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 September 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 November 11, 2020, there were 15,483,010 shares of the registrant’s common stock, $0.001 par value, issued and outstanding.

 

 

 

TABLE OF CONTENTS

 

			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Condensed Financial Statements	1
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	31
	Item 1A.	Risk Factors	31
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
	Item 3.	Defaults Upon Senior Securities	44
	Item 4.	Mine Safety Disclosures	44
	Item 5.	Other Information	44
	Item 6.	Exhibits	45

 

 

 

PART I

 

FINANCIAL INFORMATION

 

ITEM  1.   CONDENSED FINANCIAL STATEMENTS

 

SUPER LEAGUE GAMING, INC.

CONDENSED BALANCE SHEETS

  

	September 30,	December 31,
	2020	2019
ASSETS	(Unaudited)
Current Assets
Cash and cash equivalents	$10,346,000	$8,442,000
Accounts receivable	972,000	293,000
Prepaid expenses and other current assets	1,213,000	924,000
Total current assets	12,531,000	9,659,000
Property and equipment, net	160,000	239,000
Intangible and other Assets, net	1,953,000	1,984,000
Goodwill	2,565,000	2,565,000
Total assets	$17,209,000	$14,447,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$727,000	$853,000
Deferred revenue	31,000	151,000
Total current liabilities	758,000	1,004,000
Long-term note payable	1,205,000	-
Total liabilities	1,963,000	1,004,000
Commitments and Contingencies
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; 15,483,010 and 8,573,922 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.	25,000	18,000
Additional paid-in capital	115,025,000	99,237,000
Accumulated deficit	(99,804,000)	(85,812,000)
Total stockholders’ equity	15,246,000	13,443,000
Total liabilities and stockholders’ equity	$17,209,000	$14,447,000

 

 

 

SUPER LEAGUE GAMING, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)  

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
REVENUES	$718,000	$350,000	$1,285,000	$822,000
COST OF REVENUES	327,000	192,000	560,000	379,000
GROSS PROFIT	391,000	158,000	725,000	443,000
OPERATING EXPENSES
Selling, marketing and advertising	1,476,000	1,063,000	4,005,000	3,202,000
Technology platform and infrastructure	1,430,000	1,319,000	5,109,000	3,772,000
General and administrative	1,782,000	2,201,000	5,615,000	9,535,000
Total operating expenses	4,688,000	4,583,000	14,729,000	16,509,000
NET OPERATING LOSS	(4,297,000)	(4,425,000)	(14,004,000)	(16,066,000)
OTHER INCOME (EXPENSE)
Accrued interest expense	(3,000)	-	(5,000)	(187,000)
Accretion of debt discount	-	-	-	(2,684,000)
Beneficial conversion feature	-	-	-	(7,067,000)
Other	2,000	8,000	17,000	13,000
Total other income (expense)	(1,000)	8,000	12,000	(9,925,000)
NET LOSS	$(4,298,000)	$(4,417,000)	$(13,992,000)	$(25,991,000)
Net loss attributable to common stockholders - basic and diluted
Basic and diluted loss per common share	$(0.36)	$(0.52)	$(1.39)	$(3.39)
Weighted-average number of shares outstanding, basic and diluted	12,063,778	8,569,922	10,084,002	7,663,243

 

See accompanying notes to condensed financial statements

 

 

SUPER LEAGUE GAMING, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
Common stock (Shares):
Balance, beginning of period	10,460,696	8,569,922	8,573,922	4,610,109
Initial public offering of common stock	-	-	-	2,272,727
Issuance of common stock at $3.50 per share	-	-	1,825,000	-
Issuance of common stock at $1.85per share	4,988,981		4,988,981
Automatic conversion of convertible debt to common stock	-	-	-	1,475,164
Common stock issued for Framerate Acquisition (Note 4)	-	-	32,936	134,422
Stock-based compensation	33,333	-	62,171	10,833
Warrant Exercises	-	-	-	66,667
Balance, end of period	15,483,010	8,569,922	15,483,010	8,569,922
Common stock (Amount):
Balance, beginning of period	$20,000	$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	-
Issuance of common stock at $1.85 per share, net of issuance costs (Note 6)	5,000		5,000
Automatic conversion of convertible debt to common stock	-	-	-	2,000
Balance, end of period	$25,000	$18,000	$25,000	$18,000
Additional paid-in-capital:
Balance, beginning of period	$106,237,000	$97,598,000	$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	-
Issuance of common stock at $1.85 per share, net of issuance costs (Note 6)	8,398,000	-	8,398,000	-
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
Framerate Earn-Out (Note 4)	-	-	-	454,000
Stock-based compensation	380,000	714,000	1,429,000	5,199,000
Stock option and warrant exercises	10,000	-	10,000	20,000
Balance, end of period	$115,025,000	$98,312,000	$115,025,000	$98,312,000
Accumulated Deficit:
Balance, beginning of period	$(95,506,000)	$(76,707,000)	$(85,812,000)	$(55,133,000)
Net Loss	(4,298,000)	(4,417,000)	(13,992,000)	(25,991,000)
Balance, end of period	(99,804,000)	(81,124,000)	(99,804,000)	(81,124,000)
Total stockholders’ equity	$15,246,000	$17,206,000	$15,246,000	$17,206,000

