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References in this Quarterly Report on Form 10-Q to "Super League Gaming, Inc. " "Company," "we," "us," "our," or similar references meanSuper League Gaming, Inc. References to the "SEC" refer to theU.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 consolidated financial statements and the related notes included elsewhere in this interim report. Our condensed consolidated financial statements have been prepared in accordance withU.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" included Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as well as in 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. OverviewSuper League Gaming, Inc. (Nasdaq: SLGG) builds and operates networks of games, monetization tools and content channels across open-world gaming platforms that empower developers, energize players, and entertain fans. Our solutions provide incomparable access to an audience consisting of players in the largest global metaverse environments, fans of hundreds of thousands of gaming influencers, and viewers of gameplay content across major social media and digital video platforms. Fueled by proprietary and patented technology systems, the Company's platform includes access to vibrant in-game communities, a leading metaverse advertising platform, a network of highly viewed channels and original shows on Instagram,TikTok , Snap, YouTube, and Twitch, cloud-based livestream production tools, and an award-winning esports invitational tournament series. The Company's properties deliver powerful opportunities for brands and advertisers to achieve impactful insights and marketing outcomes with gamers of all ages. We generate revenue from (i) advertising, serving as a marketing channel for brands and advertisers to reach their target audiences of gamers across our network, (ii) content, curating and distributing esports and gaming-centric entertainment content for our own network of digital channels and media and entertainment partner channels, and (iii) direct to consumer offers, including digital subscriptions, in-game digital goods, and gameplay access fees. We operate in one reportable segment to reflect the way management and our chief operating decision maker review and assess the performance of the business.
Matters Affecting Comparability
During fiscal year 2021, we completed the acquisitions described below under the
heading, “FY 2021 Acquisitions” (collectively, the FY 2021 Acquisitions”).
Executive Summary During the third quarter of 2022, we continued our growth trajectory, highlighted by reaching over 70 million unique monthly players through our metaverse gaming network. Our challenge, and opportunity, is to capture the significant shift in the digital advertising market toward in-game advertising. We continued to strengthen our leadership position in video game experiences and entertainment by winning a larger share of advertisers' wallets, further monetizing our sought-after premium advertising inventory, and adding new partners to expand our global network sales fleet. Our continued focus on topline revenue growth resulted in third quarter 2022 revenue of$4.5 million , an increase of 25%, compared to$3.6 million in the third quarter of 2021, driven by strong percentage increases in our advertising and sponsorship revenue stream. Third quarter 2022 cost of revenue was$2.7 million compared to$2.3 million in the comparable prior year quarter, primarily reflecting the significant increase in related revenue, compared to the prior year quarter. As a percent of revenue, gross profit in the third quarter of 2022 was 40% compared to 38% in the prior year quarter. -26-
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Total operating expense in the third quarter of 2022, excluding noncash goodwill impairment charges totaling$42.0 million (Note 2) and accrued contingent consideration related to FY 2021 Acquisitions totaling$1.8 million (Note 4), were$10.1 million compared to$8.3 million in the comparable prior year quarter, and included increased personnel costs, and intangible asset amortization expense associated with our FY 2021 Acquisitions. Operating expense in the third quarter of 2022 included noncash amortization of intangible assets, totaling$1.7 million compared to$1.1 million in the third quarter of 2021, reflecting a full quarter of amortization of intangible assets acquired in connection with our FY 2021 Acquisitions. Noncash stock compensation charges for the third quarter of 2022 totaled$1.2 million compared to$636,000 in the third quarter of 2021. As discussed below, third quarter 2022 results included a goodwill impairment charge totaling$42.0 million , primarily due to the sustained decline in our market capitalization as ofSeptember 30, 2022 , consistent with the broader mid and micro-cap markets. In addition, as discussed below, third quarter 2022 results included the accrual of contingent consideration related to FY 2021 Acquisitions totaling$1.8 million , which is reflected as compensation expense in the condensed consolidated statement of operations due to the related earn out being contingent upon continued employment. On a GAAP-basis, which includes the impact of noncash charges, including the goodwill impairment charge of$42.0 million , net loss in the third quarter of 2022 was$52.6 million , or$(1.41) per share, compared to a net loss of$7.0 million , or$(0.20) per share, in the comparable prior year quarter. Excluding the impact of the goodwill impairment charges and the accrual of FY 2021 Acquisition related contingent consideration, the net loss for the third quarter of 2022 was$8.7 million , or ($0.23 ) per share. FY 2021 Acquisitions
FY 2021 Acquisitions were comprised of the following:
? We acquired Mobcrush, effective
believe the acquisition of Mobcrush will enable us to provide brands,
advertisers, and other consumer facing businesses with significant audience
reach across the most important engagement channels, providing livestream and
video on demand social media audience reach through a network of mid-tier
social media influencers.
