions
taken around the world to help mitigate the spread of the
coronavirus include restrictions on travel, and quarantines in
certain areas, and forced closures for certain types of public
places and businesses. The novel coronavirus and actions taken to
mitigate the spread of it have had and are expected to continue to
have an adverse impact on the economies and financial markets of
many countries, including the geographical areas in which the
Company operates. On March 27, 2020, the Coronavirus Aid,
Relief, and Economic Security Act (“CARES Act”)
was enacted to amongst other provisions, provide emergency
assistance for individuals, families and businesses affected by the
coronavirus pandemic. It is unknown how long the adverse
conditions associated with the coronavirus will last and what the
complete financial effect will be to the Company.
Notwithstanding
the growth in user engagement metrics discussed herein, the
broader impact of the ongoing
COVID-19 pandemic on our results of operations and
overall financial performance remains
uncertain. The COVID-19 pandemic may continue
to impact our revenue and revenue growth in future periods, and is
likely to continue to adversely impact certain aspects of our
business and our partners, including advertising demand,
retail expansion plans and our in-person esports
experiences. See “Risk Factors” for further
discussion of the adverse impacts of the COVID-19
pandemic on our business.
Critical Accounting Estimates
Our unaudited interim condensed financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. Preparation of these
condensed statements requires management to make judgments and
estimates. Some accounting policies have a significant impact on
amounts reported in these condensed financial statements. The SEC
has defined a company’s critical accounting policies as the
ones that are most important to the portrayal of a company’s
financial condition and results of operations, and which require a
company to make its most difficult and subjective judgments. A
summary of significant accounting policies and a description of
accounting policies that are considered critical may be found in
the audited financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2019,
filed with the SEC on March 23, 2020. In addition, refer to Note 2
to the condensed financial statements included in this Report. The
following accounting policies were identified during the current
period, based on activities occurring during the current period, as
critical and requiring significant judgments and
estimates.
Revenue Recognition
Revenue is recognized when we transfer promised goods or services
to customers in an amount that reflects the consideration to which
we expect to be entitled in exchange for those goods and services.
In this regard, revenue is recognized when: (i) the parties to the
contract have approved the contract (in writing, orally, or in
accordance with other customary business practices) and are
committed to perform their respective obligations; (ii) we can
identify each party’s rights regarding the goods or services
to be transferred; (iii) we 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 we will be
entitled in exchange for the goods or services that will be
transferred to the customer.
Super League generates revenues and related cash flows from (i)
sponsorships and advertising, including third-party content
sales and (ii) direct to consumer
offers including tournament fees for participation in our physical
and online multiplayer gaming experiences, digital subscriptions
and merchandise sales.
Sponsorships and
Advertising:
Sponsorship arrangements typically include contract terms for time
periods ranging from several weeks or months to multi-year
arrangements.
For
sponsorship arrangements that include performance obligations
satisfied over time, customers typically simultaneously receive and
consume the benefits under the agreement as the Company satisfies
its 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). Payments are typically due from customers during
the term of the arrangement.
Revenue for sponsorship arrangements for one-off branded
experiences and/or the development of content tailored specifically
for the Company’s partners’ distribution channels that
provide for a contractual delivery or performance date, is
recognized when performance is substantially complete and or
delivery occurs.
For
advertising and third-party content 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).
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.
Direct to
Consumer:
Revenue from single experiences is recognized when the experience
occurs. Revenue from multi-week packages is recognized over time as
the multi-week experiences occur based on estimates of the progress
toward complete satisfaction of the applicable offer and related
performance obligations. Subscription revenue is recognized over
the applicable subscription term. Payments are typically due from
customers at the point of sale.
Revenue
billed or collected in advance is recorded as deferred revenue
until the event occurs or until applicable performance obligations
are satisfied as described above.
We make estimates and judgments when determining whether the
collectability of accounts receivable is reasonably assured. We
assess the collectability of receivables based on several factors,
including past transaction history and the creditworthiness of our
customers. If it is determined that collection is not reasonably
assured, amounts due are recognized when collectability becomes
reasonably assured, assuming all other revenue recognition criteria
have been met, which is generally upon receipt of cash for
transactions where collectability may have been an issue.
Management’s estimates regarding collectability impact the
actual revenues recognized each period and the timing of the
recognition of revenues. Our assumptions and judgments regarding
future collectability could differ from actual events and thus
materially impact our financial position and results of
operations.
Depending on the complexity of the underlying revenue arrangement
and related terms and conditions, significant judgments,
assumptions and estimates may be required to determine each parties
rights regarding the goods or services to be transferred, each
parties performance obligations, whether performance obligations
are satisfied at a point in time or over time, the timing of
satisfaction of performance obligations, and the appropriate period
or periods in which, or during which, the completion of the
earnings process occurs. Depending on the magnitude of specific
revenue arrangements, if different judgments, assumptions and
estimates are made regarding revenue arrangements in any specific
period, our periodic financial results may be materially
affected.
Stock-Based Compensation Expense
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 accounts
for forfeitures of awards as they occur.
Determining the fair value of stock-based awards at the grant date
requires significant estimates and judgments, including estimating
the market price volatility of our common stock, determination of
grant dates, future employee stock option exercise behavior and
requisite service periods.
Results of Operations for the Three and Six Months Ended June 30,
2020 and 2019
The
following table sets forth a summary of our statements of
operations for the three and six months ended June 30, 2020 and
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentage change
values)
|
|
REVENUES
|
$324
|
$223
|
$101
|
45%
|
$567
|
$472
|
$95
|
20%
|
|
COST OF REVENUES
|
116
|
113
|
3
|
3%
|
233
|
187
|
46
|
25%
|
|
GROSS PROFIT
|
208
|
110
|
98
|
89%
|
334
|
285
|
49
|
17%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
Selling,
marketing and advertising
|
1,256
|
1,167
|
89
|
8%
|
2,529
|
2,139
|
390
|
18%
|
|
Technology
platform and infrastructure
|
1,685
|
1,291
|
394
|
31%
|
3,590
|
2,453
|
1,137
|
46%
|
|
General
and administrative
|
1,826
|
3,157
|
(1,331)
|
(42)%
|
3,922
|
7,334
|
(3,412)
|
(47)%
|
|
Total
operating expenses
|
4,767
|
5,615
|
(848)
|
(15)%
|
10,041
|
11,926
|
(1,885)
|
(16)%
|
|
NET LOSS FROM OPERATIONS
|
(4,559)
|
(5,505)
|
(946)
|
(17)%
|
(9,707)
|
(11,641)
|
(1,934)
|
(17)%
|
|
OTHER INCOME (EXPENSE), NET
|
(1)
|
-
|
(1)
|
-%
|
13
|
(9,933)
|
(9,946)
|
(100)%
|
|
NET LOSS
|
$(4,560)
|
$(5,505)
|
$(945)
|
(17)%
|
$(9,694)
|
$(21,574)
|
$(11,880)
|
(55)%
|
Comparison of the Results for the Three and Six Months Ended June
30, 2020 and 2019
Revenue
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except
percentage change values)
|
|
Sponsorships
and advertising
|
$285
|
$220
|
$65
|
30%
|
$513
|
$458
|
$55
|
12%
|
|
Direct
to Consumer
|
39
|
3
|
36
|
+100%
|
54
|
14
|
40
|
+100%
|
|
|
$324
|
$223
|
$101
|
45%
|
$567
|
$472
|
$ 95
|
20%
|
Revenue
for the three months ended June 30, 2020 increased $101,000 or 45%,
compared to the three months ended June 30, 2019. Revenue for the
six months ended June 30, 2020 increased $95,000 or 20%, compared
to the three months ended June 30, 2019. The change primarily
reflects a significant increase in advertising revenues and content
sales relative to the prior year periods, reflecting our continued
focus on the monetization of our increasing advertising inventory
and amateur gameplay content. The increase was partially offset by
a decrease in traditional sponsorship revenue in the second quarter
of 2020, reflecting the continued impact of the slow-down in
sponsorship activities by brands and advertisers as the COVID-19
pandemic continued to unfold during the second quarter of 2020. We
did not experience any cancellations of existing programs, with the
net impact of the pause by advertisers and brands in the first half
of 2020 being the deferral of some of these programs and related
revenues to future periods. Revenues for the periods presented were
comprised of the following:
Sponsorships and Advertising:
Sponsorships. Period to period changes in sponsorship
revenues are attributable to fluctuations in sponsorship activities
period to period, which is based on the specific partnership
arrangements with activities during a particular period, the
related performance obligations satisfied during the period and the
contractual consideration associated with the activities during the
period.