 

See accompanying notes to condensed financial statements

 

 

SUPER LEAGUE GAMING, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

	Nine Months Ended September 30,
	2020	2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$(13,992,000)	$(25,991,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,098,000	657,000
Stock-based compensation	1,570,000	5,266,000
Amortization of discount on convertible notes	-	2,684,000
Beneficial conversion feature	-	7,067,000
Changes in assets and liabilities:
Accounts receivable	(679,000)	171,000
Prepaid expenses and other current assets	(430,000)	(852,000)
Accounts payable and accrued expenses	(125,000)	601,000
Deferred revenue	(121,000)	68,000
Accrued interest on convertible notes	5,000	187,000
Net cash used in operating activities	(12,674,000)	(10,142,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for acquisition of Framerate (Note 4)	-	(1,491,000)
Purchase of property and equipment	(7,000)	(56,000)
Capitalization of software development costs	(877,000)	(839,000)
Acquisition of other intangible assets	(104,000)	(138,000)
Net cash used in investing activities	(988,000)	(2,524,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs (Note 6)	14,356,000	22,458,000
Proceeds from note payable (Note 5)	1,200,000	-
Proceeds from common stock purchase warrant exercises	10,000	20,000
Net cash provided by financing activities	15,566,000	22,478,000
INCREASE IN CASH	1,904,000	9,812,000
Cash – beginning of period	8,442,000	2,774,000
Cash – end of period	$10,346,000	$12,586,000
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
Automatic conversion of convertible debt to common stock	$-	$13,793,000
Issuance of common stock for Framerate Acquisition (Note 4)	$245,000	$1,000,000

 

See accompanying notes to condensed financial statements

 

 

 

1.	DESCRIPTION OF BUSINESS

 

Super League Gaming, Inc. (“Super League,” the “Company,” “we” or “our”) is a global leader in the mission to bring live and digital esports entertainment and experiences directly to everyday competitive gamers around the world. Utilizing our proprietary technology platform, Super League operates physical and digital experiences in partnership with publishers of top-tier game titles and owners/operators of a distributed footprint of venues, a network of digital social and viewing channels, and an association/organization of city-based amateur gaming clubs and teams. The Super League Network features multiple forms of content celebrating the love of play via social media, live streaming and video-on-demand, along with continuous gameplay and leaderboards. Inside our network is Framerate, a large independent social video esports network powered by user-generated highlight reels, and our exclusive proprietary platform Minehut, providing a social and gameplay forum for the avid Minecraft community. Super League is committed to supporting the development of local, grassroots player communities, while providing a global, scalable infrastructure for esports competition and engagement. We address a wide range of gamers across game titles, ages and skill levels, and also a wide range of content-capture beyond gameplay. This positions Super League as more than a tournament operator; we are a lifestyle and media company focused on capturing, generating, aggregating and distributing content across the genre of all things esports.

 

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012, as amended.

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, certain information and footnotes required by U.S. GAAP in annual financial statements have been omitted or condensed in accordance with quarterly reporting requirements of the Securities and Exchange Commission (“SEC”).  These interim financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 23, 2020.

 

The condensed interim financial statements of Super League include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of Super League’s financial position as of September 30, 2020, and results of its operations and its cash flows for the interim periods presented.  The results of operations for the three and nine months ended September 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, stock-based compensation expense, accounting for business combinations, and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.

