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, 2019
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.)
|
2906
Colorado Ave.
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 9, 2019, there were
8,569,922
shares of the registrant’s common stock,
$0.0001 par value, issued and outstanding.
T
A
BLE
O
F CONTENTS
|
|
|
Page
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
1
|
|||
|
|
|
|
|
|
|
18
|
||
|
|
|
|
|
|
|
34
|
||
|
|
|
|
|
|
|
34
|
||
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
35
|
||
|
|
|
|
|
|
|
35
|
||
|
|
|
|
|
|
|
55
|
||
|
|
|
|
|
|
|
55
|
||
|
|
|
|
|
|
|
55
|
||
|
|
|
|
|
|
|
55
|
||
|
|
|
|
|
|
|
55
|
||
PA
RT I
FINANCIAL INFORMATION
ITEM 1.
CONDENSED FINANCIAL
STATEMENTS
SUPER LEAGUE GAMING, INC.
CONDENSED BALANCE
S
HEETS
|
ASSETS
|
September
30,
2019
|
December 31,
2018
|
|
Current
Assets
|
(Unaudited)
|
|
|
Cash
|
$
12,586,000
|
$
2,774,000
|
|
Accounts
receivable
|
332,000
|
488,000
|
|
Prepaid expenses
and other current assets
|
1,146,000
|
487,000
|
|
Total current
assets
|
14,064,000
|
3,749,000
|
|
|
|
|
|
Property and
equipment, net
|
257,000
|
531,000
|
|
Intangible and
other assets, net
|
1,887,000
|
707,000
|
|
Goodwill
|
2,565,000
|
-
|
|
|
|
|
|
Total
assets
|
$
18,773,000
|
$
4,987,000
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts payable
and accrued expenses
|
$
1,454,000
|
$
813,000
|
|
Deferred
revenue
|
113,000
|
45,000
|
|
Convertible
debt and accrued interest, net
|
-
|
10,923,000
|
|
|
|
|
|
Total current
liabilities
|
1,567,000
|
11,781,000
|
|
|
|
|
|
Stockholders’
Equity (Deficit)
|
|
|
|
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; 8,569,922 and
4,610,109 shares issued and outstanding as of September 30, 2019
and December 31, 2018, respectively
|
18,000
|
14,000
|
|
Additional paid-in
capital
|
98,312,000
|
48,325,000
|
|
Accumulated
deficit
|
(81,124,000
)
|
(55,133,000
)
|
|
Total
stockholders’ equity (deficit)
|
17,206,000
|
(6,794,000
)
|
|
|
|
|
|
Total liabilities
and stockholders’ equity
|
$
18,773,000
|
$
4,987,000
|
See accompanying notes to condensed financial
statements
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF
O
PERATIONS
(Unaudited)
|
|
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
|
|
|
|
|
|
REVENUES
|
$
350,000
|
$
153,000
|
$
822,000
|
$
640,000
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
192,000
|
70,000
|
379,000
|
375,000
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
158,000
|
83,000
|
443,000
|
265,000
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
Selling, marketing
and advertising
|
215,000
|
327,000
|
687,000
|
996,000
|
|
Technology platform
development
|
638,000
|
567,000
|
2,030,000
|
1,682,000
|
|
General and
administrative
|
3,730,000
|
2,747,000
|
13,792,000
|
8,884,000
|
|
Total operating
expenses
|
4,583,000
|
3,641,000
|
16,509,000
|
11,562,000
|
|
|
|
|
|
|
|
NET
OPERATING LOSS
|
(4,425,000
)
|
(3,558,000
)
|
(16,066,000
)
|
(11,297,000
)
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
Accrued interest
expense
|
-
|
(212,000
)
|
(187,000
)
|
(311,000
)
|
|
Accretion of debt
discount
|
-
|
(1,239,000
)
|
(2,684,000
)
|
(1,537,000
)
|
|
Beneficial
conversion feature
|
-
|
-
|
(7,067,000
)
|
-
|
|
Other
|
8,000
|
-
|
13,000
|
2,000
|
|
Total other income
(expense)
|
8,000
|
(1,451,000
)
|
(9,925,000
)
|
(1,846,000
)
|
|
|
|
|
|
|
|
NET
LOSS
|
$
(4,417,000
)
|
$
(5,009,000
)
|
$
(25,991,000
)
|
$
(13,143,000
)
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders - basic and
diluted
|
|
|
|
|
|
Basic and diluted
loss per common share
|
$
(0.52
)
|
$
(1.09
)
|
$
(3.39
)
|
$
(2.85
)
|
|
Weighted-average
number of shares outstanding, basic and diluted
|
8,569,922
|
4,610,111
|
7,663,243
|
4,605,962
|
See accompanying notes to condensed financial
statements
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’
E
QUITY (DEFICIT)
(Unaudited)
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
Common stock (Shares)
|
|
|
|
|
|
Balance,
beginning of period
|
8,569,922
|
4,610,109
|
4,610,109
|
4,603,443
|
|
Initial
public offering of common stock, net of issuance costs (Note
7)
|
-
|
-
|
2,272,727
|
-
|
|
Automatic
conversion of convertible debt to common stock (Note
6)
|
-
|
-
|
1,475,164
|
-
|
|
Common
stock issued for Framerate Acquisition
|
-
|
-
|
134,422
|
-
|
|
Stock-based
compensation
|
-
|
-
|
10,833
|
6,666
|
|
Warrant
Exercises
|
-
|
-
|
66,667
|
-
|
|
Balance, end of period
|
8,569,922
|
4,610,109
|
8,569,922
|
4,610,109
|
|
|
|
|
|
|
|
Common stock (Amount):
|
|
|
|
|
|
Balance,
beginning of period
|
$
18,000
|
$
14,000
|
$
14,000
|
$
14,000
|
|
Initial
public offering of common stock, net of issuance costs (Note
7)
|
-
|
-
|
2,000
|
-
|
|
Automatic
conversion of convertible debt to common stock (Note
6)
|
-
|
-
|
2,000
|
-
|
|
Common
stock issued for Framerate Acquisition
|
-
|
-
|
-
|
-
|
|
Balance, end of period
|
$
18,000
|
$
14,000
|
$
18,000
|
$
14,000
|
|
|
|
|
|
|
|
Additional paid-in-capital:
|
|
|
|
|
|
Balance,
beginning of period
|
$
97,598,000
|
$
42,030,000
|
$
48,325,000
|
$
38,191,000
|
|
Initial
public offering of common stock, net of issuance costs (Note
7)
|
-
|
-
|
22,456,000
|
-
|
|
Automatic
conversion of convertible debt to common stock (Note
6)
|
-
|
-
|
13,791,000
|
-
|
|
Issuance
of warrants with convertible notes (Note 6)
|
-
|
3,055,000
|
-
|
5,206,000
|
|
Beneficial
conversion feature (Note 6)
|
-
|
-
|
7,067,000
|
-
|
|
Common
stock issued for Framerate Acquisition (Note 5)
|
-
|
-
|
1,000,000
|
-
|
|
Framerate
Earn-Out (Note 5)
|
-
|
-
|
454,000
|
-
|
|
Stock-based
compensation
|
714,000
|
817,000
|
5,199,000
|
2,505,000
|
|
Warrant
exercises
|
-
|
-
|
20,000
|
-
|
|
Balance,
end of period
|
$
98,312,000
|
$
45,902,000
|
$
98,312,000
|
$
45,902,000
|
|
|
|
|
|
|
|
Accumulated Deficit:
|
|
|
|
|
|
Balance,
beginning of period
|
(76,707,000
)
|
(42,641,000
)
|
(55,133,000
)
|
(34,507,000
)
|
|
Net
loss
|
(4,417,000
)
|
(5,009,000
)
|
(25,991,000
)
|
(13,143,000
)
|
|
Balance,
end of period
|
(81,124,000
)
|
(47,650,000
)
|
(81,124,000
)
|
(47,650,000
)
|
|
Total
stockholders’ equity (deficit)
|
$
17,206,000
|
$
(1,734,000
)
|
$
17,206,000
|
$
(1,734,000
)
|
See accompanying notes to condensed financial
statements
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF CASH
F
LOWS
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
$
(25,991,000
)
|
$
(13,143,000
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
and amortization
|
657,000
|
791,000
|
|
Stock-based
compensation
|
5,266,000
|
2,451,000
|
|
Amortization
of discount on convertible notes (Note 6)
|
2,684,000
|
1,537,000
|
|
Beneficial
conversion feature (Note 6)
|
7,067,000
|
-
|
|
In-kind
contribution of services
|
-
|
481,000
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
171,000
|
4,000
|
|
Prepaid
expenses and other current assets
|
(852,000
)
|
(362,000
)
|
|
Accounts
payable and accrued expenses
|
601,000
|
50,000
|
|
Deferred
revenue
|
68,000
|
-
|
|
Accrued
interest on convertible notes
|
187,000
|
311,000
|
|
Net cash used in operating activities
|
(10,142,000
)
|
(7,880,000
)
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Cash
paid for acquisition of Framerate (Note 5)
|
(1,491,000
)
|
-
|
|
Purchase
of property and equipment
|
(56,000
)
|
(190,000
)
|
|
Capitalization
of software development costs
|
(839,000
)
|
(192,000
)
|
|
Acquisition
of other intangible assets
|
(138,000
)
|
(67,000
)
|
|
Net cash used in investing activities
|
(2,524,000
)
|
(449,000
)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
from issuance of common stock, net of issuance costs
|
22,458,000
|
-
|
|
Proceeds
from convertible note payable, net
|
-
|
12,611,000
|
|
Proceeds
from common stock purchase warrant exercises
|
20,000
|
-
|
|
Net cash provided by financing activities
|
22,478,000
|
12,611,000
|
|
|
|
|
|
INCREASE IN CASH
|
9,812,000
|
4,282,000
|
|
Cash –
beginning of
period
|
2,774,000
|
1,709,000
|
|
Cash
– end of period
|
$
12,586,000
|
$
5,991,000
|
|
|
|
|
|
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES
|
|
|
|
Automatic c
onversion of convertible
debt to common stock (Note 6)
|
$
13,793,000
|
$
3,000,000
|
|
Issuance of common stock for
Framerate Acquisition (Note 5)
|
$
1,000,000
|
$
-
|
|
Common
stock purchase warrants – discount on convertible
debt
|
$
-
|
$
5,207,000
|
|
Common
stock issued for prepaid services
|
$
-
|
$
72,000
|
|
|
|
|
See accompanying notes to condensed financial
statements
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 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. In addition to providing premium experiences by operating
city-vs-city amateur esports leagues and producing thousands of
live competitive and social gaming experiences around the country,
the Super League Network features multiple forms of
content celebrating the love of play via social media, live
streaming, video-on-demand, and website-based
offerings.
As a
content producer with a dedicated esports studio, Super League
publishes live streaming and on-demand video content on all major
platforms including YouTube, Twitch and
Instagram. In addition, with exclusive
proprietary platforms like
Minehut, the avid Minecraft
community,
Framerate, one of the largest independent
social video networks in esports and gaming,
and through our partnerships with high-profile venue
owners such as Topgolf, Cinemark Theatres and independent
fast-casual restaurants, Super League is committed to supporting
the development of local, grassroots player communities all while
providing a global framework for competition and community
engagement.
Super
League was incorporated on October 1, 2014 as Nth Games, Inc. under
the laws of the State of Delaware and changed its name to Super
League Gaming, Inc. on June 15, 2015. We are an “emerging
growth company” as defined by the Jumpstart Our Business
Startups Act of 2012, as amended.
Initial Public Offering
On February 27, 2019, Super League completed its initial public
offering (“IPO”) of shares of its common stock,
pursuant to which an aggregate of 2,272,727 shares were offered and
sold at a public offering price of $11.00 per share, resulting in
net proceeds of $22,458,000 after deducting underwriting discounts,
commissions and offering costs of $2,542,000. Concurrent with the
closing of the IPO on February 27, 2019 (the “IPO Closing
Date”), in accordance with the related agreements,
all
outstanding principal and interest of the 9.00% convertible notes
outstanding, totaling $13,793,000, was automatically converted into
1,475,164 shares of the Company’s common stock at a
conversion price of $9.35.
|
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, 2018 included in our Registration Statement on
Form S-1, declared effective by the Securities and Exchange
Commission on February 25, 2019 (File No.
333-229144).
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, 2019, 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, 2019 are not necessarily
indicative of the results to be expected for the entire fiscal
year.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates. The Company believes that, of the significant accounting
policies described herein, the accounting policies associated with
revenue recognition, the valuation of convertible notes and related
common stock purchase warrants (hereinafter,
“warrants”) discussed at Note 6, stock-based
compensation expense, accounting for business combinations as
discussed at Note 5, income taxes 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
interim condensed financial statements, the Company incurred net
losses of $26.0 million and $13.1 million during the nine months
ended September 30, 2019 and 2018, respectively, and had an
accumulated deficit of $81.1 million as of September 30, 2019.
Noncash expenses (excluding depreciation and amortization of fixed
and intangible assets, respectively) included in net loss,
primarily comprised of noncash interest charges and stock-based
compensation, totaled $15.2 million and $4.8 million for the nine
months ended September 30, 2019 and September 30, 2018,
respectively. Net cash used in operating activities totaled $10.1
million and $7.9 million, for the nine months ended September 30,
2019 and September 30, 2018, respectively.
As of September 30, 2019, the Company had cash and cash equivalents
of approximately $12.6 million. The Company has 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. 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.
On February 27, 2019, we completed our
IPO, pursuant to which we issued and sold an
aggregate of 2,272,727 shares of our common stock at a public
offering price of $11.00 per share
pursuant to a
registration statement on Form
S-1, declared effective by the Securities and
Exchange Commission on February 25, 2019 (File No. 333-229144). We
received net proceeds of approximately $22,458,000 after
underwriting discounts, commissions and other offering costs of
$2,542,000.
The principal purposes of the IPO was to obtain additional capital
to support our operations, to create a public market for our common
stock and to facilitate our future access to the public equity
markets. We have and continue to use the net proceeds received from
the IPO for working capital and 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 that may complement our business and or accelerate
our growth. The amounts and timing of our actual expenditures,
including expenditure related to sales and marketing and product
development will depend on numerous factors, including the status
of our product development efforts, our sales and marketing
activities, expansion internationally, the amount of cash generated
or used by our operations, competitive pressures and other
factors.
Concurrent with the closing of the IPO on February 27, 2019, in
accordance with the related agreements, all outstanding
principal and interest for the 9.00% convertible notes outstanding,
totaling $13,793,000, was automatically converted into 1,475,164
shares of the Company’s common stock at a conversion price of
$9.35.
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)
brand and media sponsorships, (ii) Platform-As-A-Service
arrangements, and (iii) direct to consumer offers including
tournament fees for participation in our physical and online
multiplayer gaming experiences, digital subscriptions and
merchandise sales.
Brand and Media Sponsorships.
The Company generates brand and media
sponsorship revenues primarily from sales of various forms of
sponsorships and promotional campaigns for its online platforms and
from sponsorship at its in-person esports experiences. Brand and
media sponsorship 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. Brand and media
sponsorship arrangements typically include contract terms for time
periods ranging from several weeks to multi-year
arrangements.
For
brand and media 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).
Platform-As-A-Service.
The
Company generates Platform-as-a-Service (“PaaS”)
revenues pursuant to arrangements with brand and media partners,
retail venues, game publishers and broadcasters that allow its
partners to run amateur esports experiences, and or capture
specifically curated gameplay content that is customized for its
partners’ distribution channels, leveraging the flexibility
of, and powered by the Super League gaming and content technology
platform. Revenue for PaaS 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. Revenue for PaaS arrangements
that include
performance obligations satisfied over time whereby customers
simultaneously receive and consume the benefits under the agreement
as the Company satisfies its performance obligations over the
applicable contract term, 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).
Direct to Consumer Revenue.
Direct to consumer revenues include tournament
fees, digital subscriptions and merchandise. Direct to consumer
revenues have primarily consisted of the sale of season passes to
gamers for participation in Super League’s in-person and or
online multiplayer gaming experiences. For the applicable periods
presented herein, season passes for gaming experiences were
primarily comprised of multi-week packages and also include
one-time, single experience admissions. For the three and nine
months ended September 30, 2019, digital subscription revenues
include revenues related to the Company’s Minehut asset
acquisition in June 2018, which provides various Minecraft server
hosting services on a subscription basis to the Minecraft gaming
community.
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.
For the
three and nine months ended September 30, 2019, 45% and 43% of
revenues were recognized at a single point in time, and 55% and 57%
of revenues were recognized over time, respectively. For the three
and nine months ended September 30, 2018, 41% and 20% of revenues
were recognized at a single point in time, and 59% and 80% 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 expenses for the three and nine
months ended September 30, 2019 were $81,000 and $270,000,
respectively, and are included in selling, marketing and
advertising expenses in the condensed statements of operations.
Advertising expenses for the three and nine months ended September
30, 2018 were $163,000 and $362,000, respectively.
Technology Platform Development Costs
Technology
platform development costs include (i) allocated personnel costs,
including salaries, 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, and (ii) the amortization of capitalized
internal use software costs primarily comprised of capitalized
costs for internal and third-party contract software development
and engineering resources engaged in developing and enhancing our
proprietary gaming and content technology platform.
Deferred Financing Costs
Specific
incremental costs directly attributable to a proposed or actual
offering of securities or debt are deferred and charged against the
gross proceeds of the financing. In the event that the proposed or
actual financing is not completed, or is deemed not likely to be
completed, such costs are expensed in the period that such
determination is made. Deferred costs related to proposed offerings
of securities totaled $0 and $154,354 at September 30, 2019 and
December 31, 2018, respectively. Deferred financing costs, if any,
are included in other current assets in the condensed balance
sheet. Deferred financing costs charged against gross proceeds in
connection with the close of the Company’s IPO totaled
$517,000.
Property and Equipment
Property
and equipment are recorded at cost. Major additions and
improvements that materially extend useful lives of property and
equipment are capitalized. Maintenance and repairs are charged
against the results of operations as incurred. When these assets
are sold or otherwise disposed of, the asset and related
depreciation are relieved, and any gain or loss is included in the
statements of operations for the period of sale or disposal.
Depreciation and amortization are computed on a straight-line basis
over the estimated useful lives of the assets, typically over a
three- to five-year period.
Intangible Assets
Intangible
assets primarily consist of (i) internal-use software development
costs, (ii) domain name, copyright and patent registration costs,
(iii) commercial licenses and branding rights 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.
Goodwill
Goodwill
represents the excess of the purchase price of the acquired
business over the acquisition date fair value of the net assets
acquired. Goodwill is tested for impairment at the reporting unit
level (operating segment or one level below an operating segment)
on an annual basis (October 31) and between annual tests if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying
value. The Company considers its market capitalization and the
carrying value of its assets and liabilities, including goodwill,
when performing its goodwill impairment test. When conducting its
annual goodwill impairment assessment, the Company initially
performs a qualitative evaluation of whether it is more likely than
not that goodwill is impaired. If it is determined by a qualitative
evaluation that it is more likely than not that goodwill is
impaired, the Company then applies a two-step impairment test. The
two-step impairment test first compares the fair value of the
Company’s reporting unit to its carrying or book value. If
the fair value of the reporting unit exceeds its carrying value,
goodwill is not impaired, and the Company is not required to
perform further testing. If the carrying value of the reporting
unit exceeds its fair value, the Company determines the implied
fair value of the reporting unit’s goodwill and if the
carrying value of the reporting unit’s goodwill exceeds its
implied fair value, then an impairment loss equal to the difference
is recorded in the statement of operations. The Company operates in
one reporting segment.
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 accounts
for forfeitures of awards as they occur.