Sponsorship
revenues for the three months ended June 30, 2020 was primarily
comprised of revenues for our GenG Hoops at Home NBA2K remote live
streamed tournament and Penn Relays Minecraft remote live streamed
activation, our Tencent Games and OnePlus Mobile PUBG Mobile,
premium content, competitive experiences and sponsorship
activation, and our World Golf Tour competitive gameplay and
content activation with Topgolf. Sponsorship revenues for the three
months ended June 30, 2019 was primarily comprised of revenues from
our Red Bull North America, Inc.
(“Red Bull”) brand partnership, Red Bull Allstars
experience in April 2019 and our Logitech G Challenge online
tournament.
Sponsorship revenues for the six months ended June 30, 2020
included revenues for our Capcom, Inc., Street Fighter® V:
Arcade Edition partnership, our Tencent Games and OnePlus Mobile
Player Unknown’s Battlegrounds Mobile, or PUBG Mobile,
premium content, competitive experiences and sponsorship
activation, World Golf Tour competitive gameplay and content
activation with Topgolf and our Logitech G Challenge CS:GO online
tournaments, along with the activities for the three months ended
June 30, 2020 described above. Sponsorship revenues for the six
months ended June 30, 2019 was primarily comprised of revenues from
our Samsung Fortnite event held in New
York in March 2019, our Red Bull North America, Inc. master brand
partnership, our Logitech G Challenge online tournament, along with
the activities for the three months ended June 30, 2019 described
above.
Advertising
and Content Sales.
Advertising and content sales revenues
for the three and six months ended June 30, 2020 included increases
in revenues from campaigns launched related to our Framerate
digital property, advertising revenues from Snapchat Inc. related
content sales and advertising revenues generated from our Minehut
digital property. Revenues for the six months ended June 30, 2019
included revenues from the sale of gameplay and other content
generated by us to Nickelodeon to supplement their YouTube channel
programming.
Although we were impacted by the general deferral in advertising
spending by brands and sponsors during the early stages of the
COVID-19 pandemic, we expect to continue to expand our advertising
revenue and revenue from the sale of our proprietary and
third-party content derived from our technology platform in future
periods, as we expand our advertising inventory, viewership and
related sales activities.
Direct to Consumer:
Direct to consumer revenues for the three and six months ended June
30, 2020 and 2019, were primarily comprised of digital goods
revenues related to our Minehut digital property, which provides
various Minecraft server hosting services on a subscription basis
to the Minecraft gaming community.
Cost of Revenue
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except percentage
change values)
|
|
Cost
of revenue
|
$116
|
$113
|
$3
|
-%
|
$233
|
$187
|
$46
|
25%
|
Cost of
revenue for the three months ended June 30, 2020 was relatively
flat compared to the three months ended June 30, 2019, as compared
to the 45% increase in related revenues for the same periods. The
less than proportionate change in cost of revenue was driven by
lower costs associated with our largely digital and online revenue
generating activities in the second quarter of 2020 and an increase
in lower cost advertising and content sales revenues in the second
quarter of 2020.
Cost of
revenue for the six months ended June 30, 2020 increased $46,000,
or 25% compared to the six months ended June 30, 2019, as compared
to the 20% increase in related revenues for the same periods. The
less than proportionate change in cost of revenue was driven by
lower costs associated with our largely digital and online revenue
generating activities in the first half of 2020 and an increase in
lower cost advertising and content sales revenues. The decrease was
offset by a higher number of higher cost live events in the first
quarter of 2020, compared to the first quarter of
2019.
Cost of
revenues fluctuate period to period based on the specific programs
and revenue streams contributing to revenue each period and the
related cost profile of our physical and digital experiences and
advertising and content sales activities occurring each
period.
Operating Expenses
|
|
Three Months
Ended June 30,
|
Change
|
Six Months
Ended June 30,
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except
percentage change values)
|
|
Selling,
Marketing and Advertising
|
$1,256
|
$1,167
|
$89
|
8%
|
$2,529
|
$2,139
|
$390
|
18%
|
|
Technology
Platform and Infrastructure
|
1,685
|
1,291
|
394
|
31%
|
3,590
|
2,453
|
1,137
|
46%
|
General
and Administrative
|
1,826
|
3,157
|
(1,331)
|
(42%)
|
3,922
|
7,334
|
(3,412)
|
(47)%
|
|
|
$4,767
|
$5,615
|
$(848)
|
(15)%
|
$10,041
|
$11,926
|
$(1,885)
|
(16)%
|
Noncash stock-based compensation expense for the periods presented
was included in the following operating expense line
items:
|
|
Three Months
Ended June 30,
|
Change
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except
percentage change values)
|
|
Sales,
marketing and advertising
|
$197
|
$196
|
$1
|
1%
|
$395
|
$328
|
$67
|
20%
|
|
Technology
platform and infrastructure
|
59
|
27
|
32
|
119%
|
148
|
24
|
124
|
+100%
|
General
and administrative
|
141
|
1,576
|
(1,435)
|
(91)%
|
556
|
4,177
|
(3,621)
|
(87)%
|
Total
noncash stock compensation expense
|
$397
|
$1,799
|
$(1,402)
|
(78)%
|
$1,099
|
$4,529
|
$(3,430)
|
(76)%
|
Selling, Marketing and Advertising. The increase in selling,
marketing and advertising expense for the three and six months
ended June 30, 2020 was primarily due to an increase in personnel
costs, including noncash stock compensation, associated with
the increase in our direct sales and
marketing team focused on the monetization of our physical and
digital experiences and related audience across our digital
properties.
Technology Platform and Infrastructure. Technology platform
and infrastructure costs include (i) allocated personnel costs,
including salaries, noncash stock compensation, taxes and benefits
related to our internal software developers and engineers, employed
by Super League, engaged in the operation, maintenance, management,
administration, testing, development and enhancement of our
proprietary gaming and content technology platform, (ii)
third-party contract software development and engineering resources
engaged in developing and enhancing our proprietary gaming and
content technology platform, (iii) the amortization of capitalized
internal use software costs, and (iv) technology platform related
cloud services and broadband costs. Capitalized internal use software
development costs are amortized on a straight-line basis over the
software’s estimated useful life. The increase for the three and six months ended
June 30, 2020 primarily reflects an increase in technology
platform related cloud services costs totaling approximately
$445,000 and $734,000, respectively, quarterly fees paid to
ggCircuit under the related licenses and rights agreement, as
amended, totaling $0 and $150,000, respectively, and the
acceleration of amortization related to the termination of certain
rights and licenses in connection with amendments to our
arrangement with ggCircuit, totaling $107,000, and $306,000,
respectively, as described at Note 3 to the condensed financial
statements elsewhere herein.
