Company Quick10K Filing
Super League Gaming
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 9 $71
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
S-1 2019-01-04 Public Filing
8-K 2019-11-13 Earnings, Exhibits
8-K 2019-09-23 Enter Agreement, Other Events, Exhibits
8-K 2019-08-14 Earnings, Exhibits
8-K 2019-07-22
8-K 2019-06-03 Enter Agreement, M&A, Sale of Shares, Exhibits
8-K 2019-05-14 Officers, Exhibits
8-K 2019-05-14 Earnings, Exhibits
SLGG 2019-09-30
Item 2.   Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3.  Quantitative and Qualitative Disclosures About Market Risks
Part II
EX-10.1 ex10-1.htm
EX-31 ex31-1.htm
EX-31 ex31-2.htm
EX-32 ex32.htm

Super League Gaming Earnings 2019-09-30

SLGG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CRBO 72 305 228 79 74 7 26 68 94% 2.6 2%
IAMXU 72 8 2 0 0 -3 -3 70 0% -22.9 -40%
QSEP 72 1 2 0 0 -5 -5 72 -13.5 -549%
SNMX 71 21 7 26 0 0 0 56 0% 0%
ANCB 71 479 410 0 0 2 10 71 6.8 1%
RLJE 71 147 136 94 43 -7 -3 122 46% -36.9 -5%
SLGG 71 22 1 0 0 -22 -21 54 60% -2.6 -98%
LXRP 70 3 0 0 0 -4 -4 68 188% -16.2 -124%
BUDZ 70 3 1 0 0 -33 -33 70 -2.1 -1,237%
RSKIA 70 44 4 14 7 4 5 64 49% 12.0 8%

10-Q 1 slgg10q_09302019.htm QUARTERLY REPORT Blueprint

 
   

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
 
OR
 
[   ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
 
From the transition period from               to
 
Commission File Number 001-38819
 
 
SUPER LEAGUE GAMING, INC.
(Exact name of small business issuer as specified in its charter)
 
Delaware
47-1990734
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
  2906 Colorado Ave.
Santa Monica, California 90404
(Address of principal executive offices)
 
Company: (802) 294-2754; Investor Relations: 949-574-3860
(Issuer’s telephone number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]    No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]    No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[   ]
Accelerated filer
[   ]
Non-accelerated filer
[   ] 
Smaller reporting company
[X]
 
Emerging growth company 
[X]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [    ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]    No [X]
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
SLGG
NASDAQ Capital Market
 
As of November 9, 2019, there were 8,569,922 shares of the registrant’s common stock, $0.0001 par value, issued and outstanding.
 

 
 

 
 
TABLE OF CONTENTS
 
 
 
 
 
PART I
 
FINANCIAL INFORMATION
 
ITEM  1.   CONDENSED FINANCIAL STATEMENTS

SUPER LEAGUE GAMING, INC.
CONDENSED BALANCE SHEETS
 
ASSETS
 
September 30,
2019 
 
 
 December 31,
2018
 
Current Assets
(Unaudited)
 
Cash
 $12,586,000 
 $2,774,000 
Accounts receivable
  332,000 
  488,000 
Prepaid expenses and other current assets
  1,146,000 
  487,000 
Total current assets
  14,064,000 
  3,749,000 
 
    
    
Property and equipment, net
  257,000 
  531,000 
Intangible and other assets, net
  1,887,000 
  707,000 
Goodwill
  2,565,000 
  - 
 
    
    
Total assets
 $18,773,000 
 $4,987,000 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
    
    
Current Liabilities
    
    
Accounts payable and accrued expenses
 $1,454,000 
 $813,000 
Deferred revenue
  113,000 
  45,000 
Convertible debt and accrued interest, net
  - 
  10,923,000 
 
    
    
Total current liabilities
  1,567,000 
  11,781,000 
 
    
    
Stockholders’ Equity (Deficit)
    
    
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; no shares issued or outstanding 
  - 
  - 
Common stock, par value $0.001 per share;100,000,000 shares authorized; 8,569,922 and 4,610,109 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
  18,000 
  14,000 
Additional paid-in capital
  98,312,000 
  48,325,000 
Accumulated deficit
  (81,124,000)
  (55,133,000)
Total stockholders’ equity (deficit)
  17,206,000 
  (6,794,000)
 
    
    
Total liabilities and stockholders’ equity
 $18,773,000 
 $4,987,000 
   
See accompanying notes to condensed financial statements

 
 
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
  
 
 
Three Months
Ended September 30,
 
 
Nine Months
Ended September 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES
 $350,000 
 $153,000 
 $822,000 
 $640,000 
 
    
    
    
    
COST OF REVENUES
  192,000 
  70,000 
  379,000 
  375,000 
 
    
    
    
    
GROSS PROFIT
  158,000 
  83,000 
  443,000 
  265,000 
 
    
    
    
    
OPERATING EXPENSES
    
    
    
    
Selling, marketing and advertising
  215,000 
  327,000 
  687,000 
  996,000 
Technology platform development
  638,000 
  567,000 
  2,030,000 
  1,682,000 
General and administrative
  3,730,000 
  2,747,000 
  13,792,000 
  8,884,000 
Total operating expenses
  4,583,000 
  3,641,000 
  16,509,000 
  11,562,000 
 
    
    
    
    
NET OPERATING LOSS
  (4,425,000)
  (3,558,000)
  (16,066,000)
  (11,297,000)
 
    
    
    
    
OTHER INCOME (EXPENSE)
    
    
    
    
Accrued interest expense
  - 
  (212,000)
  (187,000)
  (311,000)
Accretion of debt discount
  - 
  (1,239,000)
  (2,684,000)
  (1,537,000)
Beneficial conversion feature
  - 
  - 
  (7,067,000)
  - 
Other
  8,000 
  - 
  13,000 
  2,000 
Total other income (expense)
  8,000 
  (1,451,000)
  (9,925,000)
  (1,846,000)
 
    
    
    
    
NET LOSS
 $(4,417,000)
 $(5,009,000)
 $(25,991,000)
 $(13,143,000)
 
    
    
    
    
Net loss attributable to common stockholders - basic and diluted
    
    
    