? In
commitment to helping creators monetize their fan base as they seek to turn
their passion into their livelihood and provides brands with access to
additional premium inventory from creators through the Company, to establish
organic connections with their fans and followers. Based in the United
Kingdom, and having already onboarded a strong roster of European gaming
creators and brand partners, and as the first international acquisition by the
Company, Bannerfy represents another path to expansion of our advertising and
sponsorship partner base. ? OnOctober 4, 2021 , we completed the acquisition ofBloxbiz Co. (doing
business as, and hereinafter referred to as “Superbiz”), a dynamic advertising
platform designed specifically for metaverse environments. Superbiz’s initial
deployment enables brands to advertise across popular Roblox game titles and
helps Roblox creators with monetization and game analytics. Superbiz’s
advertising platform reaches more than 70 million monthly active Roblox users
across a collection of more than 150 curated, brand-safe games. In-game ads
take the form of creative billboards that complement the gaming experience,
allowing for natural discovery without interrupting gameplay. The ads are
measured through Superbiz’s advanced technology, which verifies viewability in
a 3D space and provides aggregated audience geographic, language, and device
data. The acquisition allows us to execute on our strategic plans to extend
our existing and expanding presence and reach in the metaverse. During the nine months endedSeptember 30, 2022 , we also focused on continuing to forge strategic partnerships to create a global reseller network to augment our direct salesforce efforts. These partners have breadth and depth across all of the significant industry verticals along with global geographic coverage, which we believe will facilitate the acceleration of the rollout and awareness for our innovative ad products and drive the acceleration of future monetization. Delisting Notice OnOctober 4, 2022 ,Super League Gaming, Inc. (the "Company") received a letter (the "Letter") from the Listing Qualifications Staff ofThe Nasdaq Stock Market, LLC ("Nasdaq") indicating that, based upon the closing bid price of the Company's common stock, par value$0.001 per share ("Common Stock"), for 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of$1.00 per share for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2). The Letter has no immediate effect on the listing of the Company's Common Stock on The Nasdaq Capital Market. The Company intends to monitor the closing bid price of its Common Stock. To regain compliance, the closing bid price of the Company's Common Stock must be at least$1.00 per share for 10 consecutive business days during the 180-day period fromOctober 4, 2022 toApril 3, 2023 . If the Company does not regain compliance with the minimum bid price requirement byApril 3, 2023 , Nasdaq may grant the Company a second 180-day period to regain compliance. To qualify for this additional 180-day compliance period, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, other than the minimum bid price requirement. In addition, the Company would also be required to notify Nasdaq of its intent to cure the minimum bid price deficiency by effecting a reverse stock split, if necessary. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company's Common Stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel. Seasonality Our revenue fluctuates quarterly and is generally higher in the second half of our fiscal year, with the fourth quarter typically representing our highest revenue quarter each year. Advertising spending is traditionally seasonally strong in the second half of each year, reflecting the impact of seasonal back to school, game release and holiday season advertising spending by brands and advertisers. We believe that this seasonality in advertising spending affects our quarterly results, which generally reflect relatively higher advertising revenue in second half of each year, compared to the first half of the year. Impact of COVID-19 Pandemic 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. 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. 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 revenue in the second half of fiscal 2020, and throughout fiscal year 2021 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. For a discussion of the risk factors related to COVID-19, please refer to Part II, Item 1A.""Risk Factor"" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . -27-
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Results of Operations for the Three and Nine Months Ended
2021
The following table sets forth a summary of our results of operations for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands): Three Months Nine Months Ended September 30, Change Ended September 30, Change 2022 2021 $ % 2022 2021 $ % REVENUE$ 4,508 $ 3,605 $ 903 25 %
COST OF REVENUE
2,719 2,250 469 21 %
7,086 3,125 3,961 127 %
GROSS PROFIT
1,789 1,355 434 32 % 5,469 2,353 3,116 132 % OPERATING EXPENSE Selling, marketing and advertising 2,958 2,818 140 5 % 8,693 6,236 2,457 39 %
Engineering,
technology and development 3,827 3,113 714 23 % 12,607 7,215 5,392 75 % General and administrative 5,085 2,397 2,688 112 % 10,954 6,814 4,140 61 % Impairment of goodwill 42,000 - 42,000 100 % 42,000 - 42,000 100 % Total operating expense 53,870 8,328 45,542 547 %
74,254 20,265 53,989 266 %
NET LOSS FROM
OPERATIONS
(52,081 ) (6,973 ) (45,108 ) 647 % (68,785 ) (17,912 ) (50,873 ) 284 % OTHER INCOME (EXPENSE), NET (521 ) 4 (525 ) (N/A )% (499 ) 1,219 (1,718 ) (141 )% Loss before benefit from income taxes (52,602 ) (6,969 ) (45,633 ) 655 %
(69,284 ) (16,693 ) (52,591 ) 315 %
Benefit from
income taxes
- 5 (5 ) (100 )%
46 3,078 (3,032 ) (99 )%
NET LOSS
$ (52,602 ) $ (6,964 ) $ (45,638 ) 655 %
Comparison of the Results of Operations for the Three and Nine Months Ended
Revenue (dollars in table in thousands)
Three Months Nine Months
Ended September 30, Change Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
Advertising and
sponsorships $ 3,538 $ 2,360 $ 1,178 50 % $ 8,913 $ 3,279 $ 5,634 172 %
Content sales 553 618 (65 ) (11 )% 2,245 1,273 972 76 %
Direct to
consumer 417 627 (210 ) (33 )% 1,397 926 471 51 %
$ 4,508 $ 3,605 $ 903 25 % $ 12,555 $ 5,478 $ 7,077 129 %
Three Months Nine Months
Ended September 30, Ended September 30,
2022 2021 2022 2021
Number of customers > 10% of revenue /
percent of revenue Two / 26% Two / 34% One / 12% Two / 25%
By revenue category:
Advertising and sponsorships Two / 26% One / 19% One / 12% One / 12%
Content Sales - - - -
Direct to consumer - One / 15% - One / 13%
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Three Months Ended
? Advertising and sponsorship revenue increased primarily due to a 100%
increase in our direct sales advertising revenue generating customers for
the three months ended September 30, 2022 , as compared to the prior year
comparable quarter.
? Content sales revenue decreased 11% during the three months ended September
30, 2022 primarily due to a slight decrease in content sales revenue
generating customers, which was partially offset by a 12% increase in
average content sales revenue per customer. Content sales revenue for the
three months ended
and gameplay projects with
broadcast and gameplay projects with
of
GenG. ? Direct to consumer revenue for the three months endedSeptember 30, 2022
decreased
Direct to consumer revenue is comprised of revenue generated 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, and direct to consumer in-game platform sales revenue
through the sale of digital goods, including cosmetic items, durable goods,
player ranks and game modes, within our Mineville and Pixel Paradise gaming
servers, which leverage the flexibility of the Microsoft Minecraft Bedrock
platform, are powered by our InPvP cloud architecture technology, and
represent two of the seven official Microsoft Minecraft partner servers.