General and Administrative. General and administrative
expense for the periods presented was comprised of the
following:
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands,
except percentage change values)
|
|
Personnel
costs
|
$501
|
$627
|
$(126)
|
(20)%
|
$992
|
$1,233
|
$(241)
|
(20)%
|
|
Office
and facilities
|
90
|
101
|
(11)
|
(11)%
|
189
|
205
|
(16)
|
(8)%
|
|
Professional
fees
|
144
|
181
|
(37)
|
(20)%
|
353
|
391
|
(38)
|
(10)%
|
|
Stock-based
compensation
|
141
|
1,576
|
(1,435)
|
(91)%
|
556
|
4,177
|
(3,621)
|
(87)%
|
|
Depreciation
and amortization
|
52
|
55
|
(3)
|
(5)%
|
123
|
305
|
(182)
|
(60)%
|
|
Other
|
898
|
617
|
281
|
46%
|
1,709
|
1,023
|
686
|
67%
|
Total
general and administrative expense
|
$1,826
|
$3,157
|
$(1,331)
|
(42)%
|
$3,922
|
$7,334
|
$ (3,412)
|
(47)%
|
A summary of the main drivers of the net decrease in general
and administrative expenses for the periods presented is as follows:
For the three months ended June 30, 2020, compared to the three
months ended June 30, 2019:
|
●
|
Personnel costs decreased primarily due to $105,000 of bonuses
related to the achievement of operational performance targets in
the second quarter of 2019.
|
|
●
|
Noncash stock compensation expense included in general and
administrative expense decreased primarily due to certain
performance options and warrants previously granted to two of our
executives, which vested upon the achievement of certain
operational performance targets. During the six months ended June
30, 2019, 300,000 of performance-based stock options and warrants
vested with a weighted-average grant date fair value of $8.50,
resulting in noncash stock compensation expense of
$2,549,000.
|
|
●
|
Other
general and administrative expenses increased primarily due to an
increase in directors and officer's insurance premiums and public
company related annual meeting costs, partially offset by a
decrease in travel related expenses due to the COVID-19
pandemic.
|
For the six months ended June 30, 2020, compared to the three
months ended June 30, 2019:
|
●
|
Personnel costs decreased primarily due to $405,000 of management
performance-based bonuses paid in connection with the achievement
of certain performance targets during the six months ended June 30,
2019, including the closing of the IPO and other operational
performance targets. Personnel costs for the six months ended June
30, 2019 also includes $247,000 of R&D tax credits which are
reflected as an offset to related expense.
|
|
●
|
Noncash stock compensation expense included in general and
administrative expense decreased primarily due to certain
performance options and warrants previously granted to two of our
executives, which vested during the six months ended June 30, 2019,
upon the achievement of certain performance targets. Performance
targets included the completion of our IPO in February 2019 and
other operational performance targets. During the six months ended
June 30, 2019, 300,000 of performance-based stock options and
warrants vested with a weighted-average grant date fair value of
$8.50, resulting in noncash stock compensation expense of
$2,549,000 during the six months ended June 30, 2019.
|
|
●
|
Other
general and administrative expenses increased primarily due to an
increase in directors and officer's insurance premiums, partially
offset by a decrease in travel related expenses due to the
COVID-19 pandemic.
|
Other Income (expense)
Other
income (expense), net, for the six months ended June 30, 2020 and
2019, was $0 and $9,933,000, respectively, and was primarily
comprised of interest expense related to the convertible notes
outstanding during the 2019 period presented as
follows:
|
|
Six Months
Ended June 30,
|
Change
|
|
|
|
|
|
|
|
|
(in thousands, except
percentage change values)
|
|
Accretion
of discount on convertible notes
|
$-
|
$2,475
|
$(2,475)
|
(100)%
|
|
Accrued
interest expense on convertible notes
|
-
|
187
|
(187)
|
(100)%
|
|
Accretion
of convertible note issuance costs
|
-
|
209
|
(209)
|
(100)%
|
|
Beneficial
conversion feature
|
-
|
7,067
|
(7,067)
|
(100)%
|
|
Total interest expense
|
$-
|
$9,938
|
$(9,938)
|
(100)%
|
Interest Expense. Interest expense for the 2019 periods
presented primarily relates to the issuance of 9.00% secured
convertible promissory notes, commencing in February 2018 through
August 2018. Principal and interest as of February 27, 2019, the
closing date of the IPO totaled $13,793,000. Concurrent with the closing of the IPO on February
27, 2019, in accordance with the related agreements, all
outstanding principal and interest for the 9.00% convertible notes
outstanding was automatically converted into 1,475,164 shares of
the Company’s common stock at a conversion price of $9.35.
As a result of the automatic
conversion of the notes and the application of conversion
accounting, the Company recorded an immediate charge to interest
expense of $1,384,000, representing the write-off of the
unamortized balance of debt discounts associated with the 2018
warrants and cash commissions and warrants issued to third parties
as of the IPO closing Date.
The non-detachable conversion feature embedded in the notes
provides for a conversion rate that was below market value at the
commitment date, and therefore, represented a beneficial conversion
feature (“BCF”). The BCF is generally recognized
separately at issuance by allocating a portion of the debt proceeds
equal to the intrinsic value of the BCF to additional paid-in
capital. The resulting convertible debt discount is recognized as
interest expense using the effective yield method. However, the
conversion feature was not exercisable until the consummation of an
initial public offering by the Company of its common stock, and
therefore, was not required to be recognized in earnings until the
IPO related contingency was resolved, which occurred on the IPO
closing date. The commitment date is the IPO closing date and the
commitment date stock price was $11.00 per share. The intrinsic
value of the BCF on the IPO closing date, which was limited to the
net proceeds allocated to the debt on a relative fair value basis,
was approximately $7,067,000, and is reflected as additional
interest expense in the statement of operations for the three
months ended June 30, 2019.
Liquidity and Capital Resources
General
Cash and cash equivalents totaled $6.2 million and $8.4
million at June 30, 2020 and December 31, 2019,
respectively.
We have experienced net losses and negative cash flows from
operations since our inception. As of June 30, 2020 and December
31, 2019, we had working capital of approximately $6.0 million and
$8.7 million, respectively, and sustained cumulative losses since
inception attributable to common stockholders of approximately
$95.5 million. Total noncash charges included in accumulated
deficit since inception, primarily related to noncash stock
compensation, restricted stock units issued in connection with a
license agreement, amortization of the discount on convertible debt
and in-kind advertising expense, totaled approximately $36.0
million. On February 27, 2019, we completed our IPO, raising net
proceeds of approximately $22,458,000. During fiscal 2018, the
Company issued 9.00% secured convertible promissory notes, as
described below, in an aggregate principal amount of approximately
$13,000,000. Concurrent with the closing of the IPO on
February 27, 2019, in accordance with the related agreements, all
outstanding principal and interest for the 9.00% convertible notes
outstanding was automatically converted into shares of the
Company’s common stock as described below.
To date, our principal sources of capital used to fund our
operations have been the net proceeds we received from sales of
equity securities and proceeds received from the issuance of
convertible debt, as described herein. We have and will continue to use significant
capital for the growth and development of our business. Our
management team expects operating losses to continue in the near
term in connection with the pursuit of our strategic objectives. As
such, we believe our current cash position, absent receipt of
additional capital either from operations or that may be available
from future issuance(s) of common stock or debt financings, is not
sufficient to fund our planned operations for the twelve months
following the date of this Report. We believe these conditions
raise substantial doubt about our ability to continue as a going
concern. In addition, we may encounter unforeseen difficulties that
may deplete our capital resources more rapidly than anticipated,
including those set forth under the heading “Risk
Factors” included in Part II, Item 1A of this
Report.
We are focused on expanding our service offerings and revenue
growth opportunities through internal development, collaborations,
and through one or more strategic acquisitions. Management is
currently exploring several alternatives for raising capital to
facilitate our growth and execute our business strategy, including
strategic partnerships or other forms of equity or debt
financings.
We continue to evaluate potential strategic acquisitions. To
finance such strategic acquisitions, we may find it necessary to
raise additional equity capital, incur additional 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.
Recent Developments
On May
4, 2020, we entered into a potentially forgivable loan from the U.
S. Small Business Administration (“SBA”) resulting in
net proceeds of approximately $1.2 million pursuant to the Paycheck
Protection Program (“PPP”) enacted by Congress under
the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C.
636(a)(36)) (the “CARES Act”) administered by the SBA
(the “PPP Loan”). To facilitate the PPP Loan, we
entered into a note payable agreement with a third-party lender
(the “PPP Loan Agreement”).