    
Basic and diluted loss per common share
 $(0.52)
 $(1.09)
 $(3.39)
 $(2.85)
Weighted-average number of shares outstanding, basic and diluted
  8,569,922 
  4,610,111 
  7,663,243 
  4,605,962 
 
See accompanying notes to condensed financial statements

 
 
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
   
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Common stock (Shares)
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
  8,569,922 
  4,610,109 
  4,610,109 
  4,603,443 
Initial public offering of common stock, net of issuance costs (Note 7)
  - 
  - 
  2,272,727 
  - 
Automatic conversion of convertible debt to common stock (Note 6)
  - 
  - 
  1,475,164 
  - 
Common stock issued for Framerate Acquisition
  - 
  - 
  134,422 
  - 
Stock-based compensation
  - 
  - 
  10,833 
  6,666 
Warrant Exercises
  - 
  - 
  66,667 
  - 
Balance, end of period
  8,569,922 
  4,610,109 
  8,569,922 
  4,610,109 
 
    
    
    
    
Common stock (Amount):
    
    
    
    
Balance, beginning of period
 $18,000 
 $14,000 
 $14,000 
 $14,000 
Initial public offering of common stock, net of issuance costs (Note 7)
  - 
  - 
  2,000 
  - 
Automatic conversion of convertible debt to common stock (Note 6)
  - 
  - 
  2,000 
  - 
Common stock issued for Framerate Acquisition
  - 
  - 
  - 
  - 
Balance, end of period
 $18,000 
 $14,000 
 $18,000 
 $14,000 
 
    
    
    
    
Additional paid-in-capital:
    
    
    
    
Balance, beginning of period
 $97,598,000 
 $42,030,000 
 $48,325,000 
 $38,191,000 
Initial public offering of common stock, net of issuance costs (Note 7)
  - 
  - 
  22,456,000 
  - 
Automatic conversion of convertible debt to common stock (Note 6)
  - 
  - 
  13,791,000 
  - 
Issuance of warrants with convertible notes (Note 6)
  - 
  3,055,000 
  -
  5,206,000 
Beneficial conversion feature (Note 6)
  - 
  - 
  7,067,000 
  - 
Common stock issued for Framerate Acquisition (Note 5)
  - 
  - 
  1,000,000 
  - 
Framerate Earn-Out (Note 5) 
  - 
  - 
  454,000 
  - 
Stock-based compensation
  714,000 
  817,000 
  5,199,000 
  2,505,000 
Warrant exercises
  - 
  - 
  20,000 
  - 
Balance, end of period
 $98,312,000 
 $45,902,000 
 $98,312,000 
 $45,902,000 
 
    
    
    
    
Accumulated Deficit:
    
    
    
    
Balance, beginning of period
  (76,707,000)
  (42,641,000)
  (55,133,000)
  (34,507,000)
Net loss
  (4,417,000)
  (5,009,000)
  (25,991,000)
  (13,143,000)
Balance, end of period
  (81,124,000)
  (47,650,000)
  (81,124,000)
  (47,650,000)
Total stockholders’ equity (deficit)
 $17,206,000 
 $(1,734,000)
 $17,206,000 
 $(1,734,000)
 
See accompanying notes to condensed financial statements
 

 
SUPER LEAGUE GAMING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
 
 
2019
 
 
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
 
Net loss
 $(25,991,000)
 $(13,143,000)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization
  657,000 
  791,000 
Stock-based compensation
  5,266,000 
  2,451,000 
Amortization of discount on convertible notes (Note 6)
  2,684,000 
  1,537,000 
Beneficial conversion feature (Note 6)
  7,067,000 
  - 
In-kind contribution of services
  - 
  481,000 
Changes in assets and liabilities:
    
    
Accounts receivable
  171,000 
  4,000 
Prepaid expenses and other current assets
  (852,000)
  (362,000)
Accounts payable and accrued expenses
  601,000 
  50,000 
Deferred revenue
  68,000 
  - 
Accrued interest on convertible notes
  187,000 
  311,000 
Net cash used in operating activities
  (10,142,000)
  (7,880,000)
 
CASH FLOWS FROM INVESTING ACTIVITIES
    
    
Cash paid for acquisition of Framerate (Note 5)
  (1,491,000)
  - 
Purchase of property and equipment
  (56,000)
  (190,000)
Capitalization of software development costs
  (839,000)
  (192,000)
Acquisition of other intangible assets
  (138,000)
  (67,000)
Net cash used in investing activities
  (2,524,000)
  (449,000)
 
CASH FLOWS FROM FINANCING ACTIVITIES
    
    
Proceeds from issuance of common stock, net of issuance costs
  22,458,000 
  - 
Proceeds from convertible note payable, net
  - 
  12,611,000 
Proceeds from common stock purchase warrant exercises
  20,000 
  - 
Net cash provided by financing activities
  22,478,000 
  12,611,000 
 
    
    
INCREASE IN CASH
  9,812,000 
  4,282,000 
Cash – beginning of period
  2,774,000 
  1,709,000 
Cash – end of period
 $12,586,000 
 $5,991,000 
 
    
    
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES
    
    
   Automatic conversion of convertible debt to common stock (Note 6)
 $13,793,000 
 $3,000,000 
   Issuance of common stock for Framerate Acquisition (Note 5)
 $1,000,000 
 $- 
   Common stock purchase warrants – discount on convertible debt
 $- 
 $5,207,000 
   Common stock issued for prepaid services
 $- 
 $72,000 
 
    
    
 
See accompanying notes to condensed financial statements

 
 
 
1.
DESCRIPTION OF BUSINESS
 
Super League Gaming, Inc. (“Super League,” the “Company,” “we” or “our”) is a global leader in the mission to bring live and digital esports entertainment and experiences directly to everyday gamers around the world. Utilizing our proprietary technology platform, Super League operates physical and digital experiences in partnership with publishers of top-tier game titles. In addition to providing premium experiences by operating city-vs-city amateur esports leagues and producing thousands of live competitive and social gaming experiences around the country, the Super League Network features multiple forms of content celebrating the love of play via social media, live streaming, video-on-demand, and website-based offerings. As a content producer with a dedicated esports studio, Super League publishes live streaming and on-demand video content on all major platforms including YouTube, Twitch and Instagram. In addition, with exclusive proprietary platforms like Minehut, the avid Minecraft community, Framerate, one of the largest independent social video networks in esports and gaming, and through our partnerships with high-profile venue owners such as Topgolf, Cinemark Theatres and independent fast-casual restaurants, Super League is committed to supporting the development of local, grassroots player communities all while providing a global framework for competition and community engagement.
 