Grants
of equity-based awards (including warrants) to non-employees in
exchange for consulting or other services are accounted for using
the fair value of the consideration received (i.e., the value of
the goods or services) or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Noncash stock-based compensation expense, included in general and
administrative expense, for the periods presented was comprised of
the following:
|
|
Three Months Ended
September
30,
|
Nine Months Ended
September
30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
Stock
options
|
$
374,000
|
$
512,000
|
$
3,004,000
|
$
1,741,000
|
|
Warrants
|
263,000
|
229,000
|
1,918,000
|
682,000
|
|
Restricted
stock units
|
75,000
|
23,000
|
311,000
|
28,000
|
|
Earn-out
compensation expense (Note 5)
|
25,000
|
-
|
33,000
|
-
|
|
Total
noncash stock compensation expense
|
$
737,000
|
$
764,000
|
$
5,266,000
|
$
2,451,000
|
Noncash stock-based compensation expense for the three and 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, or 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, 2019, five customers
accounted for 90% and three customers accounted for 49% of
revenues, respectively. For the three and nine months ended
September 30, 2018, two and four customers accounted for 72% and
77% of revenues, respectively.
At
September 30, 2019 and December 31, 2018, four and three customers
accounted for 87% and 96% of accounts receivable. At September 30,
2019 and December 31, 2018, one vendor accounted for 46% and three
vendors accounted for 43% of accounts payable,
respectively.
Segment Information
The
Company operates in one segment.
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 and
warrants for the periods presented have been excluded from the
computation of diluted loss per share because the effect of
inclusion would have been anti-dilutive.
Income Taxes
Income
taxes are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
recognized in the Company’s financial statements or income
tax returns. A valuation allowance is established to reduce
deferred tax assets if all, or some portion, of such assets will
more than likely not be realized, or if it is determined that there
is uncertainty regarding future realization of such
assets.
The
provision for income taxes for interim periods is determined using
an estimate of Super League’s annual effective tax rate,
adjusted for discrete items, if any, that are considered in the
relevant period. Each quarter, the Company updates the estimate of
the annual effective tax rate, and if the estimated tax rate
changes, a cumulative adjustment is recorded.
On
December 22, 2017, new U.S. federal tax legislation was enacted
that significantly changed the U.S. federal income taxation of U.S.
corporations, including by reducing the U.S. corporate income tax
rate from 35% to 21%, revising the rules governing net operating
losses and foreign tax credits, and introducing new anti-base
erosion provisions. Many of the changes were effective immediately,
without any transition periods or grandfathering for existing
transactions. The legislation is unclear in many respects and could
be subject to potential amendments and technical corrections, as
well as interpretations and implementing regulations by the U.S.
Department of the Treasury and the Internal Revenue Service
(“IRS”), any of which could decrease or increase
certain adverse impacts of the legislation. In addition, it is
unclear how these U.S. federal income tax changes will affect state
and local taxation, which often uses federal taxable income as a
starting point for computing state and local tax
liabilities.
The new
legislation reduced the corporate income tax rate from 35% to 21%
effective January 1, 2018. As a result, all deferred income tax
assets and liabilities, including net operating losses, have been
measured using the new rate under and are reflected in the
valuation of these assets as of December 31, 2018 and 2017. As a
result, as of December 31, 2017, the value of our deferred tax
assets was reduced by $4,278,626 and the related valuation
allowance was reduced by the same amount. Given the full valuation
allowance provided for net deferred tax assets for the periods
presented herein, the change in tax law did not have a material
impact on the Company’s financial statements provided herein.
There may be additional tax impacts identified in subsequent
periods throughout the Company’s fiscal year ending December
31, 2019 in accordance with subsequent interpretive guidance issued
by the SEC or the IRS. Further, there may be other material adverse
effects resulting from the legislation that we have not yet
identified. No estimated tax provision has been recorded for tax
attributes that are incomplete or subject to change.
Fair Value Measurements
Fair value is defined as the exchange price that would be received
from selling an asset or paid to transfer a liability in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the
measurement date. The Company measures financial assets and
liabilities at fair value at each reporting period using a fair
value hierarchy which requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs when
measuring fair value. A financial instrument’s classification
within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. Three
levels of inputs may be used to measure fair value:
Level 1.
Quoted prices in active markets for identical
assets or liabilities.
Level 2
. Quoted prices for similar assets and
liabilities in active markets or inputs other than quoted prices
which are observable for the assets or liabilities, either directly
or indirectly through market corroboration, for substantially the
full term of the financial instruments.
Level 3.
Unobservable inputs which are
supported by little or no market activity and which are significant
to the fair value of the assets or liabilities.
The fair value of accounts receivable and other current assets
approximated their carrying value at the date of acquisition.
Acquired intangible assets and the Earn-Out were valued using Level
3 inputs.
Recent Accounting Guidance
Recent Accounting Pronouncements - Recently Adopted.
In May 2014, the FASB issued a new accounting standard update
(“ASU”) addressing revenue from contracts with
customers, which clarifies existing accounting literature relating
to how and when a company recognizes revenue. Under the standard, a
company will recognize revenue when it 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 doing so, the Company is required to use
more judgment and make more estimates in connection with the
accounting for revenue contracts with customers than under previous
guidance. Such areas may include: (i) identifying performance
obligations in the contract, (ii) estimating the timing of
satisfaction of performance obligations, (iii) determining whether
a promised good or service is distinct from other promised goods or
services, including whether the customer can benefit from the good
or service on its own and whether the promise to transfer a good or
service is separately identifiable from other promises in the
contract, (iv) evaluating whether performance obligations are
satisfied at a point in time or over time, (v) allocating the
transaction price to separate performance obligations, and (vi)
determining whether contracts contain a significant financing
component.
The Company used the modified retrospective method of adoption,
which would require the cumulative effect of initially applying the
new revenue standard as an adjustment to the opening balance of
retained earnings on January 1, 2019. Comparative prior year
periods would not be adjusted. The new accounting standard was
applied to all contracts at the date of initial application. There
was no cumulative effect of applying the new revenue standard to
contracts executed in prior periods. As such, the adoption of the
new accounting standard had no impact of on the balance sheet and
statement of operations in the current or prior
periods.
Recent Accounting Pronouncements – Not Yet
Adopted.
In
February 2016, the FASB issued an ASU that requires lessees to
present right-of-use assets and lease liabilities on the balance
sheet. The new guidance is to be applied using a modified
retrospective approach at the beginning of the earliest comparative
periods in the financial statements and is effective for fiscal
years beginning after December 15, 2019 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.
|
PROPERTY AND EQUIPMENT
|
Property
and equipment consisted of the following for the periods
presented:
|
|
September 30,
2019
|
December 31,
2018
|
|
|
(Unaudited)
|
|
|
Furniture
and fixtures
|
$
332,000
|
$
297,000
|
|
Computer
hardware
|
3,126,000
|
3,105,000
|
|
|
3,458,000
|
3,402,000
|
|
Less:
accumulated depreciation
|
(3,201,000
)
|
(2,871,000
)
|
|
Property and
equipment, net
|
$
257,000
|
$
531,000
|
Depreciation
expense for property and equipment was $38,000 and $330,000 for the
three and nine months ended September 30, 2019, respectively.
Depreciation expense for property and equipment was $190,000 and
$620,000 for the three and nine months ended September 30, 2018,
respectively.
|
4.
|
INTANGIBLE AND OTHER ASSETS
|
Intangible
and other assets consisted of the following for the periods
presented:
|
|
September
30,
2019
|
December
31,
2018
|
|
|
(Unaudited)
|
|
|
Capitalized
software development costs
|
$
2,122,000
|
$
1,281,000
|
|
Licenses
|
340,000
|
-
|
|
Domain
|
70,000
|
68,000
|
|
Trade name (Note
5)
|
189,000
|
-
|
|
Copyrights and
other
|
260,000
|
126,000
|
|
|
2,981,000
|
1,475,000
|
|
Less: accumulated
amortization
|
(1,094,000
)
|
(768,000
)
|
|
Intangible and
other assets, net
|
$
1,887,000
|
$
707,000
|
Amortization
expense totaled $134,000 and $326,000 for the three and nine months
ended September 30, 2019, respectively. Amortization expense
totaled $64,000 and $171,000 for the three and nine months ended
September 30, 2018, respectively. Future amortization expense of
intangible and other assets is expected to be as
follows:
For the
years ending December 31:
|
Remainder of
2019
|
$
161,000
|
|
2020
|
625,000
|
|
2021
|
557,000
|
|
2022
|
252,000
|
|
2023
|
143,000
|
|
Thereafter
|
149,000
|
|
Total
|
$
1,887,000
|
On September 23, 2019, the Company and ggCircuit,
LLC (“ggCircuit”), an
esports services company that provides gaming
center management software solutions and other esports
offerings,
entered into an
expanded commercial partnership agreement
(“Expanded Agreement”) pursuant to
which
Super League will
become the primary consumer-facing brand within
ggCircuit’s
B2B
gaming center
software
platform.
ggCircuit’s
software platform is a B2B platform and B2C application created and
owned by ggCircuit, which is licensed and distributed to owners and
operators of video gaming centers throughout the
world.
In consideration for the rights granted by ggCircuit to Super
League, Super League will pay an upfront fee of $340,000 and
quarterly fees over the term of the Agreement ranging from $0 to
$150,000, based on predetermined contractual revenue levels.
Pursuant to the terms and conditions of the Expanded Agreement,
revenues generated in connection with applicable activities under
the Expanded Agreement will be shared between Super League and
ggCircuit based on contractual revenue sharing percentages. The
initial term of the Expanded Agreement commences on October 1,
2019, the effective date and concludes on the fifth anniversary of
the effective date, subject to certain automatic renewal
provisions. The upfront fee is included as "Licenses" in intangible
assets and other assets, net (and accrued liabilities), in the
accompanying balance sheet and will be amortized over the initial
term of the Expanded Agreement of five years, commencing October 1,
2019.
|
5.
|
AQUISITION OF FRAMERATE, INC.
|
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”).
The Acquisition was approved by the board of directors of each of
the Company and Framerate, and was approved by the stockholders of
Framerate. Transaction costs incurred relating to this acquisition
were not material for the three and nine months ended September 30,
2019. The acquisition of Framerate expands the Company’s
digital programming footprint and enhances the Company’s
ability to provide value to its gaming and spectator communities
through multiple forms of engagement.
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.
The Company has determined that the Acquisition constitutes a
business acquisition as defined by Accounting Standards
Codification (“ASC”) 805,
Business
Combinations
. Accordingly, the
assets acquired and liabilities assumed in the transaction were
recorded at their estimated acquisition date fair values, while
transaction costs associated with the acquisition were expensed as
incurred pursuant to the purchase method of accounting in
accordance with ASC 805. Super League’s preliminary
purchase price allocation was based on an evaluation of the
appropriate fair values and represents management’s best
estimate based on available data. Fair values are determined based
on the requirements of ASC 820,
Fair Value Measurements and
Disclosures
(“ASC
820”).
The Company hired the former Chief Executive of Framerate
(“Framerate Executive”), who was also a selling
shareholder of Framerate. Pursuant to the provisions of the
Earn-Out included in the Merger Agreement, in the event that the
Framerate Executive is terminated for cause or resigns from his
employment with the Company at any time on or before the second
anniversary of the Effective Date, and any such resignation is
without “Good Reason” as such term is defined in his
employment agreement, then the maximum amount of any portion of the
Earn-Out that has not yet been earned as of the date of resignation
shall be reduced by 44.0164%. Under ASC 805, a contingent
consideration arrangement in which the payments are automatically
forfeited if employment terminates is considered to be compensation
for post-combination services, and not acquisition consideration.
As such approximately 44% of the estimated fair value of the
Earn-Out, or $200,000, is accounted for as deferred compensation
expense and being amortized in the statement of operations over the
two-year period ending on the second anniversary of the Effective
date. Noncash compensation expense related to the portion of the
Earn-Out treated as compensation for the three and nine months
ended September 30, 2019 was $25,000 and $33,000. The portion of
the Earn-Out included as consideration was $254,000.
The
Earn-Out arrangement does not meet the liability classification
criteria outlined in ASC 480, “Distinguishing Liabilities
from Equity,” and is both (i) indexed to the Company’s
own shares and (ii) classified in shareholders’ equity in the
accompanying condensed balance sheet. Equity-classified contingent
consideration is measured initially at fair value on the
acquisition date and is not remeasured subsequent to initial
recognition. As such, the initial value recognized for the Earn-Out
on the acquisition date is not adjusted for changes in the fair
value of the Earn-Out as of any future settlement date. Subsequent
differences between the estimated fair value of the Earn-Out
recorded at the acquisition date and the actual amount of Earn-Out
paid based on actual performance will be reflected as a charge or
credit, as applicable, in the statement of operations.
The following table summarizes the fair value of purchase price
consideration paid to acquire Framerate:
|
|
Amount
|
|
|
|
|
Cash
consideration at closing
|
$
1,515,000
|
|
Equity
consideration at closing
|
1,000,000
|
|
Fair value of
Earn-Out shares
|
254,000
|
|
Total
|
$
2,769,000
|
The purchase price allocation is based upon an estimate of the fair
value of the assets acquired and the liabilities assumed by the
Company in connection with the acquisition of Framerate, as
follows:
|
|
Amount
|
|
|
|
|
Accounts
receivable
|
$
15,000
|
|
Intangible assets -
trade name
|
189,000
|
|
Goodwill
|
2,565,000
|
|
Total
purchase price
|
$
2,769,000
|
The identifiable intangible asset acquired, totaling $189,000, was
comprised of Framerate’s trade name with an estimated useful
life of approximately five years, and is included in intangible and
other assets, net in the condensed balance sheet. The trade name
intangible asset is being amortized over the estimated useful life
on a straight-line basis. Amortization expense for the three and
nine months ended September 30, 2019 was $3,000 and $10,000
respectively.
Management is responsible for determining the fair value of the
identifiable intangible assets acquired as of the Effective Date.
Management considered a number of factors, including reference to
an analysis under ASC 805 solely for the purpose of allocating the
purchase price to the assets acquired.
The fair values of the acquired intangible asset,
as described above, was determined using the following
methods:
|
Description
|
|
Valuation Method
|
|
Valuation Method Description
|
|
Assumptions
|
|
Trade Name
|
|
Relief-from-Royalty method under the income approach
|
|
Under the Relief-from-Royalty method, the royalty savings is
calculated by estimating a reasonable royalty rate that a third
party would negotiate in a licensing agreement. Such royalties are
most commonly expressed as a percentage of total revenue involving
a trade name.
|
|
Useful life: 5 years; Royalty Rate: 05%; Discount Rate:
50%
|
|
|
|
|
|
|
|
|
|
Earn-Out
|
|
Scenario Based Model
|
|
The payoff structure was determined to be linear and the Earn-Out
is payable within two years. Revenue scenarios were estimated and a
probability for each scenario based on the likelihood of achieving
the forecasted revenues was estimated. The estimated payments from
the scenarios were then discounted based on the Company's credit
risk and the related risk-free rate. The value per share was then
adjusted for the time period through the payout date. The option
methodology employed was the Black-Scholes Option
Model.
|
|
Volatility: 75% - 100%; Term 1 -2 years; Risk Free Rate 2.21% -
1.95%;
|
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.
|
6.
|
CONVERTIBLE NOTES PAYABLE
|
In
February through April 2018, the Company issued 9.00% secured
convertible promissory notes with a collective face value of
$3,000,000 (the “Initial 2018 Notes”). The Initial 2018
Notes (i) accrued simple interest at the rate of 9.00% per annum,
(ii) matured on the earlier of December 31, 2018 or the close of a
$15,000,000 equity financing (“Qualifying Equity
Financing”) by the Company, and (iii) all outstanding
principal and accrued interest was automatically convertible into
equity or equity-linked securities sold in a Qualifying Equity
Financing based upon a conversion rate equal to (x) a 10% discount
to the price per share of a Qualifying Equity Financing, with (y) a
floor of $10.80 per share. In addition, the holders of the Initial
2018 Notes were collectively issued warrants to purchase
approximately 55,559 shares of common stock, at an exercise price
of $10.80 per share and a term of five years (the “Initial
2018 Warrants”).
In May
through August 2018, the Company issued additional 9.00% secured
convertible promissory notes with a collective face value of
$10,000,000 (the “Additional 2018 Notes”). In May 2018,
all of the Initial 2018 Notes and related accrued interest,
totaling $3,056,000, were converted into the Additional 2018 Notes,
resulting in an aggregate principal amount of $13,056,000
(hereinafter collectively, the “2018 Notes”). The
holders of the converted Initial 2018 Notes retained their
respective Initial 2018 Warrants.
The
2018 Notes (i) accrued simple interest at the rate of 9.00% per
annum, (ii) matured on the earlier of the closing of an initial
public offering of the Company’s common stock on a national
securities exchange or April 30, 2019, and (iii) all outstanding
principal and accrued interest was automatically convertible into
shares of common stock upon the closing of an IPO at the lesser of
(x) $10.80 per share or (y) a 15% discount to the price per share
of the IPO. In addition, the holders of the 2018 Notes were
collectively issued 1,396,420 warrants to purchase common stock
equal to 100% of the aggregate principal amount of the 2018 Notes
divided by $9.35 per share (the “2018 Warrants”). The
2018 Warrants are exercisable for a term of five years, commencing
on the close of an IPO, at an exercise price of $9.35 and are
callable at the election of the Company at any time following the
closing of an IPO. The 2018 Notes are secured by a security
interest in all of the assets, tangible and intangible, of the
Company.
The
proceeds from the sale of the 2018 Notes, the 2018 Warrants and the
Initial 2018 Warrants, were allocated to the instruments based on
the relative fair values of the convertible debt instrument without
the warrants and of the warrants themselves at the time of
issuance. The portion of the proceeds, totaling $5,933,000
allocated to the 2018 Warrants, was accounted for as a discount to
the debt, with the offsetting credit to additional paid-in capital.
The remainder of the proceeds were allocated to the convertible
debt instrument portion of the transaction. The resulting debt
discount is amortized over the period from issuance to April 30,
2019, the stated maturity date of the debt.
Debt
issuance costs were comprised of $389,000 of cash commissions and
warrants with a fair value of $223,000, paid and issued,
respectively, to third-parties in connection with the debt
financing, and are reflected as a discount to the debt instrument,
net of accumulated amortization, in the December 31, 2018 balance
sheet. Debt issuance costs are amortized over the term of the debt
as interest expense in the statement of operations.
Concurrent
with the closing of the IPO on February 27, 2019, all outstanding
principal and accrued interest outstanding under the 2018 Notes
totaling $13,793,000 was automatically converted into 1,475,164
shares of the Company’s common stock at a conversion price
per share of $9.35. As a result of the automatic conversion of the
2018 Notes and the application of conversion accounting, the
Company recorded an immediate charge to interest expense of
$1,384,000 for the nine months ended September 30, 2019,
representing the write-off of the unamortized balance of
debt discounts associated with the 2018 Warrants and cash
commissions and warrants issued to third parties. Unamortized debt
discounts at September 30, 2019 and December 31, 2018 totaled $0
and $2,684,000, respectively.
The
non-detachable conversion feature embedded in the 2018 Notes
provides for a conversion rate that is below market value at the
commitment date, and therefore, represents a beneficial conversion
feature (“BCF”). The BCF is generally recognized
separately at issuance by allocating a portion of the debt proceeds
equal to the intrinsic value of the BCF to additional paid-in
capital. The resulting convertible debt discount is recognized as
interest expense using the effective yield method. The BCF is
measured using the commitment date stock price. However, the
conversion feature associated with the 2018 Notes was not
exercisable until the consummation of an initial public offering by
the Company of its common stock, and therefore, was not required to
be recognized in earnings until the IPO related contingency was
resolved, which occurred on the IPO Closing Date. The commitment
date is the IPO Closing Date and the commitment date stock price
was $11.00 per share. The intrinsic value of the BCF on the IPO
Closing Date, which was limited to the net proceeds allocated to
the debt on a relative fair value basis, was approximately
$7,067,000, and is reflected as additional interest expense in the
condensed statement of operations for the nine months ended
September 30, 2019.
|
7.
|
STOCKHOLDERS’ EQUITY
|
Initial Public Offering
On February 27, 2019, Super League completed its initial public
offering (“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. Concurrent with the closing of the
IPO on February 27, 2019 (the “IPO Closing Date”), in
accordance with the related agreements,
all outstanding
principal and interest for the 9.00% convertible notes outstanding,
totaling $13,793,000, was automatically converted into 1,475,164
shares of the Company’s common stock at a conversion price of
$9.35.