On May 13, 2020, we announced that the Company entered into
securities purchase agreements with institutional investors for the
purchase and sale of 1,825,000 shares of our common stock at an
offering price of $3.50 per share, pursuant to a registered direct
offering, priced at-the-market under Nasdaq rules, which closed on
May 15, 2020. The gross proceeds of the offering were $6.4 million,
before deducting placement agent fees and other offering expenses,
as described below. The offering was made pursuant to an effective
shelf registration statement on Form S-3 previously filed with the
SEC. We intend to use the net proceeds from this offering
for working capital and other general corporate
purposes, including sales and marketing activities, product
development and capital expenditures. We may also use a portion of
the net proceeds for the acquisition of, or investment in,
technologies, solutions or businesses.
Cash Flows for the Six Months Ended June 30, 2020 and
2019
The following table summarizes the change in cash balances
for the periods presented (in thousands):
|
|
Six Months
Ended June 30,
|
|
|
|
|
|
Net
cash used in operating activities
|
$(8,585)
|
$(6,883)
|
|
Net
cash used in investing activities
|
(769)
|
(2,189)
|
|
Net
cash provided by financing activities
|
7,153
|
22,478
|
|
(Decrease)
increase in cash
|
(2,201)
|
13,406
|
|
Cash and cash equivalents, at beginning of period
|
8,442
|
2,774
|
|
Cash and cash equivalents, at end of period
|
$6,241
|
$16,180
|
Cash Flows from Operating Activities. Net cash used in operating activities during the
six months ended June 30, 2020 was $8,585,000, which primarily
reflected our net GAAP loss for the six months ended June 30, 2020
of $9,694,000, net of adjustments to reconcile net GAAP loss
to net cash used in operating activities of $1,109,000, which
included $1,099,000 of noncash stock compensation charges and
depreciation and amortization of $854,000. Changes in working
capital primarily reflected the impact of the settlement of
receivables and payables in the ordinary course. Net cash used in
operating activities during the six months ended June 30, 2019
was $6,883,000, which primarily reflected our net loss
of $21,574,000, net of adjustments to reconcile net loss to
net cash used in operating activities of $14,691,000, which
included $4,529,000 of noncash stock compensation charges,
$2,871,000 of noncash accrued interest and accretion of debt
discount, $7,067,000 of noncash interest expense related to the
recognition of the beneficial conversion feature upon the automatic
conversion of the notes upon close of the IPO, and depreciation and
amortization of $485,000. Changes in working capital primarily
reflected the impact of a net decrease in accounts receivable, the
prepayment of insurance premiums and the settlement of payables in
the ordinary course.
Cash Flows from Investing Activities. Cash flows from investing activities were
comprised of the following for the periods presented (in
thousands):
|
|
Six Months
Ended June 30,
|
|
|
|
|
|
Cash
paid for acquisition of Framerate
|
$-
|
$(1,491)
|
|
Purchase
of property and equipment
|
(6)
|
(33)
|
|
Capitalization
of software development costs
|
(691)
|
(560)
|
|
Acquisition
of other intangible and other assets
|
(72)
|
(105)
|
|
Net cash used in investing activities
|
$(769)
|
$(2,189)
|
Capitalized Internal Use Software Costs. Software
development costs incurred to develop internal-use software during
the application development stage are capitalized and amortized on
a straight-line basis over the software’s estimated useful
life, which is generally three years. Software development costs
incurred during the preliminary stages of development are charged
to expense as incurred. Maintenance and training costs are charged
to expense as incurred. Upgrades or enhancements to existing
internal-use software that result in additional functionality are
capitalized and amortized on a straight-line basis over the
applicable estimated useful life.
Cash
Flows from Financing Activities. Cash flows from financing
activities were comprised of the following for the periods
presented (in thousands):
|
|
Six Months
Ended June 30,
|
|
|
|
|
|
Proceeds
from issuance of common stock, net
|
$5,953
|
$22,458
|
|
Proceeds
from note payables
|
1,200
|
$-
|
|
Proceeds
from warrant exercise
|
-
|
20
|
|
Net cash used in investing activities
|
$7,153
|
$22,478
|
Equity Financings
Registered Direct Offering.
In May 2020, the Company issued 1,825,000 shares of common stock at
a price of $3.50 per share, raising aggregate net proceeds of
approximately $6.0 million, after deducting placement agent fees of
$319,000 and other offering expenses totaling $116,000, pursuant to
a registered direct offering. The net proceeds are for working
capital and other general corporate purposes, including sales
and marketing activities, product development and capital
expenditures. We may also use a portion of the net proceeds for the
acquisition of, or investment in, technologies, solutions or
businesses.
Initial Public Offering. On
February 27, 2019, we completed our IPO, pursuant to which we
issued and sold an aggregate of 2,272,727 shares of our common
stock at a public offering price of $11.00 per
share pursuant to a
registration statement on Form S-1, declared effective by the SEC on February 25,
2019 (File No. 333-229144). We raised net proceeds of approximately
$22,458,000 after underwriting discounts, commissions and other
offering costs of $2,542,000.
The principal purposes of the IPO were to obtain additional capital
to support our operations, to create a public market for our common
stock and to facilitate our future access to the public equity
markets. Net proceeds received from the offering were for working
capital and general corporate purposes, including sales and
marketing activities, product development and capital expenditures
(including strategic acquisitions).
Concurrent with the closing of the IPO on February 27, 2019, in
accordance with the underlying agreements, all outstanding
principal and interest for the 9.00% convertible notes outstanding,
totaling $13,793,000, was automatically converted into 1,475,164
shares of the Company’s common stock at a conversion price of
$9.35.
CARES
Act
As noted above, on May 4, 2020, we entered into the potentially
forgivable PPP Loan from the SBA, pursuant to the PPP program
enacted under the CARES Act, resulting in net proceeds of
approximately $1.2 million. To facilitate the PPP Loan, we entered
into the PPP Loan Agreement with a third-party lender.
The PPP Loan provided for working capital to us and matures on May
4, 2022. However, under the CARES Act and the PPP Loan Agreement,
all payments of both principal and interest will be deferred until
at least December 4, 2020. The PPP Loan will accrue interest at a
rate of 1.00% per annum, and interest will continue to accrue
throughout the period the PPP Loan is outstanding, or until it is
forgiven. We will be eligible to apply for forgiveness of all loan
proceeds used to pay payroll costs and other qualifying expenses
during the eight-week period following receipt of the loan,
provided that the Company maintains its employment and compensation
within certain parameters during such period. Any amounts forgiven
will not be included in the Company’s taxable income. As
specifically intended under the program, the PPP Loan, together
with our cost savings initiatives, helped us to continue operations
without salary reductions, layoffs or furloughs, during this
challenging and uncertain economic environment created by the
COVID-19 pandemic.
The PPP
Loan is accounted for as a financial liability in accordance with
FASB ASC 470, “Debt” and interest is accrued in
accordance with the interest method. Additional interest is not
imputed at a market rate pursuant to a scope exception for interest
rates prescribed by governmental agencies under the applicable
guidance.
The
proceeds from the PPP Loan are recorded as a long-term liability on
the balance sheet until either (1) the loan is, in part or wholly,
forgiven and the company has been “legally released” or
(2) the Company pays off the loan to the creditor. Once the loan
is, in part or wholly, forgiven, and legal release is received, the
Company will reduce the liability by the amount forgiven and record
a gain on extinguishment in the statement of operations in the
period of extinguishment.
Contractual Obligations
As of June 30, 2020, except as described below, and excluding the
PPP Loan described above, we had no significant commitments for
capital expenditures, nor do we have any committed lines of credit,
noncancelable operating leases obligations, other committed funding
or long-term debt, and no guarantees. The operating lease for our
corporate headquarters expired on May 31, 2017 and was subsequently
amended to operate on a month-to-month basis. In June 2020, we
terminated the lease for the majority of our corporate headquarters
(approximately 4,965 square feet). As of June 30, 2020 we maintain
approximately 1650 square feet of office space on a month-to-month
basis. The following table lists our material known future cash
commitments as of June 30, 2020 (in
thousands):
|
|
Payments Due by
Period (In thousands)
|
|
|
|
|
|
|
|
Insurance premium
financing
|
$724
|
$724
|
$-
|
$-
|
Off-Balance Sheet Commitments and Arrangements
We have not entered into any off-balance sheet financial
guarantees or other off-balance sheet commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our
shares and classified as stockholder’s equity or that are not
reflected in our financial statements included elsewhere herein.
Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not
have any variable interest in any unconsolidated entity that
provides financing, liquidity, market risk or credit support to us
or engages in leasing, hedging or product development services with
us.
Contingencies
Certain
conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company, but which will
only be resolved when one or more future events occur or fail to
occur. The Company’s management, in consultation with its
legal counsel as appropriate, assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are
pending against the Company or unasserted claims that may result in
such proceedings, the Company, in consultation with legal counsel,
evaluates the perceived merits of any legal proceedings or
unasserted claims, as well as the perceived merits of the amount of
relief sought or expected to be sought therein. If the assessment
of a contingency indicates it is probable that a material loss has
been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the
Company’s financial statements. If the assessment indicates a
potentially material loss contingency is not probable, but is
reasonably possible, or is probable, but cannot be estimated, then
the nature of the contingent liability, together with an estimate
of the range of possible loss, if determinable and material, would
be disclosed. Loss contingencies considered remote are generally
not disclosed unless they involve guarantees, in which case the
guarantees would be disclosed.
Recent Accounting Pronouncements
Refer to Note 2 to the accompany condensed financial statements
contained elsewhere in this
Report.
Relaxed Ongoing Reporting Requirements
Upon
the completion of our IPO, we elected to report as an
“emerging growth company” (as defined in the JOBS Act)
under the reporting rules set forth under the Exchange Act. For so
long as we remain an “emerging growth company,” we may
take advantage of certain exemptions from various reporting
requirements that are applicable to other Exchange Act reporting
companies that are not “emerging growth companies,”
including but not limited to:
●
not
being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act;
●
taking
advantage of extensions of time to comply with certain new or
revised financial accounting standards;
●
being
permitted to comply with reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy
statements; and
●
being
exempt from the requirement to hold a non-binding advisory vote on
executive compensation and stockholder approval of any golden
parachute payments not previously approved.
We are
subject to ongoing public reporting requirements that are less
rigorous than Exchange Act rules for companies that are not
“emerging growth companies,” and our stockholders could
receive less information than they might expect to receive from
more mature public companies.
We
expect to take advantage of these reporting exemptions until we are
no longer an emerging growth company. We will remain an
“emerging growth company” for up to five years,
although if the market value of our Common Stock that is held by
non-affiliates exceeds $700 million as of any June 30 before that
time, we would cease to be an “emerging growth company”
as of the following December 31.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS
In the
ordinary course of our business, we are not currently exposed to
market risk of the sort that may arise from changes in interest
rates or foreign currency exchange rates, or that may otherwise
arise from transactions in derivatives.
ITEM 4. CONTROLS AND
PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our Chief
Executive Officer (“CEO”) and our Chief Financial
Officer (“CFO”) conducted an evaluation as of the end
of the period covered by this Quarterly Report on Form 10-Q, of the
effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on
that evaluation, our CEO and our CFO each concluded that our
disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed in
the reports that we file or submit under the Exchange Act, (i) is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules
and forms and (ii) is accumulated and communicated to our
management, including our CEO and our CFO, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting identified in management’s evaluation pursuant to
Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period
covered by this Report that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
|
None.
Investing in our common stock involves a high degree of risk. You
should carefully consider the risks described below, as well as the
other information in this Quarterly Report on Form 10-Q, including
our financial statements and the related notes thereto and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” before deciding whether
to invest in our common stock. The occurrence of any of the events
or developments described below could harm our business, financial
condition, operating results, and growth prospects. In such an
event, the market price of our common stock could decline, and you
may lose all or part of your investment. Additional risks and
uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations.
Risks Related to Our Business and Industry
We have incurred significant losses since our inception, and we may
continue to experience losses in the future.
We incurred net losses of $9.7 million and $21.6 million during the six months ended June
30, 2020 and 2019, respectively. Noncash expenses (excluding
depreciation and amortization of fixed and intangible assets)
totaled $1.1 million and
$14.5 million for the six months ended June 30, 2020 and 2019,
respectively. As of June 30, 2020, we had an accumulated deficit
of $95.5 million.
Moreover, the report of our independent registered public
accounting firm to the financial statements for our fiscal year
ended December 31, 2019, included elsewhere herein, contains an
explanatory paragraph stating that our recurring losses from
operations, accumulated deficit and cash used in operating
activities raise substantial doubt about our ability to continue as
a going concern. We cannot predict if we will achieve profitability
soon or at all. We expect to continue to expend substantial
financial and other resources on, among other
things:
●
investments
to expand and enhance our esports technology platform and
technology infrastructure, make improvements to the scalability,
availability and security of our platform, and develop new
offerings;
●
sales
and marketing, including expanding our customer acquisition and
sales organization and marketing programs, and expanding our
programs directed at increasing our brand awareness among current
and new customers;
●
investments
in bandwidth to support our video streaming
functionality;
●
contract
labor costs and other expenses to host our leagues and
tournaments;
●
costs
to retain and attract gamers and license first tier game titles,
grow our online gamer community and generally expand our business
operations;
●
hiring
additional employees;
●
expansion
of our operations and infrastructure, both domestically and
internationally; and
●
general
administration, including legal, accounting and other expenses
related to being a public company.
We may not generate sufficient revenue to offset such costs to
achieve or sustain profitability in the future. We expect to
continue to invest heavily in our operations, our online and in
person experiences, business development related to game
publishers, advertisers, sponsors and gamer acquisition, to
accelerate as well as maintain our current market position, support
anticipated future growth and to meet our expanded reporting and
compliance obligations as a public company.
We expect operating losses to continue in the near term in order to
carry out our strategic objectives. We consider historical
operating results, capital resources and financial position, in
combination with current projections and estimates, as part of our
plan to fund operations over a reasonable period of
time.
We believe our current cash position, absent receipt of additional
capital either from operations or that may be available from future
issuance(s) of common stock or debt financings, is not sufficient
to fund our planned operations for the twelve months following the
date of this Report.
We are focused on expanding our service offerings and revenue
growth opportunities through internal development, collaborations,
and through one or more strategic acquisitions. Management is
currently exploring several alternatives for raising capital to
facilitate our growth and execute our business strategy, including
strategic partnerships or other forms of equity or debt
financings.
We intend to continue implementing our business strategy with the
expectation that there will be no material adverse developments in
our business, liquidity or capital requirements. If one or more of
these factors do not occur as expected, it could have a material
adverse impact on our activities, including (i) reduction or delay
of our business activities, (ii) forced sales of material assets,
(iii) defaults on our obligations, or (iv) insolvency. Our planned
investments may not result in increased revenue or growth of our
business. We cannot assure you that we will be able to generate
revenue sufficient to offset our expected cost increases and
planned investments in our business and platform. As a result, we
may incur significant losses for the foreseeable future, and may
not be able to achieve and/or sustain profitability. If we fail to
achieve and sustain profitability, then we may not be able to
achieve our business plan, fund our business or continue as a going
concern. The financial statements included in this Report do not
contain any adjustments which might be necessary if we were unable
to continue as a going concern.
We are a relatively young company, and we may not be able to
sustain our rapid growth, effectively manage our anticipated future
growth or implement our business strategies.
We have a limited operating history. Although we have experienced
significant growth since our gaming platform for amateur online and
in person gaming experiences was launched, and we established our
amateur city leagues, tournaments and competitions, our historical
growth rate may not be indicative of our future performance due to
our limited operating history and the rapid evolution of our
business model, including a focus on direct to consumer-based
gaming. We may not be able to achieve similar results or accelerate
growth at the same rate as we have historically. As our amateur
city leagues, tournaments and competitions continue to develop, we
may adjust our strategy and business model to adapt. These
adjustments may not achieve expected results and may have a
material and adverse impact on our financial condition and results
of operations.