Revenue is generated when transactions are facilitated between Microsoft and
the end user, either via in-game currency or cash.
Nine Months Ended
? Advertising and sponsorship revenue increased primarily due to a 95%
increase in our direct sales advertising revenue generating
customers, driven by the growth of our premium in-game and in-stream
advertising inventory, due in part to a full nine months of revenues related
to our FY 2021 Acquisitions, and an approximately 54% increase in the
average revenue per customer for the nine months ended
as compared to the prior year comparable period.
? Content sales revenue increased primarily due to a 33% increase in content
sales revenue generating customers, and a 32% increase in average content
sales revenue per customer. The increase also included
design and software development kit related revenue pursuant to a
development agreement with a customer, which was completed during the first
quarter of 2022
? Direct to consumer revenue for the nine months ended
increased
due primarily to a full nine months of direct to consumer in-game platform
sales revenue within our Mineville and Pixel Paradise gaming servers, which
was acquired inJune 2021 . -29-
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Cost of Revenue Cost of revenue includes direct costs incurred in connection with the satisfaction of performance obligations under our revenue arrangements including internal and third-party engineering, creative, content, broadcast and other personnel, talent and influencers, content capture and production services, direct marketing, cloud services, software, prizing, revenue sharing fees and venue fees. Cost of revenue fluctuates 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, advertising campaigns and content sales activities occurring each period.
Three Months Ended
? Cost of revenue increased$469,000 , or 21%, due primarily to the 25% increase in related revenue for the same period.
Nine Months Ended
? Cost of revenue increased$3,961,000 , or 127%, relatively consistent with the 129% increase in related revenue for the same period. Operating Expense
Refer to the table summarizing our results of operations for the three and nine
months ended
Noncash stock-based compensation expense for the periods presented was included
in the following operating expense line items (dollars in table in thousands):
Three Months Nine Months
Ended September 30, Change Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
Sales, marketing and
advertising $ 295 $ 288 $ 7 2 % $ 776 $ 708 $ 68 10 %
Engineering,
technology and
development 115 41 74 180 % 377 98 279 285 %
General and
administrative 776 307 469 153 % 2,131 803 1,328 165 %
Total noncash stock
compensation expense $ 1,186 $ 636 $ 550 86 % $ 3,284 $ 1,609 $ 1,675 104 %
On January 1, 2022 , the Company issued 1,350,000 performance stock units
("PSUs") under the Company's 2014 Amended and Restated Stock Option and
Incentive Plan, which vest in five equal increments of 270,000 PSUs, based on
satisfaction of market related vesting conditions during the three-year period
commencing on January 1, 2022 , as described at Note 2 to the consolidated
financial statements included elsewhere herein. A market condition is reflected
in the grant-date fair value of an award, and therefore, a Monte Carlo
simulation model is utilized to determine the estimated fair value of the
equity-based award. Compensation cost is recognized for awards with a market
condition, provided the requisite service period is satisfied, regardless of
whether the market condition is ever satisfied. Noncash stock compensation
expense related to the PSUs totaled $570,000 and $1,691,000 for the three and
nine months ended September 30, 2022 .
-30-
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Selling, Marketing and Advertising
Three Months Ended
? Selling, marketing and advertising expense was relatively flat for the three
months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . ? Selling, marketing and advertising expense included the amortization of partner, customer and advertiser related intangible assets acquired in
connection with the FY 2021 Acquisitions totaling
the three months endedSeptember 30, 2022 and 2021, respectively.
Nine Months Ended
The increase in selling, marketing and advertising expense was primarily due to
the following:
? Increase in personnel costs associated with the Mobcrush Acquisition and the
addition of a total of 11 former Mobcrush employees, effective
to our direct sales function. The year-to-date 2022 period includes nine
months of net expense related to employees acquired in connection with the
FY 2021 Acquisitions, compared to four months for the year-to-date 2021
period.
? In addition to the impact on personnel costs arising from the Mobcrush
Acquisition, the change reflects a net increase since the end of the prior
year comparable quarter of approximately 11 net full-time employees in
connection with the increase in our inhouse direct sales and marketing team,
focused on monetization and personnel in our creative and content functions.
? The increase in selling, marketing and advertising expense also included the
amortization of partner, customer and advertiser related intangible assets
acquired in connection with the FY 2021 Acquisitions totaling
the nine months ended
amortization of partner, customer and advertiser related intangible assets
for the nine months ended
2021 Acquisition related amortization for the period from
September 30, 2021 .
Engineering, Technology and Development
Components of our platform are available on a "free to use," "always on basis," and are utilized and offered as an audience acquisition tool, as a means of growing our audience, engagement, viewership, players and community. Engineering, technology and development related operating expense include the costs described below, incurred in connection with our audience acquisition and viewership expansion activities. Engineering, technology and development related operating expense includes (i) allocated internal engineering personnel expense, including salaries, noncash stock compensation, taxes and benefits, (ii) third-party contract software development and engineering expense, (iii) internal use software cost amortization expense, and (iv) technology platform related cloud services, broadband and other platform expense, incurred in connection with our audience acquisition and viewership expansion activities, including tools and product offering development, testing, minor upgrades and features, free to use services, corporate information technology and general platform maintenance and support. Capitalized internal use software development costs are amortized on a straight-line basis over the software's estimated useful life.
Three Months Ended
The increase in engineering, technology and development costs was primarily due
to the following:
? An increase of approximately nine net full-time employees since the end of
the prior year period, in connection with an increase in staffing of our
in-house product and engineering team focused on the development and
enhancement of our product and technology platforms.