Super League has and continues to use the net proceeds received
from the offering for working capital and general corporate
purposes,
including sales and
marketing activities, product development and capital expenditures.
Super League may also use a portion of the net proceeds for the
acquisition of, or investment in, technologies, solutions or
businesses that may compliment the Company’s business and or
accelerate the Company’s growth.
Upon closing of the IPO, 83,333 options and 125,000 warrants
previously granted to the CEO (with an average grant date fair
value of $8.50) became fully vested.
As a result, the
Company recorded an additional $1,770,000 of stock-based
compensation during the nine months ended September 30,
2019.
Pursuant to the related underwriting agreement, in connection with
the completion of the IPO, for the purchase price of $50.00, the
Company issued a warrant to purchase shares of our common stock
equal to 3.0% of the shares sold in the IPO, or 68,182 shares, at
an exercise price of $11.00 per share (the
“Underwriters’ Warrants”). The
Underwriters’ Warrants are exercisable during the period
commencing from the date of the close of the IPO and ending five
years from the closing date of the IPO. The Underwriters’
Warrants represent additional noncash offering costs, with an
estimated grant date fair value of $547,000, which was reflected in
additional-paid-in capital when issued and as a corresponding
offering cost in the condensed statement of shareholders equity for
the three and nine months ended September 30, 2019.
The fair
value of the Underwriters’ Warrant was estimated on February
27, 2019, the grant date, using the Black Scholes-Merton option
pricing model and the following weighted-average assumptions: (i)
volatility of 95%, (ii) risk-free interest rate of 2.5%, and (iii)
expected term of five years.
Reverse Stock Split
On
February 8, 2019, the Company filed an amendment to the
Company’s amended and restated certificate of incorporation
to effect a reverse split of shares of the Company’s common
stock on a one-for-three basis (the “Reverse Stock
Split”). All references to common stock, warrants to purchase
common stock, options to purchase common stock, early exercised
options, restricted stock, share data, per share data and related
information contained in the financial statements have been
retrospectively adjusted to reflect the effect of the Reverse Stock
Split for all periods presented. No fractional shares were issued
in connection with the Reverse Stock Split. Any fractional shares
resulting from the Reverse Stock Split will be rounded down to a
whole share, and any effected stockholders will receive a cash
payment equal to the value of such fractional shares.
In-Kind Contribution of Services
In June
2017, the Company entered into an arrangement with a major media
network for $1,000,000 of in-kind contributions of media services
in exchange for 92,592 shares of common stock. This prepaid
advertising cost was amortized over an 18-month period ending as of
December 31, 2018. Expense included in selling, marketing and
advertising expenses in the statement of operations for usage of
the in-kind media services for the three and nine months ended
September 30, 2018 was $186,000 and $481,000,
respectively.
|
8.
|
SUBSEQUENT EVENTS
|
The
Company evaluated subsequent events for their potential impact on
the financial statements and disclosures through the date the
financial statements were available to be issued and determined
that no subsequent events occurred that were reasonably expected to
impact the financial statements presented herein.
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 and Section 21E of the Securities Exchange Act of
1934 (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, 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 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. In addition to providing premium experiences by operating
city-vs-city amateur esports leagues and producing thousands of
live competitive and social gaming experiences around the country,
the Super League Network features multiple forms of
content celebrating the love of play via social media, live
streaming, video-on-demand, and website-based
offerings.
As a
content producer with a dedicated esports studio, Super League
publishes live streaming and on-demand video content on all major
platforms including YouTube, Twitch and
Instagram. In addition, with exclusive
proprietary platforms like
Minehut, the avid Minecraft
community,
Framerate, one of the largest independent
social video networks in esports and gaming,
and through our partnerships with high-profile venue
owners such as Topgolf, Cinemark Theatres and independent
fast-casual restaurants, Super League is committed to supporting
the development of local, grassroots player communities all while
providing a global framework for competition and community
engagement.
Executive Summary
We
believe Super League is on the leading edge of the rapidly
accelerating esports industry, which has become an established and
vital part of the entertainment landscape. At the professional
level, thousands of professional players on hundreds of teams
compete in dozens of high stakes competitions that draw significant
audiences, both in person and online. In addition, the value of
brand sponsorships, media rights and prize money continue to rise,
as are professional team valuations and the purchase price for
securing franchises in professional leagues.
We
believe there is a larger opportunity for the world of amateur
esports players. Amateur gamers are the gamers who enjoy the
competition, the social interaction and community, and the
entertainment value associated with playing and watching others
play. According to Nielsen Esports Playbook, 2017, competitive
amateur gamers take part in over eight hours of gameplay and
watches up to nine hours of esports-related content each
week.
Super
League is a critically important component in providing the
infrastructure for amateur esports that is synergistic and
accretive to the greater esports ecosystem. Over the past four
years, we believe we have become the preeminent brand for amateur
esports by providing a proprietary, end-to-end platform that allows
our gamers to compete, socialize and spectate premium amateur
esports gameplay and entertainment both physically and digitally.
We celebrate amateur gamers and provide a differentiated way for
players and spectators to unite around the games they love for a
better, more inclusive social experience previously not available.
Not only do we offer premium amateur esports experiences, but also
can leverage our derivative gameplay content to become the most
comprehensive amateur esports content network. Our premium,
competitive gameplay experiences and elite amateur broadcasts,
coupled with the expansion of our game title portfolio, our retail
venue partner network and our strategic brand sponsorships
introduce new gamers into our customer funnel, to drive audience
growth and, ultimately, consumer and content
monetization.
We focus on not just a wide range of gamers across game titles,
ages and skill levels, but also a wide range of content-capture
beyond just gameplay, which positions Super League as not just a
tournament operator, but a lifestyle and media company focused on
capturing, generating, aggregating and distributing content across
the genre of all things esports.
At its
core, our proprietary platform serves two main functions. First, it
enables digital and physical experiences which generate gameplay
content. In turn, this content library enables a second function,
which is multi-platform gameplay and entertainment content
distribution. One of those content distribution channels is the
physical retail venue itself where our proprietary visualization
and broadcast system creates a “stadium screen” and
transforms retail spaces into interactive and entertaining amateur
esports arenas. In addition, this user-generated content can be
distributed on our own premium digital Twitch and YouTube channels
as well as finding life on social channels and other brand partner
or third-party platforms.
Digital and Physical Experiences.
We believe that we can
monetize our digital and physical experiences in two primary
ways:
●
Traditionally,
we have created our own gameplay experiences to generate audience
and content and attracted brand and sponsorship dollars to those
offers. This continues to be a core source of revenue.
●
W
e
also have new potential partners, including game publishers,
retailers and brands across various categories who engage us to
develop their own customized branded gameplay experiences, powered
by our flexible gaming and content technology platform for their
own customers. Platform-as-a- Service is emerging as a revenue
stream for 2019 and beyond, that can not only deliver strong margin
over time, but also adds to our audience and content growth. This
is most notably evidenced by our first quarter 2019 activation with
Samsung Retail, where Super League’s platform powered a live
retail experience, held in New York in March 2019, built around
Fortnite and the influencer Ninja, that drove traffic to our
website and viewership to our Twitch channel, and our second and
third quarter partnerships with Capcom, Ltd. (“Capcom”)
and their Street Fighter® V: Arcade Edition title, Sony
Pictures Entertainment (“Sony”) related to certain
build competitions and related experiences, and Sprint, where we
hosted a large scale 5G mobile gaming tournament in Los Angeles as
part of Sprint’s 5G market launch.
Gameplay and Viewing Content
. We also believe that we can
monetize our content, comprised of gameplay and viewing, in two
primary ways:
●
We can
monetize our content commercially through advertising revenues on
our own digital channels and by selling our content to third-party
broadcasters similar to the content Nickelodeon contracted from
Super League in 2018 to supplement their YouTube channel
programming. We believe we have only begun to scratch the surface
on proprietary and third-party content distribution value that can
be derived from our platform.
●
The
second way we monetize content is through direct-to-consumer pay
walls for access to premium digital and physical experiences and
viewing content. We have historically offered a freemium model
where consumers can join Super League for free-to-play, casual
competitive experiences and charged for access to premium gameplay
experiences. We intend to expand our breadth of consumer digital
offers in 2019 and have already launched a beta product, a digital
monthly subscription offer for our youth demographic.
To
date, our revenues have been weighted towards experience
monetization, however we expect to see content monetization begin
to emerge as a revenue opportunity.
We
focus on five key performance indicators (“KPIs”), as
outlined below, to assess our progress and drive revenue growth.
The number of game titles and number of retail partner venues drive
audience, introducing more players and spectators to Super
League’s gaming and content platform. Growth in physical and
digital experiences across a wider portfolio can increase the
number of registered users and number of gameplay hours which will
have a significant impact on our content library. This focus on
audience and content generation ultimately impacts our viewership,
which has an amplification effect on potential revenue streams and
customer acquisition.
|
●
|
Game titles
: We ended fiscal 2018 with four game titles in
our portfolio and currently have six game titles with the addition
Capcom's Street Fighter® V: Arcade Edition during the second
quarter of 2019 and Tencent America's PUBG MOBILE, during the third
quarter of 2019. We continue to engage in discussions with several
other identified titles to further expand our reach across various
genres, ages of players and skill levels.
|
|
●
|
Retail Partner Venues
: While we are just seeding the build
out and monetization of our retail footprint, our national-level
announcements with Topgolf and ggCircuit LAN centers provides
access to hundreds of physical venue locations. We ended fiscal
2018 with 46 active venues and grew to 96 total active venues as of
September 30, 2019.
|
|
●
|
Registered Users
: We ended fiscal 2018 with approximately
300,000 registered users. During the nine months ended September
30, 2019, we increased our registered users by approximately 172%,
to 817,000 registered users. Registered users are defined as people
who have registered on our platform, providing applicable
identifying information, that have engaged with our platform at
some point, which could be by participation in a free event or
events, or participation in a paid event or events, or some other
engagement.
|
|
●
|
Gameplay Hours:
As of September 30, 2019, including our live
gaming experiences and our expanding digital gameplay channels, we
generated 10.73 million hours of gameplay experiences, as compared
to approximately 1.8 million full year 2018 gameplay
hours.
|
|
●
|
Viewership
: Proving that we can attract viewers to our
platform and leverage the audiences our brand partners provide, we
generated 58.0 million views during the first nine months of 2019,
which was 643% of our full-year 2018 views of 925,000, leveraging
our own programming and the significant expansion of our audience
reach in connection with the acquisition of Framerate.
|
Initial Public Offering
On February 27, 2019, we completed our initial public offering
(“
IPO”),
pursuant to which we issued and sold an aggregate of 2,272,727
shares of our common stock at a public offering price of $11.00 per
share
pursuant to a
registration statement on Form
S-1, declared effective by the Securities and
Exchange Commission on February 25, 2019 (File No. 333-229144). We
raised net proceeds of approximately $22,458,000 after underwriting
discounts, commissions and other offering costs of
$2,542,000.
The principal purposes of the IPO were to obtain additional capital
to support our operations, to create a public market for our common
stock and to facilitate our future access to the public equity
markets. We have and continue to use the net proceeds received from
the offering for working capital and 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 that may complement our business and or accelerate
our growth. The amounts and timing of our actual expenditures,
including expenditure related to sales and marketing and product
development will depend on numerous factors, including the status
of our product development efforts, our sales and marketing
activities, expansion internationally, the amount of cash generated
or used by our operations, competitive pressures and other factors
described under “
Risk
Factors
” in in our
Prospectus filed pursuant to Rule 424(b) under the Securities Act
with the SEC on February 27, 2019, as well as Item II, Part 1A of
this Report. Our management has broad discretion in the application
of the net proceeds, and investors will be relying on our judgment
regarding the application of the net proceeds from the
IPO.
Concurrent with the closing of the IPO on February 27, 2019, in
accordance with the related agreements, all outstanding
principal and interest for the 9.00% convertible notes outstanding,
totaling $13,793,000, was automatically converted into 1,475,164
shares of the Company’s common stock at a conversion price of
$9.35.
Acquisition of Framerate
On June 3, 2019, the Company 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
”).
Framerate is a cross-platform esports social video network
delivering the best in gameplay highlights, news and entertainment
to today’s generation of video gamers. The company’s
focus on user generated content and social distribution changes the
way traditional esports video content is produced, distributed and
shared by millions of esports fans worldwide. The acquisition of
Framerate represents a strategic step in our audience-building
efforts with an average of seven million video views a month built
around everyday gamers uploading their personal esports highlight
reels for recognition across our wide audience.
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, we ratably paid and/or issued to the former
shareholders of Framerate an aggregate of $1.5 million in cash and
$1.0 million worth of shares of our 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 our 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. 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 Acquisition was approved by the board of directors of each of
Super League Gaming, Inc. and Framerate, and was approved by the
stockholders of Framerate. Refer to Note 5 to the condensed
financial statements elsewhere within this Report for additional
information about the Acquisition.
Expanded Agreement with ggCircuit, LLC
On September 23, 2019, Super League and ggCircuit,
LLC (“ggCircuit”), an
esports services company that provides gaming
center management software solutions and other esports
offerings,
entered into an
expanded commercial partnership agreement
(“Expanded Agreement”) pursuant to
which
Super League will
become the primary consumer-facing brand within
ggCircuit’s
leading
gaming center
software
platform, known as “ggLeap.” Under the terms of the
Expanded Agreement,
the consumer facing components
of ggLeap, including its leaderboards, its competitive
seasons and its local loyalty programs, will be rebranded as
“Super League Gaming.” The consumer-facing components
of ggLeap and its related offerings will be managed by Super League
beginning with the next update of the ggLeap software, targeted for
release globally in November 2019. ggLeap is a B2B software
platform and B2C application created and owned by ggCircuit. ggLeap
is licensed and distributed to owners and operators of video gaming
centers throughout the world. It helps gaming centers manage the
PCs in their venue, administer loyalty programs for local players,
and provides the interface and local operating system through which
players log into computers and launch all of their gameplay
sessions within the gaming centers where ggLeap is
deployed.
The November 2019 software platform release is expected to include,
among other features, the following new features:
1.
A
consumer subscription service branded “Super League
Prime,” through which players in gaming centers will be able
to access special member benefits;
2.
A
global loyalty program for all players in ggLeap powered gaming
centers, that also can be available for gaming centers to deploy as
their local loyalty program, through which players will be able to
earn Super League points, with subscribers to Super League Prime
being able to earn points faster and in more ways than
non-subscribers. Super League points will be redeemable for prizes
that will include physical and digital goods and services, with
customized collections of prizes available locally, nationally and
internationally; and
3.
An
esports events directory that will present players with listings of
competitive and social gaming events they can play from within
their local gaming centers, including Super League branded events,
Super League powered events, events run by the local centers and
events run by third party event organizers. Super League will be
providing Super League Prime subscribers with access to special
events on a regular basis featuring multiple game
titles.
Pursuant to the terms and conditions of the Expanded Agreement,
effective October 1, 2019, these new features, along with all other
consumer facing components of ggLeap, will be managed and
branded by Super League.
In consideration for the rights granted by ggCircuit to Super
League, including the right to commercially exploit Super League
Prime and to feature the “Super League Gaming” brand on
the applicable ggCircuit customer platform, Super League will pay
an upfront fee of $340,000 and quarterly fees over the term of the
Expanded Agreement ranging from $0 to $150,000, based on
contractual revenue levels. Pursuant to the terms and conditions of
the Expanded Agreement, revenues generated in connection with
applicable activities under the Agreement will be shared between
Super League and ggCircuit based on contractual revenue sharing
percentages. The initial term of the Expanded Agreement commences
on the effective date and concludes on the fifth anniversary of the
effective date, subject to certain automatic renewal
provisions.
The upfront fee is included in intangible assets and other, net in
the accompanying balance sheet and is being amortized over the
initial term of the Expanded Agreement of 5 years, commencing
October 1, 2019.
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
Prospectus filed pursuant to Rule 424(b) under the Securities Act
with the SEC on February 27, 2019. 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)
brand and media sponsorships, (ii) Platform-As-A-Service
arrangements, and (iii) direct to consumer offers including
tournament fees for participation in our physical and online
multiplayer gaming experiences, digital subscriptions and
merchandise sales.
Brand and Media Sponsorships
.
We generate brand and media sponsorship revenues
primarily from sales of various forms of sponsorships and
promotional campaigns for our online platforms and from sponsorship
at our in-person esports experiences. Brand and media sponsorship
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. Brand and media
sponsorship arrangements typically include contract terms for time
periods ranging from several weeks to multi-year
arrangements.
For
brand and media sponsorship 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).
Platform-As-A-Service.
We
generate platform-as-a-service (“
PaaS
”) 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 our Super League
gaming and content technology platform. Revenue for PaaS
arrangements for one-off branded experiences and/or the development
of content tailored specifically for our partners’
distribution channels that provide for contractual delivery or
performance date, is recognized when performance is substantially
complete and or delivery occurs. Revenue for PaaS
arrangements
that include performance obligations satisfied
over time whereby customers simultaneously receive and consume the
benefits under the agreement as we satisfy our performance
obligations over the applicable contract term, 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).
Direct to Consumer Revenue
.
Direct to consumer revenues include tournament fees, digital
subscriptions and merchandise. Direct to consumer revenues have
primarily consisted of the sale of season passes to gamers for
participation in our in-person and or online multiplayer gaming
experiences. For the periods presented herein, season passes for
gaming experiences were primarily comprised of multi-week packages
and also include one-time, single experience admissions. For the
three and nine months ended September 30, 2019, digital
subscription revenues include revenues related to our Minehut asset
acquisition in June 2018, which provides various Minecraft server
hosting services on a subscription basis to the Minecraft gaming
community.
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.
Advertising and Third-Party Content Revenue
. We 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.
Revenue
collected in advance is recorded as deferred revenue until the
event occurs or until applicable performance obligations are
satisfied as described above.
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.
Grants
of equity-based awards (including warrants) to non-employees in
exchange for consulting or other services are accounted for using
the fair value of the consideration received (i.e., the value of
the goods or services) or the fair value of the equity instruments
issued, whichever is more reliably
measurable.
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.
Accounting for Business Combinations
In connection with the application of purchase accounting for the
acquisition of Framerate, as described above, we estimated the fair
values of the assets acquired and liabilities assumed. A fair
value measurement is determined as the price we would receive to
sell an asset or pay to transfer a liability in an orderly
transaction between market participants at the measurement date. In
the absence of active markets for the identical assets or
liabilities, such measurements involve developing assumptions based
on market observable data and, in the absence of such data,
internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at
the measurement date. In the context of purchase accounting, the
determination of fair value often involves significant judgments
and estimates by management, including the selection of valuation
methodologies, estimates of future revenues, costs and cash flows,
discount rates, and selection of comparable
companies. The estimated fair values reflected in the
purchase accounting rely on management’s judgment and the
expertise of a third-party valuation firm engaged to assist in
concluding on the fair value measurements.