 

 

 

 

Going Concern

 

The accompanying interim condensed financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the financial statements, the Company incurred net losses of $14.0 million and $26.0 million during the nine months ended September 30, 2020 and 2019, respectively, and had an accumulated deficit of $99.8 million as of September 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 $36.5 million. For the nine months ended September 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 $1.5 million and $15.2 million, respectively. For the nine months ended September 30, 2020 and 2019, net cash used in operating activities totaled $12.7 million and $10.1 million, respectively.

 

As of September 30, 2020, the Company had cash and cash equivalents of approximately $10.3 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.

 

As described at Note 6, in August and September 2020, the Company issued a total of 4,988,981 shares of common stock at a price of $1.85 per share, raising aggregate net proceeds of approximately $8.4 million, after deducting placement agent fees of $646,000 and other offering expenses totaling $180,000.

The net proceeds are for working capital and other general corporate purposes, including sales and marketing activities, product development and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses.

 

 

 

 

Revenue Recognition

 

Revenue is recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. In this regard, revenue is recognized when: (i) the parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations; (ii) the entity can identify each party’s rights regarding the goods or services to be transferred; (iii) the entity can identify the payment terms for the goods or services to be transferred; (iv) the contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract);and (v) it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

 

Super League generates revenues and related cash flows from (i) sponsorships and advertising, including third-party content sales and (ii) direct to consumer offers including tournament fees for participation in our physical and online multiplayer gaming experiences, digital subscriptions and merchandise sales.

 

Sponsorships and Advertising:

 

The Company generates sponsorship revenues primarily from sales of various forms of sponsorships and promotional campaigns for its online gameplay and content platforms and from sponsorship at its in-person esports experiences. These revenue arrangements may include: exclusive or non-exclusive title sponsorships, marketing benefits, official product status exclusivity, product visibly and additional infrastructure placement, social media rights (including rights to create and post social content and clips), rights to on-screen activations and promotions, display material rights, media rights, hospitality and tickets and merchandising rights.

 

Sponsorship revenues also include revenues pursuant to arrangements with brand and media partners, retail venues, game publishers and broadcasters that allow our partners to run amateur esports experiences, and or capture specifically curated gameplay content that is customized for our partners’ distribution channels, leveraging the flexibility of, and powered by the Super League gaming and content technology platform.

 

Sponsorship arrangements typically include contract terms for time periods ranging from several weeks or months to multi-year arrangements.

 

We also generate content through digital and physical experiences that offer opportunities for generating advertising revenue on our proprietary digital channels. In addition, we license our content to third parties seeking esports content for their own distribution channels.

 

For sponsorship arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the agreement as the Company satisfies its performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Payments are typically due from customers during the term of the arrangement.

 

Revenue for sponsorship arrangements for one-off branded experiences and/or the development of content tailored specifically for the Company’s partners’ distribution channels that provide for a contractual delivery or performance date, is recognized when performance is substantially complete and or delivery occurs.

 

For advertising and third-party content arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the arrangement as we satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for shorter-term campaigns.

 

 

 

 

Direct to Consumer:

 

Direct to consumer revenues include online and physical tournament fees, digital subscriptions, digital goods and merchandise. Revenue from single experiences is recognized when the experience occurs. Revenue from multi-week packages is recognized over time as the multi-week experiences occur based on estimates of the progress toward complete satisfaction of the applicable offer and related performance obligations. Subscription revenue is recognized over the applicable subscription term. Payments are typically due from customers at the point of sale.

 

Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied, as described above.

 

Revenue was comprised of the following for the periods presented:

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Sponsorships and advertising	$677,000	$342,000	$1,190,000	$798,000
Direct to consumer	41,000	8,000	95,000	24,000
	$718,000	$350,000	$1,285,000	$822,000

 

For the three and nine months ended September 30, 2020, 65% and 55% of revenues were recognized at a single point in time, and 35% and 45% of revenues were recognized over time, respectively. For the three and nine months ended September 30, 2019, 45% and 43% of revenues were recognized at a point in time, and 55% and 57% of revenues were recognized over time, respectively.

 

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 nine months ended September 30, 2020 were $22,000 and $73,000, respectively. Advertising expenses for the three and nine months ended September 30, 2019 were $81,000 and $270,000, respectively.