Super League was incorporated on October 1, 2014 as Nth Games, Inc. under the laws of the State of Delaware and changed its name to Super League Gaming, Inc. on June 15, 2015. We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012, as amended.
 
Initial Public Offering
 
On February 27, 2019, Super League completed its initial public offering (“IPO”) of shares of its common stock, pursuant to which an aggregate of 2,272,727 shares were offered and sold at a public offering price of $11.00 per share, resulting in net proceeds of $22,458,000 after deducting underwriting discounts, commissions and offering costs of $2,542,000. Concurrent with the closing of the IPO on February 27, 2019 (the “IPO Closing Date”), in accordance with the related agreements, all outstanding principal and interest of the 9.00% convertible notes outstanding, totaling $13,793,000, was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35.
 
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, certain information and footnotes required by U.S. GAAP in annual financial statements have been omitted or condensed in accordance with quarterly reporting requirements of the Securities and Exchange Commission (“SEC”).  These interim financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2018 included in our Registration Statement on Form S-1, declared effective by the Securities and Exchange Commission on February 25, 2019 (File No. 333-229144).
 
The condensed interim financial statements of Super League include all adjustments of a normal recurring nature which, in the opinion of management, are necessary for a fair statement of Super League’s financial position as of September 30, 2019, and results of its operations and its cash flows for the interim periods presented.  The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The Company believes that, of the significant accounting policies described herein, the accounting policies associated with revenue recognition, the valuation of convertible notes and related common stock purchase warrants (hereinafter, “warrants”) discussed at Note 6, stock-based compensation expense, accounting for business combinations as discussed at Note 5, income taxes and valuation allowances against net deferred tax assets, require its most difficult, subjective or complex judgments.
 
 
 
Going Concern

The accompanying interim condensed 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. As presented in the interim condensed financial statements, the Company incurred net losses of $26.0 million and $13.1 million during the nine months ended September 30, 2019 and 2018, respectively, and had an accumulated deficit of $81.1 million as of September 30, 2019. Noncash expenses (excluding depreciation and amortization of fixed and intangible assets, respectively) included in net loss, primarily comprised of noncash interest charges and stock-based compensation, totaled $15.2 million and $4.8 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. Net cash used in operating activities totaled $10.1 million and $7.9 million, for the nine months ended September 30, 2019 and September 30, 2018, respectively.
 
As of September 30, 2019, the Company had cash and cash equivalents of approximately $12.6 million. The Company has and will continue to use significant capital for the growth and development of its business. The Company’s management expects operating losses to continue in the near term in connection with the pursuit of its strategic objectives. As such, management believes its current cash position, absent receipt of additional capital either from operations or that may be available from future issuance(s) of common stock or debt financings, is not sufficient to fund our planned operations for the twelve months following the issuance of these financial statements. As a result, our current financial condition raises substantial doubt about our ability to continue as a going concern. The Company considers historical operating results, capital resources and financial position, in combination with current projections and estimates, as part of its plan to fund operations over a reasonable period. Management's considerations assume, among other things, that the Company will continue to be successful implementing its business strategy, that there will be no material adverse developments in the business, liquidity or capital requirements and, if necessary, the Company will be able to raise additional equity or debt financing on acceptable terms. If one or more of these factors do not occur as expected, it could cause a reduction or delay of its business activities, sales of material assets, default on its obligations, or forced insolvency. The accompanying financial statements do not contain any adjustments which might be necessary if the Company were unable to continue as a going concern. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company.
 
On February 27, 2019, we completed our IPO, pursuant to which we issued and sold an aggregate of 2,272,727 shares of our common stock at a public offering price of $11.00 per share pursuant to a registration statement on Form S-1, declared effective by the Securities and Exchange Commission on February 25, 2019 (File No. 333-229144). We received net proceeds of approximately $22,458,000 after underwriting discounts, commissions and other offering costs of $2,542,000.
 
The principal purposes of the IPO was to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets. We have and continue to use the net proceeds received from the IPO for working capital and general corporate purposes, including sales and marketing activities, product development and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that may complement our business and or accelerate our growth. The amounts and timing of our actual expenditures, including expenditure related to sales and marketing and product development will depend on numerous factors, including the status of our product development efforts, our sales and marketing activities, expansion internationally, the amount of cash generated or used by our operations, competitive pressures and other factors.
 
Concurrent with the closing of the IPO on February 27, 2019, in accordance with the related agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding, totaling $13,793,000, was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35.
 
 
Revenue Recognition
 
Revenue is recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects 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.
 
Super League generates revenues and related cash flows from (i) brand and media sponsorships, (ii) Platform-As-A-Service arrangements, and (iii) direct to consumer offers including tournament fees for participation in our physical and online multiplayer gaming experiences, digital subscriptions and merchandise sales.
 
Brand and Media Sponsorships. The Company generates brand and media sponsorship revenues primarily from sales of various forms of sponsorships and promotional campaigns for its online platforms and from sponsorship at its in-person esports experiences. Brand and media 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 (including rights to create and post social content and clips), rights to on-screen activations and promotions, display material rights, media rights, hospitality and tickets and merchandising rights. Brand and media sponsorship arrangements typically include contract terms for time periods ranging from several weeks to multi-year arrangements.
 
For brand and media sponsorship arrangements that include performance obligations satisfied over time, customers typically simultaneously receive and consume the benefits under the agreement as the Company satisfies its 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).
 