Results of Operations for the Three and Nine Months Ended September
30, 2019 and 2018
The
following table sets forth a summary of our statements of
operations for the three and nine months ended September 30, 2019
and 2018:
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
REVENUES
|
$
350,000
|
$
153,000
|
$
822,000
|
$
640,000
|
|
|
|
|
|
|
|
COST OF REVENUES
|
192,000
|
70,000
|
379,000
|
375,000
|
|
GROSS PROFIT
|
158,000
|
83,000
|
$
443,000
|
$
265,000
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
Selling,
marketing and advertising
|
215,000
|
327,000
|
687,000
|
996,000
|
|
Technology
platform development
|
638,000
|
567,000
|
2,030,000
|
1,682,000
|
|
General
and administrative
|
3,730,000
|
2,747,000
|
13,792,000
|
8,884,000
|
|
Total
operating expenses
|
4,583,000
|
3,641,000
|
16,509,000
|
11,562,000
|
|
|
|
|
|
|
|
NET LOSS FROM OPERATIONS
|
(4,425,000
)
|
(3,558,000
)
|
(16,066,000
)
|
(11,297,000
)
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE), NET
|
8,000
|
(1,451,000
)
|
(9,925,000
)
|
(1,846,000
)
|
|
|
|
|
|
|
|
NET LOSS
|
$
(4,417,000
)
|
$
(5,009,000
)
|
$
(25,991,000
)
|
$
(13,143,000
)
|
For the Three Months Ended September 30, 2019 and 2018
Revenue
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
2019
|
2018
|
$
Change
|
%
Change
|
|
Brand and Media
Sponsorships
|
$
147,000
|
$
90,000
|
$
57,000
|
63
%
|
|
Platform-as-a-service
|
176,000
|
20,000
|
156,000
|
300+
%
|
|
Advertising and
content sales
|
19,000
|
-
|
19,000
|
100
%
|
|
Direct to
Consumer
|
8,000
|
43,000
|
(35,000
)
|
(81
)%
|
|
|
$
350,000
|
$
153,000
|
$
197,000
|
129
%
|
Revenue
for the three months ended September 30, 2019 increased $197,000,
or 129%, compared to the three months ended September 30, 2018. The
change in revenues for the periods presented was comprised of the
following:
●
Brand and Media Sponsorships
. An increase in brand and media
sponsorship revenue primarily attributable to fluctuations in brand
and media sponsorship activities period to period, which is based
on the specific partnership arrangements with activities during a
particular period, the related performance obligations satisfied
during the period, the contractual consideration associated with
the activities during the period and the timing associated with the
execution of new arrangements. Brand and media sponsorship revenues
for the three months ended September 30, 2019 was primarily
comprised of revenues from our Sony related build competitions and
related experiences and our Red Games Lego Brawls live stream
sponsorship activation. Brand and media sponsorship revenues for
the three months ended September 30, 2018 was primarily comprised
of revenues from our Logitech, Inc. brand
sponsorships.
●
Platform-As-A-Service.
W
e generate PaaS
revenues pursuant to arrangements with brand and media partners,
retail venues, game publishers and broadcasters that allow our
partners to hold 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 our Super League gaming and content technology
platform. PaaS revenue for the three months ended September 30,
2019 included revenues from Capcom, Inc. related to our Street
Fighter® V: Arcade Edition partnership, from Sony related to
certain build competitions and related experiences, from Sprint
related to our Sprint 5G LA activation, and from our Cox Paladins
gameplay experience held during the period.
●
Advertising and Content Sales
. Revenues for the 2019 period
presented included revenues from campaigns launched related to our
Framerate acquisition and advertising revenues from our Minehut
digital property. We expect to continue to expand our revenue
generation from the sale of our proprietary and third-party content
derived from our technology platform in future
periods.
●
Direct
to Consumer.
The decrease in direct
to consumer revenue was primarily due to a decrease in the number
of paid experiences offered during the three months ended September
30, 2019 compared to the prior year quarter. In the third quarter
of 2019, we offered a combination of paid experiences and
experiences that were free to play, consistent with our strategic
focus on increasing the volume of new gamers and spectators
introduced into our customer funnel, to increase the number of
registered users on our platform, drive consumer conversion, and
increase the overall awareness of the Super League brand and
technology platform offerings. We intend to continue to offer a
combination of paid and free to play experiences going forward.
Digital subscription revenues included in direct to consumer
revenues for the three months ended September 30, 2019 were
primarily comprised of subscription revenues related to our Minehut
digital property acquired in June 2018, which provides various
Minecraft server hosting services on a subscription basis to the
Minecraft gaming community.
Cost of Revenue
|
|
Three Months Ended
September 30,
|
|
||
|
|
2019
|
2018
|
$ Change
|
% Change
|
|
Cost
of revenue
|
$
192,000
|
$
70,000
|
$
122,000
|
174
%
|
Cost of
revenue for the three months ended September 30, 2019 increased
$122,000, or 174%, compared to the three months ended September 30,
2018, relatively consistent with the 129% increase in related
revenues for the same periods.
Operating Expenses
|
|
Three Months Ended
September 30,
|
|
||
|
|
2019
|
2018
|
$ Change
|
% Change
|
|
Selling,
marketing and advertising
|
$
215,000
|
$
327,000
|
$
(112,000
)
|
(34
)%
|
|
Technology
platform development
|
638,000
|
567,000
|
71,000
|
13
%
|
|
General
and administrative expense
|
3,730,000
|
2,747,000
|
983,000
|
36
%
|
|
Total
operating expenses
|
$
4,583,000
|
$
3,641,000
|
$
942,000
|
26
%
|
Selling, Marketing and Advertising
. The decrease in selling,
marketing and advertising expenses was primarily due to a decrease
in amortization of noncash in-kind advertising costs, totaling
$186,000, which were initially capitalized pursuant to a June 2017
third-party investment agreement. The investment agreement included
in-kind advertising for use in future periods, valued at $1.0
million, as a component of the consideration paid to us in exchange
for equity in the Company. The prepaid advertising cost was
amortized over an 18-month period ending as of December 31, 2018.
The decrease was partially offset by an increase in costs related
to contract labor, event operations and other costs to execute
various marketing and promotional in-person experiences during the
2019 period focused on widening our customer funnel and attracting
increased numbers of registered users to our platform.
Technology Platform Development.
Technology platform
development costs include (i) allocated personnel costs, including
salaries, 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, and (ii) the amortization of capitalized
internal use software costs primarily comprised of capitalized
costs for internal and third-party contract software development
and engineering resources engaged in developing, upgrading and
enhancing our proprietary gaming and content technology platform.
Capitalized internal use
s
oftware development costs are amortized on a straight-line
basis over the software’s estimated useful life.
The period over period increase primarily reflects an increase in
engineering headcount since the end of the prior year in connection
with the expansion of our engineering and internal use software
development activities. The increase was partially offset by
$211,000 of engineering department payroll and payroll related
internal use software development costs capitalized during the
three months ended September 30, 2019 for internal software
development and engineering resources engaged in developing,
upgrading and enhancing our proprietary gaming and content
technology platform.
General and Administrative.
General and administrative
expense for the periods presented was comprised of the
following:
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
2019
|
2018
|
$ Change
|
% Change
|
|
Personnel
costs
|
$
1,451,000
|
$
1,099,000
|
352,000
|
32
%
|
|
Office
and facilities
|
98,000
|
100,000
|
(2,000
)
|
(2
)%
|
|
Professional
fees
|
208,000
|
182,000
|
26,000
|
14
%
|
|
Stock-based
compensation
|
737,000
|
764,000
|
(27,000
)
|
(4
)%
|
|
Depreciation
and amortization
|
58,000
|
190,000
|
(132,000
)
|
(69
)%
|
|
Other
|
1,178,000
|
412,000
|
766,000
|
186
%
|
|
Total
general and administrative expense
|
$
3,730,000
|
$
2,747,000
|
$
983,000
|
36
%
|
A summary of the main drivers of the
net increase in general
and administrative expenses for the periods presented
is as follows:
●
Increase in personnel costs due primarily to a 16%
increase in average headcount (including engineering personnel
described under “
Technology Platform
Development” above)
since the
end of the prior year comparable quarter in connection with the
continued expansion of our operations, requiring additional
internal resources across our engineering, product, operations, and
commercial departments. During each of the three months ended
September 30, 2019 and 2018, we had average full-time equivalent
employees of 53 and 45, respectively.
●
Increase in general and administrative expenses
primarily due to a significant increase in directors and officer's
insurance premiums in connection with our February 2019 IPO, an
increase in other administrative public company costs, and an
increase in variable costs associated with our cloud-based
technology platform.
Other Income (expense)
Other
income (expense), net, was primarily comprised of interest expense
related to convertible notes outstanding during the prior period
presented as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
2019
|
2018
|
$ Change
|
% Change
|
|
Accretion
of discount on convertible notes
|
$
-
|
$
1,124,000
|
(1,124,000
)
|
(100
%)
|
|
Accrued
interest expense on convertible notes
|
-
|
212,000
|
(212,000
)
|
(100
%)
|
|
Accretion
of convertible note issuance costs
|
-
|
115,000
|
(115,000
)
|
(100
%)
|
|
Total
interest expense
|
$
-
|
$
1,451,000
|
$
(1,451,000
)
|
(100
%)
|
Interest Expense.
Interest expense for the prior period
primarily relates to the issuance of 9.00% secured convertible
promissory notes, commencing in February 2018 through August 2018,
as described below under
Liquidity
and Capital Resources
. Principal and interest as of February
27, 2019, the closing date of the IPO and December 31, 2018 totaled
$13,793,000 and $13,606,000, respectively.
Concurrent with the closing of the IPO on February
27, 2019, in accordance with the related agreements,
all
outstanding principal and interest for the 9.00% convertible notes
outstanding was automatically converted into 1,475,164 shares of
the Company’s common stock at a conversion price of $9.35. As
of and subsequent to February 27, 2019, there was no debt
outstanding.
For the Nine Months Ended September 30, 2019 and 2018
Revenue
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
2019
|
2018
|
$
Change
|
%
Change
|
|
Brand and Media
Sponsorships
|
$
345,000
|
$
421,000
|
$
(76,000
)
|
(18
)%)
|
|
Platform-as-a-service
|
434,000
|
55,000
|
379,000
|
+%300
|
|
Advertising and
content sales
|
19,000
|
70,000
|
(51,000
)
|
(73
)%
|
|
Direct to
Consumer
|
24,000
|
94,000
|
(70,000
)
|
(74
)%
|
|
|
$
822,000
|
$
640,000
|
$
182,000
|
28
%
|
Revenue
for the nine months ended September 30, 2019 increased $182,000, or
28%, compared to the nine months ended September 30, 2018. The
change in revenues for the periods presented was comprised of the
following:
●
Brand and Media Sponsorships
. Period over period changes in
brand and media sponsorship revenue are attributable to
fluctuations in brand and media sponsorship activities period to
period, which is based on the specific partnership arrangements
with activities during a particular period, the related performance
obligations satisfied during the period and the contractual
consideration associated with the activities during the period.
Brand and media sponsorship revenues for the nine months ended
September 30, 2019 included revenues for our Red Bull North
America, Inc. (“Red Bull”) brand partnership, Red Bull
Allstars experience in April 2019, Logitech G Challenge and
Play/Train/Win online tournaments, Sony related build competitions
and related experiences and our Red Games Lego Brawls live stream
sponsorship activation. Brand and media sponsorship revenues for
the nine months ended September 30, 2018 was primarily comprised of
revenues from our Logitech, Inc. and Red Bull brand sponsorships
and our 2018 Red Bull Allstars experience.
●
Platform-As-A-Service.
W
e generate PaaS
revenues pursuant to arrangements with brand and media partners,
retail venues, game publishers and broadcasters that allow our
partners to hold 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 our Super League gaming and content technology
platform. PaaS revenue for the nine months ended September 30, 2019
included revenues from our Samsung Fortnite event held in New York
in March 2019, Capcom, Inc. related to our Street Fighter® V:
Arcade Edition partnership, Sony related to certain build
competitions and related experiences, Sprint related to our Sprint
5G LA activation, and Cox Paladins gameplay experience held during
the period.
●
Advertising and Content Sales.
Revenues for the 2019 period
presented included revenues from campaigns launched related to our
Framerate acquisition and advertising revenues from our Minehut
digital property. Revenues for the 2018 period presented included
revenues from the sale of gameplay and other
content generated by us to Nickelodeon
(third-party broadcaster) to supplement their YouTube channel
programming. We expect to continue to expand our revenue generation
from the sale of our proprietary and third-party content derived
from our technology platform in future periods.
●
Direct
to Consumer.
The decrease in direct
to consumer revenue was primarily due to a decrease in the number
of paid events held during the nine months ended September 30, 2019
as compared to the prior year period. During the nine months ended
September 30, 2019, we held paid events and events that were free
to play, consistent with our strategic focus on increasing the
volume of new gamers and spectators introduced into our customer
funnel, to increase the number of registered users on our platform,
drive consumer conversion, and increase the overall awareness of
the Super League brand and technology platform offerings. We intend
to continue to offer a combination of paid and free to play
experiences going forward. Digital subscription revenues included
in direct to consumer revenues for the nine months ended September
30, 2019 were comprised of subscription revenues related to our
Minehut digital property acquired in June 2018, which provides
various Minecraft server hosting services on a subscription basis
to the Minecraft gaming community.
Cost of Revenue
|
|
Nine Months Ended
September 30,
|
|
||
|
|
2019
|
2018
|
$ Change
|
% Change
|
|
Cost of
revenue
|
$
379,000
|
$
375,000
|
$
4,000
|
1
%
|
Cost of
revenue for the nine months ended September 30, 2019 was relatively
consistent, compared to the nine months ended September 30, 2018,
as compared to a 28% increase in revenues for the same periods. The
trend in cost of sales over the year to date periods presented was
primarily due to operational efficiencies and lower direct costs
incurred for the nine months ended September 30, 2019 in connection
with our physical and digital experiences.
Operating Expenses
|
|
Nine Months Ended
September 30,
|
|
||
|
|
2019
|
2018
|
$ Change
|
% Change
|
|
Selling,
Marketing and Advertising
|
$
687,000
|
$
996,000
|
$
(309,000
)
|
(31
)%
|
|
Technology
Platform Development
|
2,030,000
|
1,682,000
|
348,000
|
21
%
|
|
General
and Administrative
|
13,792,000
|
8,884,000
|
4,908,000
|
55
%
|
|
Total
operating expenses
|
$
16,509,000
|
$
11,562,000
|
$
4,947,000
|
43
%
|
Selling, Marketing and Advertising
. The decrease in selling,
marketing and advertising expenses was primarily due to the
decrease in amortization of noncash in-kind advertising costs,
totaling $481,000, which were initially capitalized pursuant to a
June 2017 third-party investment agreement. The investment
agreement included in-kind advertising for use in future periods,
valued at $1.0 million, as a component of the consideration paid to
us in exchange for equity in the Company. The prepaid advertising
cost was amortized over an 18-month period ending as of December
31, 2018. The decrease was partially offset by an increase in
marketing expense due to an increase in marketing and promotional
experiences during the nine months ended September 30, 2019 focused
on widening our customer funnel and attracting increased numbers of
registered users to our platform as described above. The increase
included increased costs related to contract labor, influencers,
event operations, content capture and other costs to execute
various marketing and promotional experiences during the
period.
Technology Platform Development.
Technology platform
development costs include (i) allocated personnel costs, including
salaries, 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, and (ii) the amortization of capitalized
internal use software costs primarily comprised of capitalized
costs for internal and third-party contract software development
and engineering resources engaged in developing, upgrading and
enhancing our proprietary gaming and content technology platform.
Capitalized internal use
s
oftware development costs are amortized on a straight-line
basis over the software’s estimated useful life.
The period over period increase primarily reflects an increase in
engineering headcount since the end of the prior year in connection
with the expansion of our engineering and internal use software
development activities. The increase was partially offset by
$211,000 of engineering department payroll and payroll related
internal use software development costs capitalized during the
three months ended September 30, 2019 for internal software
development and engineering resources engaged in developing,
upgrading and enhancing our proprietary gaming and content
technology platform.
General and Administrative.
General and administrative
expense for the periods presented was comprised of the
following:
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2019
|
2018
|
$ Change
|
% Change
|
|
Personnel
costs
|
$
4,346,000
|
$
3,686,000
|
$
660,000
|
18
%
|
|
Office
and facilities
|
303,000
|
269,000
|
34,000
|
13
%
|
|
Professional
fees
|
599,000
|
677,000
|
(78,000
)
|
(12
)%
|
|
Stock-based
compensation
|
5,266,000
|
2,452,000
|
2,814,000
|
115
%
|
|
Depreciation
and amortization
|
371,000
|
610,000
|
(239,000
)
|
(39
)%
|
|
Other
|
2,907,000
|
1,190,000
|
1,717,000
|
144
%
|
|
Total
general and administrative expense
|
$
13,792,000
|
$
8,884,000
|
$
4,908,000
|
55
%
|
A summary of the main drivers of the
net increase in general
and administrative expenses for the periods presented
is as follows:
●
Personnel
costs for the nine months ended September 30, 2019 included
approximately $405,000 of management performance-based bonuses paid
in connection with the achievement of certain performance targets
during the 2019 period, including the closing of the IPO and other
operational performance targets. The increase in personnel costs
also reflects a 16% increase in average headcount (including
engineering personnel described under “Technology Platform
Development” above) compared to the prior year period in
connection with the continued expansion of our operations requiring
additional internal resources across our engineering, product,
operations, and commercial departments. During the nine months
ended September 30, 2019 and September 30, 2018, we had average
full-time equivalent employees of 51 and 44,
respectively.
●
Increase
in office and facilities expense due to the increase in leased
office space commencing in June 2018 in connection with the
expansion of our SuperLeagueTV studio operations.
●
Increase
in noncash stock compensation expense primarily due to certain
performance options and warrants previously granted to two of our
executives, which vested upon the achievement of certain
performance targets, pursuant to October 2018 amended employee
agreements and vesting conditions in the underlying equity grant
agreements. Performance targets included the completion of our IPO
in February 2019 and other operational performance targets. 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 during the nine
months ended September 30, 2019. The remaining increase reflects
compensation expense related to equity based on awards granted in
connection with the increase in head count described
above.
●
Increase in other
general and administrative expenses primarily due to a significant
increase in directors and officer's insurance premiums in
connection with our February 2019 IPO, an increase in other
administrative public company costs, and an increase in variable
costs associated with our cloud-based technology
platform.
Other Income (expense)
Other
income (expense), net, was primarily comprised of interest expense
related to the convertible notes outstanding during the periods
presented as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
2019
|
2018
|
$ Change
|
% Change
|
|
Accretion
of discount on convertible notes
|
$
2,475,000
|
$
1,394,000
|
1,081,000
|
78
%
|
|
Accrued
interest expense on convertible notes
|
187,000
|
311,000
|
(124,000
)
|
(40
)%
|
|
Accretion
of convertible note issuance costs
|
209,000
|
143,000
|
66,000
|
46
%
|
|
Beneficial
conversion feature
|
7,067,000
|
-
|
7,067,000
|
100
%
|
|
To
tal
interest expense
|
$
9,938,000
|
$
1,848,000
|
$
8,090,000
|
>300
%
|
Interest Expense.
Interest expense for the periods presented
primarily relates to the issuance of 9.00% secured convertible
promissory notes, commencing in February 2018 through August 2018,
as described below under
Liquidity
and Capital Resources
. Principal and interest as of February
27, 2019, the closing date of the IPO and December 31, 2018 totaled
$13,793,000 and $13,606,000, respectively.
Concurrent with the closing of the IPO on February
27, 2019, in accordance with the related agreements,
all
outstanding principal and interest for the 9.00% convertible notes
outstanding was automatically converted into 1,475,164 shares of
the Company’s common stock at a conversion price of $9.35. As
of and subsequent to February 27, 2019, there was no debt
outstanding.
As a result of the
automatic conversion of the 2018 Notes (defined below) and the
application of conversion accounting, the Company recorded an
immediate charge to interest expense of $1,384,000, representing
the write-off of the unamortized balance of debt
discounts associated with the 2018 warrants and cash commissions
and warrants issued to third parties. Unamortized debt discounts at
September 30, 2019 and December 31, 2018 totaled $0 and $2,684,000,
respectively.
