September 21,
2021
VIA EDGAR
Mses. Aamira
Chaudhry and Theresa Brilliant
United States
Securities and Exchange Commission
Division of
Corporation Finance
Office of Trade
& Services
100 F Street,
NE
Washington,
D.C. 20549
Re:
Super League Gaming, Inc.
Form
10-K for the Fiscal Year Ended December 31, 2020
Filed
March 19, 2021
File No.
001-38819
Ladies and
Gentlemen:
This letter is
submitted on behalf of Super League Gaming, Inc. (the
“Company”) in
response to the comments from the staff of the Division of
Corporation Finance, Office of Trade & Services (the
“Staff”) of the
Securities and Exchange Commission (the “Commission”) in a letter to the
Company dated September 1, 2021 with respect to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2020, filed with the Commission on March 19, 2021 (the
“Form 10-K”).
In this letter, each of the Staff’s comments is indicated in
italics, followed by the Company’s responses
thereto.
Management's Discussion and Analysis of Financial Condition and
Results of Operations Executive Summary and Key Performance
Indicators, page 37
1.
Please
revise your discussion in MD&A to begin with a discussion and
analysis of your results of operations under GAAP, and move the
discussion of key performance indicators to follow or support your
GAAP-based results discussion.
Response: The Company
respectfully acknowledges and accepts the Staff’s comment,
and kindly requests that the Company be permitted to incorporate
the Staff’s guidance on a prospective basis, beginning first
with the Company’s Quarterly Report on Form 10-Q for the
period ending September 30, 2021 and in all subsequent quarterly
and annual filings thereafter.
Operating Expenses, page 45
2.
Please
tell us if any technology platform and infrastructure related costs
are included in cost of revenues and your basis for classifying
these costs.
Response: The Company
respectfully acknowledges the Staff’s comment and advises the
Staff that the Company does include certain technology platform and
infrastructure costs in cost of revenues. A further description of
these costs and the methodology used by the Company to classify the
relevant costs are explained below.
Cost of
revenues includes direct costs incurred by the Company in
connection with the satisfaction of performance obligations under
the Company’s revenue arrangements. As a result, the
following direct technology platform and infrastructure costs are
included in the Company’s cost of revenues: (i) allocated
personnel costs, including salaries, taxes and benefits related to
our internal software developers and engineers, (ii) third-party
contract software development and engineering resources (iii) the
amortization of capitalized internal use software costs
(“IUSC”), and
(iv) technology platform related cloud services, and other
technology platform costs. The methodology utilized by the Company
for each type of cost are as follows:
●
Internal personnel costs. Internal
personnel costs are allocated to cost of revenues based on monthly
timesheet information provided by employees that track employee
hours incurred on a project-by-project basis. Reported hours by
revenue generating project are multiplied by salaries, tax and
benefits rates per hour by employee in order to determine amounts
allocable to cost of revenues for the applicable
period.
●
Third-party consultants / contractors.
Third-party consultant / contractor costs are allocated to cost of
revenues based on descriptions of time and costs incurred included
on third-party vendor invoices and related agreements, and are
allocated to the appropriate revenue generating project for the
applicable dates of service.
●
Amortization of IUSC. Capitalized IUSC
incurred that are specific to a revenue generating project are
amortized over the estimated useful life of the capitalized project
costs, and allocated to cost of revenues on a straight-line basis
over the estimated useful life of the project costs.
●
Cloud services. Cloud services costs
are allocated to cost of revenue based on total server time used by
specific revenue generating project. Monthly server time hours
incurred by project are divided by total monthly server time, which
is applied to total monthly server costs to determine amounts
allocable to cost of revenue for the applicable
period.
The Company
appreciates that the aforementioned information may be helpful
disclosure to include in the Company’s periodic filings
moving forward. As such, the Company respectfully advises the Staff
that the Company intends to provide additional disclosure regarding
technology and platform costs included in cost of revenues in
future periodic filings, beginning with the Company’s
Quarterly Report on Form 10-Q for the period ending September 30,
2021 and in all subsequent quarterly and annual filings
thereafter.