 

 

 

 

Technology Platform and Infrastructure Costs

 

Technology platform and infrastructure costs include (i) allocated personnel costs, including salaries, noncash stock compensation, taxes and benefits related to our internal software developers and engineers, employed by Super League, engaged in the operation, maintenance, management, administration, testing and enhancement of our proprietary gaming and content technology platform, (ii) third-party contract software development and engineering resources engaged in developing and enhancing our proprietary gaming and content technology platform (iii) the amortization of capitalized internal use software costs, and (iv) technology platform related cloud services, broadband and other technology platform costs.

 

Intangible Assets

 

Intangible assets primarily consist of (i) internal-use software development costs, (ii) domain name, copyright and patent registration costs, (iii) commercial licenses and branding rights and (iv) other intangible assets, which are recorded at cost and amortized using the straight-line method over the estimated useful lives of the assets, ranging from three to 10 years.

 

Software development costs incurred to develop internal-use software during the application development stage are capitalized and amortized on a straight-line basis over the software’s estimated useful life, which is generally three years. Software development costs incurred during the preliminary stages of development are charged to expense as incurred. Maintenance and training costs are charged to expense as incurred. Upgrades or enhancements to existing internal-use software that result in additional functionality are capitalized and amortized on a straight-line basis over the applicable estimated useful life.

 

Impairment of Long-Lived Assets

 

The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. Management believes that there was no impairment of long-lived assets for the periods presented herein. There can be no assurance, however, that market conditions or demand for the Company’s products or services will not change, which could result in long-lived asset impairment charges in the future.

 

Stock-Based Compensation

 

Compensation expense for stock-based awards is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense, typically on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which is generally two to four years. Compensation expense for awards with performance conditions that affect vesting is recorded only for those awards expected to vest or when the performance criteria are met. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of stock option and common stock purchase warrant awards is estimated on the date of grant utilizing the Black-Scholes-Merton option pricing model. The Company utilizes the simplified method for estimating the expected term for options granted to employees due to the lack of available or sufficient historical exercise data for the Company for the applicable options terms. The Company accounts for forfeitures of awards as they occur.

 

 

 

 

Noncash stock-based compensation expense for the periods presented was comprised of the following:

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Stock options	$145,000	$374,000	$579,000	$3,004,000
Warrants	-	263,000	282,000	1,918,000
Restricted stock units	235,000	75,000	568,000	311,000
Earn-out compensation expense (Note 4)	90,000	25,000	141,000	33,000
Total noncash stock compensation expense	$470,000	$737,000	$1,570,000	$5,266,000

 

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

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Sales, marketing and advertising	$272,000	$120,000	$668,000	$448,000
Technology platform and infrastructure	51,000	47,000	199,000	71,000
General and administrative	147,000	570,000	703,000	4,747,000
Total noncash stock compensation expense	$470,000	$737,000	$1,570,000	$5,266,000

 

Noncash stock-based compensation expense for the nine months ended September 30, 2019 included compensation expense resulting 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, pursuant to October 2018 amended employee agreements and related vesting provisions of the underlying equity grant agreements. During the nine months ended September 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. 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 nine months ended September 30, 2020, two customers accounted for 43% and four customers accounted for 54% of revenues, respectively. For the three and nine months ended September 30, 2019, five customers accounted for 90% and three customers accounted for 49% of revenues, respectively. At September 30, 2020, four customers accounted for 74% of accounts receivable. At December 31, 2019, one customer accounted for 70% of accounts receivable. At September 30, 2020, two vendors accounted for 34% of accounts payable. At December 31, 2019, one vendor accounted for 21% of accounts payable.

 

 

 

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period. Diluted earnings per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period, including the dilutive effect of common stock equivalents. Potentially dilutive common stock equivalents primarily consist of employee stock options, warrants issued to employees and non-employees in exchange for services and warrants issued in connection with financings. All outstanding stock options, restricted stock units and warrants, totaling 4,595,000 and 4,108,000 at September 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 – Not Yet Adopted.

 

In February 2016, the FASB issued an ASU that requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative periods in the financial statements and is effective for fiscal years beginning after December 15, 2021 and early adoption is permitted. The Company is evaluating the impact that this guidance will have on its financial position, results of operations and financial statement disclosures.

