Super League Gaming, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The company operates an esports community and content platform, generating revenue from sponsorships, platform-as-a-service (PaaS), and direct-to-consumer offerings. The filing describes both physical and digital gaming experiences and related content distribution.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $249,000 | $129,000 |
| Gross profit | $175,000 | $6,000 |
| Gross margin | 70.3% | 4.7% |
| Operating expenses | $6.311 million | $4.132 million |
| Operating loss | $6.136 million | $4.126 million |
| Net loss | $16.069 million | $4.171 million |
| Net loss per share, basic and diluted | $2.68 | $0.91 |
| Cash used in operating activities | $3.322 million | $2.740 million |
- At March 31, 2019, cash was $21.486 million and current assets were $22.881 million, compared with $2.774 million and $3.749 million, respectively, at December 31, 2018.
- Current liabilities were $1.040 million, down from $11.781 million at year-end. The company reported no debt outstanding at March 31, following conversion of its notes in connection with the IPO.
- Operating cash outflow plus investing cash outflow of $424,000 was funded primarily by $22.458 million of net IPO proceeds. Cash increased by $18.712 million during the quarter.
- Stockholders’ equity was $23.167 million, versus a $6.794 million deficit at December 31, 2018. Common shares outstanding increased from 4,610,109 to 8,368,833 during the quarter.
Changes versus the prior comparable period
- Revenue increased $120,000, or 93%. PaaS revenue was $167,000, including a Samsung Fortnite activation; sponsorship revenue declined 21% to $71,000, and direct-to-consumer revenue declined 72% to $11,000.
- Management attributed lower direct-to-consumer revenue to fewer paid events and a strategic emphasis on free experiences to grow the user funnel. Cost of revenue fell 40% to $74,000, and gross profit improved to $175,000.
- Operating expenses rose 53% to $6.311 million. General and administrative expense increased 74% to $5.368 million, including $2.730 million of stock-based compensation; technology platform development costs increased 28% to $710,000.
- Net loss widened substantially, principally because of noncash financing-related charges recorded upon the IPO and note conversion: a $7.067 million beneficial conversion feature and debt discount/issuance-cost accretion. The filing’s statements report total other expense of $9.933 million; MD&A’s detailed components total $9.938 million, an apparent inconsistency to check.
Capital events, outlook, and risks
- The February 27, 2019 IPO issued 2,272,727 shares at $11.00 per share and generated $22.458 million in net proceeds after $2.542 million of offering costs. The company intends to use proceeds for working capital and general corporate purposes, including sales and marketing, product development, and capital expenditures; acquisitions or investments are also possible. Management has broad discretion over use of proceeds.
- Outstanding 9% convertible notes and accrued interest totaling $13.793 million converted into 1,475,164 shares at $9.35 per share at the IPO closing. The conversion also triggered significant noncash interest and stock-compensation charges.
- Management said cash resources were expected to fund requirements through at least May 2020. The company expects near-term operating losses and continued investment; it provided no quantitative revenue, earnings, or cash-flow guidance. A 2018 auditor’s report cited substantial doubt about the company’s ability to continue as a going concern; management’s current runway estimate depends on executing its strategy and avoiding material adverse developments.
- Operating metrics cited by management included 59 active venues, 366,000 registered users, 36,000 gameplay hours, and 748,000 views at or during Q1 2019. The company said it had five game titles in its portfolio and described PaaS and digital subscriptions as developing revenue opportunities.
- Revenue and receivables were highly concentrated: three customers represented 95% of Q1 revenue and 94% of receivables at March 31. Three vendors represented 40% of accounts payable.
- Key disclosed risks include continued losses and funding needs; dependence on customer, sponsor, vendor, game-publisher, and third-party platform relationships; uncertain monetization and growth; competition and hit-driven game demand; cybersecurity, service availability, privacy and child-protection regulation; and stock-price volatility and dilution.
- The company reported no legal proceedings, significant capital expenditure commitments, or subsequent events expected to affect the reported statements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the $9.933 million total other expense in the financial statements with the $9.938 million total shown in MD&A, and confirm the reported $2.684 million versus MD&A’s $2.475 million debt-discount accretion figures.
- Confirm the amount and timing of IPO proceeds deployment against the stated use of proceeds, while tracking quarterly cash burn and management’s May 2020 runway estimate.
- Assess whether venue, user, gameplay, and viewership growth translates into recurring, diversified revenue and improved operating performance.
- Monitor customer concentration, game-title licensing arrangements, and the status of the company’s disclosed relationships where definitive licenses were not in place.
- Review equity dilution from the IPO, note conversion, outstanding options and warrants, and IPO-triggered stock-based compensation; the filing contains inconsistent CEO option vesting counts in different sections.