Platform-As-A-Service. The Company generates Platform-as-a-Service (“PaaS”) revenues pursuant to arrangements with brand and media partners, retail venues, game publishers and broadcasters that allow its partners to run amateur esports experiences, and or capture specifically curated gameplay content that is customized for its partners’ distribution channels, leveraging the flexibility of, and powered by the Super League gaming and content technology platform. Revenue for PaaS arrangements for one-off branded experiences and/or the development of content tailored specifically for the Company’s partners’ distribution channels that provide for a contractual delivery or performance date, is recognized when performance is substantially complete and or delivery occurs. Revenue for PaaS arrangements that include performance obligations satisfied over time whereby customers simultaneously receive and consume the benefits under the agreement as the Company satisfies its performance obligations over the applicable contract term, 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).
 
Direct to Consumer Revenue. Direct to consumer revenues include tournament fees, digital subscriptions and merchandise. Direct to consumer revenues have primarily consisted of the sale of season passes to gamers for participation in Super League’s in-person and or online multiplayer gaming experiences. For the applicable periods presented herein, season passes for gaming experiences were primarily comprised of multi-week packages and also include one-time, single experience admissions. For the three and nine months ended September 30, 2019, digital subscription revenues include revenues related to the Company’s Minehut asset acquisition in June 2018, which provides various Minecraft server hosting services on a subscription basis to the Minecraft gaming community.
 
Revenue billed or collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied as described above.
 
For the three and nine months ended September 30, 2019, 45% and 43% of revenues were recognized at a single point in time, and 55% and 57% of revenues were recognized over time, respectively. For the three and nine months ended September 30, 2018, 41% and 20% of revenues were recognized at a single point in time, and 59% and 80% of revenues were recognized over time, respectively.
 
Advertising
 
Gaming experience and Super League brand related advertising costs include the cost of ad production, social media, print media, marketing, promotions, and merchandising. The Company expenses advertising costs as incurred. Advertising expenses for the three and nine months ended September 30, 2019 were $81,000 and $270,000, respectively, and are included in selling, marketing and advertising expenses in the condensed statements of operations. Advertising expenses for the three and nine months ended September 30, 2018 were $163,000 and $362,000, respectively.
 
 
 
Technology Platform Development Costs
 
Technology platform development costs include (i) allocated personnel costs, including salaries, taxes and benefits related to our internal software developers and engineers, employed by Super League, engaged in the operation, maintenance, management, administration, testing and enhancement of our proprietary gaming and content technology platform, and (ii) the amortization of capitalized internal use software costs primarily comprised of capitalized costs for internal and third-party contract software development and engineering resources engaged in developing and enhancing our proprietary gaming and content technology platform.
 
Deferred Financing Costs
 
Specific incremental costs directly attributable to a proposed or actual offering of securities or debt are deferred and charged against the gross proceeds of the financing. In the event that the proposed or actual financing is not completed, or is deemed not likely to be completed, such costs are expensed in the period that such determination is made. Deferred costs related to proposed offerings of securities totaled $0 and $154,354 at September 30, 2019 and December 31, 2018, respectively. Deferred financing costs, if any, are included in other current assets in the condensed balance sheet. Deferred financing costs charged against gross proceeds in connection with the close of the Company’s IPO totaled $517,000.
 
Property and Equipment
 
Property and equipment are recorded at cost. Major additions and improvements that materially extend useful lives of property and equipment are capitalized. Maintenance and repairs are charged against the results of operations as incurred. When these assets are sold or otherwise disposed of, the asset and related depreciation are relieved, and any gain or loss is included in the statements of operations for the period of sale or disposal. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets, typically over a three- to five-year period.
 
Intangible Assets
 
Intangible assets primarily consist of (i) internal-use software development costs, (ii) domain name, copyright and patent registration costs, (iii) commercial licenses and branding rights and (iv) other intangible assets, which are recorded at cost and amortized using the straight-line method over the estimated useful lives of the assets, ranging from three to 10 years.
 
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.
 
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 (October 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. The Company considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test. When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company then applies a two-step impairment test. The two-step impairment test first compares the fair value of the Company’s reporting unit to its carrying or book value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds its fair value, the Company determines the implied fair value of the reporting unit’s goodwill and if the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded in the statement of operations. The Company operates in one reporting segment.
 
 
 
Impairment of Long-Lived Assets
 
The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. Management believes that there was no impairment of long-lived assets for the periods presented herein. There can be no assurance, however, that market conditions or demand for the Company’s products or services will not change, which could result in long-lived asset impairment charges in the future.
 
Stock-Based Compensation
 
Compensation expense for stock-based awards is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense, typically on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which is generally two to four years. Compensation expense for awards with performance conditions that affect vesting is recorded only for those awards expected to vest or when the performance criteria are met. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of stock option and common stock purchase warrant awards is estimated on the date of grant utilizing the Black-Scholes-Merton option pricing model. The Company accounts for forfeitures of awards as they occur.
 
Grants of equity-based awards (including warrants) to non-employees in exchange for consulting or other services are accounted for using the fair value of the consideration received (i.e., the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable.
 
Noncash stock-based compensation expense, included in general and administrative expense, for the periods presented was comprised of the following:
 
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Stock options
 $374,000 
 $512,000 
 $3,004,000 
 $1,741,000 
Warrants
  263,000 
  229,000 
  1,918,000 
  682,000 
Restricted stock units
  75,000 
  23,000 
  311,000 
  28,000 
Earn-out compensation expense (Note 5)
  25,000 
  - 
  33,000 
  - 
Total noncash stock compensation expense
 $737,000 
 $764,000 
 $5,266,000 
 $2,451,000 
 
Noncash stock-based compensation expense for the three and nine months ended September 30, 2019 included compensation expense resulting from the vesting of certain performance-based options and warrants previously granted to two of the Company’s executives which vested upon completion of the IPO and the satisfaction of certain other operational performance metrics, pursuant to October 2018 amended employee agreements and related vesting provisions of the underlying equity grant agreements. During the nine months ended September 30, 2019, 300,000 of performance-based stock options and warrants vested, with a weighted-average grant date fair value of $8.50, resulting in noncash stock compensation expense of $2,549,000. The fair value of these equity awards was estimated on October 31, 2018, their original grant date, using the Black Scholes-Merton option pricing model and the following weighted-average assumptions: (i) volatility of 93%, (ii) risk-free interest rate of 3.0%, and (iii) expected term of 6.5 years.
 