? The increase also included the amortization of developed technology related
intangible assets acquired in connection with the FY 2021 Acquisitions
totaling
Acquisition related amortization of developed technology related intangible
assets for the three months ended
? The change in engineering, technology and development costs for the three
months endedSeptember 30, 2022 included a decrease in cloud services and other technology platform costs totaling$370,000 , or 23%, reflecting the initial impact of ongoing cost reduction and optimization activities. -31-
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Nine Months Ended
The increase in engineering, technology and development costs was primarily due
to the following:
? Increase in personnel costs associated with the FY 2021 Acquisitions which
included an increase in engineering and product function personnel totaling
16 full-time employees, effective
period includes nine months of net expense related to employees acquired in
connection with the FY 2021 Acquisitions, compared to four months for the
year-to-date 2021 period. ? In addition to the impact on personnel costs arising from the FY 2021
Acquisitions, the change reflects a net increase since the end of the prior
year comparable quarter of approximately 12 full-time employees in
connection with an increase in staffing of our in-house product and
engineering team focused on the development and enhancement of our product
and technology offerings and platforms. ? The increase in engineering, technology and development costs for the nine
months ended
and other technology platform costs totaling
reflecting costs resulting from our FY 2021 Acquisitions, as well as
continued strong engagement across our digital properties. The year-to-date
2022 period includes nine months of net expense related to employees
acquired in connection with the FY 2021 Acquisitions, compared to four
months for the year-to-date 2021 period.
? The increase also included the
amortization of developed
technology related intangible
assets acquired in connection with
the FY 2021 Acquisitions totaling
$1,012,000 for the nine months
ended September 30, 2022 . FY 2021
Acquisition related amortization
of developed technology related
intangible assets for the nine
months ended September 30, 2021
totaled $294,000 .
General and Administrative
General and administrative expense for the periods presented was comprised of
the following (dollars in table in thousands):
Three Months Nine Months
Ended September 30, Change Ended September 30, Change
2022 2021 $ % 2022 2021 $ %
Personnel costs $ 738 $ 577 $ 161 28 % $ 2,042 $ 1,569 $ 473 30 %
Office and
facilities 63 53 10 19 % 193 108 85 79 %
Professional
fees 207 317 (110 ) (35 )% 952 1,162 (210 ) (18 )%
Stock-based
compensation 776 307 469 153 % 2,132 802 1,330 166 %
Depreciation and
amortization 639 170 469 276 % 1,096 308 788 256 %
Other 826 973 (147 ) (15 )% 2,703 2,865 (162 ) (5 )%
Contingent
consideration
(Note 4) 1,836 - 1,836 100 % 1,836 - 1,836 100 %
Total general
and
administrative
expense $ 5,085 $ 2,397 $ 2,688 112 % $ 10,954 $ 6,814 $ 4,140 61 %
A summary of the main drivers of the change in general and administrative
expense for the periods presented is as follows:
For the Three Months Ended
Ended
? Personnel costs increased primarily due to a slight increase in headcount in
our finance and accounting, human resources and operations functions.
? Noncash stock compensation expense included in general and administrative
expense increased
stock compensation in connection with performance-based stock units granted
on
the achievement of certain Company stock price targets as described at Note
2 to the condensed consolidated financial statements elsewhere herein.
? Depreciation and amortization expense increased due primarily to the
amortization of developer related intangible assets acquired in connection
with the acquisition of Superbiz in
addition, during the three months ended
and offerings acquired in connection with the Mobcrush Acquisition were
rebranded. As a result, the Company recorded a write down of trademark
related intangible assets acquired in connection with the Mobcrush
Acquisition totaling $423,000 .
? Other general and administrative expense decreased primarily due to a 38%
decrease in D&O insurance premiums for the 2022-2023 policy period, which
covers the period fromMarch 2022 toFebruary 2023 .
? As of
the contingency associated with the Initial Earn Out Period (as defined at
Note 4 to the condensed consolidated financial statements) would be met in
accordance with the terms of the Superbiz Purchase Agreement (as defined at
Note 4 to the condensed consolidated financial statements), and the
applicable amounts were reasonably estimable as of
resulting in a charge to compensation expense totaling
approximately 512,000 shares of common stock valued at
our common stock as of
and administrative expense in the condensed consolidated statement of
operations for three and nine months ended
4 for additional information.
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For the Nine Months Ended
? Personnel costs increased primarily due to a slight increase in headcount in
our finance and accounting function, human resources and operations
functions.
? Noncash stock compensation expense included in general and administrative
expense increased primarily due to the net annual and discretionary grant of
incentive equity-based awards to employees in
our board-approved compensation and retention programs, the discretionary
grant of incentive equity-based awards to personnel in connection with the
FY 2021 Acquisitions in
amortization in connection with performance based stock units granted on
achievement of certain Company stock price targets as described at Note 2 to
the condensed consolidated financial statements elsewhere herein. ? Depreciation and amortization expense increased due primarily to the
amortization of trademark, developer and influencer related intangible
assets acquired in connection with the FY 2021 Acquisitions, totaling
$899,000 .
? As of September 30, 2022 , the Company determined that it was probable that
the contingency associated with the Initial Earn Out Period (as defined at
Note 4 to the condensed consolidated financial statements) would be met in
accordance with the terms of the Superbiz Purchase Agreement (as defined at
Note 4 to the condensed consolidated financial statements), and the
applicable amounts were reasonably estimable as of
resulting in a charge to compensation expense totaling
approximately 512,000 shares of common stock valued at
our common stock as of
and administrative expense in the condensed consolidated statement of
operations for three and nine months ended
4 for additional information. Impairment ofGoodwill As described at Note 2 to the condensed consolidated financial statements elsewhere herein, we performed a goodwill impairment test as ofSeptember 30, 2022 . We utilized the market capitalization of the Company (Level 1 observable input) as ofSeptember 30, 2022 , to estimate the fair value of the Company's single reporting unit. The estimated market capitalization was determined by multiplying ourSeptember 30, 2022 stock price and the common shares outstanding as ofSeptember 30, 2022 . The market capitalization approach was utilized to estimate the fair value of our single reporting unit as ofSeptember 30, 2022 due to significance of the decline in stock price as ofSeptember 30, 2022 , resulting in a market capitalization that was 38% of the net book value of our single reporting unit as ofSeptember 30, 2022 . Based on the analysis, the estimated fair value of our reporting unit was$25.2 million , compared to a carrying value of our single reporting unit of$67.3 million as ofSeptember 30, 2022 . As such, the fair value of our single reporting unit was deemed to be below its carrying value as ofSeptember 30, 2022 , resulting in a goodwill impairment charge of$42.0 million , which is reflected in the condensed consolidated statement of operations for the three and nine months endedSeptember 30, 2022 .
