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, 2020March 31, 2021
OR
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 |
From the transition period from to
Commission File Number 001-38819
SUPER LEAGUE GAMING, INC.
(Exact name of small business issuer as specified in its charter)
Delaware | 47-1990734 |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
2912 Colorado Ave., Suite #203
Santa Monica, California 90404
(Address of principal executive offices)
Company: (802) 294-2754; Investor Relations: 949-574-3860
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] |
| | Emerging growth company | [X] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.001 per share | SLGG | NASDAQ Capital Market |
As of November 11, 2020,May 14, 2021, there were 15,483,01023,133,918 shares of the registrant’s common stock, $0.001 par value, issued and outstanding.
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FINANCIAL INFORMATION
ITEMITEM 1. CONDENSED FINANCIAL STATEMENTS
SUPER LEAGUE GAMING, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
| | | | | |
| | | | | |
| ASSETS | | | | |
| Current Assets | | |
| Cash and cash equivalents | $10,346,000 | $8,442,000 | $36,742,000 | $7,942,000 |
| Accounts receivable | 972,000 | 293,000 | 915,000 | 588,000 |
| Prepaid expenses and other current assets | 1,213,000 | 924,000 | 751,000 | 837,000 |
| Total current assets | 12,531,000 | 9,659,000 | 38,408,000 | 9,367,000 |
| Property and equipment, net | 160,000 | 239,000 | 119,000 | 138,000 |
| Intangible and other Assets, net | 1,953,000 | 1,984,000 | 1,927,000 | 1,907,000 |
| Goodwill | 2,565,000 | 2,565,000 | 2,565,000 |
| Total assets | $17,209,000 | $14,447,000 | $43,019,000 | $13,977,000 |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | | |
| Current Liabilities | | |
| Accounts payable and accrued expenses | $727,000 | $853,000 | $1,637,000 | $1,829,000 |
| Deferred revenue | 31,000 | 151,000 | 8,000 | - |
| Total current liabilities | 758,000 | 1,004,000 | 1,645,000 | 1,829,000 |
| | | |
| Long-term note payable | 1,205,000 | - | 1,211,000 | 1,208,000 |
| | | |
| Total liabilities | 1,963,000 | 1,004,000 | 2,856,000 | 3,037,000 |
| | | |
| Commitments and Contingencies | | |
| | | |
| Stockholders’ Equity | | |
| Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding | - | - |
| Common stock, par value $0.001 per share; 100,000,000 shares authorized; 15,483,010 and 8,573,922 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively. | 25,000 | 18,000 | |
| Common stock, par value $0.001 per share; 100,000,000 shares authorized; 23,133,918 and 15,483,010 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively. | | 33,000 | 25,000 |
| Additional paid-in capital | 115,025,000 | 99,237,000 | 149,299,000 | 115,459,000 |
| Accumulated deficit | (99,804,000) | (85,812,000) | (109,169,000) | (104,544,000) |
| Total stockholders’ equity | 15,246,000 | 13,443,000 | 40,163,000 | 10,940,000 |
| Total liabilities and stockholders’ equity | $17,209,000 | $14,447,000 | $43,019,000 | $13,977,000 |
See accompanying notes to condensed financial statements
SUPERSUPER LEAGUE GAMING, INC.CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| | Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, |
| | | | | | | |
| | | |
| REVENUES | $718,000 | $350,000 | $1,285,000 | $822,000 | $788,000 | $243,000 |
| | | |
| COST OF REVENUES | 327,000 | 192,000 | 560,000 | 379,000 | 342,000 | 117,000 |
| | | |
| GROSS PROFIT | 391,000 | 158,000 | 725,000 | 443,000 | 446,000 | 126,000 |
| | | |
| OPERATING EXPENSES | | |
| Selling, marketing and advertising | 1,476,000 | 1,063,000 | 4,005,000 | 3,202,000 | 1,483,000 | 1,273,000 |
| Technology platform and infrastructure | 1,430,000 | 1,319,000 | 5,109,000 | 3,772,000 | 1,603,000 | 1,949,000 |
| General and administrative | 1,782,000 | 2,201,000 | 5,615,000 | 9,535,000 | 1,986,000 | 2,052,000 |
| Total operating expenses | 4,688,000 | 4,583,000 | 14,729,000 | 16,509,000 | 5,072,000 | 5,274,000 |
| | | |
| NET OPERATING LOSS | (4,297,000) | (4,425,000) | (14,004,000) | (16,066,000) | (4,626,000) | (5,148,000) |
| | | |
| OTHER INCOME (EXPENSE) | | |
| Accrued interest expense | (3,000) | - | (5,000) | (187,000) | (3,000) | - |
| Accretion of debt discount | - | - | (2,684,000) | |
| Beneficial conversion feature | - | - | (7,067,000) | |
| Other | 2,000 | 8,000 | 17,000 | 13,000 | 4,000 | 14,000 |
| Total other income (expense) | (1,000) | 8,000 | 12,000 | (9,925,000) | 1,000 | 14,000 |
| | | |
| NET LOSS | $(4,298,000) | $(4,417,000) | $(13,992,000) | $(25,991,000) | $(4,625,000) | $(5,134,000) |
| | | |
| Net loss attributable to common stockholders - basic and diluted | | |
| Basic and diluted loss per common share | $(0.36) | $(0.52) | $(1.39) | $(3.39) | $(0.23) | $(0.60) |
| Weighted-average number of shares outstanding, basic and diluted | 12,063,778 | 8,569,922 | 10,084,002 | 7,663,243 | 19,807,775 | 8,584,834 |
See accompanying notes to condensed financial statements
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | Three Months Ended September 30 | Nine Months Ended September 30 |
| | | | | |
| Common stock (Shares): | | | | |
| Balance, beginning of period | 10,460,696 | 8,569,922 | 8,573,922 | 4,610,109 |
| Initial public offering of common stock | - | - | - | 2,272,727 |
Issuance of common stock at $3.50 per share
| - | - | 1,825,000 | - |
Issuance of common stock at $1.85per share
| 4,988,981 | | 4,988,981 | |
| Automatic conversion of convertible debt to common stock | - | - | - | 1,475,164 |
| Common stock issued for Framerate Acquisition (Note 4) | - | - | 32,936 | 134,422 |
| Stock-based compensation | 33,333 | - | 62,171 | 10,833 |
| Warrant Exercises | - | - | - | 66,667 |
| Balance, end of period | 15,483,010 | 8,569,922 | 15,483,010 | 8,569,922 |
| | | | | |
| Common stock (Amount): | | | | |
| Balance, beginning of period | $20,000 | $18,000 | $18,000 | $14,000 |
| Initial public offering of common stock, net of issuance costs (Note 6) | - | - | - | 2,000 |
| Issuance of common stock at $3.50 per share, net of issuance costs (Note 6) | - | - | 2,000 | - |
| Issuance of common stock at $1.85 per share, net of issuance costs (Note 6) | 5,000 | | 5,000 | |
| Automatic conversion of convertible debt to common stock | - | - | - | 2,000 |
| Balance, end of period | $25,000 | $18,000 | $25,000 | $18,000 |
| | | | | |
| Additional paid-in-capital: | | | | |
| Balance, beginning of period | $106,237,000 | $97,598,000 | $99,237,000 | $48,325,000 |
| Initial public offering of common stock, net of issuance costs (Note 6) | - | - | - | 22,456,000 |
| Issuance of common stock at $3.50 per share, net of issuance costs (Note 6) | - | - | 5,951,000 | - |
| Issuance of common stock at $1.85 per share, net of issuance costs (Note 6) | 8,398,000 | - | 8,398,000 | - |
| Automatic conversion of convertible debt to common stock | - | - | - | 13,791,000 |
| Beneficial conversion feature | - | - | - | 7,067,000 |
| Common stock issued for Framerate Acquisition (Note 4) | - | - | - | 1,000,000 |
| Framerate Earn-Out (Note 4) | - | - | - | 454,000 |
| Stock-based compensation | 380,000 | 714,000 | 1,429,000 | 5,199,000 |
| Stock option and warrant exercises | 10,000 | - | 10,000 | 20,000 |
| Balance, end of period | $115,025,000 | $98,312,000 | $115,025,000 | $98,312,000 |
| | | | | |
| Accumulated Deficit: | | | | |
| Balance, beginning of period | $(95,506,000) | $(76,707,000) | $(85,812,000) | $(55,133,000) |
| Net Loss | (4,298,000) | (4,417,000) | (13,992,000) | (25,991,000) |
| Balance, end of period | (99,804,000) | (81,124,000) | (99,804,000) | (81,124,000) |
| Total stockholders’ equity | $15,246,000 | $17,206,000 | $15,246,000 | $17,206,000 |
| | Three Months Ended March 31, |
| | | |
| Common stock (Shares) | | |
| Balance, beginning of period | 15,483,010 | 8,573,922 |
| Issuance of common stock at $2.60 per share | 3,076,924 | - |
| Issuance of common stock at $4.10 per share | 2,926,830 | - |
| Issuance of common stock at $9.00 per share | 1,512,499 | |
| 134,655 | 21,820 |
| Balance, end of period | 23,133,918 | 8,595,742 |
| | | |
| Common stock (Amount): | | |
| Balance, beginning of period | $25,000 | $18,000 |
| Issuance of common stock at $2.60 per share (Note 5) | 3,000 | - |
| Issuance of common stock at $4.10 per share (Note 5) | 3,000 | - |
Issuance of common stock at $9.00 per share (Note 5) | 2,000 | - |
| Balance, end of period | $33,000 | $18,000 |
| | | |
| Additional paid-in-capital: | | |
| Balance, beginning of period | $115,459,000 | $99,237,000 |
| Issuance of common stock at $2.60 per share, net of issuance costs (Note 5) | 7,924,000 | - |
| Issuance of common stock at $4.10 per share, net of issuance costs (Note 5) | 11,927,000 | - |
| Issuance of common stock at $9.00 per share, net of issuance costs (Note 5) | 13,540,000 | - |
| Stock-based compensation | 411,000 | 677,000 |
| Stock option exercises | 38,000 | - |
| Balance, end of period | $149,299,000 | $99,914,000 |
| | | |
| Accumulated Deficit: | | |
| Balance, beginning of period | $(104,544,000) | $(85,812,000) |
| Net Loss | (4,625,000) | (5,134,000) |
| Balance, end of period | (109,169,000) | (90,946,000) |
| Total stockholders’ equity | $40,163,000 | $8,986,000 |
See accompanying notes to condensed financial statements
SUPER LEAGUE GAMING,GAMING, INC. CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Nine Months Ended September 30, | Three Months Ended March 31, |
| | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | |
| Net loss | $(13,992,000) | $(25,991,000) | $(4,625,000) | $(5,134,000) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Depreciation and amortization | 1,098,000 | 657,000 | 266,000 | 525,000 |
| Stock-based compensation | 1,570,000 | 5,266,000 | 411,000 | 702,000 |
| Amortization of discount on convertible notes | - | 2,684,000 | |
| Beneficial conversion feature | - | 7,067,000 | |
| Changes in assets and liabilities: | | |
| Accounts receivable | (679,000) | 171,000 | (327,000) | (76,000) |
| Prepaid expenses and other current assets | (430,000) | (852,000) | 86,000 | (560,000) |
| Accounts payable and accrued expenses | (125,000) | 601,000 | (192,000) | 1,242,000 |
| Deferred revenue | (121,000) | 68,000 | 8,000 | (87,000) |
| Accrued interest on convertible notes | 5,000 | 187,000 | |
| Accrued interest on note payable | | 3,000 | - |
| Net cash used in operating activities | (12,674,000) | (10,142,000) | (4,370,000) | (3,388,000) |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| Cash paid for acquisition of Framerate (Note 4) | - | (1,491,000) | |
| Purchase of property and equipment | (7,000) | (56,000) | (2,000) | (4,000) |
| Capitalization of software development costs | (877,000) | (839,000) | (192,000) | (240,000) |
| Acquisition of other intangible assets | (104,000) | (138,000) | (73,000) | (39,000) |
| Net cash used in investing activities | (988,000) | (2,524,000) | (267,000) | (283,000) |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| Proceeds from issuance of common stock, net of issuance costs (Note 6) | 14,356,000 | 22,458,000 | |
| Proceeds from note payable (Note 5) | 1,200,000 | - | |
| Proceeds from common stock purchase warrant exercises | 10,000 | 20,000 | |
| Proceeds from issuance of common stock, net of issuance costs (Note 5) | | 33,399,000 | - |
| Proceeds from common stock option exercises | | 38,000 | - |
| Net cash provided by financing activities | 15,566,000 | 22,478,000 | 33,437,000 | - |
| | | |
| INCREASE IN CASH | 1,904,000 | 9,812,000 | 28,800,000 | (3,671,000) |
Cash – beginning of period | 8,442,000 | 2,774,000 | 7,942,000 | 8,442,000 |
Cash – end of period | $10,346,000 | $12,586,000 | $36,742,000 | $4,771,000 |
| | | |
| SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES | | |
Automatic conversion of convertible debt to common stock | $- | $13,793,000 | |
Issuance of common stock for Framerate Acquisition (Note 4) | $245,000 | $1,000,000 | |
See accompanying notes to condensed financial statements
| 1. | DESCRIPTION OF BUSINESS |
Super League Gaming, Inc. (“Super League,” the “Company,” “we” or “our”)is a global leaderleading gaming community and content platform that gives everyday gamers and creators multiple ways to connect and engage with others while enjoying the video games they love. Powered by patented, proprietary technology systems, Super League offers players the ability to create gameplay-driven experiences they can share with friends, the opportunity to watch live streaming broadcasts and gameplay highlights across digital and social channels, and the chance to compete in events and challenges designed to celebrate victories and achievements across multiple skill levels. With gameplay and content offerings featuring more than a dozen of the top video game titles in the mission to bring live and digital esports entertainment and experiences directly to everyday competitive gamers around the world. Utilizing our proprietary technology platform, Super League operates physical and digital experiences in partnership with publishers of top-tier game titles and owners/operators of a distributed footprint of venues, a network of digital social and viewing channels, and an association/organization of city-based amateur gaming clubs and teams. The Super League Network features multiple forms of content celebrating the love of play via social media, live streaming and video-on-demand, along with continuous gameplay and leaderboards. Inside our network is Framerate, a large independent social video esports network powered by user-generated highlight reels, and our exclusive proprietary platform Minehut, providing a social and gameplay forum for the avid Minecraft community.world, Super League is committedbuilding a broadly inclusive, global brand at the intersection of gaming, experiences and entertainment. Whether to supportingaccess its expanding direct audience of young gamers, creators and esports players, or to leverage the development of local, grassroots player communities, while providing a global, scalable infrastructure forcompany’s remote video production division, Virtualis Studios, third parties ranging from consumer brands, video game publishers, professional esports competitionteams, traditional sports organizations, video content producers, and engagement. We address a wide range of gamers across game titles, ages and skill levels, and also a wide range of content-capture beyond gameplay. This positionsmore, are turning to Super League as more than a tournament operator; we are a lifestyle and media company focused on capturing, generating, aggregating and distributing content across the genre of all things esports.to provide integrated solutions that drive business growth.