In addition, our rapid growth and expansion have placed, and continue to
place, significant strain on our management and resources. This
level of significant growth may not be sustainable or achievable at
all in the future. We believe that our continued growth will depend
on many factors, including our ability to develop new sources of
revenues, diversify monetization methods including our direct to
consumer offerings, attract and retain competitive gamers, increase
engagement, continue developing innovative technologies,
tournaments and competitions in response to shifting demand in
esports and online gaming, increase brand awareness, and expand
into new markets. We cannot assure you that we will achieve any of
the above, and our failure to do so may materially and adversely
affect our business and results of operations.
We are subject to risks associated with operating in a rapidly
developing industry and a relatively new market.
Many elements of our business are unique, evolving and relatively
unproven. Our business and prospects depend on the continuing
development of live streaming of competitive esports gaming. The
market for esports and amateur online gaming competition is
relatively new and rapidly developing and are subject to
significant challenges. Our business relies upon our ability to
cultivate and grow an active gamer community, and our ability to
successfully monetize such community through tournament fees,
digital subscriptions for our esports gaming services, and
advertising and sponsorship opportunities. In addition, our
continued growth depends, in part, on our ability to respond to
constant changes in the esports gaming industry, including rapid
technological evolution, continued shifts in gamer trends and
demands, frequent introductions of new games and titles and the
constant emergence of new industry standards and practices.
Developing and integrating new games, titles, content, products,
services or infrastructure could be expensive and time-consuming,
and these efforts may not yield the benefits we expect to achieve
at all. We cannot assure you that we will succeed in any of these
aspects or that the esports gaming industry will continue to grow
as rapidly as it has in the past.
We generate a portion of our revenues from advertising and
sponsorship. If we fail to attract more advertisers and sponsors to
our gaming platform or tournaments or competitions, or if
advertisers or sponsors are less willing to advertise with or
sponsor us, our revenues may be adversely affected.
We generate a growing portion of our revenues from advertising and
sponsorship, which we expect to further develop and expand in the
near future as online viewership of our esports gaming offerings
expand. Our revenues from advertising and sponsorship partly depend
on the continual development of the online advertising industry and
advertisers’ willingness to allocate budgets to online
advertising in the esports gaming industry. In addition, companies
that decide to advertise or promote online may utilize more
established methods or channels, such as more established internet
portals or search engines, over advertising on our gaming platform.
If the online advertising and sponsorship market does not continue
to grow, or if we are unable to capture and retain a sufficient
share of that market, our ability to increase our current level of
advertising and sponsorship revenue and our profitability and
prospects may be materially and adversely affected.
Furthermore, our core and long-term priority of optimizing the
gamer experience and satisfaction may limit our gaming
platform’s ability to generate revenues from advertising and
sponsorship. For example, in order to provide our gamers with an
uninterrupted competitive gaming experience, we do not place
significant amounts of advertising on our streaming interface or
insert pop-up advertisements during streaming. While this
decision could adversely affect our operating results in the
short-term, we believe it enables us to provide a superior gamer
experience on our gaming platform, which will help us expand and
maintain our current base of gamers and enhance our monetization
potential in the long-term. However, this philosophy of putting our
gamers first may also negatively impact our relationships with
advertisers, sponsors or other third parties, and may not result in
the long-term benefits that we expect, in which case the success of
our business and operating results could be harmed.
Our revenue model may not remain effective and we cannot guarantee
that our future monetization strategies will be successfully
implemented or generate sustainable revenues and
profit.
We generate revenues from advertising and sponsorship of our league
tournaments, and through the operation of our live streaming gaming
platform using a revenue model whereby gamers can get free access
to certain live streaming of amateur tournaments, and gamers pay
fees to compete in league competition. We have generated, and
expect to continue to generate, a substantial portion of revenues
using this revenue model in the near term. We are, however,
particularly focused on implementing a direct to consumer model for
our expanding gamer base. Although our business has experienced
significant growth in recent years, there is no guarantee that our
direct to consumer packages will gain significant traction to
maximize our growth rate in the future, as the demand for our
offerings may change, decrease substantially or dissipate, or we
may fail to anticipate and serve gamer demands
effectively.
The loss of or a substantial reduction in activity by one or more
of our largest customers and/or vendors could materially and
adversely affect our business, financial condition and results of
operations.
For the three and six months ended June 30, 2020, six customers
accounted for 84% and 4 customers accounted for 61% of revenue,
respectively. For the three and
six months ended June 30, 2019, four customers accounted for 98%
and 89% of revenues, respectively. At June 30, 2020, four
customers accounted for 84% of accounts receivable. At December 31,
2019, one customer accounted for 70% of accounts receivable. At
June 30, 2020, one vendor accounted for 48% of accounts payable. At
December 31, 2019, one vendor accounted for 21% of accounts
payable.
The loss of or a substantial reduction in activity by one or more
of our largest customers could materially and adversely affect our
business, financial condition and results of
operations.
Our marketing and advertising efforts may fail to resonate with
amateur gamers.
Our amateur city league tournaments and competitions are marketed
through a diverse spectrum of advertising and promotional programs
such as online and mobile advertising, marketing through websites,
event sponsorship and direct communications with our gaming
community including via email, blogs and other electronic means. An
increasing portion of our marketing activity is taking place on
social media platforms that are either outside, or not totally
within, our direct control. Changes to gamer preferences,
marketing regulations, privacy and data protection laws, technology
changes or service disruptions may negatively impact our ability to
reach target gamers. Our ability to market our amateur city league
tournaments and competitions is dependent in part upon the success
of these programs. If the marketing for our amateur city league
tournaments and competitions fails to resonate and expand with the
gamer community, or if advertising rates or other media placement
costs increase, our business and operating results could be
harmed.
We have a unique community culture that is vital to our success.
Our operations may be materially and adversely affected if we fail
to maintain this community culture as we expand in our addressable
gamer communities.
We have cultivated an interactive and vibrant online social gamer
community centered around amateur online and in person gaming. We
ensure a superior gamer experience by continuously improving the
user interface and features of our gaming platform along with
offering a multitude of competitive and recreational gaming
experiences with first tier esports games. We believe that
maintaining and promoting a vibrant community culture is critical
to retaining and expanding our gamer community. We have taken
multiple initiatives to preserve our community culture and values.
Despite our efforts, we may be unable to maintain our community
culture and cease to be the preferred platform for our target
gamers as we expand our gamer footprint, which would be detrimental
to our business operations.
The amateur esports gaming industry is intensely competitive.
Gamers may prefer our competitors’ amateur leagues,
competitions or tournaments over our own.
Competition in the amateur esports gaming industry generally is
intense. Our competitors range from established leagues and
championships owned directly, as well as leagues franchised by,
well known and capitalized game publishers and developers,
interactive entertainment companies and diversified media companies
to emerging start-ups, and we expect new competitors to continue to
emerge throughout the amateur esports gaming ecosystem. If our
competitors develop and launch competing amateur city leagues,
tournaments or competitions, or develop a more successful amateur
online gaming platform, our revenue, margins, and profitability
will decline.
The amateur esports gaming industry is very “hit”
driven. We may not have access to “hit” games or
titles.
Select game titles dominate competitive amateur esports and online
gaming, and many new games titles are regularly introduced in each
major industry segment (console, mobile and PC free-to-download).
Despite the number of new entrants, only a very few
“hit” titles account for a significant portion of total
revenue in each segment.
The size and engagement level of our online and
in person gamers are critical to our success and are
closely linked to the quality and popularity of the esports game
publishers with which we have licenses. Esports game publishers on
our gaming platform, including those who have entered into license
agreements with us, may leave us for other gaming platforms or
amateur leagues which may offer better competition, and terms and
conditions than we do. Furthermore, we may lose esports game
publishers if we fail to generate the number of gamers to our
amateur tournaments and competitions expected by such publishers.