Liquidity and Capital Resources
General Cash and cash equivalents totaled approximately$1.1 million and$14.5 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The change in cash and cash equivalents for the periods presented reflects the impact of operating, investing and financing cash flow related activities as described below. The accompanying condensed consolidated 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. Including a noncash goodwill impairment charge of$42.0 million , the Company incurred net losses of$52.6 million and$69.2 million during the three and nine months endedSeptember 30, 2022 , respectively, and had an accumulated deficit of$194.5 million (including the third quarter 2022 noncash goodwill impairment charge of$42.0 million ) as ofSeptember 30, 2022 . For the nine months endedSeptember 30, 2022 , net cash used in operating activities totaled$16.0 million . To date, our principal sources of capital used to fund our operations and growth have been the net proceeds received from equity and debt financings. We have and will continue to use significant capital for the growth and development 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 strategies have been and could continue to be adversely affected by general conditions in the global economy, including conditions that are outside of our control. The most recent global financial crisis caused by severe geopolitical conditions, including conflicts abroad, and the lingering effects of COVID-19 and threats of other outbreaks, have resulted in extreme volatility, disruptions and downward pressure on stock prices and trading volumes across the capital and credit markets in which we traditionally operate. 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 funding from the capital and credit markets. In management's judgement, these conditions raise substantial doubt about the ability of the Company to continue as a going concern as contemplated by ASC 205-40, "Going Concern." -33-
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Management's Plans The Company experienced significant growth in fiscal year 2021 through organic and inorganic growth activities, including the expansion of our premium advertising inventory and quarter over quarter and year over year increases in recognized revenue across our three primary revenue streams. In 2022, we are focused on the continued expansion of our service offerings and revenue growth opportunities through internal development, collaborations, and through opportunistic strategic acquisitions, as well as management and reduction of costs. Management is currently exploring several alternatives for raising capital to facilitate our growth and execute our business strategy, including strategic partnerships and or other forms of equity or debt financings.
Securities Purchase Agreement
OnMay 16, 2022 , the Company entered into a securities purchase agreement (the "SPA") with three institutional investors (collectively, the "Note Holders") providing for the sale and issuance of a new series of senior convertible notes in the aggregate original principal amount of$4,320,000 , of which 8% is an original issue discount (each, a "Note," and, collectively, the "Notes," and such financing, the "Note Offering"). Each Note will accrue interest at a guaranteed annual rate of 9% per annum, mature 12 months from the date of issuance, and is convertible at the option of the Note Holders into that number of shares of the Company's common stock, equal to the sum of the outstanding principal balance, accrued and unpaid interest, and accrued and unpaid late charges (the "Conversion Amount"), divided by$4.00 , subject to adjustment upon the occurrence of certain events as more specifically set forth in the Note; provided, however, in no event will the Company be permitted to issue more than 19.99% of the shares of common stock issued and outstanding immediately prior to the Note Offering, which number of shares shall be reduced, on a share-for-share basis, by the number of shares of common stock issued or issuable pursuant to any transaction or series of transactions that may be aggregated with the Note Offering. In addition, the Company may be required to redeem all or a portion of the Notes under certain circumstances, and, in the event the Company sells common stock, the Note Holders will have the right, but not the obligation, to require the Company to use 50% of the gross proceeds raised from such sale to redeem all or any portion of the Conversion Amount then remaining under the Notes, in cash, at a price equal to the Conversion Amount being redeemed. The Company may, at its option, redeem all or a portion of the Notes at a price equal to 110% of the Conversion Amount being redeemed. Concurrently with the SPA, the Company and the Note Holders entered into a Registration Rights Agreement, pursuant to which the Company agreed to file a Registration Statement on Form S-3 within 30 days after the closing of the Note Offering. See Note 5 to the condensed consolidated financial statements contained elsewhere in this Report for additional information about the Note Financing.
Common Stock Purchase Agreement
OnMarch 25, 2022 , we entered into a common stock purchase agreement (the "Purchase Agreement") withTumim Stone Capital, LLC ("Tumim"), pursuant to which we have the right, but not the obligation, to sell to Tumim, and Tumim is obligated to purchase up to up to$10,000,000 of newly issued shares (the "Total Commitment") from time to time during the term of the Purchase Agreement. As consideration for Tumim's commitment to purchase shares of common stock under the Purchase Agreement, we issued to Tumim 50,000 shares of common stock (the "Commitment Shares"), valued at$100,000 , following the execution of the Purchase Agreement. The Purchase Agreement initially precludes us from issuing and selling more than 7,361,833 shares of our common stock, including the Commitment Shares, which number equals 19.99% of our common stock issued and outstanding as ofMarch 25, 2022 , unless we obtain stockholder approval to issue additional shares, or unless certain exceptions apply. In addition, a beneficial ownership limitation in the agreement initially limits us from directing Tumim to purchase shares of common stock if such purchases would result in Tumim beneficially owning more than 4.99% of the then-outstanding shares of our common stock (subject to an increase to 9.99% at Tumim's option upon at least 61 calendar days' notice). See Note 6 to the condensed consolidated financial statements contained elsewhere in this Report for additional information about the Tumim Offering. Equity Distribution Agreement OnSeptember 3, 2021 , we entered into an Equity Distribution Agreement (the "Sales Agreement") with two investment banks (the "Agents"), pursuant to which we may offer and sell, from time to time, through the Agents (the "ATM Offering"), up to$75 million of shares of our common stock (the "Shares"). Any Shares offered and sold in the ATM Offering will be issued pursuant to our Registration Statement on Form S-3 filed with theSEC onSeptember 7, 2021 . Subject to the terms and conditions of the Sales Agreement, the Agents will use their commercially reasonable efforts to sell the Shares from time to time, based upon our instructions. Under the Sales Agreement, the Agents may sell the Shares by any method permitted by law deemed to be an "at-the-market" offering as defined in Rule 415 promulgated under the Securities Act, including, without limitation, sales made directly on the Nasdaq Capital Market, on any other existing trading market for our common stock or to or through a market maker. The Agents may also sell Shares in privately negotiated transactions, provided that the Agents receive our prior written approval. -34- -------------------------------------------------------------------------------- We have no obligation to sell any of the Shares and may at any time suspend offers under the Sales Agreement. The ATM Offering will terminate upon the earlier of (a) the sale of all of the Shares, (b) the termination by the mutual written agreement of the managing agent and the Company, or (c) November 16, 2022, one year from the date that the Form S-3 was declared effective by theSEC .