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.
Proposed Acquisition of Mobcrush Streaming, Inc.
On March 9, 2021, we entered into an Agreement and Plan of Merger (the “MC Merger Agreement”) by and among Mobcrush Streaming, Inc. (“Mobcrush”), the Company, and SLG Merger Sub II, Inc., a wholly-owned subsidiary of the Company (“Merger Co”). The MC Merger Agreement provides for the acquisition of Mobcrush by Super League pursuant to the merger of Merger Co with and into Mobcrush, with Mobcrush as the surviving corporation (the “Merger”). Upon completion of the Merger, Mobcrush will be a wholly-owned subsidiary of the Company.
In accordance with the terms and subject to the conditions of the MC Merger Agreement: (A) each outstanding share of Mobcrush common stock ("Mobcrush Common Stock") and Mobcrush preferred stock ("Mobcrush Preferred Stock", and with the Mobcrush Common Stock, the "Mobcrush Stock") (other than dissenting shares) will be canceled and converted into the right to receive (i) 0.528 shares of Super League’s common stock, as determined in the MC Merger Agreement (the “Share Conversion Ratio”), and (ii) any cash in lieu of fractional shares of common stock otherwise issuable under the MC Merger Agreement (the "Merger Consideration"). Subject to certain adjustments and other terms and conditions more specifically set forth in the MC Merger Agreement, we will be issuing 12,582,204 shares of the Company’s common stock as the Merger Consideration. The MC Merger Agreement contains representations, warranties and covenants of each of the parties thereto that are customary for transactions of this type. On April 20, 2021, we entered into an amendment to the MC Merger Agreement (the “Merger Agreement Amendment”). For information regarding the Merger Agreement Amendment, please see Note 6, Subsequent Events, below.
The obligations of Super League and Mobcrush to consummate the Merger are subject to certain closing conditions, including, but not limited to, (i) the approval of Mobcrush's and our shareholders, (ii) Mobcrush and our reaching an agreement as to the treatment of Mobcrush's unvested options exercisable for shares of Mobcrush Common Stock, which agreement was reached on April 20, 2021, (iii) receipt of any necessary regulatory approvals, (iv) the execution and delivery of certain support agreements pursuant to which officers, directors and certain stockholders of Super League and Mobcrush agree to vote in favor any and all stockholder proposals related to the Merger, and (v) the execution and delivery of the Registration Rights Agreement, pursuant to which we provided Mobcrush stockholders with certain registration rights for the shares of common stock issuable as Merger Consideration. We filed our Definitive Proxy Statement (the “Proxy”) with the SEC on April 30, 2021, inviting our stockholders of record to attend the 2021 annual meeting of stockholders of Super League Gaming, Inc., to be held at 10:00 a.m., Pacific Time, on May 27, 2021. In addition to certain routine matters, the Proxy requests our stockholders to approve of the issuance of a total of 12,582,204 shares of our common stock in exchange for all issued and outstanding securities of Mobcrush pursuant to the MC Merger Agreement (the “Mobcrush Issuance Proposal”). The proxy discloses that the request of our stockholders to approve of the Mobcrush Issuance Proposal is being made in order to comply with Listing Rule 5635 of the Nasdaq Stock Market.
| 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, 20192020 included in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the SEC on March 23, 2020.19, 2021.
The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The condensed interim financial statements of Super League include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of Super League’s financial position as of September 30, 2020,March 31, 2021, 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, 2020March 31, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year.
Reclassifications
Certain reclassifications to operating expense line items have been made to prior year amounts for consistency and comparability with the current year’s financial statements presentation. These reclassifications had no effect on the reported total operating expenses for the periods presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The Company believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, stock-based compensation expense, accounting for business combinations,capitalized internal-use-software costs, and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.
Going Concern
The accompanying interim condensed financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the financial statements, the Company incurred net losses of $14.0 million and $26.0 million during the nine months ended September 30, 2020 and 2019, respectively, and had an accumulated deficit of $99.8 million as of September 30, 2020. Total noncash charges included in accumulated deficit since inception, primarily related to noncash stock compensation, restricted stock units issued in connection with a license agreement, amortization of the discount on convertible debt and in-kind advertising expense, totaled approximately $36.5 million. For the nine months ended September 30, 2020 and 2019, noncash expenses (excluding depreciation and amortization of fixed and intangible assets, respectively) included in net loss, primarily comprised of stock-based compensation and noncash interest charges (2019 period only), totaled $1.5 million and $15.2 million, respectively. For the nine months ended September 30, 2020 and 2019, net cash used in operating activities totaled $12.7 million and $10.1 million, respectively.
As of September 30, 2020, the Company had cash and cash equivalents of approximately $10.3 million. The Company has used and will continue to use significant capital for the growth and development of its business. The Company’s management expects operating losses to continue in the near term in connection with the pursuit of its strategic objectives. As such, management believes its current cash position, absent receipt of additional capital either from operations or that may be available from future issuance(s) of common stock or debt financings, is not sufficient to fund our planned operations for the twelve months following the issuance of these financial statements. As a result, our current financial condition raises substantial doubt about our ability to continue as a going concern.
We are focused on expanding our service offerings and revenue growth opportunities through internal development, collaborations, and through one or more strategic acquisitions. Management is currently exploring several alternatives for raising capital to facilitate our growth and execute our business strategy, including strategic partnerships or other forms of equity or debt financings.
The Company considers historical operating results, capital resources and financial position, in combination with current projections and estimates, as part of its plan to fund operations over a reasonable period. Management's considerations assume, among other things, that the Company will continue to be successful implementing its business strategy, that there will be no material adverse developments in the business, liquidity or capital requirements and, if necessary, the Company will be able to raise additional equity or debt financing on acceptable terms. If one or more of these factors do not occur as expected, it could cause a reduction or delay of its business activities, sales of material assets, default on its obligations, or forced insolvency. The accompanying financial statements do not contain any adjustments which might be necessary if the Company were unable to continue as a going concern. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company.
Recent Financing Activities
As described at Note 5, on May 4, 2020, the Company entered into a potentially forgivable loan from the U.S. Small Business Administration (“SBA”) resulting in net proceeds of approximately $1.2 million pursuant to the Paycheck Protection Program enacted by Congress under the CARES Act administered by the SBA.
As described at Note 6, in May 2020, the Company issued 1,825,000 shares of common stock at a price of $3.50 per share, raising aggregate net proceeds of approximately $6.0 million, after deducting placement agent fees of $319,000 and other offering expenses totaling $116,000, pursuant to a registered direct offering.
As described at Note 6, in August and September 2020, the Company issued a total of 4,988,981 shares of common stock at a price of $1.85 per share, raising aggregate net proceeds of approximately $8.4 million, after deducting placement agent fees of $646,000 and other offering expenses totaling $180,000.
The net proceeds are for working capital and other general corporate purposes, including sales and marketing activities, product development and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses.
Revenue Recognition
Revenue is recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. In this regard, revenue is recognized when: (i) the parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations; (ii) the entity can identify each party’s rights regarding the goods or services to be transferred; (iii) the entity can identify the payment terms for the goods or services to be transferred; (iv) the contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract);and (v) it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Transaction prices are based on the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, if any. We consider the explicit terms of the revenue contract, which are typically written and executed by the parties, our customary business practices, the nature, timing, and the amount of consideration promised by a customer in connection with determining the transaction price for our revenue arrangements. Refunds and sales returns historically have not been material.
Super League generates revenues and related cash flows from (i) sponsorshipsadvertising, serving as a marketing channel for brands and advertising, including third-partyadvertisers to reach their target audiences of gamers across our network, (ii) content, salescurating and distributing esports and entertainment content for our own network of digital channels and media and entertainment partner channels and (ii)(iii) direct to consumer offers including tournament fees for participation in our physical and online multiplayer gaming experiences, digital subscriptions, digital goods, gameplay access fees and merchandise sales.
Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied.
SponsorshipsAdvertising and AdvertisingSponsorships:
The Company generates sponsorship revenues Advertising revenue primarily fromconsists of direct sales activity along with sales of various formsprogrammatic display and video advertising units to third-party advertisers and exchanges. Advertising arrangements typically include contract terms for time periods ranging from several days to several weeks in length.
For advertising 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 sponsorshipsprogress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Revenue from shorter term advertising arrangements that provide for a contractual delivery or performance date is recognized when performance is substantially complete and promotionalor delivery occurs. Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for its online gameplay and content platforms and from sponsorship at its in-person esports experiences. Theseshorter-term campaigns.
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.
Sponsorship revenues also include revenues pursuant to arrangements with brand and media partners, retail venues, game publishers and broadcasters that allow our partners to run amateur esports experiences, and or capture specifically curated gameplay content that is customized for our partners’ distribution channels, leveraging the flexibility of, and powered by the Super League gaming and content technology platform.
channels. Sponsorship arrangements typically include contract terms for time periods ranging from several weeks or months to multi-year arrangements.
We also generate content through digital and physical experiences that offer opportunities for generating advertising revenue on our proprietary digital channels. In addition, we license our content to third parties seeking esports content for their own distribution channels.terms of twelve months in length.
For sponsorship arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the agreement as the Company satisfies itswe satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Payments are typically due from customers during the term of the arrangement.
Revenue forfrom sponsorship arrangements for one-off branded experiences and/or the development of content tailored specifically for the Company’sour partners’ distribution channels that provide for a contractual delivery or performance date, is recognized at a point in time, when performance is substantially complete and or delivery occurs.
Content
Content sales revenue is generated in connection with our curation and distribution of esports and entertainment content for our own network of digital channels and media and entertainment partner channels. We distribute three primary types of content for syndication and licensing, including: (1) our own original programming content, (2) user generated content (“UGC”), including online gameplay and gameplay highlights, and (3) the creation of content for third parties utilizing our remote production and broadcast technology.
For advertising and third-party content arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the arrangement as we satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Revenue from shorter term content sales arrangements that provide for a contractual delivery or performance date is recognized when performance is substantially complete and or delivery occurs. Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for shorter-term campaigns.
Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for shorter-term campaigns.
Direct to Consumer:
Direct to consumer revenues include onlineprimarily consist of primarily monthly digital subscription fees, and physical tournament fees, digital subscriptions,sales of digital goods and merchandise. Revenue from single experiences is recognized when the experience occurs. Revenue from multi-week packages is recognized over time as the multi-week experiences occur based on estimates of the progress toward complete satisfaction of the applicable offer and related performance obligations. Subscription revenue is recognized overin the applicable subscription term.period the services are rendered. Payments are typically due from customers at the point of sale.
Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied, as described above.
Revenue was comprised of the following for the periods presented:
| | Three Months Ended
September 30, | Nine Months Ended
September 30, | |
| | | | | | |
| Sponsorships and advertising | $677,000 | $342,000 | $1,190,000 | $798,000 | |
| | | | |
| Advertising and sponsorships | | $558,000 | $207,000 |
| Content sales | | 166,000 | 21,000 |
| Direct to consumer | 41,000 | 8,000 | 95,000 | 24,000 | 64,000 | 15,000 |
| | $718,000 | $350,000 | $1,285,000 | $822,000 | $788,000 | $243,000 |
For the three and nine months ended September 30,March 31, 2021 and 2020, 65%55% and 55%21% of revenues were recognized at a single point in time, and 35%45% and 45%79% of revenues were recognized over time, respectively.For the three and nine months ended September 30, 2019, 45% and 43%
Cost of Revenues
Cost of revenues were recognized at a pointincludes direct costs incurred in time,connection with the satisfaction of performance obligations under our revenue arrangements including direct labor, creative and 55%broadcast related contract services, talent and 57% of revenues were recognized over time, respectively.influencers, content capture and production services, direct marketing, prizing, platform costs and venue fees.
Advertising
Gaming experience and Super League brand related advertising costs include the cost of ad production, social media, print media, marketing, promotions, and merchandising. The Company expenses advertising costs as incurred. Advertising costs are included in selling, marketing and advertising expenses in the accompanying statements of operations. Advertising expenses for the three and nine months ended September 30,March 31, 2021 and 2020 were $22,000$134,000 and $73,000, respectively. Advertising expenses for the three and nine months ended September 30, 2019 were $81,000 and $270,000,$67,000, respectively.
Technology Platform and Infrastructure Costs
Technology platform and infrastructure costs include (i) allocated personnel costs, including salaries, noncash stock compensation, taxes and benefits related to our internal software developers and engineers, employed by Super League, engaged in the operation, maintenance, management, administration, testing and enhancement of our proprietary gaming and content technology platform, (ii) third-party contract software development and engineering resources engaged in developing and enhancing our proprietary gaming and content technology platform (iii) the amortization of capitalized internal use software costs, and (iv) technology platform related cloud services, broadband and other technology platform costs.
Intangible Assets
Intangible assets primarily consist of (i) internal-use software development costs, (ii) domain name, copyright and patent registration costs, (iii) commercial licenses and branding rights and (iv) other intangible assets, which are recorded at cost and amortized using the straight-line method over the estimated useful lives of the assets, ranging from three to 10 years.
Software development costs incurred to develop internal-use software during the application development stage are capitalized and amortized on a straight-line basis over the software’s estimated useful life, which is generally three years. Software development costs incurred during the preliminary stages of development are charged to expense as incurred. Maintenance and training costs are charged to expense as incurred. Upgrades or enhancements to existing internal-use software that result in additional functionality are capitalized and amortized on a straight-line basis over the applicable estimated useful life.
Impairment of Long-Lived Assets
The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. Management believes that there was no impairment of long-lived assets for the periods presented herein. There can be no assurance, however, that market conditions or demand for the Company’s products or services will not change, which could result in long-lived asset impairment charges in the future.
Stock-Based Compensation
Compensation expense for stock-based awards is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense, typically on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which is generally two to four years. Compensation expense for awards with performance conditions that affect vesting is recorded only for those awards expected to vest or when the performance criteria are met. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of stock option and common stock purchase warrant awards is estimated on the date of grant utilizing the Black-Scholes-Merton option pricing model. The Company utilizes the simplified method for estimating the expected term for options granted to employees due to the lack of available or sufficient historical exercise data for the Company for the applicable options terms. The Company accounts for forfeitures of awards as they occur.
Noncash stock-based compensation expenseequity-based awards (including warrants) to non-employees in exchange for consulting or other services are accounted for using the periods presented was comprisedgrant date fair value of the following:
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | | | | |
| Stock options | $145,000 | $374,000 | $579,000 | $3,004,000 |
| Warrants | - | 263,000 | 282,000 | 1,918,000 |
| Restricted stock units | 235,000 | 75,000 | 568,000 | 311,000 |
| Earn-out compensation expense (Note 4) | 90,000 | 25,000 | 141,000 | 33,000 |
| Total noncash stock compensation expense | $470,000 | $737,000 | $1,570,000 | $5,266,000 |
Noncash stock-based compensation expense for the periods presented was included in the following financial statement line items:
| | Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, |
| | | | | | | |
| Sales, marketing and advertising | $272,000 | $120,000 | $668,000 | $448,000 | $183,000 | $173,000 |
| Technology platform and infrastructure | 51,000 | 47,000 | 199,000 | 71,000 | 33,000 | 89,000 |
| General and administrative | 147,000 | 570,000 | 703,000 | 4,747,000 | 195,000 | 440,000 |
| Total noncash stock compensation expense | $470,000 | $737,000 | $1,570,000 | $5,266,000 | $411,000 | $702,000 |
Noncash stock-based compensation expense forEquity Financing Costs
Specific incremental costs directly attributable to a proposed or actual offering of securities or debt are deferred and charged against the ninegross 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 financing costs, if any, are included in other current assets in the accompanying balance sheet. For the three months ended September 30, 2019 included compensation expense resulting from the vesting of certain performance-based optionsMarch 31, 2021 and warrants previously granted to two of the Company’s executives which vested upon completion of the IPO2020, financing costs charged against gross proceeds in connection with equity financings totaled $215,000 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. $0, respectively.