In addition, if popular esports game publishers cease to license
their games to us, or our live streams fail to attract gamers, we
may experience a decline in gamer traffic, direct to consumer
opportunities and engagement, which may have a material and adverse
impact on our results of operations and financial
conditions.
Although we have entered into multi-year agreements with certain
publishers, if we fail to license multiple additional
“hit” games or any of our existing
licensed esports game publishers with which we currently have
a license decide to breach the license agreement or choose not to
continue with us once the term of the license agreement expires,
the popularity of our amateur city leagues, tournaments and
competitions may decline and the number of our gamers may decrease,
which could materially and adversely affect our results of
operations and financial condition.
In addition to the esports games we have licensed, we must continue
to attract and retain the most popular esports gaming titles in
order to maintain and increase the popularity of our amateur city
leagues, tournaments and competitions, and ensure the sustainable
growth of our gamer community. We must continue to identify and
enter into license agreements with esports gaming publishers
developing “hit’ games that resonate with our community
on an ongoing basis. We cannot assure you that we can continue to
attract and retain the same level of first-tier esports game
publishers and our ability to do so is critical to our future
success.
We have not entered into definitive license agreements with certain
game publishers that we currently have relationships with, and we
may never do so.
We currently do not have definitive license agreements in place
with game publishers for the use of certain of the game titled
played on our platform, as these publishers currently permit us to
integrate the specifications of the game title with our technology.
We may not ever enter into license agreements with these parties in
the future, instead continuing our relationship with these game
publishers without a license agreement. These game publishers may
unilaterally choose to discontinue their relationship with the
Company, thereby preventing us from offering experiences on our
platform using their game titles, as the case may be. Should those
game publishers choose not to allow us to offer experiences
involving their respective game titles to our users, the
popularity of our amateur city leagues, tournaments and
competitions may decline and the number of our gamers may decrease,
which could materially and adversely affect our results of
operations and financial condition.
If we fail to keep our existing gamers highly engaged, to acquire
new gamers, to successfully implement a direct to consumer model
for our gaming community, our business, profitability and prospects
may be adversely affected.
Our success depends on our ability to maintain and grow the number
of amateur gamers attending and participating in our in-person and
online tournaments and competitions, and using our gaming platform,
and keeping our gamers highly engaged. Of particular importance is
the successful deployment and expansion of our direct to consumer
model to our gaming community for purposes of creating predictable
recurring revenues.
In order to attract, retain and engage amateur gamers and remain
competitive, we must continue to develop and expand our city
leagues, including internationally, produce engaging tournaments
and competitions, successfully license the newest “hit”
esports games and titles, implement new technologies and
strategies, improve features of our gaming platform and stimulate
interactions in our gamer community.
A decline in the number of our amateur gamers in our ecosystem may
adversely affect the engagement level of our gamers, the vibrancy
of our gamer community, or the popularity of our amateur league
play, which may in turn reduce our monetization opportunities, and
have a material and adverse effect on our business, financial
condition and results of operations. If we are unable to attract
and retain, or convert gamers into direct to consumer-based paying
gamers, our revenues may decline, and our results of operations and
financial condition may suffer.
We cannot assure you that our online and in person gaming
platform will remain sufficiently popular with amateur gamers to
offset the costs incurred to operate and expand it. It is vital to
our operations that we remain sensitive and responsive to evolving
gamer preferences and offer first-tier esports game content that
attracts our amateur gamers. We must also keep providing amateur
gamers with new features and functions to enable superior content
viewing, and social interaction. Further, we will need to continue
to develop and improve our gaming platform and to enhance our brand
awareness, which may require us to incur substantial costs and
expenses. If such increased costs and expenses do not effectively
translate into an improved gamer experience and direct to
consumer-based, long-term engagement, our results of operations may
be materially and adversely affected.
The ability to grow our business is dependent in part on the
success and availability of mass media channels developed by third
parties, as well as our ability to develop commercially successful
content, and amateur tournaments and competitions.
The success of our business is driven in part by the commercial
success and adequate supply of third-party mass media channels for
which we may distribute our content, amateur league tournaments and
competitions, including Twitch, YouTube and ESL.tv. Our success
also depends on our ability to accurately predict which channels
and platforms will be successful with the esports gaming community,
our ability to develop commercially successful content and
distribute via SLG.TV, which is presently available on Twitch,
amateur tournaments and competition for these channels and gaming
platforms and our ability to effectively manage the transition of
our gamers from one generation or demographic to the next.
Additionally, we may enter into certain exclusive licensing
arrangements that affect our ability to deliver or market our
amateur gaming tournaments and competitions on certain channels and
platforms. A channel or platform may not succeed as expected or new
channels or platforms may take market share and gamers away from
platforms for which we have devoted significant resources. If
demand for the channels or platforms for which we are developing
amateur tournaments or competitions is lower than our expectations,
we may be unable to fully recover the investments we have made, and
our financial performance may be harmed. Alternatively, a channel
or platform for which we have not devoted significant resources
could be more successful than we initially anticipated, causing us
to not be able to take advantage of meaningful revenue
opportunities.
Our business is subject to risks generally associated with the
entertainment industry.
Our business is subject to risks that are generally associated with
the entertainment industry, many of which are beyond our control.
These risks could negatively impact our operating results and
include the popularity, price to play, and timing of release of our
esports licensed games, economic conditions that adversely affect
discretionary consumer spending, changes in gamer demographics, the
availability and popularity of other forms of entertainment, and
critical reviews and public tastes and preferences, which may
change rapidly and cannot necessarily be predicted.
If we fail to maintain and enhance our brand or if we incur
excessive expenses in this effort, our business, results of
operations and prospects may be materially and adversely
affected.
We believe that maintaining and enhancing our brand is of
significant importance to the success of our business. A
well-recognized brand is important to increasing the number of
esports gamers and the level of engagement of our overall gaming
community which is critical in enhancing our attractiveness to
advertisers and sponsors. Since we operate in a highly competitive
market, brand maintenance and enhancement directly affect our
ability to maintain and enhance our market position.
Although we have developed our brand and amateur tournaments and
competitions through word of mouth referrals, key strategic
partners and our esports game publisher licensors, as we expand, we
may conduct various marketing and brand promotion activities using
various methods to continue promoting our brand. We cannot assure
you, however, that these activities will be successful or that we
will be able to achieve the brand promotion effect we
expect.
In addition, any negative publicity in relation to our league
tournaments or competitions, or operations, regardless of its
veracity, could harm our brands and reputation. Negative publicity
or public complaints from gamers may harm our reputation, and if
complaints against us are not addressed to their satisfaction, our
reputation and our market position could be significantly harmed,
which may materially and adversely affect our business, results of
operations and prospects.
Negative gamer perceptions about our brand, gaming platform,
amateur city leagues, tournaments or competitions and/or business
practices may damage our business and increase the costs incurred
in addressing gamer concerns.
Esports gamer expectations regarding the quality, performance and
integrity of our amateur city league tournaments and competitions
are high. Esports gamers may be critical of our brand, gaming
platform, amateur city leagues, tournaments or competitions and/or
business practices for a wide variety of reasons. These negative
gamer reactions may not be foreseeable or within our control to
manage effectively, including perceptions about gameplay fairness,
negative gamer reactions to game content via social media or other
outlets, components and services, or objections to certain of our
business practices. Negative gamer sentiment about our business
practices also can lead to investigations from regulatory agencies
and consumer groups, as well as litigation, which, regardless of
their outcome, may be costly, damaging to our reputation and harm
our business.
Actual or threatened epidemics, pandemics, outbreaks, or other
public health crises may adversely affect our
business.
Our business could be materially and adversely affected by the
risks, or the public perception of the risks, related to an
epidemic, pandemic, outbreak, or other public health crisis, such
as the recent outbreak of novel coronavirus (COVID-19). The risk,
or public perception of the risk, of a pandemic or media coverage
of infectious diseases could cause a decrease to the attendance of
our in person gaming experiences, or cause certain of our partners,
such as Wanda Theaters in China, to avoid holding in person events.