 

In June 2016, the FASB issued guidance on the measurement and recognition of credit losses on most financial assets. For trade receivables, loans, and held-to-maturity debt securities, the current probable loss recognition methodology is being replaced by an expected credit loss model. For available-for-sale debt securities, the recognition model on credit losses is generally unchanged, except the losses will be presented as an adjustable allowance. The guidance will be applied retrospectively with the cumulative effect recognized as of the date of adoption. The guidance will become effective at the beginning of the Company’s first quarter of the fiscal year ending December 31, 2021 but can be adopted as early as the beginning of the first quarter of fiscal year ending December 31, 2020. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures. 

  

 

 

 

3.	INTANGIBLE AND OTHER ASSETS

 

Intangible and other assets consisted of the following for the periods presented:

 

	September 30, 2020	December 31, 2019
	(Unaudited)
Capitalized software development costs	$3,133,000	$2,363,000
Licenses	-	340,000
Trade name	189,000	189,000
Domain	68,000	68,000
Copyrights and other	392,000	289,000
	3,782,000	3,249,000
Less: accumulated amortization	(1,829,000)	(1,265,000)
Intangible and other assets, net	$1,953,000	$1,984,000

 

Amortization expense for the three and nine months ended September 30, 2020 totaled $217,000 and $1,013,000, respectively. Amortization expense for the three and nine months ended September 30, 2019 totaled $134,000 and $326,000, respectively. In April 2020, we amended our arrangement with a third party 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 the third party, focused on online play at home. 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 nine months ended September 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”).

 

 

 

 

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 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 was 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. The remaining deferred compensation balance, totaling $90,000, was expensed in July 2020 due to the cessation of services.

 

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

 

 

 

 

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 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 accrues 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 24-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.

 

 

 

6.	STOCKHOLDERS’ EQUITY

 

Financing Activities

Equity Financings

In August 2020, the Company issued 4,540,541 shares of common stock at a price of $1.85 per share, raising aggregate net proceeds of approximately $7.6 million, after deducting placement agent fees of $588,000 and other offering expenses totaling $180,000. The offering was conducted pursuant to the Company’s effective Registration Statements on Form S-1 (File No. 333-248248), and a related registration statement filed pursuant to Rule 462(b) under the Securities Act. In addition, pursuant to the terms of the related underwriting agreement, the Company granted to the underwriter a 30-day over-allotment option to purchase up to an additional 681,081 Shares at the same public offering price per share, less discounts and commissions, which was partially exercised in September 2020, resulting in the issuance of 448,440 shares of common stock and net proceeds of $771,000, after deducting placement agent fees of $58,000.

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 these offerings 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.	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.

 

 

 

 

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

 

Super League Gaming is a leading gaming community and content platform that gives everyday gamers multiple ways to connect and engage with others while enjoying the video games they love. Powered by patented, proprietary technology systems, we offer players the ability to create gameplay-driven experiences they can share with friends, the opportunity to watch live streaming broadcasts and gameplay highlights across digital and social channels, and the chance to compete in events and challenges designed to celebrate victories and achievements across multiple skill levels. With gameplay and content offerings featuring more than a dozen of the top video game titles in the world, we are building a broadly inclusive, global brand at the intersection of gaming, experiences and entertainment. Whether to access our expanding direct audience or our unique content production and virtual event capabilities, third parties ranging from consumer brands, video game publishers, television companies, traditional sports organizations, concert promoters, and more, are turning to Super League to provide integrated solutions that drive business growth.  

 

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.

 

 

 

 

During the three and nine months ended September 30, 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 increases in sales of digital goods primarily with our Minehut digital property 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. This key milestone at the time, represented more than a 700% increase over the full fiscal year of 2019, during which we achieved a total of 120 million views.

As of September 30, 2020, the ability to generate over one billion views year to date 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 three and nine months ended September 30, 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 year to date was the deferral of some of these programs and related revenues to future periods. We did not experience any cancellations of existing programs. For example, our partnership with Tencent and OnePlus, bringing PUBG mobile tournaments to life proceeded as planned, just from the comfort and safety of players’ homes, online, as opposed to in-person. The majority of our gameplay hours and other engagement occurs digitally, online, so while our “in real life” gaming is a premium and important aspect of our brand, the shift away from retail locations is not expected to have a significant impact on our overall business model over time, which is largely digitally focused.

 

 

 

 

Key Performance Indicators.