The non-detachable conversion feature embedded in the 2018 Notes
provides for a conversion rate that was below market value at the
commitment date, and therefore, represented a beneficial conversion
feature (“
BCF”). The BCF is generally recognized
separately at issuance by allocating a portion of the debt proceeds
equal to the intrinsic value of the BCF to additional paid-in
capital. The resulting convertible debt discount is recognized as
interest expense using the effective yield method. However, the
conversion feature associated with the 2018 Notes was not
exercisable until the consummation of an initial public offering by
the Company of its common stock, and therefore, was not required to
be recognized in earnings until the IPO related contingency was
resolved, which occurred on the IPO Closing Date. The commitment
date is the IPO Closing Date and the commitment date stock price
was $11.00 per share. The intrinsic value of the BCF on the IPO
Closing Date, which was limited to the net proceeds allocated to
the debt on a relative fair value basis, was approximately
$7,067,000, and was reflected as additional interest expense in the
condensed statement of operations for the nine months ended
September 30, 2019.
Liquidity and Capital Resources
General
Cash totaled $12.6 million and $2.8 million at September 30,
2019 and December 31, 2018, respectively.
We have experienced net losses and negative cash flows from
operations since our inception. As of September 30, 2019 and
December 31, 2018, we had working capital of approximately $12.5
million and ($8.0) million, respectively, and sustained cumulative
losses since inception attributable to common stockholders of
approximately $81.1 million. Total noncash charges included in
accumulated deficit since inception, primarily related to noncash
stock compensation, restricted stock units issued in connection
with a license agreement, amortization of the discount on the 2018
Notes (defined below) and in-kind advertising expense, totaled
approximately $32.9 million. On February 27, 2019, we completed our
IPO, pursuant to which we issued and sold an aggregate of 2,272,727
shares of our common stock at a public offering price of $11.00 per
share
pursuant to a
registration statement on Form
S-1, declared effective by the Securities and
Exchange Commission on February 25, 2019 (File No. 333-229144). We
raised net proceeds of approximately $22,458,000 after underwriting
discounts, commissions and other offering costs of $2,542,000.
During Fiscal 2018, the Company issued 9.00% secured convertible
promissory notes, as described below, in an aggregate principal
amount of approximately $13,000,000.
Concurrent with the
closing of the IPO on February 27, 2019, in accordance with the
related agreements, all outstanding principal and interest for the
9.00% convertible notes outstanding was automatically converted
into shares of the Company’s common stock as described below.
Approximately 1.3 million of the
warrants issued in conjunction with the 2018 Notes are callable at
the election of the Company at any time following the completion of
our IPO.
To date, our principal sources of capital used to fund our
operations have been the net proceeds we received from sales of
equity securities and proceeds received from the issuance of
convertible debt, as described herein.
We have and will continue to use significant
capital for the growth and development of our business. Our
management team expects operating losses to continue in the near
term in connection with the pursuit of our strategic objectives. As
such, we believe our current cash position, absent receipt of
additional capital either from operations or that may be available
from future issuance(s) of common stock or debt financings, is not
sufficient to fund our planned operations for the twelve months
following the date of this Report. We believe these conditions
raise substantial doubt about our ability to continue as a going
concern. In addition, we may encounter unforeseen difficulties that
may deplete our capital resources more rapidly than anticipated,
including those set forth under the heading “Risk
Factors” included in Item II, Part 1A of this
Report.
We are focused on expanding our service offering through internal
development, collaborations, and through strategic acquisitions. We
are continually evaluating potential asset acquisitions and
business combinations. To finance such acquisitions, we may find it
necessary to raise additional equity capital, incur additional
debt, or both. Any efforts to seek additional funding could be made
through issuances of equity or debt, or other external
financing. However, additional funding may not be
available on favorable terms, or at all. The capital and credit
markets have experienced extreme volatility and disruption
periodically and such volatility and disruption may occur in the
future. If we fail to obtain additional financing when needed,
we may not be able to execute our business plans which, in turn,
would have a material adverse impact on our financial condition,
our ability to meet our obligations, and our ability to pursue our
business strategies.
Cash Flows for the Nine Months Ended September 30, 2019 and
2018
The following table summarizes the change in cash
balances
for the periods presented:
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Net
cash used in operating activities
|
$
(10,142,000
)
|
$
(7,880,000
)
|
|
Net
cash used in investing activities
|
(2,524,000
)
|
(449,000
)
|
|
Net
cash provided by financing activities
|
22,478,000
|
12,611,000
|
|
Increase
(decrease) in cash
|
9,812,000
|
4,282,000
|
|
Cash
at beginning of period
|
2,774,000
|
1,709,000
|
|
Cash
at end of period
|
$
12,586,000
|
$
5,991,000
|
Cash Flows from Operating Activities.
Net cash used in operating activities during the
nine months ended September 30, 2019 was $10,142,000, which
primarily reflected our net GAAP loss of $25,991,000, net of
adjustments to reconcile net GAAP loss to net cash used in
operating activities of $15,849,000, which included $5,266,000
of noncash stock compensation charges, $2,871,000 of noncash
accrued interest and accretion of debt discount, $7,067,0000 of
noncash interest expense related to the recognition of the
beneficial conversion feature upon the automatic conversion of the
2018 Notes upon close of the IPO, and depreciation and amortization
of $657,000. Changes in working capital primarily reflected the
impact of the prepayment of increased directors and officer’s
insurance premiums in connection with the consummation of our IPO
and the settlement of payables in the ordinary course. Net cash
used in operating activities during the nine months ended September
30, 2018 was $7,880,000, which primarily reflected our net loss of
$13,143,000, net of adjustments to reconcile net loss to net cash
used in operating activities of $5,263,000, which included
$2,451,000 of non-cash stock compensation, noncash amortization of
prepaid in-kind advertising totaling $481,000 and $791,000 of
non-cash depreciation and amortization charges. Changes in working
capital primarily reflected increases in receivables and the
settlement of payables in the ordinary course of business during
the period.
Cash Flows from Investing Activities.
Cash flows from investing activities were
comprised of the following
for the periods
presented
:
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Cash
paid for acquisition of Framerate
|
$
(1,491,000
)
|
$
-
|
|
Purchase
of property and equipment
|
(56,000
)
|
(190,000
)
|
|
Capitalization
of software development costs
|
(839,000
)
|
(192,000
)
|
|
Acquisition
of other intangible and other assets
|
(138,000
)
|
(67,000
)
|
|
Net cash used in investing activities
|
$
(2,524,000
)
|
$
(449,000
)
|
Acquisition of Framerate
.
On June 3, 2019, the Company and
Merger Sub, entered into the
Merger Agreement
with Framerate, pursuant to which Framerate merged
with and into Merger Sub, with Merger Sub continuing as the
surviving corporation. The Acquisition was consummated on the
Effective Date when the certificate of merger of Merger Sub and
Framerate was filed with the Secretary of State of the State of
Delaware. As consideration for the Acquisition, we ratably paid
and/or issued to the former shareholders of Framerate an aggregate
of $1.5 million in cash and $1.0 million worth of shares of our
common stock, at a price per share of $7.4395, which price was
equal to the volume weighted average price of our common stock over
the five trading days preceding the date of the Merger Agreement,
as reported on the Nasdaq Capital Market.
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 our common stock at the same price per share as
the Closing 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. 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 Acquisition was approved by the board of directors of each of
Super League Gaming, Inc. and Framerate, and was approved by the
stockholders of Framerate.
Cash Flows from Financing Activities.
Cash flows from financing activities were
comprised of the following
for the periods
presented
:
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Proceeds
from issuance of common stock, net of issuance costs
|
$
22,458,000
|
$
-
|
|
Proceeds
from convertible notes payable, net of issuance cost
|
-
|
12,611,000
|
|
Proceeds
from common stock purchase warrant exercises
|
20,000
|
-
|
|
Net cash provided by financing activities
|
$
22,478,000
|
$
12,611,000
|
Initial Public Offering
. On
February 27, 2019, we completed our IPO, pursuant to which we
issued and sold an aggregate of 2,272,727 shares of our common
stock at a public offering price of $11.00 per share. We raised net
proceeds of approximately $22,458,000 after deducting underwriting
discounts, commissions and other offering costs of $2,542,00. We
currently intend to use the net proceeds received from the offering
for working capital and 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 that may
compliment or business and or accelerate or growth. The amounts and
timing of our actual expenditure, including expenditure related to
sales and marketing and product development will depend on numerous
factors, including the status of our product development efforts,
our sales and marketing activities, expansion internationally, the
amount of cash generated or used by our operations, competitive
pressures and other factors described under “Risk
Factors” in our Prospectus filed pursuant to Rule 424(b)
under the Securities Act with the SEC on February 27, 2019, as well
as Item II, Part 1A of this Report. Our management has broad
discretion in the application of the net proceeds, and investors
will be relying on our judgment regarding the application of the
net proceeds from the IPO.
Concurrent with the closing of the IPO on February 27, 2019, in
accordance with the related agreements,
all outstanding
principal and interest for the 9.00% convertible notes outstanding,
totaling $13,793,000, was automatically converted into 1,475,164
shares of the Company’s common stock at a conversion price of
$9.35. As of September 30, 2019, there is no debt
outstanding.
Pursuant to the related underwriting agreement, in connection with
the completion of the IPO, for the purchase price of $50.00, we
issued a warrant to purchase shares of our common stock equal to
3.0% of the shares sold in the IPO, or 68,182 shares, at an
exercise price of $11.00 per share (the “
Underwriters’
Warrants
”). The
Underwriters’ Warrants are exercisable during the period
commencing from the date of the close of the IPO and ending five
years from the closing date of the IPO. The Underwriters’
Warrants represent additional noncash offering costs, with an
estimated grant date fair value of $547,000, which was reflected in
additional-paid-in capital when issued and as a corresponding
offering cost in the condensed statement of shareholders equity for
the nine months ended September 30, 2019.
Convertible Debt Issuances
. In February and April 2018, we
issued 9.00% secured convertible promissory notes with a collective
face value of $3,000,000 (the “Initial 2018 Notes”).
The Initial 2018 Notes (i) accrued simple interest at the rate of
9.00% per annum, (ii) matured on the earlier of December 31, 2018
or the close of a $15,000,000 equity financing (“Qualifying
Equity Financing”) by us, and (iii) all outstanding principal
and accrued interest was automatically convertible into equity or
equity-linked securities sold in a Qualifying Equity Financing
based upon a conversion rate equal to (x) a 10% discount to the
price per share of a Qualifying Equity Financing, with (y) a floor
of $10.80 per share. In addition, the holders of the Initial 2018
Notes were collectively issued warrants to purchase approximately
55,559 shares of common stock, at an exercise price of $10.80 per
share and a term of five years (the “Initial 2018
Warrants”).
In May through August 2018, we issued additional 9.00% secured
convertible promissory notes with a collective face value of
$10,000,000 (the “Additional 2018 Notes”). In May 2018,
all of the Initial 2018 Notes and related accrued interest,
totaling $3,056,182, were converted into the Additional 2018 Notes,
resulting in an aggregate principal amount of $13,056,182
(hereinafter collectively, the “
2018 Notes”). The holders of the
converted Initial 2018 Notes retained their respective Initial 2018
Warrants
The 2018 Notes (i) accrued simple interest at the rate of 9.00% per
annum, (ii) matured on the earlier of the closing of an
IPO
of our common stock on a national securities
exchange or April 30, 2019, and (iii) all outstanding principal and
accrued interest was automatically convertible into shares of
common stock upon the closing of an IPO at the lesser of (x) $10.80
per share or (y) a 15% discount to the price per share of the
IPO. In addition, the holders of the 2018 Notes were
collectively issued 1,396,383 warrants to purchase common
stock equal to 100% of the aggregate principal amount of the 2018
Notes divided by $9.35 per share (the “
2018 Warrants”). The number of 2018
Warrants ultimately issued is subject to adjustment upon the
closing of an IPO and will be determined by dividing 100% of the
face value of the 2018 Notes by the lesser of (x) $10.80 per share
or (y) a 15% discount to the price per share of the IPO. The 2018
Warrants are exercisable for a term of five years, commencing on
the close of an IPO, at an exercise price equal to the lesser of
(x) $10.80 per share or (y) a 15% discount to the IPO price per
share and are callable at our election at any time following the
closing of an IPO.
Refer to Note 6 to the accompany condensed financial statements
elsewhere in this Report for additional information.
Contractual Obligations
As of September 30, 2019, except as described below, we had no
significant commitments for capital expenditures, nor do we have
any committed lines of credit, noncancelable operating leases
obligations, other committed funding or long-term debt, and no
guarantees.
The operating lease for our corporate
headquarters expired on May 31, 2017 and was subsequently amended
to operate on a month-to-month basis.
In consideration for the rights granted by ggCircuit to Super
League in connection with the Expanded Agreement described above,
including the right to commercially exploit Super League Prime and
to feature the “Super League Gaming” brand on the
applicable ggCircuit customer platform, Super League will pay an
upfront fee of $340,000 and quarterly fees over the term of the
Expanded Agreement ranging from $0 to $150,000, based on
contractual revenue levels.
Off-Balance Sheet Commitments and Arrangements
We have not entered into any off-balance sheet financial
guarantees or other off-balance sheet commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our
shares and classified as stockholder’s equity or that are not
reflected in our financial statements included elsewhere in this
prospectus. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity.
We do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support
to us or engages in leasing, hedging or product development
services with us.
Recent Accounting Pronouncements
Refer to Note 2 to the accompany condensed financial statements
contained elsewhere
in this
Report
.
ITEM 3.
Q
UANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
In the
ordinary course of our business, we are not currently exposed to
market risk of the sort that may arise from changes in interest
rates or foreign currency exchange rates, or that may otherwise
arise from transactions in derivatives.
ITEM 4.
C
O
NTROLS AND
PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of
1934, as amended, (the “Exchange Act”) our Chief
Executive Officer (“CEO”) and our Chief Financial
Officer (“
CFO”) conducted an evaluation as of
the end of the period covered by this Quarterly Report on Form
10-Q, of the effectiveness of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act. Based on that evaluation, our CEO and our CFO each
concluded that our disclosure controls and procedures are effective
to provide reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Exchange
Act, (i) is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's
rules and forms and (ii) is accumulated and communicated to our
management, including our CEO and our CFO, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting identified in management’s evaluation pursuant to
Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period
covered by this Report that materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
P
ART
II
OTHER INFORMATION
|
ITEM
1.
LEGAL
PROCEEDINGS
|
None.
Investing in our common stock involves a high degree of risk. You
should carefully consider the risks described below, as well as the
other information in this Quarterly Report on Form 10-Q, including
our financial statements and the related notes thereto and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” before deciding whether
to invest in our common stock. The occurrence of any of the events
or developments described below could harm our business, financial
condition, operating results, and growth prospects. In such an
event, the market price of our common stock could decline, and you
may lose all or part of your investment. Additional risks and
uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations.
Risks Related to Our Business and Industry
We have incurred significant losses since our inception, and we may
continue to experience losses in the future.
We incurred net losses of $26.0 million and $20.6 million during
the nine months ended September 30, 2019 and the year ended
December 31, 2018, respectively. Noncash expenses (excluding
depreciation and amortization of fixed and intangible assets)
totaled $15.2 million and $8.9 million for the nine months ended
September 30, 2019 and the year ended December 31, 2018,
respectively. As of September 30, 2019, we had an accumulated
deficit of $81.1 million. Moreover, the report of our independent
registered public accounting firm to the financial statements for
our fiscal year ended December 31, 2018, included Prospectus filed
pursuant to Rule 424(b) under the Securities Act with the SEC on
February 27, 2019, contains an explanatory paragraph stating that
our recurring losses from operations, accumulated deficit and cash
used in operating activities raise substantial doubt about our
ability to continue as a going concern.
We cannot predict if we will achieve profitability
soon or at all. We expect to continue to expend substantial
financial and other resources on, among other
things:
●
investments
to expand and enhance our esports technology platform and
technology infrastructure, make improvements to the scalability,
availability and security of our platform, and develop new
offerings;
●
sales
and marketing, including expanding our customer acquisition and
sales organization and marketing programs, and expanding our
programs directed at increasing our brand awareness among current
and new customers;
●
investments
in bandwidth to support our video streaming
functionality;
●
contract
labor costs and other expenses to host our leagues and
tournaments;
●
costs
to retain and attract gamers and license first tier game titles,
grow our online gamer community and generally expand our business
operations;
●
hiring
additional employees;
●
expansion
of our operations and infrastructure, both domestically and
internationally; and
●
general
administration, including legal, accounting and other expenses
related to being a public company.
We may not generate sufficient revenue to offset such costs to
achieve or sustain profitability in the future. We expect to
continue to invest heavily in our operations, our online and in
person experiences, business development related to game
publishers, advertisers, sponsors and gamer acquisition, to
accelerate as well as maintain our current market position, support
anticipated future growth and to meet our expanded reporting and
compliance obligations as a public company.
We expect operating losses to continue in the near term in order to
carry out our strategic objectives. We consider historical
operating results, capital resources and financial position, in
combination with current projections and estimates, as part of our
plan to fund operations over a reasonable period of
time.
We believe our current cash position, absent receipt of additional
capital either from operations or that may be available from future
issuance(s) of common stock or debt financings, is not sufficient
to fund our planned operations for the twelve months following the
date of this Report. We intend to continue implementing our
business strategy with the expectation that there will be no
material adverse developments in our business, liquidity or capital
requirements. If one or more of these factors do not occur as
expected, it could have a material adverse impact on our
activities, including (i) reduction or delay of our business
activities, (ii) forced sales of material assets, (iii) defaults on
our obligations, or (iv) insolvency. Our planned investments may
not result in increased revenue or growth of our business. We
cannot assure you that we will be able to generate revenue
sufficient to offset our expected cost increases and planned
investments in our business and platform. As a result, we may incur
significant losses for the foreseeable future, and may not be able
to achieve and/or sustain profitability. If we fail to achieve and
sustain profitability, then we may not be able to achieve our
business plan, fund our business or continue as a going concern.
The financial statements included in this Quarterly Report on Form
10-Q do not contain any adjustments which might be necessary if we
were unable to continue as a going concern.
We are a relatively young company, and we may not be able to
sustain our rapid growth, effectively manage our anticipated future
growth or implement our business strategies.
We have a limited operating history. Although we have experienced
significant growth since our gaming platform for amateur online and
in person gaming experiences was launched, and we established our
amateur city leagues, tournaments and competitions, our historical
growth rate may not be indicative of our future performance due to
our limited operating history and the rapid evolution of our
business model, including a focus on direct to consumer-based
gaming. We may not be able to achieve similar results or accelerate
growth at the same rate as we have historically. As our amateur
city leagues, tournaments and competitions continue to develop, we
may adjust our strategy and business model to adapt. These
adjustments may not achieve expected results and may have a
material and adverse impact on our financial condition and results
of operations.
In addition, our rapid
growth and expansion have placed, and continue to
place, significant strain on our management and resources. This
level of significant growth may not be sustainable or achievable at
all in the future. We believe that our continued growth will depend
on many factors, including our ability to develop new sources of
revenues, diversify monetization methods including our direct to
consumer offerings, attract and retain competitive gamers, increase
engagement, continue developing innovative technologies,
tournaments and competitions in response to shifting demand in
esports and online gaming, increase brand awareness, and expand
into new markets. We cannot assure you that we will achieve any of
the above, and our failure to do so may materially and adversely
affect our business and results of operations.
We are subject to risks associated with operating in a rapidly
developing industry and a relatively new market.
Many elements of our business are unique, evolving and relatively
unproven. Our business and prospects depend on the continuing
development of live streaming of competitive esports gaming. The
market for esports and amateur online gaming competition is
relatively new and rapidly developing and are subject to
significant challenges. Our business relies upon our ability to
cultivate and grow an active gamer community, and our ability to
successfully monetize such community through tournament fees,
digital subscriptions for our esports gaming services, and
advertising and sponsorship opportunities. In addition, our
continued growth depends, in part, on our ability to respond to
constant changes in the esports gaming industry, including rapid
technological evolution, continued shifts in gamer trends and
demands, frequent introductions of new games and titles and the
constant emergence of new industry standards and practices.