Risks and Uncertainties
 
Concentrations. The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, or whose accounts payable balances individually represented 10% or more of the Company’s total accounts payable, as follows:
 
 
 
For the three and nine months ended September 30, 2019, five customers accounted for 90% and three customers accounted for 49% of revenues, respectively. For the three and nine months ended September 30, 2018, two and four customers accounted for 72% and 77% of revenues, respectively.
 
At September 30, 2019 and December 31, 2018, four and three customers accounted for 87% and 96% of accounts receivable. At September 30, 2019 and December 31, 2018, one vendor accounted for 46% and three vendors accounted for 43% of accounts payable, respectively.
 
Segment Information
 
The Company operates in one segment.
 
Earnings (Loss) Per Share
 
Basic earnings (loss) per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period. Diluted earnings per share is computed by dividing the income or loss by the weighted-average number of outstanding shares of common stock for the applicable period, including the dilutive effect of common stock equivalents. Potentially dilutive common stock equivalents primarily consist of employee stock options, warrants issued to employees and non-employees in exchange for services and warrants issued in connection with financings. All outstanding stock options and warrants for the periods presented have been excluded from the computation of diluted loss per share because the effect of inclusion would have been anti-dilutive.
 
Income Taxes
 
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or income tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized, or if it is determined that there is uncertainty regarding future realization of such assets.
 
The provision for income taxes for interim periods is determined using an estimate of Super League’s annual effective tax rate, adjusted for discrete items, if any, that are considered in the relevant period. Each quarter, the Company updates the estimate of the annual effective tax rate, and if the estimated tax rate changes, a cumulative adjustment is recorded.
 
On December 22, 2017, new U.S. federal tax legislation was enacted that significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate from 35% to 21%, revising the rules governing net operating losses and foreign tax credits, and introducing new anti-base erosion provisions. Many of the changes were effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the U.S. Department of the Treasury and the Internal Revenue Service (“IRS”), any of which could decrease or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
 
The new legislation reduced the corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, all deferred income tax assets and liabilities, including net operating losses, have been measured using the new rate under and are reflected in the valuation of these assets as of December 31, 2018 and 2017. As a result, as of December 31, 2017, the value of our deferred tax assets was reduced by $4,278,626 and the related valuation allowance was reduced by the same amount. Given the full valuation allowance provided for net deferred tax assets for the periods presented herein, the change in tax law did not have a material impact on the Company’s financial statements provided herein. There may be additional tax impacts identified in subsequent periods throughout the Company’s fiscal year ending December 31, 2019 in accordance with subsequent interpretive guidance issued by the SEC or the IRS. Further, there may be other material adverse effects resulting from the legislation that we have not yet identified. No estimated tax provision has been recorded for tax attributes that are incomplete or subject to change.
 
 
 
-10-
 
Fair Value Measurements
 
Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company measures financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
 
Level 1. Quoted prices in active markets for identical assets or liabilities.  
 
Level 2 . Quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices which are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
 
Level 3. Unobservable inputs which are supported by little or no market activity and which are significant to the fair value of the assets or liabilities.
 
The fair value of accounts receivable and other current assets approximated their carrying value at the date of acquisition. Acquired intangible assets and the Earn-Out were valued using Level 3 inputs.
 
Recent Accounting Guidance
 
Recent Accounting Pronouncements - Recently Adopted.
 
In May 2014, the FASB issued a new accounting standard update (“ASU”) addressing revenue from contracts with customers, which clarifies existing accounting literature relating to how and when a company recognizes revenue. Under the standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. In doing so, the Company is required to use more judgment and make more estimates in connection with the accounting for revenue contracts with customers than under previous guidance. Such areas may include: (i) identifying performance obligations in the contract, (ii) estimating the timing of satisfaction of performance obligations, (iii) determining whether a promised good or service is distinct from other promised goods or services, including whether the customer can benefit from the good or service on its own and whether the promise to transfer a good or service is separately identifiable from other promises in the contract, (iv) evaluating whether performance obligations are satisfied at a point in time or over time, (v) allocating the transaction price to separate performance obligations, and (vi) determining whether contracts contain a significant financing component.
 
The Company used the modified retrospective method of adoption, which would require the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings on January 1, 2019. Comparative prior year periods would not be adjusted. The new accounting standard was applied to all contracts at the date of initial application. There was no cumulative effect of applying the new revenue standard to contracts executed in prior periods. As such, the adoption of the new accounting standard had no impact of on the balance sheet and statement of operations in the current or prior periods.
 
Recent Accounting Pronouncements – Not Yet Adopted.
 
In February 2016, the FASB issued an ASU that requires lessees to present right-of-use assets and lease liabilities on the balance sheet. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative periods in the financial statements and is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is evaluating the impact that this guidance will have on its financial position, results of operations and financial statement disclosures.
 
 
 
-11-
 
In June 2016, the FASB issued guidance on the measurement and recognition of credit losses on most financial assets. For trade receivables, loans, and held-to-maturity debt securities, the current probable loss recognition methodology is being replaced by an expected credit loss model. For available-for-sale debt securities, the recognition model on credit losses is generally unchanged, except the losses will be presented as an adjustable allowance. The guidance will be applied retrospectively with the cumulative effect recognized as of the date of adoption. The guidance will become effective at the beginning of the Company’s first quarter of the fiscal year ending December 31, 2021 but can be adopted as early as the beginning of the first quarter of fiscal year ending December 31, 2020. The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures.
 
3.
PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following for the periods presented:
 
 
September 30,
2019
 
 
December 31,
2018
 
 
 
(Unaudited)
 
 
 
 
Furniture and fixtures
 $332,000 
 $297,000 
Computer hardware
  3,126,000 
  3,105,000 
 
  3,458,000 
  3,402,000 
Less: accumulated depreciation
  (3,201,000)
  (2,871,000)
Property and equipment, net
 $257,000 
 $531,000 
 
Depreciation expense for property and equipment was $38,000 and $330,000 for the three and nine months ended September 30, 2019, respectively. Depreciation expense for property and equipment was $190,000 and $620,000 for the three and nine months ended September 30, 2018, respectively.
 
