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.
 

 

 
 
 
TABLE OF CONTENTS
 
 
 
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PART I
 
FINANCIAL INFORMATION
 
ITEM  1.   CONDENSED FINANCIAL STATEMENTS
 
SUPER LEAGUE GAMING, INC.
CONDENSED BALANCE SHEETS
  
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
 2019
 
ASSETS
 
(Unaudited) 
 
 
 
 
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 
Deferred revenue
  - 
  151,000 
Total current liabilities
  850,000 
  1,004,000 
 
    
    
Long-term note payable
  1,202,000 
  - 
 
    
    
Total Liabilities
  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
 
 
-1-
 
 
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)  
 
 
 
Three Months
Ended June 30,
 
 
Six Months
Ended June 30,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
-2-
 
 
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

 
 
Three Months Ended June 30
 
 
Six Months Ended June 30
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
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
 
 
-3-
 
 
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Six Months
Ended June 30,
 
 
 
2020
 
 
2019
 
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
 
 
-4-
 
 
 
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.
 
 
 
-5-
 
 
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.
 
 
-6-
 
 
 
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.
 
 
 
-7-
 
 
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,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
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.
 
 
 
-8-
 
 
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.
 
 
 
 
-9-
 
 
 
Noncash stock-based compensation expense for the periods presented was comprised of the following:
 
 
 
Three Months
Ended June 30,
 
 
Six Months
Ended June 30,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
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,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
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.
 
 
 
-10-
 
 
 
Earnings (Loss) Per Share
 
Basic earnings (loss) per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period. Diluted earnings per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period, including the dilutive effect of common stock equivalents. Potentially dilutive common stock equivalents primarily consist of 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. 
  
 
 
-11-
 
 
 
3.
    INTANGIBLE AND OTHER ASSETS
 
Intangible and other assets consisted of the following for the periods presented:
 
 
 
June 30,
2020
 
 
December 31,
2019
 
 
(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.
 
4.
BUSINESS COMBINATIONS
 
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”).
 
 
 
-12-
 
 
 
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:
 
 
 
Amount
 
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:
 
 
 
Amount
 
Accounts receivable
 $15,000 
Intangible Assets - Trade name
  189,000 
Goodwill
  2,565,000 
Total purchase price
 $2,769,000 
 
 
 
-13-
 
 
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.
 

 
 
-14-
 
 

6.
STOCKHOLDERS’ EQUITY
 
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%.
 
8.
SUBSEQUENT EVENTS
 
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.
 
 
 
-15-
 
 
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.
 
 
-16-
 
 
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.
 
 
 
-17-
 
 
 
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.
 
 
 
-18-
 
 
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.
 
 
-19-
 
 
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.
 
 
 
-20-
 
 

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:

 
 
Three Months
 
 
     
 
 
Six Months
 
 
     
 
 
 
Ended June 30,
 
 
Change
 
 
Ended June 30,
 
 
Change
 
 
 
2020
 
 
2019
 
 
$
 
 
%
 
 
2020
 
 
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)%
 
 
 
 
-21-
 
 
Comparison of the Results for the Three and Six Months Ended June 30, 2020 and 2019
 
Revenue
 
 
 
Three Months
Ended June 30,
 
 
Change
 
 
Six Months 
Ended June 30,
 
 
Change
 
 
 
2020
 
 
2019 
 
 
 
 
 
 
2020 
 
 
2019 
 
 
 
 
 
 
(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.
 
 
-22-
 
 
Cost of Revenue
 
  Three Months
Ended June 30,
 
 
Change
 
 
Six Months
Ended June 30,
 
 
Change
 
 
 
2020 
 
 
2019 
 
 
 
 
 
 
2020 
 
 
2019 
 
 
 
 
 
 
(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 
 
 
2020  
 
 
2019  
 
 
$
 
 
%
 
 
2020  
 
 
2019  
 
 
$
 
 
%
 
 
(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)%
Total operating expenses
 $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,
 
 
Change
 
 
 
2020  
 
 
2019  
 
 
$
 
 
%
 
 
2020  
 
 
2019  
 
 
$
 
 
%
 
 
(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. 
 
-23-
 
 
General and Administrative. General and administrative expense for the periods presented was comprised of the following:
 
 
  Three Months
Ended June 30,
 
 
Change
 
  Six Months
Ended June 30,
 
 
Change
 
 
 
2020 
 
 
2019 
 
 
$
 
 
%
 
 
2020 
 
 
2019 
 
 
$
 
 
%
 
 
(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
 
 
2020
 
 
2019
 
 
 $
 
 
%
 
 
(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)%
 
 
-24-
 

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”).
 
-25-
 

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,
 
 
 
2020
 
 
2019
 
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,
 
 
 
2020
 
 
2019
 
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.
 
 
 
-26-
 
 
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,
 
 
 
2020
 
 
2019
 
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.
 
 
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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)
 
 
 
Total
 
 
Less than 1 year
 
 
1-3 years
 
 
More than 3 years
 
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.
 
 
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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.
 
 
 
 
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PART II
 
OTHER INFORMATION
 
ITEM  1.     LEGAL PROCEEDINGS
 
None.
 
ITEM  1A.   RISK FACTORS
 
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.
 
 
 
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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.
 
 
 
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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.
 
 
 
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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.
 
 
 
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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.
  
 
 
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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.
 
 
 
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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.
 
 
 
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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.
 
 
 
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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.
 
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