Developing and integrating new games, titles, content, products,
services or infrastructure could be expensive and time-consuming,
and these efforts may not yield the benefits we expect to achieve
at all. We cannot assure you that we will succeed in any of these
aspects or that the esports gaming industry will continue to grow
as rapidly as it has in the past.
We generate a portion of our revenues from advertising and
sponsorship. If we fail to attract more advertisers and sponsors to
our gaming platform or tournaments or competitions, or if
advertisers or sponsors are less willing to advertise with or
sponsor us, our revenues may be adversely affected.
We generate a growing portion of our revenues from advertising and
sponsorship, which we expect to further develop and expand in the
near future as online viewership of our esports gaming offerings
expand. Our revenues from advertising and sponsorship partly depend
on the continual development of the online advertising industry and
advertisers’ willingness to allocate budgets to online
advertising in the esports gaming industry. In addition, companies
that decide to advertise or promote online may utilize more
established methods or channels, such as more established internet
portals or search engines, over advertising on our gaming platform.
If the online advertising and sponsorship market does not continue
to grow, or if we are unable to capture and retain a sufficient
share of that market, our ability to increase our current level of
advertising and sponsorship revenue and our profitability and
prospects may be materially and adversely affected.
Furthermore, our core and long-term priority of optimizing the
gamer experience and satisfaction may limit our gaming
platform’s ability to generate revenues from advertising and
sponsorship. For example, in order to provide our gamers with an
uninterrupted competitive gaming experience, we do not place
significant amounts of advertising on our streaming interface or
insert pop-up advertisements during streaming. While this
decision could adversely affect our operating results in the
short-term, we believe it enables us to provide a superior gamer
experience on our gaming platform, which will help us expand and
maintain our current base of gamers and enhance our monetization
potential in the long-term. However, this philosophy of putting our
gamers first may also negatively impact our relationships with
advertisers, sponsors or other third parties, and may not result in
the long-term benefits that we expect, in which case the success of
our business and operating results could be harmed.
Our revenue model may not remain effective and we cannot guarantee
that our future monetization strategies will be successfully
implemented or generate sustainable revenues and
profit.
We generate revenues from advertising and sponsorship of our league
tournaments, and through the operation of our live streaming gaming
platform using a revenue model whereby gamers can get free access
to certain live streaming of amateur tournaments, and gamers pay
fees to compete in league competition. We have generated, and
expect to continue to generate, a substantial portion of revenues
using this revenue model in the near term. We are, however,
particularly focused on implementing a direct to consumer model for
our expanding gamer base. Although our business has experienced
significant growth in recent years, there is no guarantee that our
direct to consumer packages will gain significant traction to
maximize our growth rate in the future, as the demand for our
offerings may change, decrease substantially or dissipate, or we
may fail to anticipate and serve gamer demands
effectively.
The loss of or a substantial reduction in activity by one or more
of our largest customers and/or vendors could materially and
adversely affect our business, financial condition and results of
operations.
During the nine months ended September 30, 2019 and the year ended
December 31, 2018, (i) five customers accounted for 90% of our
revenue and four customers accounted for 82%, respectively, (ii)
four customers accounted for 87% and three customers accounted for
96% of accounts receivable, respectively, and (iii) one vendor
accounted for 46% and three vendors accounted for
43% of accounts payable, respectively.
The loss of or a substantial reduction in activity by one or more
of our largest customers could materially and adversely affect our
business, financial condition and results of
operations.
Our marketing and advertising efforts may fail to resonate with
amateur gamers.
Our amateur city league tournaments and competitions are marketed
through a diverse spectrum of advertising and promotional programs
such as online and mobile advertising, marketing through websites,
event sponsorship and direct communications with our gaming
community including via email, blogs and other electronic means. An
increasing portion of our marketing activity is taking place on
social media platforms that are either outside, or not totally
within, our direct control. Changes to gamer preferences,
marketing regulations, privacy and data protection laws, technology
changes or service disruptions may negatively impact our ability to
reach target gamers. Our ability to market our amateur city league
tournaments and competitions is dependent in part upon the success
of these programs. If the marketing for our amateur city league
tournaments and competitions fails to resonate and expand with the
gamer community, or if advertising rates or other media placement
costs increase, our business and operating results could be
harmed.
We have a unique community culture that is vital to our success.
Our operations may be materially and adversely affected if we fail
to maintain this community culture as we expand in our addressable
gamer communities.
We have cultivated an interactive and vibrant online social gamer
community centered around amateur online and in person gaming. We
ensure a superior gamer experience by continuously improving the
user interface and features of our gaming platform along with
offering a multitude of competitive and recreational gaming
experiences with first tier esports games. We believe that
maintaining and promoting a vibrant community culture is critical
to retaining and expanding our gamer community. We have taken
multiple initiatives to preserve our community culture and values.
Despite our efforts, we may be unable to maintain our community
culture and cease to be the preferred platform for our target
gamers as we expand our gamer footprint, which would be detrimental
to our business operations.
The amateur esports gaming industry is intensely competitive.
Gamers may prefer our competitors’ amateur leagues,
competitions or tournaments over our own.
Competition in the amateur esports gaming industry generally is
intense. Our competitors range from established leagues and
championships owned directly, as well as leagues franchised by,
well known and capitalized game publishers and developers,
interactive entertainment companies and diversified media companies
to emerging start-ups, and we expect new competitors to continue to
emerge throughout the amateur esports gaming ecosystem. If our
competitors develop and launch competing amateur city leagues,
tournaments or competitions, or develop a more successful amateur
online gaming platform, our revenue, margins, and profitability
will decline.
The amateur esports gaming industry is very “hit”
driven. We may not have access to “hit” games or
titles.
Select game titles dominate competitive amateur esports and online
gaming, and many new games titles are regularly introduced in each
major industry segment (console, mobile and PC free-to-download).
Despite the number of new entrants, only a very few
“hit” titles account for a significant portion of total
revenue in each segment.
The size and engagement level of our online and
in person gamers are critical to our success and are
closely linked to the quality and popularity of the esports game
publishers with which we have licenses. Esports game publishers on
our gaming platform, including those who have entered into license
agreements with us, may leave us for other gaming platforms or
amateur leagues which may offer better competition, and terms and
conditions than we do. Furthermore, we may lose esports game
publishers if we fail to generate the number of gamers to our
amateur tournaments and competitions expected by such publishers.
In addition, if popular esports game publishers cease to license
their games to us, or our live streams fail to attract gamers, we
may experience a decline in gamer traffic, direct to consumer
opportunities and engagement, which may have a material and adverse
impact on our results of operations and financial
conditions.
Although we have entered into multi-year agreements with certain
publishers, if we fail to license multiple additional
“hit” games or any of our existing
licensed esports game publishers with which we currently have
a license decide to breach the license agreement or choose not to
continue with us once the term of the license agreement expires,
the popularity of our amateur city leagues, tournaments and
competitions may decline and the number of our gamers may decrease,
which could materially and adversely affect our results of
operations and financial condition.
In addition to the esports games we have licensed, we must continue
to attract and retain the most popular esports gaming titles in
order to maintain and increase the popularity of our amateur city
leagues, tournaments and competitions, and ensure the sustainable
growth of our gamer community. We must continue to identify and
enter into license agreements with esports gaming publishers
developing “hit’ games that resonate with our community
on an ongoing basis. We cannot assure you that we can continue to
attract and retain the same level of first-tier esports game
publishers and our ability to do so is critical to our future
success.
We have not entered into definitive license agreements with certain
game publishers that we currently have relationships with, and we
may never do so.
Although we have relationships with Supercell, Epic Games, Tencent
America and Capcom for experiences involving Clash Royale,
Fortnite, PUBG MOBILE and
Street Fighter® V: Arcade
Edition
, respectively, we currently do
not have definitive license agreements in place with respect to
these relationships. We currently anticipate that we will enter
into license agreements with both parties in the future, however no
assurances can be given as to when we will be able to come to terms
agreeable to both parties, if ever. In the event that we are not
able to come to mutually agreeable terms and enter into definitive
license agreements with Supercell, Epic Games, Tencent America
and/or Capcom, they may unilaterally choose to discontinue their
relationship with the Company, thereby preventing us from offering
experiences on our platform using Clash Royale Fortnite, PUBG
MOBILE and/or
Street Fighter® V: Arcade
Edition
, as the case may be. Should
Supercell, Epic Games, Tencent America and/or Capcom choose not to
allow us to offer experiences involving Clash Royale, Fortnite,
PUBG MOBILE and/or
Street Fighter® V: Arcade Edition
to our users, the popularity of
our amateur city leagues, tournaments and competitions may decline
and the number of our gamers may decrease, which could materially
and adversely affect our results of operations and financial
condition.
If we fail to keep our existing gamers highly engaged, to acquire
new gamers, to successfully implement a direct to consumer model
for our gaming community, our business, profitability and prospects
may be adversely affected.
Our success depends on our ability to maintain and grow the number
of amateur gamers attending and participating in our in-person and
online tournaments and competitions, and using our gaming platform,
and keeping our gamers highly engaged. Of particular importance is
the successful deployment and expansion of our direct to consumer
model to our gaming community for purposes of creating predictable
recurring revenues.
In order to attract, retain and engage amateur gamers and remain
competitive, we must continue to develop and expand our city
leagues, including internationally, produce engaging tournaments
and competitions, successfully license the newest “hit”
esports games and titles, implement new technologies and
strategies, improve features of our gaming platform and stimulate
interactions in our gamer community.
A decline in the number of our amateur gamers in our ecosystem may
adversely affect the engagement level of our gamers, the vibrancy
of our gamer community, or the popularity of our amateur league
play, which may in turn reduce our monetization opportunities, and
have a material and adverse effect on our business, financial
condition and results of operations. If we are unable to attract
and retain, or convert gamers into direct to consumer-based paying
gamers, our revenues may decline, and our results of operations and
financial condition may suffer.
We cannot assure you that our online and in person gaming
platform will remain sufficiently popular with amateur gamers to
offset the costs incurred to operate and expand it. It is vital to
our operations that we remain sensitive and responsive to evolving
gamer preferences and offer first-tier esports game content that
attracts our amateur gamers. We must also keep providing amateur
gamers with new features and functions to enable superior content
viewing, and social interaction. Further, we will need to continue
to develop and improve our gaming platform and to enhance our brand
awareness, which may require us to incur substantial costs and
expenses. If such increased costs and expenses do not effectively
translate into an improved gamer experience and direct to
consumer-based, long-term engagement, our results of operations may
be materially and adversely affected.
The ability to grow our business is dependent in part on the
success and availability of mass media channels developed by third
parties, as well as our ability to develop commercially successful
content, and amateur tournaments and competitions.
The success of our business is driven in part by the commercial
success and adequate supply of third-party mass media channels for
which we may distribute our content, amateur league tournaments and
competitions, including Twitch, YouTube and ESL.tv. Our success
also depends on our ability to accurately predict which channels
and platforms will be successful with the esports gaming community,
our ability to develop commercially successful content and
distribute via SuperLeagueTV, which is presently available on
Twitch, amateur tournaments and competition for these channels and
gaming platforms and our ability to effectively manage the
transition of our gamers from one generation or demographic to the
next. Additionally, we may enter into certain exclusive licensing
arrangements that affect our ability to deliver or market our
amateur gaming tournaments and competitions on certain channels and
platforms. A channel or platform may not succeed as expected or new
channels or platforms may take market share and gamers away from
platforms for which we have devoted significant resources. If
demand for the channels or platforms for which we are developing
amateur tournaments or competitions is lower than our expectations,
we may be unable to fully recover the investments we have made, and
our financial performance may be harmed. Alternatively, a channel
or platform for which we have not devoted significant resources
could be more successful than we initially anticipated, causing us
to not be able to take advantage of meaningful revenue
opportunities.
Our business is subject to risks generally associated with the
entertainment industry.
Our business is subject to risks that are generally associated with
the entertainment industry, many of which are beyond our control.
These risks could negatively impact our operating results and
include the popularity, price to play, and timing of release of our
esports licensed games, economic conditions that adversely affect
discretionary consumer spending, changes in gamer demographics, the
availability and popularity of other forms of entertainment, and
critical reviews and public tastes and preferences, which may
change rapidly and cannot necessarily be predicted.
If we fail to maintain and enhance our brand or if we incur
excessive expenses in this effort, our business, results of
operations and prospects may be materially and adversely
affected.
We believe that maintaining and enhancing our brand is of
significant importance to the success of our business. A
well-recognized brand is important to increasing the number of
esports gamers and the level of engagement of our overall gaming
community which is critical in enhancing our attractiveness to
advertisers and sponsors. Since we operate in a highly competitive
market, brand maintenance and enhancement directly affect our
ability to maintain and enhance our market position.
Although we have developed our brand and amateur tournaments and
competitions through word of mouth referrals, key strategic
partners and our esports game publisher licensors, as we expand, we
may conduct various marketing and brand promotion activities using
various methods to continue promoting our brand. We cannot assure
you, however, that these activities will be successful or that we
will be able to achieve the brand promotion effect we
expect.
In addition, any negative publicity in relation to our league
tournaments or competitions, or operations, regardless of its
veracity, could harm our brands and reputation. Negative publicity
or public complaints from gamers may harm our reputation, and if
complaints against us are not addressed to their satisfaction, our
reputation and our market position could be significantly harmed,
which may materially and adversely affect our business, results of
operations and prospects.
Negative gamer perceptions about our brand, gaming platform,
amateur city leagues, tournaments or competitions and/or business
practices may damage our business and increase the costs incurred
in addressing gamer concerns.
Esports gamer expectations regarding the quality, performance and
integrity of our amateur city league tournaments and competitions
are high. Esports gamers may be critical of our brand, gaming
platform, amateur city leagues, tournaments or competitions and/or
business practices for a wide variety of reasons. These negative
gamer reactions may not be foreseeable or within our control to
manage effectively, including perceptions about gameplay fairness,
negative gamer reactions to game content via social media or other
outlets, components and services, or objections to certain of our
business practices. Negative gamer sentiment about our business
practices also can lead to investigations from regulatory agencies
and consumer groups, as well as litigation, which, regardless of
their outcome, may be costly, damaging to our reputation and harm
our business.
Technology changes
rapidly in our business and if we fail to anticipate
or
successfully implement new
technologies or adopt new business strategies, technologies or
methods, the quality, timeliness and competitiveness of our amateur
city leagues, tournaments or competition may
suffer.
Rapid technology changes in the esports gaming market require us to
anticipate, sometimes years in advance, which technologies we must
develop, implement and take advantage of in order to be and remain
competitive in the esports gaming market. We have invested, and in
the future may invest, in new business strategies including a
direct to consumer model, technologies, products, or games or
first-tier game titles to continue to persistently engage the
amateur gamer and deliver the best online and
in person gaming experience. Such endeavors may involve
significant risks and uncertainties, and no assurance can be given
that the technology we choose to adopt and the features that we
pursue will be successful. If we do not successfully implement
these new technologies, our reputation may be materially adversely
affected and our financial condition and operating results may be
impacted. We also may miss opportunities to adopt technology, or
develop amateur city leagues, tournaments or competitions that
become popular with gamers, which could adversely affect our
financial results. It may take significant time and resources to
shift our focus to such technologies, putting us at a competitive
disadvantage.
Our development process usually starts with particular gamer
experiences in mind, and a range of technical development and
feature goals that we hope to be able to achieve. We may not be
able to achieve these goals, or our competitors may be able to
achieve them more quickly and effectively than we can based on
having greater operating capital and personnel resources. If we
cannot achieve our technology goals within the original development
schedule, then we may delay their release until these goals can be
achieved, which may delay or reduce revenue and increase our
development expenses. Alternatively, we may be required to
significantly increase the resources employed in research and
development in an attempt to accelerate our development of new
technologies, either to preserve our launch schedule or to keep up
with our competitors, which would increase our development
expenses.
We may experience security breaches and cyber threats.
We continually face cyber risks and threats that seek to damage,
disrupt or gain access to our networks and our gaming platform,
supporting infrastructure, intellectual property and other assets.
In addition, we rely on technological infrastructure, including
third party cloud hosting and broadband, provided by third party
business partners to support the in person and online
functionality of our gaming platform. These business partners are
also subject to cyber risks and threats. Such cyber risks and
threats may be difficult to detect. Both our partners and we
have implemented certain systems and processes to guard against
cyber risks and to help protect our data and systems. However, the
techniques that may be used to obtain unauthorized access or
disable, degrade, exploit or sabotage our networks and gaming
platform change frequently and often are not detected. Our systems
and processes, and the systems and processes of our third-party
business partners, may not be adequate. Any failure to prevent or
mitigate security breaches or cyber risks, or respond adequately to
a security breach or cyber risk, could result in interruptions to
our gaming platform, degrade the gamer experience, cause gamers to
lose confidence in our gaming platform and cease utilizing it, as
well as significant legal and financial exposure. This could
harm our business and reputation, disrupt our relationships with
partners and diminish our competitive position.
Successful exploitation of our networks and gaming platform can
have other negative effects upon the gamer experience we offer. In
particular, the virtual economies that exist in certain of our
licensed game publishers’ games are subject to abuse,
exploitation and other forms of fraudulent activity that can
negatively impact our business. Virtual economies involve the
use of virtual currency and/or virtual assets that can be used or
redeemed by a player within a particular online game or
service.
Our business could be adversely affected if our data privacy and
security practices are not adequate, or perceived as being
inadequate, to prevent data breaches, or by the application of data
privacy and security laws generally.
In the course of our business, we may collect, process, store and
use gamer and other information, including personally identifiable
information, passwords and credit card information, the latter of
which is subject to PCI-DSS compliance. Although we take measures
to protect this information from unauthorized access, acquisition,
disclosure and misuse, our security controls, policies and
practices may not be able to prevent the improper or unauthorized
access, acquisition or disclosure of such information. The
unauthorized access, acquisition or disclosure of this information,
or a perception that we do not adequately secure this information
could result in legal liability, costly remedial measures,
governmental and regulatory investigations, harm our profitability
and reputation and cause our financial results to be materially
affected. In addition, third party vendors and business partners
receive access to information that we collect. These vendors and
business partners may not prevent data security breaches with
respect to the information we provide them or fully enforce our
policies, contractual obligations and disclosures regarding the
collection, use, storage, transfer and retention of personal data.
A data security breach of one of our vendors or business partners
could cause reputational harm to them and/or negatively impact our
ability to maintain the credibility of our gamer
community.
Data privacy, data protection, localization, security and
consumer-protection laws are evolving, and the interpretation and
application of these laws in the United States, Europe (including
compliance with the General Data Protection Regulation), and
elsewhere often are uncertain, contradictory and changing. It is
possible that these laws may be interpreted or applied in a manner
that is averse to us or otherwise inconsistent with our practices,
which could result in litigation, regulatory investigations and
potential legal liability or require us to change our practices in
a manner adverse to our business. As a result, our reputation and
brand may be harmed, we could incur substantial costs, and we could
lose both gamers and revenue.
We depend on servers to operate our games with online features and
our proprietary online gaming service. If we were to lose server
functionality for any reason, our business may be negatively
impacted.
Our business relies on the continuous operation of servers, some of
which are owned and operated by third parties. Although we strive
to maintain more than sufficient server capacity, and provide for
active redundancy in the event of limited hardware failure, any
broad-based catastrophic server malfunction, a significant
service-disrupting attack or intrusion by hackers that circumvents
security measures, a failure of disaster recovery service or the
failure of a company on which we are relying for server capacity to
provide that capacity for whatever reason could degrade or
interrupt the functionality of our platform, and could prevent the
operation of our platform for both in-person and online gaming
experiences.
We also rely on networks operated by third parties to support
content on our platform, including networks owned and operated by
game publishers. An extended interruption to any of these services
could adversely affect the use of our platform, which would have a
negative impact on our business.
Further, insufficient server capacity could also negatively impact
our business. Conversely, if we overestimate the amount of server
capacity required by our business, we may incur additional
operating costs.