Under the terms of the Sales Agreement, the Agents will be entitled to an
aggregate commission at a fixed rate of 3.0% of the gross sales price of Shares
sold under the Sales Agreement.
We intent to use the net proceeds from any "at-the-market" offering, if any, primarily for working capital and general corporate purposes, including sales and marketing activities, product development and capital and acquisition related expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses. As of the date of this Report, there have been no sales of any Shares in connection with the ATM Offering. We may continue to evaluate potential strategic acquisitions. To finance such strategic acquisitions, we may find it necessary to raise additional equity capital, incur 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.
Cash Flows for the Nine Months Ended
The following table summarizes the change in cash balances for the periods
presented (dollars in table in thousands):
Nine Months Ended
September 30,
2022 2021
Net cash used in operating activities $ (16,036 ) $ (16,273 )
Net cash used in investing activities (1,514 ) (658 )
Net cash provided by financing activities 4,160 33,501
(Decrease) Increase in cash (13,390 ) 16,570
Cash and cash equivalents, at beginning of period 14,533 7,942
Cash and cash equivalents, at end of period
Cash Flows from Operating Activities.
Net cash used in operating activities during the nine months endedSeptember 30, 2022 , primarily reflected our net GAAP loss for the nine months endedSeptember 30, 2022 of ($69,238,000 ), net of adjustments to reconcile net GAAP loss to net cash used in operating activities totaling$53,202,000 , which included$42,000,000 of goodwill impairment charges,$3,284,000 of noncash stock compensation charges and depreciation and amortization of$4,478,000 . Net cash used in operating activities during the nine months endedSeptember 30, 2021 primarily reflected our net GAAP loss for the nine months endedSeptember 30, 2021 of ($13,615,000 ), net of adjustments to reconcile net GAAP loss to net cash used in operating activities totaling ($2,658,000 ), which included$1,609,000 of noncash stock compensation charges, depreciation and amortization of$1,962,000 , a noncash gain totaling$1,213,000 in connection with the forgiveness of our PPP Loan inMay 2021 and changes in valuation allowance totaling$3,078,000 . Changes in working capital for the periods presented reflected the impact of 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 (dollars in table in thousands):
Nine Months Ended
September 30,
2022 2021
Cash acquired in connection with Merger with Mobcrush $ –
Cash paid in connection with Bannerfy Acquisition, net
- (496 ) Purchase of property and equipment (149 ) (12 ) Purchase of third-party game properties (500 )
–
Capitalization of software development costs (766 ) (560 ) Acquisition of other intangible and other assets (99 ) (176 ) Net cash used in investing activities$ (1,514 ) $ (658 ) -35-
-------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2022 , the Company purchased Anime Battlegrounds X, one of the highest rated games on Roblox, from a third-party game developer. The total purchase price of$500,000 was capitalized and is being amortized to cost of revenue over the applicable useful life of 5 years.
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. Acquisition of Mobcrush. OnJune 1, 2021 , we completed the Mobcrush Acquisition pursuant to which we acquired all of the issued and outstanding shares of Mobcrush. At closing, the Company issued to the former stockholders of Mobcrush an aggregate total of 12,067,571 shares of common stock and reserved an aggregate total of 514,633 shares of common stock for issuance pursuant to stock options to be granted to Mobcrush employees retained in connection with the Mobcrush Acquisition, resulting in a total of 12,582,204 shares of common stock issued and reserved as consideration for the Mobcrush Acquisition. Upon completion of the Mobcrush Acquisition, Mobcrush became a wholly owned subsidiary of the Company. Refer to Note 4 to the consolidated condensed financial statements herein for information regarding assets acquired and liabilities assumed in connection with the Mobcrush Acquisition. Acquisition ofBannerfy, LTD. OnAugust 24, 2021 , the Company completed the acquisition ofBannerfy, Ltd. , ("Bannerfy") pursuant to which the Company acquired all of the issued and outstanding common shares of Bannerfy. Pursuant to the Share Purchase Agreement, datedAugust 11, 2021 (the "Bannerfy Purchase Agreement"), the Company paid initial consideration of$2.45 million (the "Bannerfy Closing Consideration"), as follows: (i)$525,000 in the form of a cash payment, and (ii)$1.925 million in the form of shares of the Company's common stock at a price per share of$4.10 , the closing price of the Company's common stock on the date of the Bannerfy Purchase Agreement, as reported on the Nasdaq Capital Market. Pursuant to the terms of the Bannerfy Purchase Agreement,$275,000 of the Bannerfy Closing Consideration (the "Holdback Amount"), was withheld from the Bannerfy Closing Consideration to satisfy any indemnifiable Losses incurred by the Company (as defined in the Bannerfy Purchase Agreement) prior to the first anniversary of the Bannerfy Closing Date. The Company incurred no indemnifiable losses prior to the first anniversary of the Bannerfy Closing Date, and therefore during the three months endedSeptember 30, 2022 , the Company released to the Sellers the Holdback Amount as follows: (i)$55,000 payable in the form of cash, and (ii) approximately$220,000 in the form of shares of the Company's common stock at a price of$4.10 . In accordance with the Bannerfy Purchase Agreement, all remaining portions of the Bannerfy Purchase Price subsequent to the payment of the Bannerfy Closing Consideration, up to approximately$4.55 million (the "Contingent Consideration"), is payable upon the achievement of certain revenue and gross profit thresholds for the remainder of the 2021 fiscal year, and each of the fiscal years endingDecember 31, 2022 , andDecember 31, 2023 ("Earnout Periods"). Refer to Note 4 to the consolidated condensed financial statements herein for additional information.
