Super League Gaming, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company operates esports experiences, content and gaming platforms, including Framerate and Minehut. The filing describes it as a small reporting company and an emerging growth company.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $243,000 | $249,000 |
| Gross profit / margin | $126,000 / 52% | $175,000 / 70% |
| Operating expenses | $5.274 million | $6.311 million |
| Operating loss | $5.148 million | $6.136 million |
| Net loss | $5.134 million | $16.069 million |
| Net cash used in operating activities | $3.388 million | $3.322 million |
- Cash and cash equivalents were $4.771 million at March 31, down from $8.442 million at December 31, 2019. Working capital was approximately $4.4 million; the reported current ratio was approximately 3.1.
- Total assets were $11.145 million and current liabilities were $2.159 million. The company reported no debt outstanding at quarter-end; its prior convertible notes had converted to equity in February 2019.
- Revenue was 94% sponsorship and advertising and 6% direct-to-consumer. Four customers represented 79% of Q1 revenue; three customers represented 86% of accounts receivable at quarter-end.
Changes versus the prior period
- Revenue declined 2% year over year. Sponsorship and advertising fell 4%, while direct-to-consumer revenue rose 36% from a small base.
- Gross margin fell about 18 percentage points as cost of revenue rose 58%, despite slightly lower revenue. Management attributed the higher costs to more live events and the prior period’s lower-cost sponsorship mix.
- Operating expenses decreased 16%. Lower general and administrative expense, including substantially lower stock compensation than in Q1 2019, more than offset increases in sales and marketing and technology costs.
- Net loss narrowed substantially, mainly because Q1 2019 included significant noncash interest and debt-conversion charges, including a $7.067 million beneficial conversion feature expense. Operating cash use was slightly higher year over year.
Outlook, commentary and risks
- Management expects operating losses to continue in the near term and stated that quarter-end cash, without additional financing or operating cash generation, was insufficient for planned operations over the following 12 months. The filing says this raises substantial doubt about the company’s ability to continue as a going concern.
- COVID-19 prompted some sponsors and advertisers to defer programs and revenue; the company reported no cancellations of existing programs in Q1. Management cited increased online users, engagement and gameplay, but said the pandemic’s overall financial impact remained uncertain and could affect advertising demand, retail expansion and in-person events.
- Reported Q1 performance indicators included 1.335 million registered users, up approximately 36% from year-end 2019; 10.0 million engagement hours; and 99.5 million views. These are operating measures, not revenue or profitability metrics.
- Subsequent financing: a potentially forgivable $1.2 million PPP loan was received May 4, 2020, bearing 1% interest and maturing May 4, 2022; payments were deferred at least until December 4, 2020. Forgiveness depends on eligible use and maintaining employment and compensation conditions. On May 13, the company announced a registered direct offering of 1.825 million shares at $3.50 per share, expected to generate approximately $6.4 million gross, subject to closing conditions.
- An April amendment to the ggCircuit arrangement shifted certain rights toward online play and terminated certain prior rights. The company recorded $306,000 of accelerated amortization in Q1 related to the terminated licenses. An April D&O insurance premium financing agreement totaled approximately $2.3 million, with a $1.0 million down payment and seven installments at approximately 4% interest.
- Key risks include ongoing losses and financing needs, customer and vendor concentration, reliance on sponsors and game publishers, competition and execution of direct-to-consumer monetization, COVID-19 disruption, and technology, cybersecurity, privacy and regulatory risks. Management reported disclosure controls were effective and no material change in internal control; no legal proceedings were reported.
Important facts for investors to verify
- Whether the announced share offering closed, its net proceeds, and the resulting dilution; whether the PPP loan qualifies for forgiveness and how much is forgiven.
- Cash runway and subsequent cash use, including the insurance-financing payments, against management’s going-concern warning.
- Whether engagement and view growth converts into sustained sponsorship, advertising and direct-to-consumer revenue, particularly after pandemic-related deferrals.
- Customer concentration and gross-margin trends, including the impact of the ggCircuit license changes and accelerated amortization.
- The filing’s signature date appears as “May 15, 2019,” inconsistent with the 2020 reporting period and May 2020 subsequent events; verify the filed version and date.