 

We focus on three key performance indicators (“KPIs”), as outlined below, to assess our progress and drive revenue growth, which is also a key performance indicator. As of the end of the third quarter of 2020, we continued to see strong growth in our leading key performance indicators, as follows:

 

●

Registered Users: We ended fiscal 2019 with approximately 980,000 registered users. During the nine months ended September 30, 2020, we increased our registered users by approximately 150%, to 2.4 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 September 30, 2020, including our live gaming experiences and our expanding digital gameplay channels, we generated approximately 47.8 million hours of gameplay and other engagement, as compared to approximately 15.0 million full year 2019 gameplay and other engagement hours, an increase of approximately 218%. We continue to focus on ways we can repackage and distribute this significant derivative content library for further monetization.

 

●

Views and Impressions: We generated 1.4 billion views and impressions during the nine months ended September 30, 2020, compared to our full-year 2019 views of 120.0 million, representing an approximately 1000% increase over full year 2019 views. This continued growth in views results in the exponential growth of our monetizable advertising inventory.

 

Impact of COVID-19 Pandemic

 

Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The novel coronavirus and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic. It is unknown how long the adverse conditions associated with the coronavirus will last and what the complete financial effect will be to the Company.

 

Notwithstanding the growth in user engagement metrics discussed herein, the broader impact of the ongoing COVID-19 pandemic on our results of operations and overall financial performance remains uncertain. The COVID-19 pandemic may continue to impact our revenue and revenue growth in future periods, and is likely to continue to adversely impact certain aspects of our business and our partners, including advertising demand, retail expansion plans and our in-person esports experiences. See “Risk Factors” for further discussion of the adverse impacts of the COVID-19 pandemic on our business.

 

Critical Accounting Estimates

 

Our unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these condensed statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these condensed financial statements. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 23, 2020. In addition, refer to Note 2 to the condensed financial statements included in this Report. The following accounting policies were identified during the current period, based on activities occurring during the current period, as critical and requiring significant judgments and estimates.

 

 

 

 

Revenue Recognition

 

Revenue is recognized when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. In this regard, revenue is recognized when: (i) the parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations; (ii) we can identify each party’s rights regarding the goods or services to be transferred; (iii) we can identify the payment terms for the goods or services to be transferred; (iv) the contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract); and (v) it is probable that the entity will collect substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer.

 

Super League generates revenues and related cash flows from (i) sponsorships and advertising, including third-party content sales and (ii) direct to consumer offers including tournament fees for participation in our physical and online multiplayer gaming experiences, digital subscriptions and merchandise sales.

 

Sponsorships and Advertising:

  

Sponsorship arrangements typically include contract terms for time periods ranging from several weeks or months to multi-year arrangements.

 

For sponsorship arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the agreement as the Company satisfies its performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Payments are typically due from customers during the term of the arrangement.

 

Revenue for sponsorship arrangements for one-off branded experiences and/or the development of content tailored specifically for the Company’s partners’ distribution channels that provide for a contractual delivery or performance date, is recognized when performance is substantially complete and or delivery occurs.

 

For advertising and third-party content arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the arrangement as we satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for shorter-term campaigns.

 

 

 

 

Direct to Consumer:

 

Revenue from single experiences is recognized when the experience occurs. Revenue from multi-week packages is recognized over time as the multi-week experiences occur based on estimates of the progress toward complete satisfaction of the applicable offer and related performance obligations. Subscription revenue is recognized over the applicable subscription term. Payments are typically due from customers at the point of sale.

 

Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied as described above.

 

We make estimates and judgments when determining whether the collectability of accounts receivable is reasonably assured. We assess the collectability of receivables based on several factors, including past transaction history and the creditworthiness of our customers. If it is determined that collection is not reasonably assured, amounts due are recognized when collectability becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash for transactions where collectability may have been an issue. Management’s estimates regarding collectability impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectability could differ from actual events and thus materially impact our financial position and results of operations.

 

Depending on the complexity of the underlying revenue arrangement and related terms and conditions, significant judgments, assumptions and estimates may be required to determine each parties rights regarding the goods or services to be transferred, each parties performance obligations, whether performance obligations are satisfied at a point in time or over time, the timing of satisfaction of performance obligations, and the appropriate period or periods in which, or during which, the completion of the earnings process occurs. Depending on the magnitude of specific revenue arrangements, if different judgments, assumptions and estimates are made regarding revenue arrangements in any specific period, our periodic financial results may be materially affected.

