Super League Gaming, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 13, 2020. The filing identifies the registrant as Super League Gaming, Inc.
Business context
The company operates digital and in-person esports experiences, content and gaming communities, including the Minehut platform and Framerate social video network. Revenue comes primarily from sponsorships and advertising, with a smaller direct-to-consumer business. Management reported substantial growth in audience engagement during the COVID-19 period, while noting that increased engagement has not yet translated into profitability.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $718,000 | $350,000 | $1.285 million | $822,000 |
| Gross profit | $391,000 | $158,000 | $725,000 | $443,000 |
| Gross margin | 54.5% | 45.1% | 56.4% | 53.9% |
| Operating expenses | $4.688 million | $4.583 million | $14.729 million | $16.509 million |
| Operating loss | $4.297 million | $4.425 million | $14.004 million | $16.066 million |
| Net loss | $4.298 million | $4.417 million | $13.992 million | $25.991 million |
| Loss per share, basic and diluted | $0.36 | $0.52 | $1.39 | $3.39 |
- Q3 revenue increased 105%; nine-month revenue increased 56%. Sponsorship and advertising generated $677,000 in Q3 and $1.190 million in the first nine months. Direct-to-consumer revenue was $41,000 and $95,000, respectively.
- For the first nine months, operating cash use was $12.674 million, investing cash use was $988,000, and financing provided $15.566 million. Cash increased by $1.904 million to $10.346 million.
- At September 30, cash was $10.346 million, working capital was approximately $11.8 million, total liabilities were $1.963 million, and stockholders’ equity was $15.246 million. Liabilities included a $1.205 million long-term PPP loan.
- The company reported an accumulated deficit of $99.8 million and stated that cash on hand, without additional capital, was insufficient to fund planned operations for the twelve months following issuance of the statements. Management identified substantial doubt about the company’s ability to continue as a going concern.
Changes versus prior comparable periods
- Revenue growth and higher gross profit reflected increased advertising, content sales and Minehut activity. Management cited campaigns for Netflix and Disney+, content sales including Snapchat and Cox Media, and increased programmatic advertising.
- Nine-month net loss improved by $12.0 million year over year, largely because the 2019 period included substantial noncash convertible-note charges, including a $7.067 million beneficial conversion feature. Operating loss improved by $2.062 million.
- Nine-month operating cash use increased from $10.142 million to $12.674 million despite the lower net loss.
- Common shares outstanding increased from 8.574 million at December 31, 2019 to 15.483 million at September 30, 2020, primarily reflecting 2020 equity offerings. The offerings raised approximately $14.4 million net in total.
Outlook, risks and unusual items
- No quantitative revenue, earnings or cash-flow guidance is provided. Management expects near-term operating losses and is exploring additional funding, including strategic partnerships and equity or debt financing; availability and terms are uncertain.
- COVID-19 contributed to increased online engagement but also caused advertising and sponsorship programs to be deferred and affected in-person activities. Management reported no cancellations of existing programs at the time, but the future impact remained uncertain.
- The PPP loan of approximately $1.2 million bears 1% interest, matures in May 2022, and may be forgiven if eligible costs and program conditions are met. Forgiveness had not been reported as completed.
- Customer concentration remains material: four customers represented 54% of nine-month revenue, and four customers accounted for 74% of accounts receivable at quarter-end. The company also cited dependence on game publishers, advertising demand, third-party platforms and technology providers, and its ability to monetize user growth.
- In April 2020, changes to a licensing arrangement led to accelerated amortization of $413,000 in the first nine months. In July, $90,000 of remaining Framerate earn-out compensation was expensed following cessation of services.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. No legal proceedings were reported in the filing.
Important facts for investors to verify
- Whether the company obtains sufficient additional financing to address the stated going-concern uncertainty and fund operations.
- Whether audience growth and views convert into sustained advertising, sponsorship and direct-to-consumer revenue, and whether customer concentration declines.
- The status and terms of PPP loan forgiveness, and any repayment obligation if forgiveness is denied or partial.
- The cash-burn trajectory, including whether increased technology and sales costs are supported by improving revenue and margins.
- The effects of equity issuance and potential future financing on share count and existing shareholders’ ownership.