4.
INTANGIBLE AND OTHER ASSETS
 
Intangible and other assets consisted of the following for the periods presented:
 
 
September 30,
2019
 
 
December 31,
2018
 
 
 
(Unaudited)
 
 
 
 
Capitalized software development costs
 $2,122,000 
 $1,281,000 
Licenses
  340,000 
  - 
Domain
  70,000 
  68,000 
Trade name (Note 5)
  189,000 
  - 
Copyrights and other
  260,000 
  126,000 
 
  2,981,000 
  1,475,000 
Less: accumulated amortization
  (1,094,000)
  (768,000)
Intangible and other assets, net
 $1,887,000 
 $707,000 
 
Amortization expense totaled $134,000 and $326,000 for the three and nine months ended September 30, 2019, respectively. Amortization expense totaled $64,000 and $171,000 for the three and nine months ended September 30, 2018, respectively. Future amortization expense of intangible and other assets is expected to be as follows:
 
 
 
-12-
 
For the years ending December 31:
 
Remainder of 2019
 $161,000 
2020
  625,000 
2021
  557,000 
2022
  252,000 
2023
  143,000 
Thereafter
  149,000 
Total
 $1,887,000 
 
On September 23, 2019, the Company and ggCircuit, LLC (“ggCircuit”), an esports services company that provides gaming center management software solutions and other esports offerings, entered into an expanded commercial partnership agreement (“Expanded Agreement”) pursuant to which Super League will become the primary consumer-facing brand within ggCircuit’s B2B gaming center software platform. ggCircuit’s software platform is a B2B platform and B2C application created and owned by ggCircuit, which is licensed and distributed to owners and operators of video gaming centers throughout the world.
 
In consideration for the rights granted by ggCircuit to Super League, Super League will pay an upfront fee of $340,000 and quarterly fees over the term of the Agreement ranging from $0 to $150,000, based on predetermined contractual revenue levels. Pursuant to the terms and conditions of the Expanded Agreement, revenues generated in connection with applicable activities under the Expanded Agreement will be shared between Super League and ggCircuit based on contractual revenue sharing percentages. The initial term of the Expanded Agreement commences on October 1, 2019, the effective date and concludes on the fifth anniversary of the effective date, subject to certain automatic renewal provisions. The upfront fee is included as "Licenses" in intangible assets and other assets, net (and accrued liabilities), in the accompanying balance sheet and will be amortized over the initial term of the Expanded Agreement of five years, commencing October 1, 2019.
 
5.
AQUISITION OF FRAMERATE, INC.
 
On June 3, 2019, Super League and SLG Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), entered into an agreement and plan of merger (the “Merger Agreement”) with Framerate, Inc., a Delaware corporation (“Framerate”), pursuant to which Framerate merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Acquisition”). The Acquisition was consummated on June 6, 2019 when the certificate of merger of Merger Sub and Framerate was filed with the Secretary of State of the State of Delaware (the “Effective Date”). As consideration for the Acquisition, the Company ratably paid and/or issued to the former shareholders of Framerate an aggregate of (i) $1.5 million paid in cash and (ii) $1.0 million paid by the issuance of a total of 134,422 shares of the Company’s common stock, at a price per share of $7.4395 (the “Closing Shares”).
 
The Acquisition was approved by the board of directors of each of the Company and Framerate, and was approved by the stockholders of Framerate. Transaction costs incurred relating to this acquisition were not material for the three and nine months ended September 30, 2019. The acquisition of Framerate expands the Company’s digital programming footprint and enhances the Company’s ability to provide value to its gaming and spectator communities through multiple forms of engagement.
 
In addition to the issuance of the Closing Shares, the Merger Agreement provides for the issuance of up to an additional $980,000 worth of shares of the Company’s common stock at the same price per share as the Closing Shares (the “Earn-Out Shares”) in the event Framerate achieves certain performance-based milestones during the two-year period following the closing of the Acquisition, or June 6, 2021 (the “Earn-Out”). One-half of the Earn-Out Shares will be issuable on the one-year anniversary of the Effective Date, and the remaining one-half will be issuable on the second anniversary of the Effective Date. The fair value of the Earn-Out on the Effective Date was estimated to be $454,000.
 
The Company has determined that the Acquisition constitutes a business acquisition as defined by Accounting Standards Codification (“ASC”) 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred pursuant to the purchase method of accounting in accordance with ASC 805. Super League’s preliminary purchase price allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data. Fair values are determined based on the requirements of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”).
 
 
 
-13-
 
The Company hired the former Chief Executive of Framerate (“Framerate Executive”), who was also a selling shareholder of Framerate. Pursuant to the provisions of the Earn-Out included in the Merger Agreement, in the event that the Framerate Executive is terminated for cause or resigns from his employment with the Company at any time on or before the second anniversary of the Effective Date, and any such resignation is without “Good Reason” as such term is defined in his employment agreement, then the maximum amount of any portion of the Earn-Out that has not yet been earned as of the date of resignation shall be reduced by 44.0164%. Under ASC 805, a contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is considered to be compensation for post-combination services, and not acquisition consideration. As such approximately 44% of the estimated fair value of the Earn-Out, or $200,000, is accounted for as deferred compensation expense and being amortized in the statement of operations over the two-year period ending on the second anniversary of the Effective date. Noncash compensation expense related to the portion of the Earn-Out treated as compensation for the three and nine months ended September 30, 2019 was $25,000 and $33,000. The portion of the Earn-Out included as consideration was $254,000.
 
The Earn-Out arrangement does not meet the liability classification criteria outlined in ASC 480, “Distinguishing Liabilities from Equity,” and is both (i) indexed to the Company’s own shares and (ii) classified in shareholders’ equity in the accompanying condensed balance sheet. Equity-classified contingent consideration is measured initially at fair value on the acquisition date and is not remeasured subsequent to initial recognition. As such, the initial value recognized for the Earn-Out on the acquisition date is not adjusted for changes in the fair value of the Earn-Out as of any future settlement date. Subsequent differences between the estimated fair value of the Earn-Out recorded at the acquisition date and the actual amount of Earn-Out paid based on actual performance will be reflected as a charge or credit, as applicable, in the statement of operations.
 