 

Stock-Based Compensation Expense

 

Compensation expense for stock-based awards is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense, typically on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award), which is generally two to four years. Compensation expense for awards with performance conditions that affect vesting is recorded only for those awards expected to vest or when the performance criteria are met. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of stock option and common stock purchase warrant awards is estimated on the date of grant utilizing the Black-Scholes-Merton option pricing model. The Company accounts for forfeitures of awards as they occur.

 

Determining the fair value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of our common stock, determination of grant dates, future employee stock option exercise behavior and requisite service periods.

 

 

 

 

 

Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

 

The following table sets forth a summary of our statements of operations for the three and nine months ended September 30, 2020 and 2019:

 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020	2019	$ Change	% Change	2020	2019	$ Change	% Change
	(in thousands, except percentage change values)
REVENUES	$718	$350	$368	105%	$1,285	$822	$463	56%
COST OF REVENUES	327	192	135	70%	560	379	181	48%
GROSS PROFIT	391	158	233	147%	725	443	282	64%
OPERATING EXPENSES
Selling, marketing and advertising	1,476	1,063	413	39%	4,005	3,202	803	25%
Technology platform and infrastructure	1,430	1,319	111	8%	5,109	3,772	1,337	35%
General and administrative	1,782	2,201	(419)	(19)%	5,615	9,535	(3,920)	(41)%
Total operating expenses	4,688	4,583	105	2%	14,729	16,509	(1,780)	(11)%
NET LOSS FROM OPERATIONS	(4,297)	(4,425)	128	(3)%	(14,004)	(16,066)	2,062	(13)%
OTHER INCOME (EXPENSE), NET	(1)	8	(9)	(100)%	12	(9,925)	(9,937)	(100)%
NET LOSS	$(4,298)	$(4,417)	$119	(3)%	$(13,992)	$(25,991)	$11,999	(46)%

 

 

 

 

Comparison of the Results for the Three and Nine Months Ended September 30, 2020 and 2019

 

Revenue

 

	Three Months Ended September 30,				Nine Months  Ended September 30,
	2020	2019	$ Change	% Change	2020	2019	$ Change	% Change
	(in thousands, except percentage change values)
Sponsorships and advertising	$677	$342	$335	98%	$1,190	$798	$392	49%
Direct to Consumer	41	8	33	+100%	95	24	71	+100%
	$718	$350	$368	105%	$1,285	$822	$463	56%

 

Revenue for the three months ended September 30, 2020 increased $368,000 or 105%, compared to the three months ended September 30, 2019. Revenue for the nine months ended September 30, 2020 increased $463,000 or 56%, compared to the three months ended September 30, 2019. For the three and nine months ended September 30, 2020, two customers accounted for 43% and four customers accounted for 54% of revenues, respectively. For the three and nine months ended September 30, 2019, five customers accounted for 90% and three customers accounted for 49% of revenues, respectively.

 

Sponsorships and Advertising. Period to period changes in sponsorship, advertising and content sales revenues are attributable to fluctuations in sponsorship, advertising and content sales activities period to period, which is based on the specific partnership and advertising arrangements with activities during a particular period, activations during the period, the related performance obligations satisfied during the period and the contractual consideration and revenue share arrangements associated with the sponsorship and advertising activities during the period.

 

The increase in sponsorships and advertising revenue primarily reflects significant increases in advertising and content sales revenues compared to the prior year periods, reflecting our continued focus on the monetization of our increasing advertising inventory and amateur gameplay content.

 

Advertising sales revenues for the three and nine months ended September 30, 2020 increased $280,000 and $351,000, respectively, and included revenues from advertising campaigns with Netflix, Inc., or Netflix, in connection with Netflix’s “The Sleepover” movie release, and with Disney+ in connection with their animated musical comedy series Phineas and Ferb. The three and nine months ended September 30, 2020 also reflected a $121,000 and $198,000, respectively, increase in third party content sale revenues, primarily driven by continuing content sales with Snapchat Inc. and Cox media, and significant increases in programmatic advertising revenues primarily related to our Minecraft digital property, Minehut.

 

Although we were impacted by the general deferral in advertising spending by brands and sponsors resulting from 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 continue to expand our advertising inventory, viewership and related sales activities.

 

Direct to Consumer. Direct to consumer revenues 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. The increase in direct to consumer revenues reflects our continued focus on the acceleration of direct to consumer monetization, and the impact of the surge in engagement across all of our digital properties due in part to the COVID-19 pandemic. 