Our online gaming platform and games offered through our gaming
platform may contain defects.
Our online gaming platform and the games offered through our gaming
platform are extremely complex and are difficult to develop and
distribute. We have quality controls in place to detect defects in
our gaming platform before they are released. Nonetheless, these
quality controls are subject to human error, overriding, and
reasonable resource or technical constraints. Further, we have not
undertaken independent third-party testing, verification or
analysis of our gaming platform and associated systems and
controls. Therefore, our gaming platform and quality controls and
preventative measures we have implemented may not be effective in
detecting all defects in our gaming platform. In the event a
significant defect in our gaming platform and associated systems
and controls is realized, we could be required to offer refunds,
suspend the availability of our city league competitions and other
gameplay, or expend significant resources to cure the defect, each
of which could significantly harm our business and operating
results.
We may experience system failures, outages and/or disruptions of
the functionality of our platform. Such failures, delays and other
problems could harm our reputation and business, cause us to lose
customers and expose us to customer liability.
We may experience system failures, outages and/or disruptions of
our infrastructure, including information technology system
failures and network disruptions, cloud hosting and broadband
availability at in person and online experiences. Our
operations could be interrupted or degraded by any damage to or
failure of:
●
our
computer software or hardware, or our customers’ or
suppliers’ computer software or hardware;
●
our
network, our customers’ networks or our suppliers’
networks; or
●
our
connections and outsourced service arrangements with third
parties.
Our systems and operations are also vulnerable to damage or
interruption from:
●
power
loss, transmission cable cuts and other telecommunications and
utility failures;
●
hurricanes,
fires, earthquakes, floods and other natural
disasters;
●
a
terrorist attack in the U.S. or in another country in which we
operate;
●
interruption
of service arising from facility migrations, resulting from changes
in business operations including acquisitions and planned data
center migrations;
●
computer
viruses or software defects;
●
loss
or misuse of proprietary information or customer data that
compromises security, confidentiality or integrity; or
●
errors
by our employees or third-party service providers.
From time to time in the ordinary course of our business, our
network nodes and other systems experience temporary outages. As a
means of ensuring continuity in the services we provide to our
community and partners, we have invested in system
redundancies via partnerships with industry leading cloud service
providers, proactive alarm monitoring and other back-up
infrastructure, though we cannot assure you that we will be able to
re-route our services over our back-up facilities and provide
continuous service to customers in all circumstances without
material degradation. Because many of our services play a critical
role for our community and partners, any damage to or failure of
the infrastructure we rely on could disrupt or degrade the
operation of our network, our platform and the provision of our
services and result in the loss of current and potential community
members and/or partners and harm our ability to conduct normal
business operations.
We use third-party services and technologies in connection with our
business, and any disruption to the provision of these services and
technologies to us could result in negative publicity and a
slowdown in the growth of our users, which could materially and
adversely affect our business, financial condition and results of
operations.
Our business partially depends on services provided by, and
relationships with, various third parties, including cloud hosting
and broadband providers, among others. To this end, when our cloud
hosting and broadband vendors experience outages, our esports
gaming services will be negatively impacted and alternative
resources will not be immediately available. In addition, certain
third-party software we use in our operations is currently publicly
available free of charge. If the owner of any such software decides
to charge users or no longer makes the software publicly available,
we may need to incur significant costs to obtain licensing, find
replacement software or develop it on our own. If we are unable to
obtain licensing, find or develop replacement software at a
reasonable cost, or at all, our business and operations may be
adversely affected.
We exercise no control over the third-party vendors that we rely
upon for cloud hosting, broadband and software service. If such
third parties increase their prices, fail to provide their services
effectively, terminate their service or agreements or discontinue
their relationships with us, we could suffer service interruptions,
reduced revenues or increased costs, any of which may have a
material adverse effect on our business, financial condition and
results of operations.
Growth and engagement of our gamer community depends upon effective
interoperability with mobile operating systems, networks, mobile
devices and standards that we do not control.
We make our services available across a variety of mobile operating
systems and devices. We are dependent on the interoperability of
our services with popular mobile devices and mobile operating
systems that we do not control, such as Android and iOS. Any
changes in such mobile operating systems or devices that degrade
the functionality of our services or give preferential treatment to
competitive services could adversely affect usage of our services.
In order to deliver high quality services, it is important that our
services work well across a range of mobile operating systems,
networks, mobile devices and standards that we do not control. We
may not be successful in developing relationships with key
participants in the mobile industry or in developing services that
operate effectively with these operating systems, networks, devices
and standards. In the event that it is difficult for our users to
access and use our services, particularly on their mobile devices,
our user growth and user engagement could be harmed, and our
business and operating results could be adversely
affected.
Our business depends substantially on the continuing efforts of our
executive officers, key employees and qualified personnel, and our
business operations may be severely disrupted if we lose their
services.
Our future success depends substantially on the continued efforts
of our executive officers and key employees. If one or more of our
executive officers or key employees were unable or unwilling to
continue their services with us, we might not be able to replace
them easily, in a timely manner, or at all. Since the esports
gaming industry is characterized by high demand and intense
competition for talents, we cannot assure you that we will be able
to attract or retain qualified staff or other highly skilled
employees. In addition, as the Company is relatively young, our
ability to train and integrate new employees into our operations
may not meet the growing demands of our business which may
materially and adversely affect our ability to grow our business
and hence our results of operations.
If any of our executive officers and key employees terminates their
services with us, our business may be severely disrupted, our
financial condition and results of operations may be materially and
adversely affected and we may incur additional expenses to recruit,
train and retain qualified personnel. If any of our executive
officers or key employees joins a competitor or forms a competing
company, we may lose gamers, know-how and key
professionals and staff members. Certain of our executive officers
and key employees have entered into a non-solicitation and
non-competition agreements with us. However, certain provisions
under the non-solicitation and non-competition agreement may
be deemed legally invalid or unenforceable. If any dispute arises
between our executive officers and us, we cannot assure you that we
would be able to enforce
these non-compete agreements.
Our business is subject to regulation, and changes in applicable
regulations may negatively impact our business.
We are subject to a number of foreign and domestic laws and
regulations that affect companies conducting business on the
Internet. In addition, laws and regulations relating to user
privacy, data collection, retention, electronic commerce, virtual
items and currency, consumer protection, content, advertising,
localization, and information security have been adopted or are
being considered for adoption by many jurisdictions and countries
throughout the world. These laws could harm our business by
limiting the products and services we can offer consumers or the
manner in which we offer them. The costs of compliance with these
laws may increase in the future as a result of changes in
interpretation. Furthermore, any failure on our part to comply with
these laws or the application of these laws in an unanticipated
manner may harm our business and result in penalties or significant
legal liability.
In addition, we include modes in our gaming platform that allow
players to compete against each other. Although we structure and
operate these skill-based competitions with applicable laws in
mind, our skill-based competitions in the future could become
subject to evolving rules and regulations and expose us to
significant liability, penalties and reputational
harm.
Our online activities are subject to various laws and regulations
relating to privacy and child protection, which, if violated, could
subject us to an increased risk of litigation and regulatory
actions.
In addition to our gaming platform, we use third-party
applications, websites, and social media platforms to promote our
amateur tournaments and competitions and engage gamers, as well as
monitor and collect certain information about gamers in our online
forums. A variety of laws and regulations have been adopted in
recent years aimed at protecting children using the internet such
as the Children’s Online Privacy and Protection Act of 1998
(“
COPPA”).
COPPA sets forth, among other things, a number of restrictions on
what website operators can present to children under the age of 13
and what information can be collected from them. COPPA is of
particular concern to us, and in an effort to minimize our risk of
potential exposure, we retained a COPPA expert as a consultant and
have posted a compliant privacy policy, terms of use and various
other policies on our website. We undertake significant effort to
implement certain precautions to ensure that access to our gaming
platform for competitive gameplay is COPPA compliant. Despite our
efforts, no assurances can be given that such measures will be
sufficient to completely avoid exposure and COPPA violations, any
of which could expose us to significant liability, penalties,
reputational harm and loss of revenue, among other
things.
The laws and regulations concerning data privacy are continually
evolving. Failure to comply with these laws and regulations could
harm our business.
Consumers are able to play our licensed game titles online, using
our platform. We collect and store information about our consumers
both personally identifying and non-personally identifying
information. Numerous federal, state and international laws address
privacy, data protection and the collection, storing, sharing, use,
disclosure and protection of personally identifiable information
and other user data. Numerous states already have, and are looking
to expand, data protection legislation requiring companies like
ours to consider solutions to meet differing needs and expectations
of creators and attendees. Outside the United States, personally
identifiable information and other user data is increasingly
subject to legislation and regulations in numerous jurisdictions
around the world, the intent of which is to protect the privacy of
information that is collected, processed and transmitted in or from
the governing jurisdiction. Foreign data protection, privacy,
information security, user protection and other laws and
regulations are often more restrictive than those in the United
States. In particular, the European Union and its member states
traditionally have taken broader views as to types of data that are
subject to privacy and data protection laws and regulations and
have imposed greater legal obligations on companies in this regard.
For example, in April 2016, European legislative bodies adopted the
General Data Protection Regulation (“
GDPR
”), which became effective on May 25,
2018. The GDPR applies to any company established in the
European Union as well as to those outside of the European Union if
they collect and use personal data in connection with the offering
of goods or services to individuals in the European Union or the
monitoring of their behavior. The GDPR enhances data
protection obligations for processors and controllers of personal
data, including, for example, expanded disclosures about how
personal information is to be used, limitations on retention of
information, mandatory data breach notification requirements and
onerous new obligations on service
providers. Non-compliance with the GDPR may
result in monetary penalties of up to €20 million or 4%
of annual worldwide revenue, whichever is higher. In addition, some
countries are considering or have passed legislation implementing
data protection requirements or requiring local storage and
processing of data or similar requirements that could increase the
cost and complexity of delivering our services.
The GDPR and other changes in laws or regulations
associated with the enhanced protection of certain types of
personal data could greatly increase our cost of providing our
products and services or even prevent us from offering certain
services in jurisdictions in which we operate. The European
Commission is also currently negotiating a new ePrivacy Regulation
that would address various matters, including provisions
specifically aimed at the use of cookies to identify an
individual’s online behavior, and any such ePrivacy
Regulation may provide for new compliance obligations and
significant penalties. Any of these changes to European Union data
protection law or its interpretation could disrupt and/or harm our
business.
Further, following a referendum in June 2016 in which voters in the
United Kingdom approved an exit from the European Union, the United
Kingdom government has initiated a process to leave the European
Union, which has created uncertainty with regard to the regulation
of data protection in the United Kingdom. In particular, although a
Data Protection Bill designed to be consistent with
the GDPR is pending in the United Kingdom’s
legislative process, it is unclear whether the United Kingdom will
enact data protection laws or regulations designed to be consistent
with the GDPR and how data transfers to and from the
United Kingdom will be regulated. The interpretation and
application of many privacy and data protection laws are, and will
likely remain, uncertain, and it is possible that these laws may be
interpreted and applied in a manner that is inconsistent with our
existing data management practices or product features. Although
player interaction on our platform is subject to our privacy
policies, end user license agreements (“
EULAs
”), and terms of service, if we fail to
comply with our posted privacy policies, EULAs, or terms of
service, or if we fail to comply with existing privacy-related or
data protection laws and regulations, it could result in
proceedings or litigation against us by governmental authorities or
others, which could result in fines or judgments against us, damage
our reputation, impact our financial condition and/or harm our
business.
In addition to government regulation, privacy advocacy and industry
groups may propose new and different self-regulatory standards that
either legally or contractually apply to us. Any inability to
adequately address privacy, data protection and data security
concerns or comply with applicable privacy, data protection or data
security laws, regulations, policies and other obligations could
result in additional cost and liability to us, damage our
reputation, inhibit sales and harm our business. Further, our
failure, and/or the failure by the various third-party service
providers and partners with which we do business, to comply with
applicable privacy policies or federal, state or similar
international laws and regulations or any other obligations
relating to privacy, data protection or information security, or
any compromise of security that results in the unauthorized release
of personally identifiable information or other user data, or the
perception that any such failure or compromise has occurred, could
damage our reputation, result in a loss of creators or attendees,
discourage potential creators and attendees from trying our
platform and/or result in fines and/or proceedings by governmental
agencies and/or users, any of which could have an adverse effect on
our business, results of operations and financial condition. In
addition, given the breadth and depth of changes in data protection
obligations, ongoing compliance with evolving interpretation of
the GDPR and other regulatory requirements requires time
and resources and a review of the technology and systems currently
in use against the requirements of GDPR and other
regulations.
The preparation of our financial statements involves the use of
good faith estimates, judgments and assumptions, and our financial
statements may be materially affected if such good faith estimates,
judgments or good faith assumptions prove to be
inaccurate
.
Financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(“
GAAP”)
typically require the use of good faith estimates, judgments and
assumptions that affect the reported amounts. Often, different
estimates, judgments and assumptions could reasonably be used that
would have a material effect on such financial statements, and
changes in these estimates, judgments and assumptions may occur
from period to period over time. Significant areas of accounting
requiring the application of management’s judgment include,
but are not limited to, determining the fair value of assets,
share-based compensation and the timing and amount of cash flows
from assets. These estimates, judgments and assumptions are
inherently uncertain and, if our estimates were to prove to be
wrong, we would face the risk that charges to income or other
financial statement changes or adjustments would be required. Any
such charges or changes would require a restatement of our
financial statements and could harm our business, including our
financial condition and results of operations and the price of our
securities. See “
Management’s Discussion
and Analysis of Financial Condition and Results of
Operations
” for a
discussion of the accounting estimates, judgments and assumptions
that we believe are the most critical to an understanding of our
financial statements and our business.
We may be held liable for information or content displayed on,
retrieved from or linked to our gaming platform, or distributed to
our users.
Our interactive live streaming platform enables gamers to exchange
information and engage in various other online activities. Although
we require our gamers to register their real name, we do not
require user identifications used and displayed during gameplay to
contain any real-name information, and hence we are unable to
verify the sources of all the information posted by our gamers. In
addition, because a majority of the communications on our online
and in person gaming platform is conducted in real time,
we are unable to examine the content generated by gamers before
they are posted or streamed. Therefore, it is possible that gamers
may engage in illegal, obscene or incendiary conversations or
activities, including publishing of inappropriate or illegal
content that may be deemed unlawful. If any content on our platform
is deemed illegal, obscene or incendiary, or if appropriate
licenses and third-party consents have not been obtained, claims
may be brought against us for defamation, libel, negligence,
copyright, patent or trademark infringement, other unlawful
activities or other theories and claims based on the nature and
content of the information delivered on or otherwise accessed
through our platform. Moreover, the costs of compliance may
continue to increase when more content is made available on our
platform as a result of our growing base of gamers, which may
adversely affect our results of operations.
Intensified government regulation of the Internet industry could
restrict our ability to maintain or increase the level of traffic
to our gaming platform as well as our ability to capture other
market opportunities.
The Internet industry is increasingly subject to strict scrutiny.
New laws and regulations may be adopted from time to time to
address new issues that come to the authorities’ attention.
We may not timely obtain or maintain all the required licenses or
approvals or make all the necessary filings in the future. We also
cannot assure you that we will be able to obtain the required
licenses or approvals if we plan to expand into other Internet
businesses. If we fail to obtain or maintain any of the required
licenses or approvals or make the necessary filings, we may be
subject to various penalties, which may disrupt our business
operations or derail our business strategy, and materially and
adversely affect our business, financial condition and results of
operations.
From time to time we may become involved in legal
proceedings.
From time to time we may become subject to legal proceedings,
claims, litigation and government investigations or inquiries,
which could be expensive, lengthy, disruptive to normal business
operations and occupy a significant amount of our employees’
time and attention. In addition, the outcome of any legal
proceedings, claims, litigation, investigations or inquiries may be
difficult to predict and could have a material adverse effect on
our business, operating results, or financial
condition.
Our amended and restated bylaws designate a state or federal court
located within the State of Delaware as the exclusive forum for
certain litigation that may be initiated by our stockholders, which
could limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us.
Pursuant to our amended and restated bylaws, unless we consent in
writing to the selection of an alternative forum, the sole and
exclusive forum for (i) any derivative action or proceeding
brought on our behalf, (ii) any action asserting a claim of
breach of a fiduciary duty owed by any of our directors, officers
or other employees to us or our stockholders, (iii) any action
asserting a claim against us arising pursuant to any provision of
the Delaware General Corporation Law, or (iv) any action
asserting a claim against us that is governed by the internal
affairs doctrine shall be a state or federal court located within
the State of Delaware, in all cases subject to the court’s
having personal jurisdiction over indispensable parties named as
defendants. Any person or entity purchasing or otherwise acquiring
any interest in shares of our capital stock shall be deemed to have
notice of and consented to this provision. The forum
selection clause in our amended and restated bylaws may have
the effect of discouraging lawsuits against us or our directors and
officers and may limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us.
Risks Related to Intellectual Property
We may be subject to claims of infringement of third-party
intellectual property rights.
From time to time, third parties may claim that we have infringed
their intellectual property rights. For example, patent holding
companies may assert patent claims against us in which they seek to
monetize patents they have purchased or otherwise obtained.
Although we take steps to avoid knowingly violating the
intellectual property rights of others, it is possible that third
parties still may claim infringement.
Existing or future infringement claims against us, whether valid or
not, may be expensive to defend and divert the attention of our
employees from business operations. Such claims or litigation could
require us to pay damages, royalties, legal fees and other costs.
We also could be required to stop offering, distributing or
supporting esports games, our gaming platform or other features or
services which incorporate the affected intellectual property
rights, redesign products, features or services to avoid
infringement, or obtain a license, all of which could be costly and
harm our business.
In addition, many patents have been issued that may apply to
potential new modes of delivering, playing or monetizing
interactive entertainment software products and services, such as
those offered on our gaming platform or that we would like to offer
in the future. We may discover that future opportunities to provide
new and innovative modes of game play and game delivery to gamers
may be precluded by existing patents that we are unable to license
on reasonable terms.
Our technology, content and brands are subject to the threat of
piracy, unauthorized copying and other forms of intellectual
property infringement.
We regard our technology, content and brands as proprietary and
take measures to protect our technology, content and brands and
other confidential information from infringement. Piracy and other
forms of unauthorized copying and use of our technology, content
and brands are persistent, and policing is difficult. Further, the
laws of some countries in which our products are or may be
distributed either do not protect our intellectual property rights
to the same extent as the laws of the United States or are poorly
enforced. Legal protection of our rights may be ineffective in such
countries. In addition, although we take steps to enforce and
police our rights, factors such as the proliferation of technology
designed to circumvent the protection measures used by our business
partners or by us, the availability of broadband access to the
Internet, the refusal of Internet service providers or platform
holders to remove infringing content in certain instances, and the
proliferation of online channels through which infringing product
is distributed all have contributed to an expansion in unauthorized
copying of our technology, content and brands.
Third parties may register trademarks or domain names or purchase
internet search engine keywords that are similar to our registered
trademark or pending trademarks, brands or websites, or
misappropriate our data and copy our gaming platform, all of which
could cause confusion, divert gamers away from our gaming platform
and league tournaments, or harm our reputation.
Competitors and other third parties may purchase
(i) trademarks that are similar to our trademarks and
(ii) keywords that are confusingly similar to our brands or
websites in Internet search engine advertising programs and in the
header and text of the resulting sponsored links or advertisements
in order to divert gamers from us to their websites. Preventing
such unauthorized use is inherently difficult. If we are unable to
prevent such unauthorized use, competitors and other third parties
may continue to drive potential gamers away from our gaming
platform to competing, irrelevant or potentially offensive
platforms, which could harm our reputation and cause us to lose
revenue.
We may not be able to prevent others from unauthorized use of our
intellectual property, which could harm our business and
competitive position.
We regard our registered trademark and pending trademarks, service
marks, pending patents, domain names, trade secrets, proprietary
technologies and similar intellectual property as critical to our
success. We rely on trademark and patent law, trade secret
protection and confidentiality and license agreements with our
employees and others to protect our proprietary
rights.