The following table summarizes the fair value of purchase price consideration paid to acquire Framerate:
 
 
 
Amount
 
 
 
 
 
Cash consideration at closing
 $1,515,000 
Equity consideration at closing
  1,000,000 
Fair value of Earn-Out shares
  254,000 
Total
 $2,769,000 
  
The purchase price allocation is based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in connection with the acquisition of Framerate, as follows:
 
 
 
Amount
 
 
 
 
 
Accounts receivable
 $15,000 
Intangible assets - trade name
  189,000 
Goodwill
  2,565,000 
Total purchase price
 $2,769,000 
 
The identifiable intangible asset acquired, totaling $189,000, was comprised of Framerate’s trade name with an estimated useful life of approximately five years, and is included in intangible and other assets, net in the condensed balance sheet. The trade name intangible asset is being amortized over the estimated useful life on a straight-line basis. Amortization expense for the three and nine months ended September 30, 2019 was $3,000 and $10,000 respectively.
 
 
 
-14-
 
Management is responsible for determining the fair value of the identifiable intangible assets acquired as of the Effective Date. Management considered a number of factors, including reference to an analysis under ASC 805 solely for the purpose of allocating the purchase price to the assets acquired. The fair values of the acquired intangible asset, as described above, was determined using the following methods:
 
Description
 
Valuation Method
 
Valuation Method Description
 
Assumptions
Trade Name
 
Relief-from-Royalty method under the income approach
 
Under the Relief-from-Royalty method, the royalty savings is calculated by estimating a reasonable royalty rate that a third party would negotiate in a licensing agreement. Such royalties are most commonly expressed as a percentage of total revenue involving a trade name.
 
Useful life: 5 years; Royalty Rate: 05%; Discount Rate: 50%
 
 
 
 
 
 
 
Earn-Out
 
Scenario Based Model
 
The payoff structure was determined to be linear and the Earn-Out is payable within two years. Revenue scenarios were estimated and a probability for each scenario based on the likelihood of achieving the forecasted revenues was estimated. The estimated payments from the scenarios were then discounted based on the Company's credit risk and the related risk-free rate. The value per share was then adjusted for the time period through the payout date. The option methodology employed was the Black-Scholes Option Model.
 
Volatility: 75% - 100%; Term 1 -2 years; Risk Free Rate 2.21% - 1.95%;
 
The Acquisition was treated for tax purposes as a nontaxable transaction and as such, the historical tax bases of the acquired assets, net operating losses, and other tax attributes of Framerate will carryover. As a result, no new goodwill for tax purposes was be created in connection with the Acquisition as there is no step-up to fair value of the underlying tax bases of the acquired net assets.
 
6.
CONVERTIBLE NOTES PAYABLE
   
In February through April 2018, the Company issued 9.00% secured convertible promissory notes with a collective face value of $3,000,000 (the “Initial 2018 Notes”). The Initial 2018 Notes (i) accrued simple interest at the rate of 9.00% per annum, (ii) matured on the earlier of December 31, 2018 or the close of a $15,000,000 equity financing (“Qualifying Equity Financing”) by the Company, and (iii) all outstanding principal and accrued interest was automatically convertible into equity or equity-linked securities sold in a Qualifying Equity Financing based upon a conversion rate equal to (x) a 10% discount to the price per share of a Qualifying Equity Financing, with (y) a floor of $10.80 per share. In addition, the holders of the Initial 2018 Notes were collectively issued warrants to purchase approximately 55,559 shares of common stock, at an exercise price of $10.80 per share and a term of five years (the “Initial 2018 Warrants”).
  
In May through August 2018, the Company issued additional 9.00% secured convertible promissory notes with a collective face value of $10,000,000 (the “Additional 2018 Notes”). In May 2018, all of the Initial 2018 Notes and related accrued interest, totaling $3,056,000, were converted into the Additional 2018 Notes, resulting in an aggregate principal amount of $13,056,000 (hereinafter collectively, the “2018 Notes”). The holders of the converted Initial 2018 Notes retained their respective Initial 2018 Warrants.
 
The 2018 Notes (i) accrued simple interest at the rate of 9.00% per annum, (ii) matured on the earlier of the closing of an initial public offering of the Company’s common stock on a national securities exchange or April 30, 2019, and (iii) all outstanding principal and accrued interest was automatically convertible into shares of common stock upon the closing of an IPO at the lesser of (x) $10.80 per share or (y) a 15% discount to the price per share of the IPO. In addition, the holders of the 2018 Notes were collectively issued 1,396,420 warrants to purchase common stock equal to 100% of the aggregate principal amount of the 2018 Notes divided by $9.35 per share (the “2018 Warrants”). The 2018 Warrants are exercisable for a term of five years, commencing on the close of an IPO, at an exercise price of $9.35 and are callable at the election of the Company at any time following the closing of an IPO. The 2018 Notes are secured by a security interest in all of the assets, tangible and intangible, of the Company.
 
 
 
-15-
 
The proceeds from the sale of the 2018 Notes, the 2018 Warrants and the Initial 2018 Warrants, were allocated to the instruments based on the relative fair values of the convertible debt instrument without the warrants and of the warrants themselves at the time of issuance. The portion of the proceeds, totaling $5,933,000 allocated to the 2018 Warrants, was accounted for as a discount to the debt, with the offsetting credit to additional paid-in capital. The remainder of the proceeds were allocated to the convertible debt instrument portion of the transaction. The resulting debt discount is amortized over the period from issuance to April 30, 2019, the stated maturity date of the debt.
 
Debt issuance costs were comprised of $389,000 of cash commissions and warrants with a fair value of $223,000, paid and issued, respectively, to third-parties in connection with the debt financing, and are reflected as a discount to the debt instrument, net of accumulated amortization, in the December 31, 2018 balance sheet. Debt issuance costs are amortized over the term of the debt as interest expense in the statement of operations.
 
Concurrent with the closing of the IPO on February 27, 2019, all outstanding principal and accrued interest outstanding under the 2018 Notes totaling $13,793,000 was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price per share of $9.35. As a result of the automatic conversion of the 2018 Notes and the application of conversion accounting, the Company recorded an immediate charge to interest expense of $1,384,000 for the nine months ended September 30, 2019, representing the write-off of the unamortized balance of debt discounts associated with the 2018 Warrants and cash commissions and warrants issued to third parties. Unamortized debt discounts at September 30, 2019 and December 31, 2018 totaled $0 and $2,684,000, respectively.
 