Index to Financial Statements
Balance Sheet, page F-3
3.
We note
you have incurred significant losses since inception and expect
continued future operating losses. In light of your history of
losses and negative cash flows from operating activities for the
years ended December 31, 2020 and December 31, 2019, please tell us
and disclose the results of your annual impairment tests of
goodwill, including the significant factors and assumptions used in
your analysis. Refer to ASC 350-20. Additionally, tell us how you
determined that the value of intangibles and other assets is
recoverable in light of the above factors. Refer to ASC
360-10-35.
Response:
The Company
respectfully acknowledges the Staff’s comment, and has
divided its response into two sections: (i) a description of the
Company’s annual impairment tests of goodwill, including the
significant factors and assumptions used, and (ii) the factors
behind the Company’s determination that the value of its
intangibles and other assets is recoverable despite the
Company’s history of and disclosure regarding expectation for
future operating losses.
The Company’s Annual Impairment Tests of
Goodwill. In accordance with ASC 350-20-35, goodwill is
tested for impairment at the Company’s reporting unit level
on an annual basis (December 31) and between annual tests if an
event occurs or circumstances change that would more likely than
not reduce the fair value of our reporting unit below its carrying
value. The Company considers its market capitalization and the
carrying value of assets and liabilities, including goodwill, as of
the testing date, when performing goodwill impairment
testing.
When conducting
the Company’s annual goodwill impairment assessment, we
initially perform a qualitative evaluation of whether it is more
likely than not that goodwill is impaired. In evaluating whether it
is more likely than not that the fair value of our reporting unit
is less than its carrying amount, we considered the guidance set
forth in ASC-350-20-35-3C, which requires an entity to assess
relevant events and circumstances, including macroeconomic
conditions, industry and market considerations, cost factors,
financial performance and other relevant events or circumstances.
From a qualitative standpoint, given the Company’s early
history of losses and negative cash flows from operating
activities, we concluded it was necessary to perform the
quantitative goodwill impairment test pursuant to ASC 350, and
compare the fair value of the Company’s reporting unit to its
carrying or book value as of testing date.
In performing
the goodwill impairment test, we compared the fair value of the
Company’s reporting unit to its carrying or book value to
determine if the fair value of the reporting unit exceeded its
carrying value as of December 31, 2020, in which case the standard
indicates that goodwill would not be impaired, and we would not be
required to perform any further testing.
Pursuant to
guidance set forth in ASC 350-20-35, the fair value of a reporting
unit refers to the price that would be received to sell the
reporting unit as a whole in an orderly transaction between market
participants at the measurement date. Further, quoted market prices
in active markets are considered to be the best evidence of fair
value and should be used as the basis for fair value measurement,
if available.
For this
impairment test, we utilized the Company’s market
capitalization (based on the closing price of the Company’s
common stock, multiplied by shares of common stock outstanding as
of the measurement date) for purposes of estimating the fair value
of the Company at December 31, 2020, as in management’s
estimate, our stock price was the best estimate of fair value of
the company’s single reporting unit available at the date of
testing. At December 31, 2020, we reported goodwill of $2.6
million.
The impairment
test was calculated as follows as of December 31,
2020:
|
|
|
|
Fair value of Reporting
Unit – December 31, 2020
|
$43,817,000
|
Carrying value of net
assets:
|
|
Current assets
|
9,367,000
|
Noncurrent assets including
goodwill
|
4,610,000
|
Current and noncurrent
liabilities
|
(3,037,000)
|
Carrying value of net
assets
|
10,940,000
|
Excess fair
value
|
$32,877,000
|
Based on the
results of the impairment test, the fair value of the
Company’s reporting unit exceeded its carrying value as
December 31, 2020 by approximately $32.9 million. As such, as of
December 31, 2020, we determined that, under the standard, there
was no indication of goodwill impairment as of December 31,
2020.