Cash Flows from Financing Activities.
Cash flows from financing activities were comprised of the following for the
periods presented (dollars in table in thousands):
Nine Months Ended
September 30,
2022 2021
Proceeds from issuance of common stock, net
Proceeds from convertible notes, net
4,000 - Payments on convertible notes (160 ) - Proceeds from stock option exercises - 111
Net cash provided by financing activities
Convertible Debt. OnMay 16, 2022 , as summarized above and further described at Note 5, the Company entered into a securities purchase agreement with three institutional investors, providing for the sale and issuance of a new series of senior convertible notes in the aggregate original principal amount of$4,320,000 , of which 8% is an original issue discount. Equity Financings. During the nine months endedSeptember 30, 2022 , we issued 331,000 shares of common stock at an average price of$0.97 , raising net proceeds of approximately$320,000 , primarily under the Equity Distribution Agreement.
In
of
million
In
of
million
-36- -------------------------------------------------------------------------------- InMarch 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 expense totaling$72,000 . The offerings described above were made pursuant to an effective shelf registration statement on Form S-3, which was originally filed with theSecurities and Exchange Commission onApril 10, 2020 (File No. 333-237626). The net proceeds from these offerings are intended to be used for working capital and other general corporate purposes, including sales and marketing activities, product development and capital expenditures. The Company may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses. Contractual Obligations As ofSeptember 30, 2022 , except as described below and at Note 5 to the condensed consolidated financial statements elsewhere herein, we had no significant commitments for capital expenditures, nor do we have any committed lines of credit, noncancelable operating leases obligations, other committed funding or long-term debt, and no guarantees. InJune 2020 , we terminated the lease for the majority of our corporate headquarters (approximately 4,965 square feet). As ofSeptember 30, 2022 we maintain approximately 3,200 square feet of office space, 1650 square feet of which is on a month-to-month basis, and 1550 square feet of which is subject to a two-year lease, commencing onAugust 1, 2021 . The following table lists our material known future cash commitments as ofSeptember 30, 2022 (dollars in thousands): Payments Due by Period Less than 1 More than 3 Total year 1-3 years years Operating lease$ 73 $ 73 $ - $ - Insurance premium financing 283 283 - - Total contractual obligations$ 356 $ 356 $ - $ -
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 condensed consolidated 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.
-37-
--------------------------------------------------------------------------------
Contingencies Certain conditions may exist as of the date the condensed consolidated 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 condensed consolidated 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 consolidated financial statements
contained elsewhere in this Report.
Critical Accounting Estimates Our unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America . Preparation of these condensed consolidated statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these condensed consolidated financial statements. TheSEC 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 endedDecember 31, 2021 , filed with theSEC onMarch 31, 2022 . In addition, refer to Note 2 to the condensed consolidated 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) 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. We report revenue on a gross or net basis based on management's assessment of whether we act as a principal or agent in the transaction and is evaluated on a transaction-by-transaction basis. To the extent we act as the principal, revenue is reported on a gross basis net of any sales tax from customers, when applicable. The determination of whether we act as a principal or an agent in a transaction is based on an evaluation of whether we control the good or service prior to transfer to the customer. Where applicable, we have determined that it acts as the principal in all of its advertising and sponsorships, content and direct to consumer revenue streams, except in situations where we utilize a reseller partner with respect to direct advertising sales arrangements. -38- -------------------------------------------------------------------------------- We generate revenue from (i) advertising, serving as a marketing channel for brands and advertisers to reach their target audiences of gamers across our network, (ii) content, curating and distributing esports and gaming-centric entertainment content for our own network of digital channels and media and entertainment partner channels and (iii) direct to consumer offers including digital subscriptions, in-game digital goods, and gameplay access fees.
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 revenue also
includes revenue 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 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 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). Payments are typically due from customers during the term of the
arrangement.
Revenue from sponsorship arrangements for one-off branded experiences and/or the
development of content tailored specifically for our 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 Sales:
Content-related 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 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.
-39-
--------------------------------------------------------------------------------
Direct to Consumer:
Direct to consumer revenue primarily consists of digital subscription fees,
in-game digital goods, and gameplay access fees. Subscription revenue is
recognized in the period the services are rendered. Payments are typically due
from customers at the point of sale.
Platform Generated Sales Transactions. Our Mobcrush subsidiary generates in-game Platform sales revenue via digital goods sold within the platform, including cosmetic items, durable goods, player ranks and game modes, leveraging the flexibility of the Microsoft Minecraft Bedrock platform, and powered by the InPvP cloud architecture technology platform. Revenue is generated when transactions are facilitated between Microsoft and the end user, either via in-game currency or cash. Revenue for digital goods sold on the platform is recognized when Microsoft (our partner) collects the revenue and facilitates the transaction on the platform. Revenue for such arrangements includes all revenue generated, bad debt, make goods, and refunds of all transactions managed via the platform by Microsoft. The revenue is recognized on a monthly basis. Payments are made to the Company monthly based on the reconciled sales revenue generated. We make estimates and judgments when determining whether we will collect substantially all of the 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 revenue recognized each period and the timing of the recognition of revenue. 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.