Risks and Uncertainties
Concentrations. The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, and vendors whose accounts payable balances individually represented 10% or more of the Company’s total accounts payable, as follows:
For the three and nine months ended September 30,March 31, 2021 and 2020, twothree customers accounted for 43% and four customers accounted for 54%79% of revenues,revenue, respectively.For the three and nine months ended September 30, 2019, At March 31, 2021, five customers accounted for 90% and three customers accounted for 49% of revenues, respectively.At September 30, 2020, four customers accounted for 74%58% of accounts receivable. At December 31, 2019, one customer2020, two customers accounted for 70%39% of accounts receivable. At September 30, 2020, two vendorsMarch 31, 2021, one vendor accounted for 34%25% of accounts payable. At December 31, 2019, one vendor2020, three vendors accounted for 21%52% of accounts payable.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period. Diluted earnings per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period, including the dilutive effect of common stock equivalents. Potentially dilutive common stock equivalents primarily consist of employee stock options, warrants issued to employees and non-employees in exchange for services and warrants issued in connection with financings. All outstanding stock options, restricted stock units and warrants, totaling 4,595,0004,364,000 and 4,108,0004,470,000 at September 30,March 31, 2021 and December 31, 2020, and 2019, respectively, have been excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive.
Recent Accounting Guidance
Recent Accounting Pronouncements – Not Yet Adopted.
In February 2016, the FASB issued an ASU that requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative periods in the financial statements and is effective for fiscal years beginning after December 15, 2021 and early adoption is permitted. The Company is evaluating the impact that this guidance will have on its financial position, results of operations and financial statement disclosures.
In June 2016, the FASB issued guidance on the measurement and recognition of credit losses on most financial assets. For trade receivables, loans, and held-to-maturity debt securities, the current probable loss recognition methodology is being replaced by an expected credit loss model. For available-for-sale debt securities, the recognition model on credit losses is generally unchanged, except the losses will be presented as an adjustable allowance. The guidance will be applied retrospectively with the cumulative effect recognized as of the date of adoption. The guidance will become effective at the beginning of the Company’s first quarter of the fiscal year ending December 31, 2021 but can be adopted as early as the beginning of the first quarter of fiscal year ending December 31, 2020. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures.
| 3. | INTANGIBLE AND OTHER ASSETS |
Intangible and other assets consisted of the following for the periods presented:
| | | | | |
| | | | |
| Capitalized software development costs | $3,133,000 | $2,363,000 | $3,483,000 | $3,291,000 |
| Licenses | - | 340,000 | |
| Trade name | 189,000 | 189,000 |
| Domain | 68,000 | 68,000 |
| Copyrights and other | 392,000 | 289,000 | 507,000 | 435,000 |
| | 3,782,000 | 3,249,000 | 4,247,000 | 3,983,000 |
| Less: accumulated amortization | (1,829,000) | (1,265,000) | (2,320,000) | (2,076,000) |
| Intangible and other assets, net | $1,953,000 | $1,984,000 | $1,927,000 | $1,907,000 |
Amortization expense totaled $244,000 and $493,000 for the three and nine months ended September 30,March 31, 2021 and 2020, totaled $217,000 and $1,013,000, respectively. Amortization expense for the three and nine months ended September 30, 2019 totaled $134,000 and $326,000, respectively. In April 2020, we amended ouran arrangement with a third party terminating certain rights and licenses from a prior agreement, as amended, focused on in-person playgameplay in gaming centers, and securing other rights and licenses from the third party, focused on online play at home. As a result of the termination of the rights and licenses related to the prior arrangement, the Company accelerated the amortization of the remaining balance related to the prior rights and licenses, included in “Licenses” above, totaling $306,000, and certain capitalized internal use software development costs totaling $107,000, which areis included in technology platform and infrastructure expense in the accompanying statement of operations for the ninethree months ended September 30,March 31, 2020.
On June 3, 2019, Super League and SLG Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), entered into an agreement and plan of merger (the “Merger Agreement”) with Framerate, Inc., a Delaware corporation (“Framerate”), pursuant to which Framerate merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Acquisition”). The Acquisition was consummated on June 6, 2019 when the certificate of merger of Merger Sub and Framerate was filed with the Secretary of State of the State of Delaware (the “Effective Date”). As consideration for the Acquisition, the Company ratably paid and/or issued to the former shareholders of Framerate an aggregate of i) $1.5 million paid in cash and ii) $1.0 million paid by the issuance of a total of 134,422 shares of the Company’s common stock, at a price per share of $7.4395 (the “Closing Shares”).
In addition to the issuance of the Closing Shares, the Merger Agreement provides for the issuance of up to an additional $980,000 worth of shares of the Company’s common stock at the same price per share as the Closing Shares (the “Earn-Out Shares”) in the event Framerate achieves certain performance-based milestones during the two-year period following the closing of the Acquisition, or June 6, 2021 (the “Earn-Out”). One-half of the Earn-Out Shares will be issuable on the one-year anniversary of the Effective Date, and the remaining one-half will be issuable on the second anniversary of the Effective Date. The fair value of the Earn-Out on the Effective Date was estimated to be $454,000. In June 2020, we issued an additional 32,936 shares of our common stock to the former shareholders of Framerate in connection with the achievement of certain components of the year-one earn-out related performance milestones.
The Company determined that the Acquisition constitutes a business acquisition as defined by Accounting Standards Codification (“ASC”) 805,Business Combinations. Accordingly, the assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. Super League’s preliminary purchase price allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data. Fair values are determined based on the requirements of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”).
The Company hired the former Chief Executive of Framerate (“Framerate Executive”), who was also a selling shareholder of Framerate. Pursuant to the provisions of the Earn-Out included in the Merger Agreement, in the event that the Framerate Executive is terminated for cause or resigns from his employment with the Company at any time on or before the second anniversary of the Effective Date, and any such resignation is without “Good Reason” as such term is defined in his employment agreement, then the maximum amount of any portion of the Earn-Out that has not yet been earned as of the date of resignation shall be reduced by 44.0164%. Under ASC 805, a contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is considered to be compensation for post-combination services, and not acquisition consideration. As such approximately 44% of the estimated fair value of the Earn-Out, or $200,000 was accounted for as deferred compensation expense and being amortized in the statement of operations over the two-year period ending on the second anniversary of the Effective date. The remaining deferred compensation balance, totaling $90,000, was expensed in July 2020 due to the cessation of services.
The Earn-Out arrangement does not meet the liability classification criteria outlined in ASC 480, “Distinguishing Liabilities from Equity,” and is both (i) indexed to the Company’s own shares and (ii) classified in shareholders’ equity in the accompanying condensed balance sheet. Equity-classified contingent consideration is measured initially at fair value on the acquisition date and is not remeasured subsequent to initial recognition. As such, the initial value recognized for the Earn-Out on the acquisition date is not adjusted for changes in the fair value of the Earn-Out as of any future settlement date. Subsequent differences between the estimated fair value of the Earn-Out recorded at the acquisition date and the actual amount of Earn-Out paid based on actual performance will be reflected as a charge or credit, as applicable, in the statement of operations.
The following table summarizes the fair value of purchase price consideration paid to acquire Framerate:
| |
Cash consideration at closing | $1,515,000
|
Equity consideration at closing | 1,000,000
|
Fair value of Earn-Out shares | 254,000
|
Total | $2,769,000
|
The purchase price allocation is based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in connection with the acquisition of Framerate, as follows:
| |
Accounts receivable | $15,000
|
Intangible Assets - Trade name | 189,000
|
Goodwill | 2,565,000
|
Total purchase price | $2,769,000
|
The Acquisition was treated for tax purposes as a nontaxable transaction and as such, the historical tax bases of the acquired assets, net operating losses, and other tax attributes of Framerate will carryover. As a result, no new goodwill for tax purposes was be created in connection with the Acquisition as there is no step-up to fair value of the underlying tax bases of the acquired net assets.
5.4. NOTE PAYABLE
Long-Term Note Payable
On May 4, 2020, the Company entered into a potentially forgivable loan from the SBAU.S. Small Business Administration (“SBA”) resulting in net proceeds of $1,200,047 pursuant to the Paycheck Protection Program (“PPP”) enacted by Congress under the CARES Act administered by the SBA (the “PPP Loan”). To facilitate the PPP Loan, the Company entered into a Note Payable Agreement with South Porte Bank as the lendera bank (the “Lender”) (the “PPP Loan Agreement”).
The PPP Loan will mature on May 4, 2022. However, under the CARES Act and the PPP Loan Agreement, all payments of both principal and interest will be deferred until at least December 4, 2020. The PPP Loan accrues interest at a rate of 1.00% per annum, and interest will continue to accrue throughout the period the PPP Loan is outstanding, or until it is forgiven. The Company will be eligible to applyhas applied for forgiveness of all loan proceeds used to pay payroll costs and other qualifying expenses during the 24-week period following receipt of the loan, providedand believes that the Company maintained its employment and compensation within certainapplicable parameters during such period. The Company’s forgiveness application is currently awaiting review and processing with the SBA. Any amounts forgiven will not be included in the Company’s taxable income. As specifically intended under the program, the PPP Loan, together with our cost savings initiatives, helped us to continue operations without salary reductions, layoffs or furloughs, during thisthe challenging and uncertain economic environment created by the COVID-19 pandemic.
The PPP Loan is accounted for as a financial liability in accordance with FASB ASC 470, “Debt” and interest is accrued in accordance with the interest method. Additional interest is not imputed at a market rate pursuant to a scope exception for interest rates prescribed by governmental agencies under the applicable guidance.
The proceeds from the PPP Loan are recorded as a long-term liability on the balance sheet until either (1) the loan is, in part or wholly, forgiven and the company has been “legally released” or (2) the Company pays off the loan to the creditor.Lender. Once the loan is, in part or wholly, forgiven, and legal release is received, the Company will reduce the liability by the amount forgiven and record a gain on extinguishment in the statement of operations in the period of extinguishment.
Financing Activities
Equity Financings
In August 2020,January 2021, the Company issued 4,540,5413,076,924 shares of common stock at a price of $1.85$2.60 per share, raising aggregate net proceeds of approximately $7.6$8.0 million, after deducting placement agent fees of $588,000 and other offering expenses totaling $180,000. The offering was conducted pursuant to the Company’s effective Registration Statements on Form S-1 (File No. 333-248248), and a related registration statement filed pursuant to Rule 462(b) under the Securities Act. In addition, pursuant to the terms of the related underwriting agreement, the Company granted to the underwriter a 30-day over-allotment option to purchase up to an additional 681,081 Shares at the same public offering price per share, less discounts and commissions, which was partially exercised in September 2020, resulting in the issuance of 448,440 shares of common stock and net proceeds of $771,000, after deducting placement agent fees of $58,000.$73,000.
In May 2020,February 2021, the Company issued 1,825,0002,926,830 shares of common stock at a price of $3.50$4.10 per share, raising aggregate net proceeds of approximately $6.0$12.0 million, after deducting placement agent fees of $319,000 and other offering expenses totaling $116,000. $70,000.
In March 2021, the Company issued 1,512,499 shares of common stock at a price of $9.00 per share, raising aggregate net proceeds of approximately $13.6 million, after deducting offering expenses totaling $72,000.
The offering wasofferings described above were made pursuant to an effective shelf registration statement on Form S-3, previouslywhich was originally filed with the U.S. Securities and Exchange Commission.
We intend to use theCommission on April 10, 2020 (File No. 333-237626). The net proceeds from these offerings are intended to be used for working capital and other general corporate purposes,, including sales and marketing activities, product development and capital expenditures. WeThe Company may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses.
Initial Public Offering
On February 27, 2019, Super League completed its IPO of its common stock, pursuant to which the Company issued and sold an aggregate of 2,272,727 shares of common stock at $11.00 per share, raising aggregate net proceeds of $22,458,000 after deducting underwriting discounts, commissions and offering costs of $2,542,000.businesses.
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, except as set forth below, no subsequent events occurred that were reasonably expected to impact the financial statements presented herein.
Amendment to MC Merger Agreement
On April 20, 2021, the Company and Mobcrush entered into Amendment No. 1 to the MC Merger Agreement, pursuant to which the MC Merger Agreement was modified as follows: (i) the termination date was extended to June 30, 2021, and (ii) all vested options of Mobcrush Common Stock will be exercised prior to the consummation of Merger, and all unvested options will be cancelled. Any and all vested options exercised prior to the closing of the Merger will not increase the 12,582,204 shares of the Company’s common stock expected to be issued to Mobcrush equity holders as Merger Consideration.
ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
References in this Quarterly Report on Form 10-Q to “Super League Gaming, Inc.” “Company,” “we,” “us,” “our,” or similar references mean Super League Gaming, Inc. References to the “SEC” refer to the U.S. Securities and Exchange Commission.
Forward-Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed financial statements and the related notes included elsewhere in this interim report. Our condensed financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” “believe,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our business and financial performance are subject to substantial risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth under the heading “Risk Factors” includedPart I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, as well asin Item II, Part 1A of this Quarterly Report on Form 10-Q (this “Report”). Readers are cautioned not to place undue reliance on these forward-looking statements.
Overview
Super League Gaming is a leading gaming community and content platform that gives everyday gamers and creators multiple ways to connect and engage with others while enjoying the video games they love. Powered by patented, proprietary technology systems, we offerSuper League offers players the ability to create gameplay-driven experiences they can share with friends, the opportunity to watch live streaming broadcasts and gameplay highlights across digital and social channels, and the chance to compete in events and challenges designed to celebrate victories and achievements across multiple skill levels. With gameplay and content offerings featuring more than a dozen of the top video game titles in the world, we areSuper League is building a broadly inclusive, global brand at the intersection of gaming, experiences and entertainment. Whether to access ourits expanding direct audience of young gamers, creators and esports players, or our unique contentto leverage the company’s remote video production and virtual event capabilities,division, Virtualis Studios, third parties ranging from consumer brands, video game publishers, television companies,professional esports teams, traditional sports organizations, concert promoters,video content producers, and more, are turning to Super League to provide integrated solutions that drive business growth.