 

 

 

 

Cost of Revenue

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020	2019	$ Change	% Change	2020	2019	$ Change	% Change
	(in thousands, except percentage change values)
Cost of revenue	$327	$192	$135	70%	$560	$379	$181	48%

 

Cost of revenue for the three months ended September 30, 2020 increased $135,000 or 70% compared to the three months ended September 30, 2019, as compared to the 105% increase in related revenues for the same periods. The less than proportionate change in cost of revenue was driven by a significant increase in lower cost advertising and third party content sales revenues in the third quarter of 2020.

 

Cost of revenue for the nine months ended September 30, 2020 increased $181,000, or 48% compared to the nine months ended September 30, 2019, relatively consistent with the 56% 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 and a significant increase in lower cost advertising and content sales revenues during the nine months ended September 30, 2020.

 

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 September 30,				Nine Months  Ended September 30,
	2020	2019	$ Change	% Change	2020	2019	$ Change	% Change
	(in thousands, except percentage change values)
Selling, marketing and advertising	$1,476	$1,063	$413	39%	$4,005	$3,202	$803	25%
Technology platform and infrastructure	1,430	1,319	111	8%	5,109	3,772	1,337	35%
General and administrative	1,782	2,201	(419)	(19)%	5,615	9,535	(3,920)	(41)%
Total operating expenses	$4,688	$4,583	$105	2%	$14,729	$16,509	$(1,780)	(11)%

 

Noncash stock-based compensation expense for the periods presented was included in the following operating expense line items:

 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020	2019	$ Change	% Change	2020	2019	$ Change	% Change
	(in thousands, except percentage change values)
Sales, marketing and advertising	$272	$120	$152	127%	$668	$448	$220	49%
Technology platform and infrastructure	51	47	4	9%	199	71	128	+100%
General and administrative	147	570	(423)	(74)%	703	4,747	(4,044)	(85)%
Total noncash stock compensation expense	$470	$737	$(267)	(36)%	$1,570	$5,266	$(3,696)	(70)%

 

Selling, Marketing and Advertising. The increase in selling, marketing and advertising expense for the three and nine months ended September 30, 2020 was primarily due to an increase in personnel costs, including noncash stock compensation, associated with the increase in our direct sales force focused on the monetization of our physical and digital experiences and related audience across our digital properties. The increase was partially offset by a reduction in traditional physical / in-person marketing activities costs totaling $150,000, due to the impact of the COVID-19 pandemic on physical / in-person related activities.

 

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, broadband and other technology platform costs. Capitalized internal use software development costs are amortized on a straight-line basis over the software’s estimated useful life. The increase in technology platform and infrastructure costs for the three and nine months ended September 30, 2020 primarily reflects an increase in cloud services and other technology platform costs totaling $343,000 and $1.2 million, respectively, which reflects the impact of the surge in engagement across our digital properties as described earlier, quarterly fees paid to a third party under a licenses and rights agreement, as amended, totaling $15,000 and $165,000, respectively, and the acceleration of amortization related to the termination of certain rights and licenses in connection with amendments to our arrangement with a third party, totaling $0, and $413,000, respectively, as described at Note 3 to the condensed financial statements elsewhere herein. The increase in technology platform and infrastructure costs was partially offset by a decrease in broadband costs totaling $76,000 and $229,000 for the three and nine months ended September 30, 2020 and 2019, respectively.

 

 

 

 

General and Administrative. General and administrative expense for the periods presented was comprised of the following:

 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020	2019	$ Change	% Change	2020	2019	$ Change	% Change
	(in thousands, except percentage change values)
Personnel costs	$479	$576	$(97)	(17)%	$1,471	$1,809	$(338)	(19)%
Office and facilities	28	98	(70)	(71)%	217	303	(86)	(28)%
Professional fees	199	208	(9)	(4)%	552	599	(47)	(8)%
Stock-based compensation	147	570	(423)	(74)%	703	4,747	(4,044)	(85)%
Depreciation and amortization	53	58	(5)	(9)%	176	363	(187)	(52)%
Other	876	691	185	27%	2,496	1,714	782	46%
Total general and administrative expense	$1,782	$2,201	$(419)	(19)%	$5,615	$9,535	$(3,920)	(41)%