Accounting for Business Combinations
Acquisition Method. Acquisitions that meet the definition of a business under ASC 805 are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired, liabilities assumed, contractual contingencies, and contingent consideration, when applicable, are recorded at fair value at the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The application of the acquisition method of accounting requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in connection with the allocation of the purchase price consideration to the assets acquired and liabilities assumed. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expense in the consolidated statements of operations. Contingent consideration, if any, is recognized and measured at fair value as of the acquisition date. Cost Accumulation Model. Acquisitions that do not meet the definition of a business under ASC 805 are accounted for as an asset acquisition, utilizing a cost accumulation model. Assets acquired and liabilities assumed are recognized at cost, which is the consideration the acquirer transfers to the seller, including direct transaction costs, on the acquisition date. The cost of the acquisition is then allocated to the assets acquired based on their relative fair values.Goodwill is not recognized in an asset acquisition. Direct transaction costs include those third-party costs that can be directly attributable to the asset acquisition and would not have been incurred absent the acquisition transaction. Contingent consideration, representing an obligation of the acquirer to transfer additional assets or equity interests to the seller if future events occur or conditions are met, is recognized when probable and reasonably estimable. Contingent consideration recognized is included in the initial cost of the assets acquired, with subsequent changes in the recorded amount of contingent consideration recognized as an adjustment to the cost basis of the acquired assets. Subsequent changes are allocated to the acquired assets based on their relative fair value. Depreciation and/or amortization of adjusted assets are recognized as a cumulative catch-up adjustment, as if the additional amount of consideration that is no longer contingent had been accrued from the outset of the arrangement. Contingent consideration that is paid to sellers that remain employed by the acquirer and linked to future services is generally considered compensation cost and recorded in the statement of operations in the post-combination period. -40- --------------------------------------------------------------------------------
Goodwill Goodwill represents the excess of the purchase price of the acquired business over the acquisition date fair value of the net assets acquired.Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December 31 ) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We consider our market capitalization and the carrying value of our assets and liabilities, including goodwill, when performing our goodwill impairment tests. We operate in one reporting segment. If a potential impairment exists, a calculation is performed to determine the fair value of existing goodwill. This calculation can be based on quoted market prices and / or valuation models, which consider the estimated future undiscounted cash flows resulting from the reporting unit, and a discount rate commensurate with the risks involved. Third-party appraised values may also be used in determining whether impairment potentially exists. In assessing goodwill impairment, significant judgment is required in connection with estimates of market values, estimates of the amount and timing of future cash flows, and estimates of other factors that are used to determine the fair value of our reporting unit. If these estimates or related projections change in future periods, future goodwill impairment tests may result in charges to earnings. When conducting the Company's annual or interim goodwill impairment assessment, we initially perform a qualitative evaluation of whether it is more likely than not that goodwill is impaired. In evaluating whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we consider the guidance set forth in ASC 350, "Intangibles Goodwill and Other," ("ASC 350") which requires an entity to assess relevant events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, financial performance and other relevant events or circumstances.
At
testing, the goodwill balance totaled
AtSeptember 30, 2022 , from a qualitative standpoint, we considered the Company's history of reported losses and negative cash flows from operating activities, and also considered the sustained downturn in industry and macroeconomic conditions, including inflation and reductions in advertising spending and the sustained downturn of the broader mid-cap and micro-cap equity markets in 2022. We also considered that the Company experienced significant inorganic and organic growth in fiscal 2021, including the impact of the acquisitions of Mobcrush, Bannerfy and Superbiz on our premium advertising inventory, product offerings to advertisers, current period revenue recognized and future revenue generating opportunities. Given the Company's recent significant growth management does not believe that the current market capitalization of the Company is indicative of any fundamental change in the Company's underlying business or future prospects as of the measurement date. -41-
-------------------------------------------------------------------------------- However, the Company's stock price has been volatile, and the volatility continued during the three months endedSeptember 30, 2022 , declining 34% to$0.68 as ofSeptember 30, 2022 , reflecting a market capitalization that was approximately 38% of the Company'sSeptember 30, 2022 net book value. To assess whether the decline in our market capitalization was an indicator requiring an interim goodwill impairment test, we considered the significance of the decline and the length of time our common stock has been trading at a depressed value along with the macro factors described above. The significance of the decline is consistent with the broader microcap market. As ofSeptember 30, 2022 the decline in our stock price and other factors were deemed to be sustained, and therefore a triggering event requiring a goodwill impairment test as ofSeptember 30, 2022 was deemed to have occurred. We utilized the market capitalization of the Company as ofSeptember 30, 2022 , a Level 1 input as described above, to estimate the fair value of the Company's single reporting unit. The estimated market capitalization was determined by multiplying ourSeptember 30, 2022 stock price and the common shares outstanding as ofSeptember 30, 2022 . The market capitalization approach was utilized to estimate the fair value of our single reporting unit as ofSeptember 30, 2022 due to significance of the decline in stock price as ofSeptember 30, 2022 , resulting in a market capitalization that was 38% of the net book value of our single reporting unit. Based on the analysis, the estimated fair value of our reporting unit was$25.2 million , compared to a carrying value of our single reporting unit of$67.3 million as ofSeptember 30, 2022 . As such, the fair value of our single reporting unit was deemed to be below its carrying value as ofSeptember 30, 2022 , resulting in a goodwill impairment charge of$42.0 million , which is reflected in the condensed consolidated statement of operations for the three and nine months endedSeptember 30, 2022 .
Relaxed Ongoing Reporting Requirements
Upon the completion of our 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 ? 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 anyJune 30 before that time, we would cease to be an "emerging growth company" as of the followingDecember 31 . -42-
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