First Quarter 2021 Developments
Registered Direct Offerings. During the quarter ended March 31, 2021, we offered and sold to certain institutional investors an aggregate total of 7,516,253 shares of common stock in registered direct offerings pursuant to our effective shelf registration statement on Form S-3, which was originally filed with the Securities and Exchange Commission on April 10, 2020 (File No. 333-237626). We received aggregate net proceeds of approximately $33.6 million, after deducting offering expenses.
Mobcrush Merger Agreement. On March 9, 2021, we entered into an Agreement and Plan of Merger (the “MC Merger Agreement”) with Mobcrush Streaming, Inc. (“Mobcrush”) and SLG Merger Sub II, Inc., a wholly-owned subsidiary of Super League (“Merger Co”). The MC Merger Agreement provides for the acquisition of Mobcrush by us pursuant to the merger of Merger Co with and into Mobcrush, with Mobcrush as the surviving corporation (the “Merger”). Upon completion of the Merger, Mobcrush will be a wholly-owned subsidiary of Super League.
In accordance with the terms and subject to the conditions of the MC Merger Agreement: (A) each outstanding share of Mobcrush common stock and Mobcrush preferred stock (collectively, the "Mobcrush Stock") (other than dissenting shares) will be canceled and converted into the right to receive (i) 0.528 shares of Super League’s common stock (the “Share Conversion Ratio”), and (ii) any cash in lieu of fractional shares of common stock otherwise issuable under the MC Merger Agreement (the "Merger Consideration"). Subject to certain adjustments and other terms and conditions more specifically set forth in the MC Merger Agreement, we will be issuing 12,582,204 shares of the our common stock as the Merger Consideration.
On April 20, 2021, the Company and Mobcrush entered into Amendment No. 1 to the MC Merger Agreement (the “Merger Agreement Amendment”), pursuant to which the MC Merger Agreement was modified as follows: (i) the termination date was extended to June 30, 2021, and (ii) all vested options of Mobcrush Common Stock will be exercised prior to the consummation of Merger, and all unvested options will be cancelled. Any and all vested options exercised prior to the closing of the Merger will not increase the 12,582,204 shares of the Company’s common stock expected to be issued to Mobcrush equity holders as Merger Consideration.
The obligations of Super League and Mobcrush to consummate the Merger are subject to certain closing conditions, including, but not limited to, (i) the approval of Mobcrush's and our shareholders, (ii) Mobcrush and our reaching an agreement as to the treatment of Mobcrush's unvested options exercisable for shares of Mobcrush common stock, which agreement was finalized pursuant to the Merger Agreement Amendment (iii) receipt of any necessary regulatory approvals, (iv) the execution and delivery of certain support agreements pursuant to which officers, directors and certain stockholders of Super League and Mobcrush agree to vote in favor any and all stockholder proposals related to the Merger, and (v) the execution and delivery of a Registration Rights Agreement, pursuant to which we provided Mobcrush stockholders with certain registration rights for the shares of common stock issuable as Merger Consideration. We filed our Definitive Proxy Statement (the “Proxy”) with the SEC on April 30, 2021, inviting our stockholders of record to attend the 2021 annual meeting of stockholders of Super League Gaming, Inc. to be held at 10:00 a.m., Pacific Time, on May 27, 2021. In addition to certain routine matters, the Proxy requests our stockholders to approve of the issuance of a total of 12,582,204 shares of our common stock in exchange for all issued and outstanding securities of Mobcrush pursuant to the MC Merger Agreement (the “Mobcrush Issuance Proposal”). The proxy discloses that the request of our stockholders to approve of the Mobcrush Issuance Proposal is being made in order to comply with Listing Rule 5635 of the Nasdaq Stock Market.
Commerical Partnerships. In February 2021, reflecting the shifting focus of video gaming, Super League and innovative esports community aggregator and media distributor, Harena Data, Inc., agreed to a partnership to produce and distribute video gaming and esports entertainment and targeted community-driven experiences nationwide, amplified through global content distribution.
In March 2021, we announced the continuation of our existing partnership with Topgolf Entertainment Group to broadcast a series of World Golf Tour by Topgolf competitive events. These events, streamed live across digital platforms, bring together avid golf fans, celebrities and professional athletes—connecting everyone through their love for the game of golf.
Executive Summary
We believe Super League is on the leading edge of the rapidly growing competitive video gaming industry, which has become an established and vital part of the entertainment landscape. We believe there is a significant opportunity for the world of mainstream competitive players and creators who want their own esports and entertainment experience. These amateur gamers are players whoand creators enjoy the competition, the social interaction and community, and the entertainment value associated with playing, creating and watching others play.
Super League is a critically important component in providing the infrastructure for mainstream esportscompetitive video gaming content and gameplay, that is synergistic and accretive to the greater esports ecosystem. Over the past five years, we believe we have become the preeminent brand for amateur esportsgamers by providing a proprietary software platform that allows our gamersthem to create, compete, socialize and spectate premium amateur esports gameplay and entertainment, both physically and digitally online. Not only do we offer premium amateur esports leaguesOur creator and community, but we are able to leverage ourplayer platform generates a significant amount of derivative gameplay content to become a comprehensive amateur esports content network.for further syndication beyond our own digital channels.
The fundamental driversdriver of our business model and monetization strategy areis creating deep community engagement through our highly contextualized, localpersonalized experiences that, when coupled with the critical mass of our large digital audiences, provides the depth and volume for premium content and offer monetization differentiated from a more traditional, commoditized advertising model. The combination of our physical venue network and digital programming channels, with Super League’s cloud-based, digital products platform technology platform at the hub, creates the opportunity for not just a share of the player’s wallet, but also the advertiser’s wallet. We do this by offering brand sponsors and advertisers a premium marketing channel to reach elusive Generation Z and Millennial gamers and creators and offering players ways to access exclusive tournaments rewards and programming through our Super League consumer subscription offer and other consumer offerings.
programming.
During the three and nine months ended September 30, 2020,March 31, 2021, management continued to focus on monetization with respect to our twothree primary revenue categories:streams: (1) sponsorships and advertising revenues, or the monetization of our(2) content revenues, and (2)(3) direct to consumer revenues, or gamer monetization.revenues. In addition to the significant increase in engagementstrong key performance indicator (“KPI”) performance described below, wewe: (i) continued our focus on our premium advertising model for future monetization of our rapidly growing premium advertising inventory, and expanded our direct sales team to facilitate delivery;increased revenues generated from programmatic display and video advertising units; (ii) continued to focus on the monetization of our original and user generated content library and remote production and broadcast capabilities, which emerged as a significant component of revenue in 2020; (iii) continued to focus on the monetization of the gamer and creator through direct-to-consumer offers, including increases in sales of digital goods, primarily with our Minehut digital property, and the launchcontinued rollout of the early stages of aour micro-transaction marketplace; and, we began(iv) continued to unlock new ways that our content production technology can extend beyond esports into traditional sports and other entertainment formats representing potential new revenue growth opportunities in future periods.
Super League Gaming has experienced its strongest period of audience growth during the challenging time of the COVID-19 pandemic, marked by the reaching of a key 2020 milestone in July 2020; reaching one billion video views and impressions. This key milestone at the time, represented more than a 700% increase over the full fiscal year of 2019, during which we achieved a total of 120 million views.
As of September 30, 2020, the ability to generate over one billion views year to date is a key proof point of not only the compelling attractiveness of Super League’s content, but also to the variety we are able to offer. We have established ourselves as a leading publisher of user generated gaming highlights within our Framerate social video network, and we produce 11 general and game title-specific channels that, together, deliver tens of millions of video views per month. This includes three original shows on Snapchat, five TikTok channels, and three Instagram channels, with more to come.
During the three and nine months ended September 30, 2020, we experienced a significant increase in new users, gamer engagement, and gameplay hours across all of our platforms. We believe a driver of the increase was, to a certain extent, the current period of social distancing and mandatory shelter in place orders stemming from the COVID-19 pandemic, during which passionate video gamers around the world are seeking a competitive outlet, seeking to connect with others around the games they love and are turning to esports and other online gaming communities to fill the void. We also believe that a driver of the increase is the fact that esports is mainstream, which was the case prior to COVID-19. These increases are accelerating our growth plans, and are increasing our opportunities for monetization.
Super League’s video content business is also accelerating on an additional path through the advancement of Super League’s proprietary live content capture and broadcast system, which includes patented technology and fully remote, innovative workflows operated by SuperLeagueTV, a completely virtual studio. Endemic and non-endemic brands and partners have sought out Super League to provide premium, TV-quality production services across a multitude of live streamed events. During 2020, within gaming alone, broadcasts have spanned an impressive mix of game titles including Minecraft, APEX Legends, NBA2K, PUBG Mobile, the World Golf Tour and more.
In response to the COVID-19 pandemic and the related uncertainty, advertisers and sponsors across the board inevitably paused to reset their marketing strategies. The impact on Super League year to date was the deferral of some of these programs and related revenues to future periods. We did not experience any cancellations of existing programs. For example,expect to continue to grow our partnershipadverting pipeline across various verticals with Tencentthe capability to provide brands and OnePlus, bringing PUBG mobile tournaments to life proceeded as planned, just from the comfort and safety of players’ homes, online, as opposed to in-person. The majority of our gameplay hours and other engagement occurs digitally, online, so while our “in real life” gaming is aadvertisers with targeted, high quality integrations that warrant premium and important aspect of our brand, the shift away from retail locations is not expected to have a significant impact on our overall business model over time, which is largely digitally focused.
costs per impressions (“CPM”) advertising rates.
In addition, as described above, in March 2021, we announced the proposed acquisition of Mobcrush, a live streaming technology platform used by hundreds of thousands of gaming influencers who generate and distribute almost two million hours of original content annually and have accumulated more than 4.5 billion fans and subscribers across the most popular live streaming and social media platforms, including Twitch, YouTube, Facebook, Instagram, Twitter, and more. Mobcrush also owns Mineville, one of six exclusive, official Minecraft server partners that is enjoyed by more than 22 million unique players annually. Mineville is highly complementary to Minehut, Super League’s owned and operated Minecraft community, strengthening the combined company’s leading position with young gamers. This strategic, all-stock transaction, is anticipated to be accretive and will enable Super League to take a significant leap forward in providing brands, advertisers, and other consumer facing businesses with massive audience reach across the most important engagement channels in video gaming – competitive events, social media and live streaming content, and in-game experiences.
From a KPI and metrics standpoint, we believe the combination of Super League and Mobcrush has the potential to represent a new, higher level of increased scale and reach, including the following:
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The combined companies have the potential to reach more than 25 million players per year, three million players per month, with over 400,000 players per day.
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In addition, the combination of Super League and Mobcrush has the potential for a U.S. monthly viewing audience of 85 million, which would create for a top 50 U.S. media property according to measurements used by Nielsen.
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Annually, Super League and Mobcrush combined have the potential to generate 7.7 billion annual U.S video views across live streaming platforms, two billion views on social media platforms, and enable 60 million hours of gameplay on owned and operated platforms.
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Collectively, we believe the combined companies could generate and distribute over 200,000 gameplay highlights across streaming and social channels per month.
Key Performance Indicators.Indicators for the Three Months Ended March 31, 2021.
We focus and report on three key performance indicators (“KPIs”),KPIs, as outlined below, to assess our progress and drive revenue growth, which is also a key performance indicator. As of the end of the third quarter of 2020,March 31, 2021, we continued to see strong growth in our leading key performance indicators, as follows:
| ● | Registered UsersViews and Impressions:: We ended fiscal 2019 with approximately 980,000 registered users. During the ninethree months ended September 30,March 31, 2021, we generated 578.0 million views and impressions, compared to 199.0 million views and impressions during the three months ended March 31, 2020, representing an approximately 3 times, or 190% increase, compared to the prior year quarter. This continued growth in views results in the exponential growth of our total and monetizable advertising inventory, which can drive brands and advertisers to our audience and platform.
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| ● | Registered Users: As of March 31, 2021, we increased our registered users by approximately 150%25%, to 2.43.7 million registered users. Registered users, representfrom 2.9 million as of December 31, 2020, and by 174% from 1.3 million as of March 31, 2020. We believe that continuing the trend of significant increases in registered users introduces more gamers and creators into our customer funnel, from whom we can gather higher volumes of quality user generated content and convert into subscribers and/or upsell into other paid offers. |
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| ● | Engagement Hours: As of September 30, 2020,During the three months ended March 31, 2021, including our live gaming experiences and our expanding digital gameplay channels, we generated approximately 47.834.6 million hours of gameplay and other engagement, as compared to approximately 15.010.0 million full year 2019hours of gameplay and other engagement hours,for the three months ended March 31, 2020, an increase of approximately 218%245%. We continue to focus on ways we can repackage and distribute this significant derivative content library for further monetization. |
● | Views and Impressions: We generated 1.4 billion views and impressions during the nine months ended September 30, 2020, compared to our full-year 2019 views of 120.0 million, representing an approximately 1000% increase over full year 2019 views. This continued growth in views results in the exponential growth of our monetizable advertising inventory.
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Impact of COVID-19 Pandemic
Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The novel coronavirus and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic. It is unknown how long the adverse conditions associated with the coronavirus will last and what the complete financial effect will be to the Company.
Commencing in the first quarter of 2020, in response to the COVID-19 pandemic and the related uncertainty, advertisers and sponsors across the board inevitably paused to reset their marketing strategies, and as a result, all companies with business models that include sponsorship and advertising revenues felt the impact of the pause in advertising spend industry-wide. In addition, in the first half of 2020, as a result of COVID-19, we felt the impact of the deferral of some of the programs in our pipeline and related revenues to future periods. The majority of our gameplay hours and other engagement occurs digitally, online, so while our “in real life” gaming is a premium and important aspect of our brand, the shift away from retail locations is not expected to have a significant impact on our overall business model over time, which is largely digitally focused.
Although we were impacted by the general deferral in advertising spending by brands and sponsors resulting from the COVID-19 pandemic for a significant portion of fiscal year 2020, we reported significant quarter over quarter growth in revenues in the second half of fiscal 2020 and we expect to continue to expand our advertising revenue and revenue from the sale of our proprietary and third-party user generated content in future periods, as we continue to expand our advertising inventory, viewership and related sales activities.
Notwithstanding the growth in revenues and in user engagement metrics discussed herein, the broader impact of the ongoing COVID-19 pandemic on our results of operations and overall financial performance remains uncertain. The COVID-19 pandemic may continue to impact our revenue and revenue growth in future periods, and is likely to continue to adversely impact certain aspects of our business and our partners, including advertising demand, retail expansion plans and our in-person esports experiences. See “Risk Factors” for furtherFor a discussion of the adverse impacts ofrisk factors related to COVID-19, please refer to Part II, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the COVID-19 pandemic on our business.year ended December 31, 2020.
Critical Accounting Estimates
Our unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these condensed statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these condensed financial statements. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the SEC on March 23, 2020.19, 2021. 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) wethe entity can identify each party’s rights regarding the goods or services to be transferred; (iii) wethe 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 weit will be entitled in exchange for the goods or services that will be transferred to the customer.
Transaction prices are based on the amount of consideration to which we expect to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, if any. We consider the explicit terms of the revenue contract, which are typically written and executed by the parties, our customary business practices, the nature, timing, and the amount of consideration promised by a customer, in connection with determining the transaction price for our revenue arrangements.
Super League generatesWe generate revenues and related cash flows from (i) sponsorshipsadvertising, serving as a marketing channel for brands and advertising, including third-partyadvertisers to reach their target audiences of gamers across our network, (ii) content, salescurating and distributing esports and entertainment content for our own network of digital channels and media and entertainment partner channels and (ii)(iii) direct to consumer offers including tournament fees for participation in our physical and online multiplayer gaming experiences, digital subscriptions, digital goods, gameplay access fees and merchandise sales.
Sponsorships and Advertising:Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied.
Advertising and Sponsorships:
Advertising revenue primarily consists of direct sales activity along with sales of programmatic display and video advertising units to third-party advertisers and exchanges. Advertising arrangements typically include contract terms for time periods ranging from several days to several weeks in length.
For advertising 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). Revenue from shorter term advertising arrangements that provide for a contractual delivery or performance date is recognized when performance is substantially complete and or delivery occurs. Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for shorter-term campaigns.
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, rights to on-screen activations and promotions, display material rights, media rights, hospitality and tickets and merchandising rights. Sponsorship revenues also include revenues pursuant to arrangements with brand and media partners, retail venues, game publishers and broadcasters that allow our partners to run amateur esports experiences, and or capture specifically curated gameplay content that is customized for our partners’ distribution channels. Sponsorship arrangements typically include contract terms for time periods ranging from several weeks or months to multi-year arrangements.terms of twelve months in length.
For sponsorship arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the agreement as the Company satisfies itswe satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Payments are typically due from customers during the term of the arrangement.
Revenue forfrom sponsorship arrangements for one-off branded experiences and/or the development of content tailored specifically for the Company’sour partners’ distribution channels that provide for a contractual delivery or performance date, is recognized at a point in time, when performance is substantially complete and or delivery occurs.
Content:
Content related revenues are generated in connection with our curation and distribution of esports and entertainment content for our own network of digital channels and media and entertainment partner channels. We distribute three primary types of content for syndication and licensing, including: (1) our own original programming content, (2) user generated content (“UGC”), including online gameplay and gameplay highlights, and (3) the creation of content for third parties utilizing our remote production and broadcast technology.
For advertising and third-party content arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the arrangement as we satisfy our performance obligations, over the applicable contract term. As such, revenue is recognized over the contract term based upon estimates of progress toward complete satisfaction of the contract performance obligations (typically utilizing a time, effort or delivery-based method of estimation). Revenue from shorter term content sales arrangements that provide for a contractual delivery or performance date is recognized when performance is substantially complete and or delivery occurs. Payments are typically due from customers during the term of the arrangement for longer-term campaigns, and once delivery is complete for shorter-term campaigns.
Direct to Consumer:
Revenue from single experiences is recognized when the experience occurs. Revenue from multi-week packages is recognized over time as the multi-week experiences occur based on estimatesDirect to consumer revenues primarily consist of the progress toward complete satisfaction of the applicable offerdigital subscription fees, digital goods, gameplay access fees and related performance obligations.merchandise sales. Subscription revenue is recognized overin the applicable subscription term.period the services are rendered. Payments are typically due from customers at the point of sale.
Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied as described above.
We make estimates and judgments when determining whether we will collect substantially all of the collectability of accounts receivable is reasonably assured.consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. We assess the collectability of receivables based on several factors, including past transaction history and the creditworthiness of our customers. If it is determined that collection is not reasonably assured, amounts due are recognized when collectability becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash for transactions where collectability may have been an issue. Management’s estimates regarding collectability impact the actual revenues recognized each period and the timing of the recognition of revenues. Our assumptions and judgments regarding future collectability could differ from actual events and thus materially impact our financial position and results of operations.
Depending on the complexity of the underlying revenue arrangement and related terms and conditions, significant judgments, assumptions and estimates may be required to determine each parties rights regarding the goods or services to be transferred, each parties performance obligations, whether performance obligations are satisfied at a point in time or over time, estimates of completion methodologies, the timing of satisfaction of performance obligations, and the appropriate period or periods in which, or during which, the completion of the earnings process occurs. Depending on the magnitude of specific revenue arrangements, if different judgments, assumptions and estimates are made regarding revenue arrangements in any specific period, our periodic financial results may be materially affected.
Stock-Based Compensation Expense
Compensation expense for stock-based awards is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense, typically on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award), which is generally two to four years. Compensation expense for awards with performance conditions that affect vesting is recorded only for those awards expected to vest or when the performance criteria are met. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of stock option and common stock purchase warrant awards is estimated on the date of grant utilizing the Black-Scholes-Merton option pricing model. The Company accounts for forfeitures of awards as they occur.
Determining the fair value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of our common stock, determination of grant dates, future employee stock option exercise behavior and requisite service periods.
Results of Operations for the Three and Nine Months Ended September 30,March 31, 2021 and 2020 and 2019
The following table sets forth a summary of our statements of operations for the three and nine months ended September 30, 2020March 31, 2021 and 2019:2020:
| | Three Months Ended September 30,
| Nine Months Ended September 30, | Three Months Ended March 31, |
| | | | | | | | | | | | | |
| | (in thousands, except percentage change values) | |
| REVENUES | $718 | $350 | $368 | 105% | $1,285 | $822 | $463 | 56% | $788,000 | $243,000 | $545,000 | 224% |
| COST OF REVENUES | 327 | 192 | 135 | 70% | 560 | 379 | 181 | 48% | 342,000 | 117,000 | 225,000 | 192% |
| GROSS PROFIT | 391 | 158 | 233 | 147% | 725 | 443 | 282 | 64% | 446,000 | 126,000 | 320,000 | 254% |
| OPERATING EXPENSES | | |
| Selling, marketing and advertising | 1,476 | 1,063 | 413 | 39% | 4,005 | 3,202 | 803 | 25% | 1,483,000 | 1,273,000 | 210,000 | 16% |
| Technology platform and infrastructure | 1,430 | 1,319 | 111 | 8% | 5,109 | 3,772 | 1,337 | 35% | 1,603,000 | 1,949,000 | (346,000) | (18)% |
| General and administrative | 1,782 | 2,201 | (419) | (19)% | 5,615 | 9,535 | (3,920) | (41)% | 1,986,000 | 2,052,000 | (66,000) | (3)% |
| Total operating expenses | 4,688 | 4,583 | 105 | 2% | 14,729 | 16,509 | (1,780) | (11)% | 5,072,000 | 5,274,000 | (202,000) | (4)% |
| NET LOSS FROM OPERATIONS | (4,297) | (4,425) | 128 | (3)% | (14,004) | (16,066) | 2,062 | (13)% | (4,626,000) | (5,148,000) | 522,000 | (10)% |
| OTHER INCOME (EXPENSE), NET | (1) | 8 | (9) | (100)% | 12 | (9,925) | (9,937) | (100)% | 1,000 | 14,000 | (13,000) | (93)% |
| NET LOSS | $(4,298) | $(4,417) | $119 | (3)% | $(13,992) | $(25,991) | $11,999 | (46)% | $(4,625,000) | $(5,134,000) | $509,000 | (10)% |
Comparison of the Results for the Three and Nine Months Ended September 30,March 31, 2021 and 2020 and 2019
Revenue
| | Three Months Ended September 30,
| Nine Months Ended September 30,
|
| | | | | | | | | |
| | (in thousands, except percentage change values)
|
| Sponsorships and advertising | $677 | $342 | $335 | 98% | $1,190 | $798 | $392 | 49% |
| Direct to Consumer | 41 | 8 | 33 | +100% | 95 | 24 | 71 | +100% |
| | $718 | $350 | $368 | 105% | $1,285 | $822 | $463 | 56% |
| | Three Months Ended March 31, |
| | | | | |
| Advertising and sponsorships | $558,000 | $207,000 | $351,000 | 170% |
Content sales
| 166,000 | 21,000 | 145,000 | +300% |
| Direct to consumer | 64,000 | 15,000 | 49,000 | +300% |
| | $788,000 | $243,000 | $545,000 | 224% |
Revenue for the three months ended September 30, 2020March 31, 2021 increased $368,000$545,000 or 105%224%, compared to the three months ended September 30, 2019. Revenue for the nine months ended September 30, 2020 increased $463,000 or 56%, compared toMarch 31, 2020. For the three months ended September 30, 2019. For theMarch 31, 2021 and 2020, three and nine months ended September 30, 2020, two customers accounted for 43% and four customers accounted for 54% of revenues, respectively.For the three and nine months ended September 30, 2019, five customers accounted for 90% and three customers accounted for 49%79% of revenues, respectively.
Sponsorships and Advertising. Period to period changes in sponsorship, advertising and content sales revenues are attributable to fluctuations in sponsorship, advertising and content sales activities period to period, which is based on the specific partnership and advertising arrangements with activities during a particular period, activations during the period, the related performance obligations satisfied during the period and the contractual consideration and revenue share arrangements associated with the sponsorship and advertising activities during the period.
The increase in sponsorships and advertising revenuerevenues primarily reflects significant increases in advertising on our owned and operated digital channels and content sales revenues, compared to the prior year periods,period, reflecting our continued focus on the monetization of our increasing premium advertising inventory and amateur gameplayesports and entertainment content.
Advertising salesand sponsorship revenues for the three and nine months ended September 30, 2020March 31, 2021 increased $280,000 and $351,000, respectively,or 170%, and included revenues from advertising campaigns with Netflix, Inc., or Netflix,ViacomCBS Digital, in connection with Netflix’s “The Sleepover” movie release, and with Disney+the promotion of ViacomCBS Digital’s Spongebob property, Logitech, Inc., in connection with our Galentine’s Games and Minehut related Spring Break activations, Square Enix, in connection with the promotion of their animated musical comedy series Phineasplatform game, Balan Wonderworld, and Ferb.Moose Toys, in connection with the promotion of Moose Toys’ Goo Jit Zu and Treasure X products within our Minehut digital property. The threechange reflects an increase in direct sales and nineprogrammatic display and video advertising revenues within our Minecraft related digital property, Minehut, of $419,000, a significantly greater than 300% increase, compared to the prior year quarter. The increase in advertising revenues was partially offset by a $67,000 decrease in sponsorship and other revenues during the three months ended September 30, 2020 also reflected a $121,000 and $198,000, respectively,March 31, 2021.
Content related revenues increased to $166,000, or greater than 300%, for the three months ended March 31, 2021, as compared to $21,000 in the comparable prior year period. The increase in third party content sale revenues,was primarily driven by continuingan increase in sales of our proprietary and user generated content, primarily with Snap Inc., and Cox Media, and live stream broadcast related content sales activities with Snapchat Inc.Topgolf Entertainment Group and Cox media, and significant increases in programmatic advertising revenues primarily related to our Minecraft digital property, Minehut.GenG during the three months ended March 31, 2021.
Although we were impacted by the general deferral in advertising spending by brands and sponsors resulting from the COVID-19 pandemic for a significant portion of fiscal year 2020, we reported significant quarterly revenue growth in the second half of fiscal 2020 and in the first quarter of 2021, compared to the comparable prior year quarters, and we expect to continue to expand our advertising revenue and revenue from the sale of our proprietary and third-partyuser generated content derived from our technology platform in future periods, as we continue to expand our premium advertising inventory, viewership and related sales activities.
Direct to Consumer.Direct to consumer revenues were primarily comprised of digital goods revenues related togenerated from our Minehut digital property, which provides various Minecraft server hosting services on a subscription basis and other digital goods to the Minecraft gaming community. The increase in directDirect to consumer revenues reflects our continued focus onfor the acceleration of direct to consumer monetization, and the impact of the surge in engagement across all of our digital properties due in partthree months ended March 31, 2021 increased $49,000, or greater than 300%, compared to the COVID-19 pandemic. comparable prior year quarter.
Cost of Revenue
| | Three Months Ended March 31, |
| | | | | |
| Cost of revenue | $342,000 | $117,000 | $225,000 | 192% |
Cost of Revenue
| | Three Months Ended September 30,
| Nine Months Ended September 30,
|
| | | | | | | | |
| | (in thousands, except percentage change values) |
| Cost of revenue | $327 | $192 | $135 | 70% | $560 | $379 | $181 | 48% |
Cost of revenue forrevenues increased $225,000, or 192%, relatively consistent with the three months ended September 30, 2020 increased $135,000 or 70% compared to the three months ended September 30, 2019, as compared to the 105%224% increase in related revenues for the same periods. The less than proportionate changeincrease in cost of revenue was driven by a significantthe increase in lower cost advertising and third party content sales revenues induring the third quarter of 2020.
Cost of revenue for the ninethree months ended September 30, 2020 increased $181,000, or 48% compared to the nine months ended September 30, 2019, relatively consistent with the 56% increase in related revenues for the same periods. The less than proportionate change in cost of revenue was driven by lower costs associated with our largely digital and online revenue generating activities and a significant increase in lower cost advertising and content sales revenues during the nine months ended September 30, 2020.March 31, 2021.
Cost of revenues fluctuate period to period based on the specific programs and revenue streams contributing to revenue each period and the related cost profile of our physical and digital experiences, and advertising and content sales activities occurring each period.
Operating Expenses
| | Three Months Ended September 30,
| Nine Months Ended September 30,
| |
| | | | | | | | | | Three Months Ended March 31, |
| | (in thousands, except percentage change values) | | | | |
| Selling, marketing and advertising | $1,476 | $1,063 | $413 | 39% | $4,005 | $3,202 | $803 | 25% | $1,483,000 | $1,273,000 | $210,000 | 16% |
| Technology platform and infrastructure | 1,430 | 1,319 | 111 | 8% | 5,109 | 3,772 | 1,337 | 35% | 1,603,000 | 1,949,000 | (346,000) | (18)% |
| General and administrative | 1,782 | 2,201 | (419) | (19)% | 5,615 | 9,535 | (3,920) | (41)% | 1,986,000 | 2,052,000 | (66,000) | (3)% |
| Total operating expenses | $4,688 | $4,583 | $105 | 2% | $14,729 | $16,509 | $(1,780) | (11)% | $5,072,000 | $5,274,000 | $(202,000) | (4)% |
Noncash stock-based compensation expense for the periods presented was included in the following operating expense line items:
| | Three Months Ended September 30,
| Nine Months Ended September 30,
| Three Months Ended March 31, |
| | | | | | | | | | | | | |
| | (in thousands, except percentage change values) | |
| Sales, marketing and advertising | $272 | $120 | $152 | 127% | $668 | $448 | $220 | 49% | |
| Selling, marketing and advertising | | $183,000 | $173,000 | $10,000 | 6% |
| Technology platform and infrastructure | 51 | 47 | 4 | 9% | 199 | 71 | 128 | +100% | 33,000 | 114,000 | (81,000) | (71% |
| General and administrative | 147 | 570 | (423) | (74)% | 703 | 4,747 | (4,044) | (85)% | 195,000 | 415,000 | (220,000) | (53)% |
| Total noncash stock compensation expense | $470 | $737 | $(267) | (36)% | $1,570 | $5,266 | $(3,696) | (70)% | $411,000 | $702,000 | $(291,000) | (41)% |
Selling, Marketing and Advertising. The increase in selling, marketing and advertising expense for the three and nine months ended September 30, 2020March 31, 2021 was primarily due to an increase in personnel costs, including noncash stock compensation, associated with the increase in our in-house direct sales force focused on the monetization of our physicalincreasing premium advertising inventory and digital experiences and related audience across our digital properties. The increase was partially offset byalso reflects an increase in digital marketing expense, compared to the prior year period, which reflected a reduction in traditional physical / in-person marketing activities costs totaling $150,000, due to the impact of the COVID-19 pandemic on physical / in-person related activities.our marketing activities in first quarter of 2020.
Technology Platform and Infrastructure. Technology platform and infrastructure costs include (i) allocated personnel costs, including salaries, noncash stock compensation, taxes and benefits related to our internal software developers and engineers, employed by Super League, engaged in the operation, maintenance, management, administration, testing, development and enhancement of our proprietary gaming and content technology platform, (ii) third-party contract software development and engineering resources engaged in developing and enhancing our proprietary gaming and content technology platform, (iii) the amortization of capitalized internal use software costs, and (iv) technology platform related cloud services, broadband and other technology platform costs. Capitalized internal use softwaresoftware development costs are amortized on a straight-line basis over the software’s estimated useful life.
The increasedecrease in technology platform and infrastructure costs for the three and nine months ended September 30, 2020March 31, 2021 primarily reflects an increasea net reduction in cloud servicesengineering personnel and other technology platformrelated recruiting costs totaling, $343,000 and $1.2 million, respectively, which reflects the impact of the surge$179,000, a decrease in engagement across our digital properties as described earlier, quarterly fees paid to a third party under a licenses and rights agreement, as amended (the “License Agreement”), totaling $15,000 and $165,000, respectively,$150,000, and the acceleration of amortization, totaling $306,000, related to the termination of certain rights and licensesthe License Agreement in connection with amendments to our arrangement with a third party, totaling $0, and $413,000, respectively,the first quarter of 2020, as described at Note 3 to the condensedour financial statements elsewhere herein. The increase in technology platform and infrastructure costsdecrease was partially offset by a decreasean increase in broadbandcloud services and other technology platform costs totaling $76,000 and $229,000 for$327,000, which primarily reflects the three and nine months ended September 30,impact of the surge in engagement across our digital properties occurring subsequent to the first quarter of 2020, and 2019, respectively.continuing into fiscal year 2021.
General and Administrative. General and administrative expense for the periods presented was comprised of the following:
| | Three Months Ended September 30,
| Nine Months Ended September 30,
| |
| | | | | | | | | | Three Months Ended March 31, |
| | (in thousands, except percentage change values) | | | | |
| Personnel costs | $479 | $576 | $(97) | (17)% | $1,471 | $1,809 | $(338) | (19)% | $461,000 | $491,000 | $(30,000) | (6)% |
| Office and facilities | 28 | 98 | (70) | (71)% | 217 | 303 | (86) | (28)% | 27,000 | 99,000 | (72,000) | (73)% |
| Professional fees | 199 | 208 | (9) | (4)% | 552 | 599 | (47) | (8)% | 457,000 | 209,000 | 248,000 | 119% |
| Stock-based compensation | 147 | 570 | (423) | (74)% | 703 | 4,747 | (4,044) | (85)% | 195,000 | 415,000 | (220,000) | (53)% |
| Depreciation and amortization | 53 | 58 | (5) | (9)% | 176 | 363 | (187) | (52)% | 51,000 | 71,000 | (20,000) | (28)% |
| Other | 876 | 691 | 185 | 27% | 2,496 | 1,714 | 782 | 46% | 795,000 | 767,000 | 28,000 | 4% |
| Total general and administrative expense | $1,782 | $2,201 | $(419) | (19)% | $5,615 | $9,535 | $(3,920) | (41)% | $1,986,000 | $2,052,000 | $(66,000) | (3)% |
A summary of the main drivers of the net decrease in general and administrative expenses for the periods presented is as follows:
For the three months ended September 30, 2020, compared to the three months ended September 30, 2019:
●
Personnel costs decreased primarily due to a decrease in recruiting and relocation costs for the three months ended September 30, 2020.
●
Office and facilities costs decreased due to the termination of the leases for 75% of our office space in Santa Monica, California, and converting to a fully remote work structure as of June 30, 2020, resulting in significant rent and facilities costs savings for the applicable periods presented and going forward.
●
Professional fees costs increased $248,000, or 119%, primarily due to legal, audit, advisory and financial and tax due diligence professional fees, totaling $217,000, incurred in connection with the proposed acquisition of Mobcrush, described elsewhere herein. In accordance with the acquisition method of accounting, acquisition-related costs incurred are expensed as incurred in the period that the services are performed.
●
NoncashNoncash stock compensation expense included in general and administrative expense decreased primarily due to the completion of the vesting and related expensing of certain previously granted nonemployee common stock purchase warrants in the second quarter of 2020, resulting in a decrease in warrant related stock compensation of $263,000 in$222,000 for the third quarter of 2020, and a reduction of the average fair value of options and restricted shares expensed in the third quarter of 2020 to approximately $3.33, from approximately $8.45 in the third quarter of 2019.
●
Other general and administrative expenses increased primarily due to an increase in directors and officer's insurance premiums and public company related annual meeting costs, partially offset by a decrease in travel related expenses due to the COVID-19 pandemic.three months ended March 31, 2021.
For the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019:
●
Personnel costs decreased primarily due to $455,000 of management performance-based bonuses paid in connection with the achievement of certain performance targets during the nine months ended September 30, 2019, including the closing of the IPO and other operational performance targets. Personnel costs for the nine months ended September 30, 2019 also includes $247,000 of R&D tax credits which are reflected as an offset to related expense.
●
Office and facilities costs decreased due to the termination of our lease for approximately 75% of our office space in Santa Monica, California, and converting to a fully remote work structure, resulting in significant rent and facilities costs savings commencing in the third quarter of 2020 and going forward.
●
Noncashstock compensation expense included in general and administrative expense decreased primarily due to certain performance options and warrants previously granted to two of our executives, which vested during the nine months ended September 30, 2019, upon the achievement of certain performance targets. Performance targets included the completion of our IPO in February 2019 and other operational performance targets. During the 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 decrease also reflects a reduction of the average fair value of options and restricted shares expensed for the nine month period ended September 30, 2020 to approximately $3.38, from approximately $8.40 for the nine month period ended September 30, 2019.
●
Other general and administrative expenses increased primarily due to an increase in directors and officer's insurance premiums and a full nine months of public company costs, partially offset by a decrease in travel related expenses due to the COVID-19 pandemic.
Other Income (expense)
Other income (expense), net, for the nine months ended September 30, 2020 and 2019, was $0 and $9,933,000, respectively, and was primarily comprised of interest expense related to the convertible notes outstanding during the 2019 period presented as follows:
| | Nine Months Ended September 30, |
| | | | | |
| | (in thousands, except percentage change values) |
| Accretion of discount on convertible notes | $- | $2,475 | $(2,475) | (100)% |
| Accrued interest expense on convertible notes | - | 187 | (187) | (100)% |
| Accretion of convertible note issuance costs | - | 209 | (209) | (100)% |
| Beneficial conversion feature | - | 7,067 | (7,067) | (100)% |
Total interest expense | $- | $9,938 | $9,938) | (100)% |
Interest Expense. Interest expense for the 2019 periods presented primarily relates to the issuance of 9.00% secured convertible promissory notes, commencing in February 2018 through August 2018. Principal and interest as of February 27, 2019, the closing date of the IPO totaled $13,793,000. Concurrent with the closing of the IPO on February 27, 2019, in accordance with the related agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35. As a result of the automatic conversion of the notes and the application of conversion accounting, the Company recorded an immediate charge to interest expense of $1,384,000, representing the write-off of the unamortized balance of debt discounts associated with the 2018 warrants and cash commissions and warrants issued to third parties as of the IPO closing Date.
The non-detachable conversion feature embedded in the notes provides for a conversion rate that was below market value at the commitment date, and therefore, represented a beneficial conversion feature (“BCF”). The BCF is generally recognized separately at issuance by allocating a portion of the debt proceeds equal to the intrinsic value of the BCF to additional paid-in capital. The resulting convertible debt discount is recognized as interest expense using the effective yield method. However, the conversion feature was not exercisable until the consummation of an initial public offering by the Company of its common stock, and therefore, was not required to be recognized in earnings until the IPO related contingency was resolved, which occurred on the IPO closing date. The commitment date is the IPO closing date and the commitment date stock price was $11.00 per share. The intrinsic value of the BCF on the IPO closing date, which was limited to the net proceeds allocated to the debt on a relative fair value basis, was approximately $7,067,000, and is reflected as additional interest expense in the statement of operations for the three months ended September 30, 2019.
Liquidity and Capital Resources
General
Cash and cash equivalents totaled $10.3$36.7 million and $8.4$7.9 million at September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.
We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2020 and December 31, 2019, we had working capital of approximately $11.8 million and $8.7 million, respectively, and sustained cumulative losses since inception The period over period increase is largely attributable to common stockholdersthe aggregate net proceeds of approximately $99.8 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$33.6 million received from the discount on convertible debt and in-kind advertising expense, totaled approximately $36.5 million. Refer to “Cash Flows from Financing Activities” below for a summary of financing activities forregistered direct offerings completed during the periods presented.quarter ended March 31, 2021.
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 fromsuch as the issuance of convertible debt, as described herein.registered direct offerings completed during the first quarter. 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 ofbelieves that our strategic objectives. As such, we believe our current cash position, absent receipt of additional capital either from operations or that maybalances will be available from future issuance(s) of common stock or debt financings, is not sufficient to fundmeet our planned operations for the twelve months following the date of this Report.cash requirements through at least March 2022. We believe these conditions raise substantial doubt about our ability to continue as a going concern. In addition, we may, however, encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth underanticipated. For a discussion of the heading “Risk Factors” included inrisk factors related to COVID-19, please refer to Part II, Item 1A of this Report.1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020.
We are focused on expanding our service offerings and revenue growth opportunities through internal development, collaborations, and through one or more strategic acquisitions. Management is currently exploring several alternatives for raising capital to facilitate our growth and execute our business strategy, including strategic partnerships or other forms of equity or debt financings.
We continue to evaluate potential strategic acquisitions. To finance such strategic acquisitions, we may find it necessary to raise additional equity capital, incur additional debt, or both. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption periodically and such volatility and disruption may occur in the future. If we fail to obtain additional financing when needed, we may not be able to execute our business plans which, in turn, would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies.
As described below, in August and September 2020, the Company issued a total of 4,988,981 shares of common stock at a price of $1.85 per share, raising aggregate net proceeds of approximately $8.4 million, after deducting placement agent fees of $646,000 and other offering expenses totaling $180,000.
As described below, on May 13, 2020, we announced that the Company entered into securities purchase agreements with institutional investors for the purchase and sale of 1,825,000 shares of our common stock at an offering price of $3.50 per share, pursuant to a registered direct offering, priced at-the-market under Nasdaq rules, which closed on May 15, 2020.
On May 4, 2020, we entered into a potentially forgivable loan from the U. S. Small Business Administration (“SBA”) resulting in net proceeds of approximately $1.2 million pursuant to the Paycheck Protection Program (“PPP”) enacted by Congress under the CARES Act administered by the SBA (the “PPP Loan”). To facilitate the PPP Loan, we entered into a note payable agreement with a third-party lender (the “PPP Loan Agreement”).
Cash Flows for the NineThree Months Ended September 30,March 31, 2021 and 2020 and 2019
The following table summarizes the change in cash balances for the periods presented (in thousands):presented:
| | Nine Months Ended September 30, | Three Months Ended March 31, |
| | | | | |
| Net cash used in operating activities | $(12,674) | $(10,142) | $(4,370,000) | $(3,388,000) |
| Net cash used in investing activities | (988) | (2,524) | (267,000) | (283,000) |
| Net cash provided by financing activities | 15,566 | 22,478 | 33,437,000 | - |
| Increase in cash | 1,904 | 9,8112 | 28,800,000 | (3,671,000) |
| Cash and cash equivalents, at beginning of period | 8,442 | 2,774 | 7,942,000 | 8,442,000 |
| Cash and cash equivalents, at end of period | $10,346 | $12,586 | $36,742,000 | $4,771,000 |
Cash Flows from Operating Activities. Net cash used in operating activities during the ninethree months ended September 30, 2020March 31, 2021 was $12,674,000,$4,370,000, which primarily reflected our net GAAP loss for the ninethree months ended September 30, 2020March 31, 2021 of $13,992,000,$4,625,000, net of adjustments to reconcile net GAAP loss to net cash used in operating activities of $1,318,000,$255,000, which included $1,570,000$411,000 of noncash stock compensation charges and depreciation and amortization of $1,098,000.$266,000. Changes in working capital primarily reflected the impact of the settlement of receivables and payables in the ordinary course. Net cash used in operating activities during the ninethree months ended September 30, 2019March 31, 2020 was $10,142,000,$3,388,000, which primarily reflected our net GAAP loss of $25,991,000,$5,134,000, net of adjustments to reconcile net GAAP loss to net cash used in operating activities of $15,849,000,$1,746,000, which included $5,266,000$702,000 of noncash stock compensation charges $2,871,000 of noncash accrued interest and accretion of debt discount, $7,067,000 of noncash interest expense related to the recognition of the beneficial conversion feature upon the automatic conversion of the notes upon close of the IPO, and depreciation and amortization of $657,000.525,000. Changes in working capital primarily reflected the impact of a net decrease in accounts receivable, the prepayment of insurance premiums and the settlement of receivables and payables in the ordinary course.
Cash Flows from Investing Activities. Cash flows from investing activities were comprised of the following for the periods presented (in thousands):
| | Nine Months Ended September 30, | Three Months Ended March 31, |
| | | | | |
| Cash paid for acquisition of Framerate | $- | $(1,491) | |
| Purchase of property and equipment | (7) | (56) | (2,000) | (4,000) |
| Capitalization of software development costs | (877) | (839) | (192,000) | (240,000) |
| Acquisition of other intangible and other assets | (104) | (138) | (73,000) | (39,000) |
| Net cash used in investing activities | $(988) | $(2,524) | $(267,000) | $(283,000) |
Capitalized Internal Use Software Costs. Software development costs incurred to develop internal-use software during the application development stage are capitalized and amortized on a straight-line basis over the software’s estimated useful life, which is generally three years. Software development costs incurred during the preliminary stages of development are charged to expense as incurred. Maintenance and training costs are charged to expense as incurred. Upgrades or enhancements to existing internal-use software that result in additional functionality are capitalized and amortized on a straight-line basis over the applicable estimated useful life.