We have invested significant resources to develop our own
intellectual property and acquire licenses to use and distribute
the intellectual property of others on our gaming platform. Failure
to maintain or protect these rights could harm our business. In
addition, any unauthorized use of our intellectual property by
third parties may adversely affect our current and future revenues
and our reputation.
Policing unauthorized use of proprietary technology is difficult
and expensive. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. Further, we require every
employee and consultant to execute proprietary information and
invention agreements prior to commencing work. Despite our efforts
to protect our proprietary rights, third parties may attempt to
copy or otherwise obtain and use our intellectual property or seek
court declarations that they do not infringe upon our intellectual
property rights. Monitoring unauthorized use of our intellectual
property is difficult and costly, and we cannot assure you that the
steps we have taken will prevent misappropriation of our
intellectual property. From time to time, we may have to resort to
litigation to enforce our intellectual property rights, which could
result in substantial costs and diversion of our
resources.
Our patent and trademark applications may not be granted and our
patent and trademark rights, once patents are issued and trademarks
are registered, may be contested, circumvented, invalidated or
limited in scope, and our patent and trademark rights may not
protect us effectively once issued and registered, respectively. In
particular, we may not be able to prevent others from developing or
exploiting competing technologies and trademarks, which could have
a material and adverse effect on our business operations, financial
condition and results of operations.
Currently, we have three patent applications pending, one
registered trademark and eighteen pending trademark applications,
along with licenses from game publishers to utilize their
proprietary games. For our pending patent applications and we
cannot assure you that we will be granted patents pursuant to our
pending applications as well as future patent applications we
intend to file. Even if our patent applications succeed, it is
still uncertain whether these patents will be contested,
circumvented or invalidated in the future. In addition, the rights
granted under any issued patents may not provide us with sufficient
protection or competitive advantages. The claims under any patents
that issue from our patent applications may not be broad enough to
prevent others from developing technologies that are similar or
that achieve results similar to ours. It is also possible that the
intellectual property rights of others will bar us from licensing
and from exploiting any patents that issue from our pending
applications. Numerous U.S. and foreign issued patents and pending
patent applications owned by others exist in the fields in which we
have developed and are developing our technology. These patents and
patent applications might have priority over our patent
applications and could subject our patent applications to
invalidation. Finally, in addition to those who may claim priority,
any of our pending patent and trademark applications may also be
challenged by others on the basis that they are otherwise invalid
or unenforceable.
We may be held liable for information or content displayed on,
retrieved from or linked to our gaming platform, or distributed to
our users.
Our interactive live streaming platform enables gamers to exchange
information and engage in various other online activities. Although
we require our gamers to register their real name, we do not
require user identifications used and displayed during gameplay to
contain any real-name information, and hence we are unable to
verify the sources of all the information posted by our gamers. In
addition, because a majority of the communications on our online
and in person gaming platform is conducted in real time,
we are unable to examine the content generated by gamers before
they are posted or streamed. Therefore, it is possible that gamers
may engage in illegal, obscene or incendiary conversations or
activities, including publishing of inappropriate or illegal
content that may be deemed unlawful. If any content on our platform
is deemed illegal, obscene or incendiary, or if appropriate
licenses and third-party consents have not been obtained, claims
may be brought against us for defamation, libel, negligence,
copyright, patent or trademark infringement, other unlawful
activities or other theories and claims based on the nature and
content of the information delivered on or otherwise accessed
through our platform. Moreover, the costs of compliance may
continue to increase when more content is made available on our
platform as a result of our growing base of gamers, which may
adversely affect our results of operations.
Intensified government regulation of the Internet industry could
restrict our ability to maintain or increase the level of traffic
to our gaming platform as well as our ability to capture other
market opportunities.
The Internet industry is increasingly subject to strict scrutiny.
New laws and regulations may be adopted from time to time to
address new issues that come to the authorities’ attention.
We may not timely obtain or maintain all the required licenses or
approvals or make all the necessary filings in the future. We also
cannot assure you that we will be able to obtain the required
licenses or approvals if we plan to expand into other Internet
businesses. If we fail to obtain or maintain any of the required
licenses or approvals or make the necessary filings, we may be
subject to various penalties, which may disrupt our business
operations or derail our business strategy, and materially and
adversely affect our business, financial condition and results of
operations.
From time to time we may become involved in legal
proceedings.
From time to time we may become subject to legal proceedings,
claims, litigation and government investigations or inquiries,
which could be expensive, lengthy, disruptive to normal business
operations and occupy a significant amount of our employees’
time and attention. In addition, the outcome of any legal
proceedings, claims, litigation, investigations or inquiries may be
difficult to predict and could have a material adverse effect on
our business, operating results, or financial
condition.
Risks Related to our Common Stock
Although out common stock is listed on the Nasdaq Capital Market,
our shares are likely to be thinly traded for some time and an
active market may never develop.
Although our common stock is listed on the Nasdaq Capital
Market,
it is likely that
initially there will be a very limited trading market for our
common stock, and we cannot ensure that a robust trading market
will ever develop or be sustained. Our shares of common stock may
be thinly traded, and the price, if traded, may not reflect our
actual or perceived value. There can be no assurance that there
will be an active market for our shares of common stock in the
future. The market liquidity will be dependent on the perception of
our operating business, competitive forces, state of the esports
gaming industry, growth rate and becoming cash flow profitable on a
sustainable basis, among other things. We may, in the future, take
certain steps, including utilizing investor awareness campaigns,
press releases, road shows, and conferences to increase awareness
of our business and any steps that we might take to bring us to the
awareness of investors may require we compensate financial public
relations firms with cash and/or stock. There can be no assurance
that there will be any awareness generated or the results of any
efforts will result in any impact on our trading volume.
Consequently, investors may not be able to liquidate their
investment or liquidate it at a price that reflects the value of
the business and trading may be at an inflated price relative to
the performance of our company due to, among other things,
availability of sellers of our shares. If a market should develop,
the price may be highly volatile. Because there may be a low price
for our shares of common stock, many brokerage firms or clearing
firms may not be willing to effect transactions in the securities
or accept our shares for deposit in an account. Even if an investor
finds a broker willing to effect a transaction in the shares of our
common stock, the combination of brokerage commissions, transfer
fees, taxes, if any, and any other selling costs may exceed the
selling price. Further, many lending institutions will not permit
the use of low-priced shares of common stock as collateral for any
loans.
Our stock price may be volatile, and you could lose all or part of
your investment.
The trading price of our common stock following this offering may
fluctuate substantially and may be higher or lower than the initial
public offering price. This may be especially true for companies
with a small public float. The trading price of our common stock
following this offering will depend on several factors, including
those described in this “
Risk
Factors
” section, many of
which are beyond our control and may not be related to our
operating performance. These fluctuations could cause you to lose
all or part of your investment in our common stock since you might
be unable to sell your shares at or above the price you paid in
this offering. Factors that could cause fluctuations in the trading
price of our common stock include:
●
changes
to our industry, including demand and regulations;
●
we
may not be able to compete successfully against current and future
competitors;
●
competitive
pricing pressures;
●
our
ability to obtain working capital financing as
required;
●
additions
or departures of key personnel;
●
sales
of our common stock;
●
our
ability to execute our business plan;
●
operating
results that fall below expectations;
●
loss
of any strategic relationship, sponsor or licensor;
●
any
major change in our management;
●
changes
in accounting standards, procedures, guidelines, interpretations or
principals; and
●
economic,
geo-political and other external factors.
In addition, the stock market in general, and the market for
technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies.
Broad market and industry factors, as well as general economic,
political and market conditions such as recessions or interest rate
changes, may seriously affect the market price of our common stock,
regardless of our actual operating performance. These fluctuations
may be even more pronounced in the trading market for our stock
shortly following this offering. If the market price of our common
stock after this offering does not exceed the initial public
offering price, you may not realize any return on your investment
in us and may lose some or all of your investment.
In addition, in the past, following periods of volatility in the
overall market and the market prices of particular companies’
securities, securities class action litigations have often been
instituted against these companies. Litigation of this type, if
instituted against us, could result in substantial costs and a
diversion of our management’s attention and resources. Any
adverse determination in any such litigation or any amounts paid to
settle any such actual or threatened litigation could require that
we make significant payments.
If securities industry analysts do not publish research reports on
us, or publish unfavorable reports on us, then the market price and
market trading volume of our common stock could be negatively
affected.
Any trading market for our common stock will be influenced in part
by any research reports that securities industry analysts publish
about us. We may not obtain any future research coverage by
securities industry analysts. In the event we are covered by
research analysts, and one or more of such analysts downgrade our
securities, or otherwise reports on us unfavorably, or discontinues
coverage of us, the market price and market trading volume of our
common stock could be negatively affected.
We have not paid cash dividends in the past and do not expect to
pay dividends in the future. Any return on investment will likely
be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not
anticipate doing so in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial
condition and other business and economic factors affecting us at
such time as our board of directors may consider relevant. If we do
not pay dividends, our common stock may be less valuable because a
return on your investment will only occur if our stock price
appreciates.
Since we do not anticipate paying any cash dividends on our capital
stock in the foreseeable future, stock price appreciation, if any,
will be your sole source of gain.
We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business. In addition,
the terms of any future debt agreements may preclude us from paying
dividends. As a result, appreciation, if any, in the market price
of our common stock will be your sole source of gain for the
foreseeable future.
Upon expiration of lock-up agreements between the
underwriters of our IPO and our officers, directors and certain
holders of our common stock in late-August 2019, a substantial
number of shares of our common stock could be sold into the public
market, which could depress our stock price.
Our officers, directors and certain holders of our common stock,
options and warrants, which represents substantially all of our
outstanding shares of common stock immediately prior to completion
of our IPO, entered into lock-up agreements with the
underwriters of our IPO which prohibit, subject to certain limited
exceptions, the disposal or pledge of, or the hedging against, any
of their common stock or securities convertible into or
exchangeable for shares of common stock for a period through August
26, 2019, subject to extension in certain circumstances. The market
price of our common stock could decline as a result of sales by our
stockholders in the market after the expiration of
the lock-up period, or the perception that these sales
could occur. After these lock-up period expires, many of
our stockholders will have an opportunity to sell their stock for
the first time. These factors could also make it difficult for us
to raise additional capital by selling stock.
Future issuances of debt securities, which would rank senior to our
common stock upon our bankruptcy or liquidation, and future
issuances of preferred stock, which would rank senior to our common
stock for the purposes of dividends and liquidating distributions,
may adversely affect the level of return you may be able to achieve
from an investment in our common stock
.
In the future, we may attempt to increase our capital resources by
offering debt securities. In the event of a bankruptcy or
liquidation, holders of our debt securities, and lenders with
respect to other borrowings we may make, would receive
distributions of our available assets prior to any distributions
being made to holders of our common stock. Moreover, if we issue
preferred stock in the future, the holders of such preferred stock
could be entitled to preferences over holders of common stock in
respect of the payment of dividends and the payment of liquidating
distributions. Because our decision to issue debt or preferred
securities in any future offering, or borrow money from lenders,
will depend in part on market conditions and other factors beyond
our control, we cannot predict or estimate the amount, timing or
nature of any such future offerings or borrowings. Holders of our
common stock must bear the risk that any such future offerings we
conduct or borrowings we make may adversely affect the level of
return they may be able to achieve from an investment in our common
stock.
We are an emerging growth company, and any decision on our
part to comply only with certain reduced reporting and disclosure
requirements applicable to emerging growth companies could make our
common stock less attractive to investors.
We are an emerging growth company, and, for as long as we
continue to be an emerging growth company, we may choose to
take advantage of exemptions from various reporting requirements
applicable to other public companies that are not “emerging
growth companies,” including:
●
not
being required to have our independent registered public accounting
firm audit our internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act;
●
reduced
disclosure obligations regarding executive compensation in our
periodic reports and annual report on Form 10-K; and
●
exemptions
from the requirements of holding a non-binding advisory vote on
executive compensation and stockholder approval of any golden
parachute payments not previously approved.
We could be an emerging growth company for up to five
years following the completion of this offering. Our status as
an emerging growth company will end as soon as any of the
following takes place:
●
the
last day of the fiscal year in which we have more than $1.07
billion in annual revenue;
●
the
date we qualify as a “large accelerated filer,” with at
least $700 million of equity securities held by
non-affiliates;
●
the
date on which we have issued, in any three-year period, more than
$1.0 billion in non-convertible debt securities; or
●
the
last day of the fiscal year ending after the fifth anniversary of
the completion of this offering.
We cannot predict if investors will find our common stock less
attractive if we choose to rely on the exemptions afforded emerging
growth companies. If some investors find our common stock less
attractive because we rely on any of these exemptions, there may be
a less active trading market for our common stock and the market
price of our common stock may be more volatile.
Under the JOBS Act, emerging growth companies can also delay
adopting new or revised accounting standards until such time as
those standards apply to private companies. We have elected to use
this extended transition period for complying with new or revised
accounting standards that have different effective dates for public
and private companies until the earlier of the date we (i) are no
longer an emerging growth company or
(ii) affirmatively and irrevocably opt out of the extended
transition period provided in the JOBS Act. As a result, our
financial statements may not be comparable to companies that comply
with new or revised accounting pronouncements as of public company
effective dates.
We will incur increased costs as a result of being a public
company, particularly after we cease to qualify as an
“emerging growth company.”
Upon completion of this offering, we will become a public company
and expect to incur significant legal, accounting and other
expenses that we did not incur as a private company.
The Sarbanes-Oxley Act, as well as rules subsequently
implemented by the SEC and Nasdaq, impose various requirements on
the corporate governance practices of public companies. We expect
these rules and regulations to increase our legal and financial
compliance costs and to make some corporate activities more
time-consuming and costly. We expect to incur significant expenses
and devote substantial management effort toward ensuring compliance
with the requirements of Section 404 of
the Sarbanes-Oxley Act and the other rules and
regulations of the SEC. For example, as a result of becoming a
public company, we will need to adopt policies regarding internal
controls and disclosure controls and procedures. We also expect
that operating as a public company will make it more difficult and
more expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same
or similar coverage. In addition, we will incur additional costs
associated with our public company reporting requirements. It may
also be more difficult for us to find qualified persons to serve on
our board of directors or as executive officers. We are currently
evaluating and monitoring developments with respect to these rules
and regulations, and we cannot predict or estimate with any degree
of certainty the amount of additional costs we may incur or the
timing of such costs.
In the past, stockholders of a public company often brought
securities class action suits against the company following periods
of instability in the market price of that company’s
securities. If we were involved in a class action suit, it could
divert a significant amount of our management’s attention and
other resources from our business and operations, which could harm
our results of operations and require us to incur significant
expenses to defend the suit. Any such class action suit, whether or
not successful, could harm our reputation and restrict our ability
to raise capital in the future. In addition, if a claim is
successfully made against us, we may be required to pay significant
damages, which could have a material adverse effect on our
financial condition and results of operations.
Because of our status as an emerging growth company, you will not
be able to depend on any attestation from our independent
registered public accounting firm as to our internal control over
financial reporting for the foreseeable future
.
Our independent registered public accounting firm will not be
required to attest to the effectiveness of our internal control
over financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act until the later of the year following our first
annual report required to be filed with the SEC or the date we are
no longer an “emerging growth company” as defined in
the JOBS Act. Accordingly, you will not be able to depend on any
attestation concerning our internal control over financial
reporting from our independent registered public accounting firm
for the foreseeable future. Subsequent to the time frame
above, our independent registered public accounting firm will not
be required to attest to the effectiveness of our internal control
over financial reporting pursuant to the Sarbanes-Oxley
Act until such time that the Company becomes an
“accelerated filer,” as defined by the
SEC.
Changes in tax laws or regulations that are applied adversely to us
or our customers may have a material adverse effect on our
business, cash flow, financial condition or results of
operations.
New income, sales, use or other tax laws, statutes, rules,
regulations or ordinances could be enacted at any time, which could
affect the tax treatment of our earnings and adversely affect our
operations, and our business and financial performance. Further,
existing tax laws, statutes, rules, regulations or ordinances could
be interpreted, changed, modified or applied adversely to us.
For example, on December 22, 2017, President Trump signed tax
legislation into law, commonly referred to as the Tax Cuts and Jobs
Act of 2017, that contains many significant changes to the U.S. tax
laws. The new legislation reduced the corporate income tax
rate from 34% to 21% effective January 1, 2018, causing all of our
deferred income tax assets and liabilities, including NOLs, to be
measured using the new rate and which value is reflected in the
valuation of these assets as of December 31, 2017. As a result, the
value of our deferred tax assets decreased by approximately $4.3
million and the related valuation allowance has been reduced by the
same amount. Our analysis and interpretation of this legislation is
ongoing. Given the full valuation allowance provided for net
deferred tax assets for the periods presented herein, the change in
tax law did not have a material impact on our financial statements
provided herein. There may, however, be additional tax impacts
identified in subsequent fiscal periods in accordance with
subsequent interpretive guidance issued by the SEC or the Internal
Revenue Service. Further, there may be other material adverse
effects resulting from the legislation that we have not yet
identified. No estimated tax provision has been recorded in the
financial statements included herein for tax attributes that are
incomplete or subject to change.
The foregoing items could have a material adverse effect on our
business, cash flow, financial condition or results of
operations. In addition, it is unclear how these U.S. federal
income tax changes will affect state and local taxation, which
often uses federal taxable income as a starting point for computing
state and local tax liabilities. The impact of this tax
legislation on holders of our common stock is also uncertain and
could be adverse. We urge our stockholders and investors to consult
with our legal and tax advisors with respect to this legislation
and the potential tax consequences of investing in or holding our
common stock.
We have granted, and may continue to grant, share incentive awards,
which may result in increased share-based compensation
expenses.
We adopted our Amended and Restated 2014 Stock Option and Incentive
Plan (the “
2014
Plan
”) in October 2014,
for purposes of granting share-based compensation awards to
employees, directors and consultants to incentivize their
performance and align their interests with ours. We account for
compensation costs for all share-based awards issued under the 2014
Plan using a fair-value based method and recognize expenses in our
statements of comprehensive loss in accordance with GAAP. Under the
2014 Plan, we are authorized to grant options to purchase shares of
common stock of our Company, restricted share units to receive
shares of common stock and restricted shares of common stock. For
the nine months ended September 30, 2019 and the year ended
December 31, 2018, we recorded share-based compensation expense of
$2.73 million and $2.5 million, respectively, primarily related to
issuances and vesting of awards under the 2014
Plan.
We believe the granting of share incentive awards is important to
our ability to attract and retain employees, and we will continue
to grant share incentive awards to employees in the future. As a
result, our expenses associated with share-based compensation may
increase, which may have an adverse effect on our results of
operations.
None.
|
ITEM 3.
D
EFAULTS UPON SENIOR
SECURITIES
|
None.
|
ITEM 4.
MINE
SAFETY
DISCLOSURES
|
|
|
Not applicable.
|
ITEM 5.
OTHER
INFORMATION
|
None.
|
(b)
|
Exhibits
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
Commercial
Partnership Agreement between Super League Gaming, Inc., and
ggCircuit, LLC, dated September 23, 2019.
|
|
|
|
|
|
|
|
Certification
of the Principal Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
Certification
of the Principal Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
Certification
of the Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
+
|
Certain
portions of this exhibit (indicated by “[*****]”) have
been omitted as the Company has determined (i) the omitted
information is not material and (ii) the omitted information would
likely cause harm to the Company if publicly
disclosed.
|
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
|
|
|
SUPER LEAGUE GAMING, INC.
|
|
|
|
|
|
|
|
|
|
By
|
/s/
Ann Hand
|
|
|
|
|
Ann Hand
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
By
|
/s/
Clayton Haynes
|
|
|
|
|
Clayton Haynes
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
Date: November 14, 201
9
|
|
|
|
-56-
TABLE OF CONTENTS
Part IItem 1. Condensed Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RisksItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits