Business context and reporting period
Super League Gaming, Inc. (NASDAQ: SLGG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company operates an amateur esports platform spanning in-person and online competitions, content, sponsorships, platform-as-a-service (PaaS), and consumer subscriptions and fees.
During the period, the company completed its February 2019 IPO and acquired Framerate in June, adding a user-generated esports video and social network. Reported results include Framerate only from the acquisition date.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $223,000 | $358,000 | $472,000 | $487,000 |
| Gross profit (margin) | $110,000 (49.3%) | $176,000 (49.2%) | $285,000 (60.4%) | $182,000 (37.4%) |
| Operating expenses | $5.615 million | $3.778 million | $11.926 million | $7.921 million |
| Operating loss | $5.505 million | $3.602 million | $11.641 million | $7.739 million |
| Net loss | $5.505 million | $3.963 million | $21.574 million | $8.134 million |
| Basic and diluted loss per share | $0.65 | $0.86 | $3.00 | $1.77 |
Q2 revenue fell 38%, principally reflecting lower sponsorship revenue and no advertising/content sales, partly offset by new PaaS work. First-half revenue declined 3%; new PaaS revenue partly offset lower sponsorship and consumer revenue. First-half net loss included $7.067 million of beneficial-conversion-feature interest expense and substantial debt-discount and financing-cost charges associated with the IPO conversion of the notes.
Operating cash use was $6.883 million in the first half, versus $5.494 million a year earlier; investing cash use was $2.189 million versus $242,000, including $1.491 million cash paid for Framerate. Financing provided $22.478 million, primarily the IPO proceeds. Cash rose to $16.180 million at June 30 from $2.774 million at year-end. Current liabilities were $1.185 million, compared with current assets of $17.888 million. The $13.793 million of 9% convertible notes converted into common shares at the IPO; the company reported no debt outstanding at June 30.
Stockholders’ equity was $20.909 million, compared with a $6.794 million deficit at December 31, 2018. Shares outstanding increased from 4.61 million to 8.57 million during the first half. The filing reports an accumulated deficit of $76.707 million.
Material developments and management commentary
- IPO: The company sold 2,272,727 shares at $11 per share and received $22.458 million net proceeds. It said proceeds were intended for working capital and general purposes, including sales and marketing, product development, capital expenditures, and potentially acquisitions or investments.
- Framerate: Acquired for approximately $1.5 million cash and $1.0 million in shares, with up to an additional $980,000 in performance-based shares. The preliminary purchase allocation included $2.565 million of goodwill and a $189,000 trade name intangible.
- Operating indicators: Active venues increased to 93 from 46 at year-end 2018; registered users reached 509,000 from approximately 300,000; gameplay totaled 4.96 million hours; and first-half views were 5.95 million, compared with 925,000 for all of 2018. Management attributed part of the viewership increase to Framerate and promotional partnerships.
- Management said free-to-play events were used to grow the user funnel, with a mix of free and paid experiences planned. PaaS was described as an emerging revenue stream. No numerical revenue or profitability guidance was provided.
Risks, contingencies and unusual items
- The company reported continuing losses and expected near-term operating losses. Management believed cash would fund requirements through at least August 2020, but warned that additional financing might be needed and might not be available on favorable terms. The filing also notes that the auditor’s 2018 report included a going-concern explanatory paragraph; management’s liquidity outlook depends on executing its plan and avoiding adverse developments.
- Revenue and receivables were concentrated: four customers represented 98% of Q2 revenue and 89% of first-half revenue; three customers represented 86% of receivables at June 30. The filing’s risk-factor discussion gives a different first-half customer concentration figure (98%), which investors should reconcile.
- The filing says relationships involving major game titles—including Fortnite, PUBG, Clash Royale and Street Fighter V—did not yet have definitive license agreements. A loss of publisher access, sponsors, customers, or third-party platforms could materially affect results.
- Key risks include the ability to monetize and retain users, competition and hit-driven game demand, cybersecurity and service outages, privacy and child-protection compliance, intellectual-property claims, and execution of growth plans. The company also cited public-company costs and stock-based compensation; first-half stock-based compensation was $4.529 million.
- IPO-related unusual items included the automatic conversion of notes and $7.067 million of beneficial-conversion-feature expense. Performance-based executive options and warrants also drove substantial noncash compensation expense.
- The company reported no legal proceedings, significant capital expenditure commitments, long-term debt, or off-balance-sheet financing arrangements at June 30. It said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the user, venue, gameplay, and viewership growth translates into recurring paid revenue and improved margins.
- The customer concentration discrepancy between the notes and risk-factor discussion, and the durability of key customer and publisher relationships.
- Cash burn relative to the stated runway through August 2020, and management’s assumptions regarding future financing needs.
- Framerate’s performance against earn-out milestones and the acquisition’s contribution to revenue, audience, and costs.
- The impact of equity compensation, outstanding warrants, and post-lock-up share sales; the filing identified August 26, 2019 as the expected lock-up expiration date.