Cash Flows from Financing Activities. Cash flows from financing activities were comprised of the following for the periods presented (in thousands):presented:
| | Nine Months Ended September 30, | Three Months Ended March 31, |
| | | | | |
| Proceeds from issuance of common stock, net | $14,356 | $22,458 | $33,399,000 | $- |
| Proceeds from note payables | 1,200 | - | |
| Proceeds from warrant exercise | 10 | 20 | |
| Proceeds from stock option exercises | | 38,000 | - |
| Net cash used in investing activities | $15,566 | $22,478 | $33,437,000 | $- |
Equity Financings
In August 2020,January 2021, the Company issued 4,540,5413,076,924 shares of common stock at a price of $1.85$2.60 per share, raising aggregate net proceeds of approximately $7.6$8.0 million, after deducting placement agent fees of $588,000 and other offering expenses totaling $180,000. The offering was conducted pursuant to the Company’s effective Registration Statements on Form S-1 (File No. 333-248248), and a related registration statement filed pursuant to Rule 462(b) under the Securities Act. In addition, pursuant to the terms of the related underwriting agreement, the Company granted to the underwriter a 30-day over-allotment option to purchase up to an additional 681,081 Shares at the same public offering price per share, less discounts and commissions, which was partially exercised in September 2020, resulting in the issuance of 448,440 shares and net proceeds of $771,000, after deducting placement agent fees of $58,000. We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including sales and marketing activities, product development and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses.$73,000.
In May 2020,February 2021, the Company issued 1,825,0002,926,830 shares of common stock at a price of $3.50$4.10 per share, raising aggregate net proceeds of approximately $6.0$12.0 million, after deducting placement agent fees of $319,000 and other offering expenses totaling $116,000,$70,000.
In March 2021, the Company issued 1,512,499 shares of common stock at a price of $9.00 per share, raising aggregate net proceeds of approximately $13.6 million, after deducting offering expenses totaling $72,000.
The offerings described above were made pursuant to a registered direct offering.an effective shelf registration statement on Form S-3, which was originally filed with the Securities and Exchange Commission on April 10, 2020 (File No. 333-237626). The net proceeds from these offerings are intended to be used for working capital and other general corporate purposes, including sales and marketing activities, product development and capital expenditures. WeThe Company may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses.
On February 27, 2019, we completed our IPO, pursuant to which we issued and sold an aggregate of 2,272,727 shares of our common stock at a public offering price of $11.00 per share pursuant to a registration statement on Form S-1, declared effective by the SEC on February 25, 2019 (File No. 333-229144). We raised net proceeds of approximately $22,458,000 after underwriting discounts, commissions and other offering costs of $2,542,000.
Concurrent with the closing of the IPO on February 27, 2019, in accordance with the underlying agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding, totaling $13,793,000, was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35.
CARES Act
As noted above, on May 4, 2020, we entered into the potentially forgivable PPP Loan from the SBA, pursuant to the PPP program enacted under the CARES Act, resulting in net proceeds of approximately $1.2 million. To facilitate the PPP Loan, we entered into the PPP Loan Agreement with a third-party lender.
The PPP Loan matures on May 4, 2022. However, under the CARES Act and the PPP Loan Agreement, all payments of both principal and interest will be deferred until at least December 4, 2020. The PPP Loan accrues interest at a rate of 1.00% per annum, and interest will continue to accrue throughout the period the PPP Loan is outstanding, or until it is forgiven. We are eligible to apply for forgiveness of all loan proceeds used to pay payroll costs and other qualifying expenses during the 24-week period following receipt of the loan, provided that the Company maintains its employment and compensation within certain parameters during such period. Any amounts forgiven will not be included in the Company’s taxable income. As specifically intended under the program, the PPP Loan, together with our cost savings initiatives, helped us to continue operations without salary reductions, layoffs or furloughs, during this challenging and uncertain economic environment created by the COVID-19 pandemic.
The PPP Loan is accounted for as a financial liability in accordance with FASB ASC 470, “Debt” and interest is accrued in accordance with the interest method. Additional interest is not imputed at a market rate pursuant to a scope exception for interest rates prescribed by governmental agencies under the applicable guidance.
The proceeds from the PPP Loan are recorded as a long-term liability on the balance sheet until either (1) the loan is, in part or wholly, forgiven and the company has been “legally released” or (2) the Company pays off the loan to the creditor. Once the loan is, in part or wholly, forgiven, and legal release is received, the Company will reduce the liability by the amount forgiven and record a gain on extinguishment in the statement of operations in the period of extinguishment.
Contractual Obligations
As of September 30, 2020,March 31, 2021, except as described below, and excluding the forgivable PPP Loan described above, we had no significant commitments for capital expenditures, nor do we have any committed lines of credit, noncancelable operating leases obligations, other committed funding or long-term debt, and no guarantees. The operating lease for our corporate headquarters expired on May 31, 2017 and was subsequently amended to operate on a month-to-month basis. In June 2020, we terminated the lease for the majority of our corporate headquarters (approximately 4,965 square feet). As of September 30, 2020March 31, 2021 we maintain approximately 1650 square feet of office space on a month-to-month basis. The following table lists our material known future cash commitments as of September 30, 2020 (in thousands):March 31, 2021:
| | Payments Due by Period (In thousands) |
| | | | | |
| Insurance premium financing | $181 | $181 | - | - |
| | |
| | | | | |
| Insurance premium financing | $1,876,000 | $1,876,000 | - | - |
Off-Balance Sheet Commitments and Arrangements
We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our financial statements included elsewhere herein. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Recent Accounting Pronouncements
Refer to Note 2 to the accompany condensed financial statements contained elsewhere in this Report.
Relaxed Ongoing Reporting Requirements
Upon the completion of our IPO,initial public offering, we elected to report as an “emerging growth company” (as defined in the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies,” including but not limited to:
●
not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
●
taking advantage of extensions of time to comply with certain new or revised financial accounting standards;
●
being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
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being exempt from the requirement to hold a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We are subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies,” and our stockholders could receive less information than they might expect to receive from more mature public companies.
We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an “emerging growth company” for up to five years, although if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.
ITEM 3. QUANTITATIVE QUANTITATIVEAND 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. CONTROLSCONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our CEO and our CFO each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS |
None.
ITEMITEM 1A. RISK FACTORS |
InvestingExcept as set forth below, management is not aware of any material changes to the risk factors discussed in our common stock involves a high degreePart 1, Item 1A, of risk. You should carefully consider the risks described below, as well asAnnual Report on Form 10-K for the year ended December 31, 2020. In addition to the following risk factors and other information set forth in this Quarterly Report on Form 10-Q, including our financial statements andyou should carefully consider the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to investrisk factors discussed in our common stock. The occurrence of anyPart 1, Item 1A, of the events or developments described belowAnnual Report on Form 10-K for the year ended December 31, 2020, which could harm ourmaterially and adversely affect the Company’s business, financial condition, operating results of operations, and growth prospects. In such an event,stock price. The risks described in the market price of our common stock could decline, and you may lose all or part of your investment.Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not presently known to usmanagement, or that we currently deem immaterialmanagement presently believes not to be material, may 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 $14.0 million and $26.0 million during the nine months ended September 30, 2020 and 2019, respectively. Noncash expenses (excluding depreciation and amortization of fixed and intangible assets) totaled $1.6 million and $15.2 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, we had an accumulated deficit of $99.8 million. Moreover, the report of our independent registered public accounting firm to the financial statements for our fiscal year ended December 31, 2019, included elsewhere herein, contains an explanatory paragraph stating that our recurring losses from operations, accumulated deficit and cash used in operating activities raise substantial doubt about our ability to continue as a going concern. We cannot predict if we will achieve profitability soon or at all. We expect to continue to expend substantial financial and other resources on, among other things:
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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;
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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;
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investments in bandwidth to support our video streaming functionality;
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contract labor costs and other expenses to host our leagues and tournaments;
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costs to retain and attract gamers and license first tier game titles, grow our online gamer community and generally expand our business operations;
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hiring additional employees;
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expansion of our operations and infrastructure, both domestically and internationally; and
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general administration, including legal, accounting and other expenses related to being a public company.
We may not generate sufficient revenue to offset such costs to achieve or sustain profitability in the future. We expect to continue to invest heavily in our operations, our online and in person experiences, business development related to game publishers, advertisers, sponsors and gamer acquisition, to accelerate as well as maintain our current market position, support anticipated future growth and to meet our expanded reporting and compliance obligations as a public company.
We expect operating losses to continue in the near term in order to carry out our strategic objectives. We consider historical operating results, capital resources and financial position, in combination with current projections and estimates, as part of our plan to fund operations over a reasonable period of time.
We believe our current cash position, absent receipt of additional capital either from operations or that may be available from future issuance(s) of common stock or debt financings, is not sufficient to fund our planned operations for the twelve months following the date of this Report.
We are focused on expanding our service offerings and revenue growth opportunities through internal development, collaborations, and through one or more strategic acquisitions. Management is currently exploring several alternatives for raising capital to facilitate our growth and execute our business strategy, including strategic partnerships or other forms of equity or debt financings.
We intend to continue implementing our business strategy with the expectation that there will be no material adverse developments in our business, liquidity or capital requirements. If one or more of these factors do not occur as expected, it could have a material adverse impact on our activities, including (i) reduction or delay of our business activities, (ii) forced sales of material assets, (iii) defaults on our obligations, or (iv) insolvency. Our planned investments may not result in increased revenue or growth of our business. We cannot assure you that we will be able to generate revenue sufficient to offset our expected cost increases and planned investments in our business and platform. As a result, we may incur significant losses for the foreseeable future, and may not be able to achieve and/or sustain profitability. If we fail to achieve and sustain profitability, then we may not be able to achieve our business plan, fund our business or continue as a going concern. The financial statements included in this Report do not contain any adjustments which might be necessary if we were unable to continue as a going concern.
We are a relatively young company, and we may not be able to sustain our rapid growth, effectively manage our anticipated future growth or implement our business strategies.
We have a limited operating history. Although we have experienced significant growth since our gaming platform for amateur online and in person gaming experiences was launched, and we established our amateur city leagues, tournaments and competitions, our historical growth rate may not be indicative of our future performance due to our limited operating history and the rapid evolution of our business model, including a focus on direct to consumer-based gaming. We may not be able to achieve similar results or accelerate growth at the same rate as we have historically. As our amateur city leagues, tournaments and competitions continue to develop, we may adjust our strategy and business model to adapt. These adjustments may not achieve expected results and may have a material and adverse impacteffects on our business, financial condition, and results of operations.
In addition, our rapidgrowth and expansion have placed, and continue to place, significant strain on our management and resources. This levelWe may experience difficulties in integrating the operations 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 expandMobcrush 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 resultsin realizing the expected benefits of operations.the Merger.
We are subject to risks associated with operating in a rapidly developing industry and a relatively new market.
Many elementsThe success of our business are unique, evolving and relatively unproven. Our business and prospectsthe Merger will 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 changesrealize the anticipated business opportunities from combining the operations of Mobcrush with our business in an efficient and effective manner. The integration process could take longer than anticipated and could result in the esports gaming industry, including rapid technological evolution, continued shiftsloss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or inconsistencies in gamer trendsstandards, controls, information technology systems, procedures and demands, frequent introductionspolicies, any of new games and titles and the constant emergence of new industry standards and practices. Developing and integrating new games, titles, content, products, serviceswhich could adversely affect our ability to maintain relationships with customers, employees or infrastructure could be expensive and time-consuming, and these efforts may not yield the benefits we expectother third parties, or our ability 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 developmentanticipated benefits of the online advertising industryMerger, 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 oncould harm our gaming platform.financial performance. If the online advertising and sponsorship market does not continue to grow, or if we are unable to capturesuccessfully or timely integrate the operations of Mobcrush with our business, we may incur unanticipated liabilities and retain a sufficient share of that market, our abilitybe unable to increase our current level of advertisingrealize the revenue growth, synergies and sponsorship revenueother anticipated benefits resulting from the Merger, and our profitabilitybusiness, results of operations and prospects mayfinancial condition could be materially and adversely affected.
Furthermore, our coreWe have incurred significant costs in connection with the Merger. The substantial majority of these costs are non-recurring expenses related to the Merger. These non-recurring costs 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 doexpenses are 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 resultsreflected 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 potentialunaudited pro forma condensed combined financial information incorporated by reference in this proxy statement. We may incur additional costs in the long-term. However, this philosophyintegration of putting our gamers firstMobcrush’s business, and may alsonot achieve cost synergies and other benefits sufficient to offset the incremental costs of the Merger.
The Merger is subject to conditions to closing that could result in the Merger being delayed or not consummated and can be terminated in certain circumstances, each of which could negatively impact our relationships with advertisers, sponsors or other third parties,stock price and may not resultfuture business and operations.
The Merger is subject to conditions to closing as set forth in the long-termMC Merger Agreement. In addition, each of the Company and Mobcrush has the right, in certain circumstances, to terminate the MC Merger Agreement. If the MC Merger Agreement is terminated or any of the conditions to the Merger are not satisfied and, where permissible, not waived, the Merger will not be consummated. Failure to consummate the Merger or any delay in the consummation of the Merger or any uncertainty about the consummation of the Merger may adversely affect the Company’s stock price or have an adverse impact on the Company’s future business operations.
If the Merger is not completed, the Company’s ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Merger, it would be subject to a number of risks, including the following:
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negative reactions from the financial markets and from persons who have or may be considering business dealings with the Company;
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financial difficulties that we expect,the Company may experience;
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the Company will be required to pay certain costs relating to the Merger, whether or not the Merger is completed; and
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the Company has agreed to pay Mobcrush's expenses if the Merger Agreement is terminated in which casecertain circumstances.
In addition, the success of our business and operating resultsCompany could be harmed.
Our revenue model may not remain effective and we cannot guarantee that our future monetization strategies will be successfully implementedsubject to litigation related to any failure to complete the Merger or generate sustainable revenues and profit.
We generate revenues from advertising and sponsorship of our league tournaments, and throughrelated to any proceeding commenced against the operation of our live streaming gaming platform using a revenue model whereby gamers can get free accessCompany seeking to certain live streaming of amateur tournaments, and gamers pay feesrequire the Company to compete in league competition. We have generated, and expect to continue to generate, a substantial portion of revenues using this revenue model inperform its obligations under 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.
Merger Agreement.
The Merger will present challenges associated with integrating operations, personnel, and other aspects of the companies and assumption of liabilities that may exist at Mobcrush and which may be known or unknown by the Company.
The results of the combined company following the Merger will depend in part upon the Company’s ability to integrate Mobcrush’s business with the Company’s business in an efficient and effective manner. The Company’s attempt to integrate two companies that have previously operated independently may result in significant challenges, and the Company may be unable to accomplish the integration smoothly or successfully. In particular, the necessity of coordinating geographically dispersed organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration may require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the combined company. In addition, the combined company may adjust the way in which Mobcrush or the Company has conducted its operations and utilized its assets, which may require retraining and development of new procedures and methodologies. The process of integrating operations and making such adjustments after the Merger could cause an interruption of, or loss of or a substantial reductionmomentum in, activity bythe activities of one or more of our largest customers and/or vendors could materiallythe combined company’s businesses and adversely affect our business, financial condition and results of operations.