Factors Behind the Company’s Disclosure
Regarding the Recovery of the Value of Intangibles and Other
Assets. The Company respectfully advises the Staff that the
guidance set forth in ASC 360-10-35 was utilized by the Company in
determining whether the value of intangibles and other assets was
recoverable as of December 31, 2020. Specifically, we considered
the factors included in ASC 360-10-35-21, as well as estimated
undiscounted cash flow projections related to our intangible assets
as of December 31, 2020. At December 31, 2020, the Company’s
internal cash flow projections reflected cash flows sufficient to
recover the value of recorded intangible assets over the useful
life of the intangible assets, including break-even and
profitability forecast estimates within the estimated useful lives
of our recorded intangible assets as of December 31,
2020.
The Company
further advises the Staff that the Company has historically
included the language surrounding “expecting continued future
operating losses,” as a general conservative risk factor,
rather than as a contradictory statement to the Company’s
estimates of recoverability of intangible assets as contemplated by
ASC 360-10-35. Instead, the Company currently expects to be
profitable in the future with sufficient cash flows to recover
intangible assets as of December 31, 2020. In an effort to mitigate
the appearance of a contradictory statement, the Company intends to
revise the risk factor language in future periodic filings to
ensure that such language does not contradict estimates of
recoverability of intangible assets as of the applicable balance
sheet date, and include additional disclosures in the notes to the
financial statements in future filings to clarify the results of
our periodic analysis regarding the recoverability of intangible
assets as applicable.
Notes to Financial Statements
Note 2. Summary of Significant Accounting Policies, page
F-12
4.
We note
your disclosure that you operate in one segment. Please tell us the
factors used to identify your reportable segment, including the
basis of organization, and whether operating segments have been
aggregated into one reportable segment. See ASC 280-10-
50-21.
Response: The Company
respectfully acknowledges the Staff’s comment and advises the
Staff that the Company considered the factors outlined in ASC
280-10, including the information our Chief Operating Decision
Maker (“CODM”)
reviews, our business activities and our reporting structure, to
identify our reportable segment, as described below.
Per ASC
280-10-05-3, in connection with determining the Company’s
operating segments, we utilized the management approach which is
based on the way that management organizes the segments within the
public entity for making operating decisions and assessing
performance. Accordingly, we considered whether any of the
components of our business satisfied all of the following
characteristics required to be considered an operating
segment:
a.
It engages in business
activities from which it may recognize revenues and incur
expenses.
We generate
revenues and incur expenses from (i) advertising, for brands and
advertisers, and from the sale of content on our own network of
digital channels and our media and entertainment partner channels
and (ii) direct-to-consumer offers primarily comprised of digital
subscriptions. As such, the components of our operations under ASC
280 are our (1) advertising and sponsorship component, including
content sales component and (2) our direct-to-consumer
component.
b.
Its operating results are
regularly reviewed by the public entity’s chief operating
decision maker to make decisions about resources to be allocated to
the segment and assess its performance.
Identification of the CODM: Our CODM,
as contemplated under ASC 280, is our Chief Executive Officer
(“CEO”). The
CODM is responsible for the key operating decisions as described in
ASC 280.
Operating results: Our CODM reviews
operating results for the Company quarterly (quarter and
year-to-date information) on a consolidated basis and receives and
reviews the same financial package that is provided to and reviewed
by the Company’s audit committee and board of directors on a
quarterly basis. Consistent with the disaggregation of revenues
provided in the financial statements as required by ASC 606, the
quarterly financial statement package contains a disaggregation of
revenues by the advertising, content and direct-to-consumer
categories described above. Cost information included in the
financial package provided to the CODM and board of directors is
provided and reviewed in the aggregate, on a consolidated basis. As
such, operating results are regularly reviewed by the CODM on a
consolidated basis for purposes of making decisions about resources
to be allocated and assess performance.