Moreover, an epidemic, pandemic, outbreak or other public health
crisis, such as COVID-19, could cause members of our Action Squad,
in whom we rely to manage the logistics of our in person
experiences, or on-site employees of partners to avoid any
involvement with our in person experiences or other events, which
would adversely affect our ability to hold such events. The
ultimate extent of the impact of any epidemic, pandemic or other
health crisis on our business, financial condition and results of
operations will depend on future developments, which are highly
uncertain and cannot be predicted, including new information that
may emerge concerning the severity of such epidemic, pandemic or
other health crisis and actions taken to contain or prevent their
further spread, among others. These and other potential impacts of
an epidemic, pandemic or other health crisis, such as COVID-19,
could therefore adversely affect our business, financial condition
and results of operations.
Technology changes
rapidly in our business and if we fail to anticipate
or successfully implement new
technologies or adopt new business strategies, technologies or
methods, the quality, timeliness and competitiveness of our amateur
city leagues, tournaments or competition may
suffer.
Rapid technology changes in the esports gaming market require us to
anticipate, sometimes years in advance, which technologies we must
develop, implement and take advantage of in order to be and remain
competitive in the esports gaming market. We have invested, and in
the future may invest, in new business strategies including a
direct to consumer model, technologies, products, or games or
first-tier game titles to continue to persistently engage the
amateur gamer and deliver the best online and
in person gaming experience. Such endeavors may involve
significant risks and uncertainties, and no assurance can be given
that the technology we choose to adopt and the features that we
pursue will be successful. If we do not successfully implement
these new technologies, our reputation may be materially adversely
affected and our financial condition and operating results may be
impacted. We also may miss opportunities to adopt technology, or
develop amateur city leagues, tournaments or competitions that
become popular with gamers, which could adversely affect our
financial results. It may take significant time and resources to
shift our focus to such technologies, putting us at a competitive
disadvantage.
Our development process usually starts with particular gamer
experiences in mind, and a range of technical development and
feature goals that we hope to be able to achieve. We may not be
able to achieve these goals, or our competitors may be able to
achieve them more quickly and effectively than we can based on
having greater operating capital and personnel resources. If we
cannot achieve our technology goals within the original development
schedule, then we may delay their release until these goals can be
achieved, which may delay or reduce revenue and increase our
development expenses. Alternatively, we may be required to
significantly increase the resources employed in research and
development in an attempt to accelerate our development of new
technologies, either to preserve our launch schedule or to keep up
with our competitors, which would increase our development
expenses.
We may experience security breaches and cyber threats.
We continually face cyber risks and threats that seek to damage,
disrupt or gain access to our networks and our gaming platform,
supporting infrastructure, intellectual property and other assets.
In addition, we rely on technological infrastructure, including
third party cloud hosting and broadband, provided by third party
business partners to support the in person and online
functionality of our gaming platform. These business partners are
also subject to cyber risks and threats. Such cyber risks and
threats may be difficult to detect. Both our partners and we
have implemented certain systems and processes to guard against
cyber risks and to help protect our data and systems. However, the
techniques that may be used to obtain unauthorized access or
disable, degrade, exploit or sabotage our networks and gaming
platform change frequently and often are not detected. Our systems
and processes, and the systems and processes of our third-party
business partners, may not be adequate. Any failure to prevent or
mitigate security breaches or cyber risks, or respond adequately to
a security breach or cyber risk, could result in interruptions to
our gaming platform, degrade the gamer experience, cause gamers to
lose confidence in our gaming platform and cease utilizing it, as
well as significant legal and financial exposure. This could
harm our business and reputation, disrupt our relationships with
partners and diminish our competitive position.
Successful exploitation of our networks and gaming platform can
have other negative effects upon the gamer experience we offer. In
particular, the virtual economies that exist in certain of our
licensed game publishers’ games are subject to abuse,
exploitation and other forms of fraudulent activity that can
negatively impact our business. Virtual economies involve the
use of virtual currency and/or virtual assets that can be used or
redeemed by a player within a particular online game or
service.
Our business could be adversely affected if our data privacy and
security practices are not adequate, or perceived as being
inadequate, to prevent data breaches, or by the application of data
privacy and security laws generally.
In the course of our business, we may collect, process, store and
use gamer and other information, including personally identifiable
information, passwords and credit card information, the latter of
which is subject to PCI-DSS compliance. Although we take measures
to protect this information from unauthorized access, acquisition,
disclosure and misuse, our security controls, policies and
practices may not be able to prevent the improper or unauthorized
access, acquisition or disclosure of such information. The
unauthorized access, acquisition or disclosure of this information,
or a perception that we do not adequately secure this information
could result in legal liability, costly remedial measures,
governmental and regulatory investigations, harm our profitability
and reputation and cause our financial results to be materially
affected. In addition, third party vendors and business partners
receive access to information that we collect. These vendors and
business partners may not prevent data security breaches with
respect to the information we provide them or fully enforce our
policies, contractual obligations and disclosures regarding the
collection, use, storage, transfer and retention of personal data.
A data security breach of one of our vendors or business partners
could cause reputational harm to them and/or negatively impact our
ability to maintain the credibility of our gamer
community.
Data privacy, data protection, localization, security and
consumer-protection laws are evolving, and the interpretation and
application of these laws in the United States, Europe (including
compliance with the General Data Protection Regulation), and
elsewhere often are uncertain, contradictory and changing. It is
possible that these laws may be interpreted or applied in a manner
that is averse to us or otherwise inconsistent with our practices,
which could result in litigation, regulatory investigations and
potential legal liability or require us to change our practices in
a manner adverse to our business. As a result, our reputation and
brand may be harmed, we could incur substantial costs, and we could
lose both gamers and revenue.
We depend on servers to operate our games with online features and
our proprietary online gaming service. If we were to lose server
functionality for any reason, our business may be negatively
impacted.
Our business relies on the continuous operation of servers, some of
which are owned and operated by third parties. Although we strive
to maintain more than sufficient server capacity, and provide for
active redundancy in the event of limited hardware failure, any
broad-based catastrophic server malfunction, a significant
service-disrupting attack or intrusion by hackers that circumvents
security measures, a failure of disaster recovery service or the
failure of a company on which we are relying for server capacity to
provide that capacity for whatever reason could degrade or
interrupt the functionality of our platform, and could prevent the
operation of our platform for both in-person and online gaming
experiences.
We also rely on networks operated by third parties to support
content on our platform, including networks owned and operated by
game publishers. An extended interruption to any of these services
could adversely affect the use of our platform, which would have a
negative impact on our business.
Further, insufficient server capacity could also negatively impact
our business. Conversely, if we overestimate the amount of server
capacity required by our business, we may incur additional
operating costs.
Our online gaming platform and games offered through our gaming
platform may contain defects.
Our online gaming platform and the games offered through our gaming
platform are extremely complex and are difficult to develop and
distribute. We have quality controls in place to detect defects in
our gaming platform before they are released. Nonetheless, these
quality controls are subject to human error, overriding, and
reasonable resource or technical constraints. Further, we have not
undertaken independent third-party testing, verification or
analysis of our gaming platform and associated systems and
controls. Therefore, our gaming platform and quality controls and
preventative measures we have implemented may not be effective in
detecting all defects in our gaming platform. In the event a
significant defect in our gaming platform and associated systems
and controls is realized, we could be required to offer refunds,
suspend the availability of our city league competitions and other
gameplay, or expend significant resources to cure the defect, each
of which could significantly harm our business and operating
results.
We may experience system failures, outages and/or disruptions of
the functionality of our platform. Such failures, delays and other
problems could harm our reputation and business, cause us to lose
customers and expose us to customer liability.
We may experience system failures, outages and/or disruptions of
our infrastructure, including information technology system
failures and network disruptions, cloud hosting and broadband
availability at in person and online experiences. Our
operations could be interrupted or degraded by any damage to or
failure of:
●
our
computer software or hardware, or our customers’ or
suppliers’ computer software or hardware;
●
our
network, our customers’ networks or our suppliers’
networks; or
●
our
connections and outsourced service arrangements with third
parties.