For the three and nine months ended September 30, 2020, two customers accounted for 43% and four customers accounted for 54% of revenues, respectively.For the three and nine months ended September 30, 2019, five customers accounted for 90% and three customers accounted for 49% of revenues, respectively.At September 30, 2020, four customers accounted for 74% of accounts receivable. At December 31, 2019, one customer accounted for 70% of accounts receivable. At September 30, 2020, two vendors accounted for 34% of accounts payable. At December 31, 2019, one vendor accounted for 21% of accounts payable.
The loss of key personnel. Employee uncertainty, lack of focus, 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 effortsturnover during the integration process 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 uponalso disrupt 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 popularitybusinesses 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,combined company. Any inability of management to integrate the operations of the Company 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 mayMobcrush successfully could have a material and adverse impact on our results of operations and financial conditions.
Although we have entered into multi-year agreements with certain publishers, if we fail to license multiple additional “hit” games or any of our existing licensed esports game publishers with which we currently have a license decide to breach the license agreement or choose not to continue with us once the term of the license agreement expires, the popularity of our amateur city leagues, tournaments and competitions may decline and the number of our gamers may decrease, which could materially and adversely affect our results of operations and financial condition.
In addition to the esports games we have licensed, we must continue to attract and retain the most popular esports gaming titles in order to maintain and increase the popularity of our amateur city leagues, tournaments and competitions, and ensure the sustainable growth of our gamer community. We must continue to identify and enter into license agreements with esports gaming publishers developing “hit’ games that resonate with our community on an ongoing basis. We cannot assure you that we can continue to attract and retain the same level of first-tier esports game publishers and our ability to do so is critical to our future success.
We have not entered into definitive license agreements with certain game publishers that we currently have relationships with, and we may never do so.
We currently do not have definitive license agreements in place with game publishers for the use of certain of the game titled played on our platform, as these publishers currently permit us to integrate the specifications of the game title with our technology. We may not ever enter into license agreements with these parties in the future, instead continuing our relationship with these game publishers without a license agreement. These game publishers may unilaterally choose to discontinue their relationship with the Company, thereby preventing us from offering experiences on our platform using their game titles, as the case may be. Should those game publishers choose not to allow us to offer experiences involving their respective game titles to our users, the popularity of our amateur city leagues, tournaments and competitions may decline and the number of our gamers may decrease, which could materially and adversely affect our results of operations and financial condition.
If we fail to keep our existing gamers highly engaged, to acquire new gamers, to successfully implement a direct to consumer model for our gaming community, our business, profitability and prospects may be adversely affected.
Our success depends on our ability to maintain and grow the number of amateur gamers attending and participating in our in-person and online tournaments and competitions, and using our gaming platform, and keeping our gamers highly engaged. Of particular importance is the successful deployment and expansion of our direct to consumer model to our gaming community for purposes of creating predictable recurring revenues.
In order to attract, retain and engage amateur gamers and remain competitive, we must continue to develop and expand our city leagues, including internationally, produce engaging tournaments and competitions, successfully license the newest “hit” esports games and titles, implement new technologies and strategies, improve features of our gaming platform and stimulate interactions in our gamer community.
A decline in the number of our amateur gamers in our ecosystem may adversely affect the engagement level of our gamers, the vibrancy of our gamer community, or the popularity of our amateur league play, which may in turn reduce our monetization opportunities, and have a material and adverse effect on ourthe 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 offsetof the costs incurred to operate and expand it. It is vital to our operations that we remain sensitive and responsive to evolving gamer preferences and offer first-tier esports game content that attracts our amateur gamers. We must also keep providing amateur gamers with new features and functions to enable superior content viewing, and social interaction. Further, we will need to continue to develop and improve our gaming platform and to enhance our brand awareness, which may require us to incur substantial costs and expenses. If such increased costs and expenses do not effectively translate into an improved gamer experience and direct to consumer-based, long-term engagement, our results of operations may be materially and adversely affected.
The ability to grow our business is dependent in part on the success and availability of mass media channels developed by third parties, as well as our ability to develop commercially successful content, and amateur tournaments and competitions.
The success of our business is driven in part by the commercial success and adequate supply of third-party mass media channels for which we may distribute our content, amateur league tournaments and competitions, including Twitch, YouTube and ESL.tv. Our success also depends on our ability to accurately predict which channels and platforms will be successful with the esports gaming community, our ability to develop commercially successful content and distribute via SLG.TV, which is presently available on Twitch, amateur tournaments and competition for these channels and gaming platforms and our ability to effectively manage the transition of our gamers from one generation or demographic to the next. Additionally, we may enter into certain exclusive licensing arrangements that affect our ability to deliver or market our amateur gaming tournaments and competitions on certain channels and platforms. A channel or platform may not succeed as expected or new channels or platforms may take market share and gamers away from platforms for which we have devoted significant resources. If demand for the channels or platforms for which we are developing amateur tournaments or competitions is lower than our expectations, we may be unable to fully recover the investments we have made, and our financial performance may be harmed. Alternatively, a channel or platform for which we have not devoted significant resources could be more successful than we initially anticipated, causing us to not be able to take advantage of meaningful revenue opportunities.
Our business is subject to risks generally associated with the entertainment industry.
Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control. These risks could negatively impact our operating results and include the popularity, price to play, and timing of release of our esports licensed games, economic conditions that adversely affect discretionary consumer spending, changes in gamer demographics, the availability and popularity of other forms of entertainment, and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.
If we fail to maintain and enhance our brand or if we incur excessive expenses in this effort, our business, results of operations and prospects may be materially and adversely affected.
We believe that maintaining and enhancing our brand is of significant importance to the success of our business. A well-recognized brand is important to increasing the number of esports gamers and the level of engagement of our overall gaming community which is critical in enhancing our attractiveness to advertisers and sponsors. Since we operate in a highly competitive market, brand maintenance and enhancement directly affect our ability to maintain and enhance our market position.
Although we have developed our brand and amateur tournaments and competitions through word of mouth referrals, key strategic partners and our esports game publisher licensors, as we expand, we may conduct various marketing and brand promotion activities using various methods to continue promoting our brand. We cannot assure you, however, that these activities will be successful or that we will be able to achieve the brand promotion effect we expect.combined company.
In addition, any negative publicity in relationthe Merger will subject the Company to our league tournamentscontractual or competitions, or operations, regardlessother obligations and liabilities 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,Mobcrush, some of which may materiallybe unknown. Although the Company and adversely affect ourits legal and financial advisors have conducted due diligence on Mobcrush and its business, resultsthere can be no assurance that the Company is aware of operationsall obligations and prospects.
Negative gamer perceptions about our brand, gaming platform, amateur city leagues, tournaments or competitions and/or business practices may damage ourliabilities of Mobcrush. These liabilities, and any additional risks and uncertainties related to Mobcrush’s business and increaseto the costs incurred in addressing gamer concerns.
Esports gamer expectations regardingMerger not currently known to the quality, performance and integrityCompany or that the Company may currently be aware of, our amateur city league tournaments and competitions are high. Esports gamers maybut that prove to be critical of our brand, gaming platform, amateur city leagues, tournamentsmore significant than assessed or competitions and/or business practices for a wide variety of reasons. These negative gamer reactions may not be foreseeable or within our control to manage effectively, including perceptions about gameplay fairness, negative gamer reactions to game content via social media or other outlets, components and services, or objections to certain of our business practices. Negative gamer sentiment about our business practices also can lead to investigations from regulatory agencies and consumer groups, as well as litigation, which, regardless of their outcome, may be costly, damaging to our reputation and harm our business.
Actual or threatened epidemics, pandemics, outbreaks, or other public health crises may adversely affect our business.
Our business could be materially and adversely affectedestimated by the risks, orCompany, could negatively impact the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the recent outbreak of novel coronavirus (COVID-19). The risk, or public perception of the risk, of a pandemic or media coverage of infectious diseases could cause a decrease to the attendance of our in person gaming experiences, or cause certain of our partners, such as Wanda Theaters in China, to avoid holding in person events. Moreover, an epidemic, pandemic, outbreak or other public health crisis, such as COVID-19, could cause members of our Action Squad, in whom we rely to manage the logistics of our in person experiences, or on-site employees of partners to avoid any involvement with our in person experiences or other events, which would adversely affect our ability to hold such events. The ultimate extent of the impact of any epidemic, pandemic or other health crisis on our business, financial condition, and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerningof the severitycombined company following consummation of such epidemic, pandemic or other health crisis and actions taken to contain or prevent their further spread, among others. These and other potential impacts of an epidemic, pandemic or other health crisis, such as COVID-19, could therefore adversely affect our business, financial condition and results of operations.
Technology changes rapidly in our business and if we fail to anticipate orsuccessfully 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.Merger.
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 disruptionsCompletion 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:
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our computer software or hardware, or our customers’ or suppliers’ computer software or hardware;
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our network, our customers’ networks or our suppliers’ networks; or
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our connections and outsourced service arrangements with third parties.
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Our systems and operations are also vulnerable to damage or interruption from:
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power loss, transmission cable cuts and other telecommunications and utility failures;
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hurricanes, fires, earthquakes, floods and other natural disasters
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a terrorist attack in the U.S. or in another country in which we operate;
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interruption of service arising from facility migrations, resulting from changes in business operations including acquisitions and planned data center migrations;
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computer viruses or software defects;
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loss or misuse of proprietary information or customer data that compromises security, confidentiality or integrity; or
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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 andMerger would result in the lossissuance 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.
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 holdersshares of our common stock, is also uncertain and could be adverse. We urgewhich will reduce the voting power of our current stockholders and investors to consult with our legal and tax advisors with respect to this legislation andmay depress the potential tax consequencestrading price of investing in or holding our common stock.
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 outsideCompletion 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 mayMerger would 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.
A reversal of the U.S. economic recovery and a return to volatile or recessionary conditions in the United States or abroad could adversely affect our business or our access to capital markets in a material manner.
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 usea significant capital for the growth and developmentnumber of our business, and, as such, we expect to seek additional capital either from operations or that may be available from future issuance(s) of common stock or debt financings, to fund our planned operations.
Accordingly, our results of operations and the implementation of our long-term business strategy could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the current outbreak of COVID-19. The most recent global financial crisis caused by COVID-19 resulted in extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business and could have a material adverse effect on us, including limiting our ability to obtain additional capital from the capital markets. We could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in eachshares of the countries in which we operate.
From timeCompany’s common stock. As a result, the Company’s existing stockholders will not exert the same degree of voting power with respect 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 occupythe combined company that they did before the consummation of the Merger. Further, the issuance of such a significant amount of our employees’ timecommon stock, 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.
Because the applicability of the exclusive forum provision is limited to the extent permitted by law, we believe that the exclusive forum provision would not apply to suits brought to enforce any duty or liability created by the Exchange Act, the Securities, any other claim for which the federal courts have exclusive jurisdiction or concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act. We note that there is uncertainty as to whether a court would enforce the provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although we believe this provision benefits us by providing increased consistencyits potential sale in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
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 otherpublic 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.
Risks Related to our Common Stock
Although our 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 our 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 our 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 the offering. Factors that could cause fluctuations indepress the trading price of our common stock include:and you may lose all or a part of your investment.
●changesThe Company has incurred and will continue to our industry, including demandincur significant transaction, combination-related and regulations;restructuring costs in connection with the Merger.
●The Company has incurred and will continue to incur transaction fees and other expenses related to the Merger, including filing fees, legal and accounting fees, soliciting fees, regulatory fees, and printing and mailing costs. The Company also expects to incur significant costs associated with combining the operations of the two companies. It is difficult to predict the amount of these costs before we begin the integration process. The combined company may incur additional unanticipated costs as a consequence of difficulties arising from efforts to integrate the operations of the twocompanies. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, can offset incremental transaction, combination-related, and restructuring costs over time, we may not be able to compete successfully against current and future competitors;achieve this net benefit in the near term, or at all. If the Merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the Merger.
●competitive pricing pressures;If Mobcrush or the combined company fails to comply with obligations under any license, collaboration or other agreements, the combined company could lose intellectual property rights that are necessary for developing and commercializing product candidates.
●our abilityMobcrush’s intellectual property relating to obtain working capital financing as required;
●additionsthe Minecraft Online Channel Agreement licensed from Microsoft corporation intellectual property relating to InPVP’s Mineville, one of six official Microsoft Minecraft partner servers. Mobcrush’s license agreements with Microsoft impose, and any future licenses or departurescollaboration agreements the combined company might enter into are likely to impose, various development, maintenance, funding, milestone, royalty, diligence, sublicensing, copyright prosecution and enforcement and other obligations]. These type of key personnel;
agreements and related obligations are complex and subject to contractual disputes. If Mobcrush (and the combined company following the closing of the Merger) breaches any of these imposed obligations, or use the intellectual property licensed to Mobcrush in an unauthorized manner, Mobcrush (and the combined company following the closing of the Merger) might be required to pay damages or the licensor might have the right to terminate the license, which could result in the loss of the intellectual property rights and Mobcrush (and the combined company following the closing of the Merger) being unable to develop, manufacture and sell drugs that are covered by the licensed technology.
●our ability to obtain working capital financing as required;
●additions or departures of key personnel;
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sales of our common stock;
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our ability to execute our business plan;
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operating results that fall below expectations;
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loss of any strategic relationship, sponsor or licensor;
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any major change in our management;
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changes in accounting standards, procedures, guidelines, interpretations or principals; and
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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 our offering. If the market price of our common stock after our 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.
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:
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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;
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reduced disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; and
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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 our offering. Our status as an emerging growth company will end as soon as any of the following takes place:
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the last day of the fiscal year in which we have more than $1.07 billion in annual revenue;
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the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates;
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the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or
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the last day of the fiscal year ending after the fifth anniversary of the completion of our 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.
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.
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, 2020 and 2019, we recorded share-based compensation expense of$1.6 millionand $5.3 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.
ITEMITEM 2. UNREGISTEREDUNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS |
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. MINE SAFETY DISCLOSURES |
| |
Not applicable.
ITEM 5. OTHER INFORMATION |
None.
| Exhibit No. | | Description | | Incorporation by Reference
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| | Agreement and Plan of Merger, dated March 9, 2021, by and among Super League Gaming, Inc., SLG Merger Sub II, Inc., and Mobcrush, Inc. |
| Exhibit 2.1 to the Current Report on Form 8-K, filed March 11, 2021. |
| | | | |
| | Amendment No. 1 to Agreement and Plan of Merger by and between Super League Gaming, Inc., and Mobcrush Streaming, Inc., dated April 20, 2021 |
| Exhibit 10.1 to the Current Report on Form 8-K, filed April 21, 2021. |
| | | | |
| | Form of Registration Rights Agreement |
| Exhibit 10.1 to the Current Report on Form 8-K, filed March 11, 2021. |
| | | | |
| | Form of Voting Agreement | | Exhibit 10.2 to the Current Report on Form 8-K, filed March 11, 2021. |
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| | Form of Securities Purchase Agreement, dated March 19, 2021 | | Exhibit 10.1 to the Current Report on Form 8-K, filed March 23, 2021. |
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| | Certification of the Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | |
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| 101.INS | | XBRL Instance Document | | |
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| 101.SCH | | XBRL Taxonomy Extension Schema | | |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase | | |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase | | |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase | | |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase | | |
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 13, 2020May 17, 2021 | | | |