Organizational Structure: The Company
is organized into three main functions: (1) Commercial Team,
responsible for revenues and business development; (2) Engineering,
and (3) Finance. The Commercial Team is led by our Chief Revenue
Officer (“CRO”), our Engineering team by
our Chief Technology Officer and Finance by our Chief Financial
Officer. These components of our senior leadership team report
directly to the CEO/CODM. The CRO is responsible for all revenue
related activities for the company.
The CODM meets
with the CRO weekly, and on an ad hoc basis to discuss commercial
team operations, business development, sales pipeline, sales
updates and other matters. Operating results are considered on a
consolidated basis periodically with the CRO for purposes of making
decisions about resources to be allocated to the segment and assess
its performance. Advertising revenues from traditional adverting
and sponsorships and content sales are reviewed, as well as
direct-to-consumer revenues with respect to our Minecraft digital
goods offer.
Budgeting: Cost budgets are prepared
and reviewed by our CODM on a consolidated basis.
Compensation: Incentive compensation
for the CODM’s direct reports is based on aggregated
consolidated results.
c.
Its discrete financial
information is available.
Discrete Financial Information:
Financial information is provided to the CODM on a consolidated
basis, including consolidated gross margin and operating expense.
The only financial information included in the financial packages
provided to the CODM that is disaggregated is revenue, which is
provided and reviewed based on the categories described above. It
is our understanding that, in accordance with the standard, the
review of only disaggregated revenue information is generally not
deemed to be sufficient for CODMs to assess overall performance and
allocate resources at a component level. Financial information is
assessed by our CODM for purposes of assessing performance and
allocating resources in the aggregate at a consolidated level. The
Company does not generate, and our CODM does review discrete
operating or balance sheet information for the individual
components identified.
Consideration of Quantitative
Thresholds. Direct-to-consumer revenues for the years ended
December 31, 2020 and 2019 were $159,000 and 33,000, respectively,
or 7% and 3%, of consolidated revenues, respectively. Further,
discreet financial information is not available for the
direct-to-consumer component for net loss from operations or total
assets, as individual component profit or loss and balance sheet
information is not prepared, presented or reviewed by the CODM for
purposes of making operating decisions and assessing performance.
However, given the early stage of our direct-to-consumer offerings,
it is anticipated that the direct-to-consumer component would not
meet the quantitative thresholds in ASC 280-10-50-12 for separate
presentation.
Based on the
analysis above, the Company has determined that it only has one
operating segment and one reportable segment.
5.
We note
that for the years ended December 31, 2020 and 2019, four customers
accounted for 49% and five customers accounted for 69% of revenue,
respectively. Please disclose whether the revenue generated by
these customers related to advertising and sponsorships, content,
or direct-to-consumer revenue.
Response: The Company
respectfully acknowledges the Staff’s comment and advises the
Staff that the revenue concentration disclosure for the years ended
December 31, 2020 and 2019 was comprised of the
following:
|
|
|
|
|
Advertising and
sponsorships
|
31%
|
69%
|
Content
|
18
|
-
|
Direct-to-consumer
|
-
|
-
|
|
49%
|
69%
|
The Company
appreciates that the aforementioned information may be helpful
disclosure to include in the Company’s periodic filings
moving forward. As such, the Company respectfully advises the Staff
that the Company intends to provide the additional disclosure
described above regarding the components of revenue concentration
on a prospective basis, beginning first with the Company’s
Quarterly Report on Form 10-Q for the period ending September 30,
2021 and in all subsequent quarterly and annual filings
thereafter.
We hope that
the foregoing has been responsive to the Staff’s comments. If
you have any questions or would like further information regarding
the foregoing, please do not hesitate to contact either myself at
(949) 903-5120 or Ms. Jessica Sudweeks of Disclosure Law Group, the
Company’s corporate and securities counsel, at (619)
272-7063.
Sincerely,
/s/ Clayton Haynes
Clayton
Haynes
Chief Financial
Officer
Super League
Gaming, Inc.
cc:
Ms. Ann Hand
Chief Executive
Officer
Super League Gaming,
Inc.
Ms. Jessica R.
Sudweeks
Partner
Disclosure Law
Group,
a Professional
Corporation