The non-detachable conversion feature embedded in the 2018 Notes provides for a conversion rate that is below market value at the commitment date, and therefore, represents a beneficial conversion feature (“BCF”). The BCF is generally recognized separately at issuance by allocating a portion of the debt proceeds equal to the intrinsic value of the BCF to additional paid-in capital. The resulting convertible debt discount is recognized as interest expense using the effective yield method. The BCF is measured using the commitment date stock price. However, the conversion feature associated with the 2018 Notes was not exercisable until the consummation of an initial public offering by the Company of its common stock, and therefore, was not required to be recognized in earnings until the IPO related contingency was resolved, which occurred on the IPO Closing Date. The commitment date is the IPO Closing Date and the commitment date stock price was $11.00 per share. The intrinsic value of the BCF on the IPO Closing Date, which was limited to the net proceeds allocated to the debt on a relative fair value basis, was approximately $7,067,000, and is reflected as additional interest expense in the condensed statement of operations for the nine months ended September 30, 2019.
 
7.
STOCKHOLDERS’ EQUITY
 
Initial Public Offering
 
On February 27, 2019, Super League completed its initial public offering (“IPO”) of its common stock, pursuant to which the Company issued and sold an aggregate of 2,272,727 shares of common stock at $11.00 per share, raising aggregate net proceeds of $22,458,000 after deducting underwriting discounts, commissions and offering costs of $2,542,000. Concurrent with the closing of the IPO on February 27, 2019 (the “IPO Closing Date”), in accordance with the related agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding, totaling $13,793,000, was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35.
 
Super League has and continues to use the net proceeds received from the offering for working capital and general corporate purposes, including sales and marketing activities, product development and capital expenditures. Super League may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that may compliment the Company’s business and or accelerate the Company’s growth.
 
Upon closing of the IPO, 83,333 options and 125,000 warrants previously granted to the CEO (with an average grant date fair value of $8.50) became fully vested. As a result, the Company recorded an additional $1,770,000 of stock-based compensation during the nine months ended September 30, 2019.
 
 
 
-16-
 
Pursuant to the related underwriting agreement, in connection with the completion of the IPO, for the purchase price of $50.00, the Company issued a warrant to purchase shares of our common stock equal to 3.0% of the shares sold in the IPO, or 68,182 shares, at an exercise price of $11.00 per share (the “Underwriters’ Warrants”). The Underwriters’ Warrants are exercisable during the period commencing from the date of the close of the IPO and ending five years from the closing date of the IPO. The Underwriters’ Warrants represent additional noncash offering costs, with an estimated grant date fair value of $547,000, which was reflected in additional-paid-in capital when issued and as a corresponding offering cost in the condensed statement of shareholders equity for the three and nine months ended September 30, 2019. The fair value of the Underwriters’ Warrant was estimated on February 27, 2019, the grant date, using the Black Scholes-Merton option pricing model and the following weighted-average assumptions: (i) volatility of 95%, (ii) risk-free interest rate of 2.5%, and (iii) expected term of five years.
 
Reverse Stock Split
 
On February 8, 2019, the Company filed an amendment to the Company’s amended and restated certificate of incorporation to effect a reverse split of shares of the Company’s common stock on a one-for-three basis (the “Reverse Stock Split”). All references to common stock, warrants to purchase common stock, options to purchase common stock, early exercised options, restricted stock, share data, per share data and related information contained in the financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares resulting from the Reverse Stock Split will be rounded down to a whole share, and any effected stockholders will receive a cash payment equal to the value of such fractional shares.
 
In-Kind Contribution of Services
 
In June 2017, the Company entered into an arrangement with a major media network for $1,000,000 of in-kind contributions of media services in exchange for 92,592 shares of common stock. This prepaid advertising cost was amortized over an 18-month period ending as of December 31, 2018. Expense included in selling, marketing and advertising expenses in the statement of operations for usage of the in-kind media services for the three and nine months ended September 30, 2018 was $186,000 and $481,000, respectively.
 
8.
SUBSEQUENT EVENTS
 
The Company evaluated subsequent events for their potential impact on the financial statements and disclosures through the date the financial statements were available to be issued and determined that no subsequent events occurred that were reasonably expected to impact the financial statements presented herein.
 
 
 
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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
References in this Quarterly Report on Form 10-Q to “Super League Gaming, Inc.” “Company,” “we,” “us,” “our,” or similar references mean Super League Gaming, Inc. References to the “SEC” refer to the U.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 financial statements and the related notes included elsewhere in this interim report. Our condensed financial statements have been prepared in accordance with U.S. GAAP. The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (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 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.
 
Overview
 
Super League Gaming, Inc. (“Super League,” the “Company,” “we” or “our”) is a global leader in the mission to bring live and digital esports entertainment and experiences directly to everyday gamers around the world. Utilizing our proprietary technology platform, Super League operates physical and digital experiences in partnership with publishers of top-tier game titles. In addition to providing premium experiences by operating city-vs-city amateur esports leagues and producing thousands of live competitive and social gaming experiences around the country, the Super League Network features multiple forms of content celebrating the love of play via social media, live streaming, video-on-demand, and website-based offerings. As a content producer with a dedicated esports studio, Super League publishes live streaming and on-demand video content on all major platforms including YouTube, Twitch and Instagram. In addition, with exclusive proprietary platforms like Minehut, the avid Minecraft community, Framerate, one of the largest independent social video networks in esports and gaming, and through our partnerships with high-profile venue owners such as Topgolf, Cinemark Theatres and independent fast-casual restaurants, Super League is committed to supporting the development of local, grassroots player communities all while providing a global framework for competition and community engagement.
 
Executive Summary
 
We believe Super League is on the leading edge of the rapidly accelerating esports industry, which has become an established and vital part of the entertainment landscape. At the professional level, thousands of professional players on hundreds of teams compete in dozens of high stakes competitions that draw significant audiences, both in person and online. In addition, the value of brand sponsorships, media rights and prize money continue to rise, as are professional team valuations and the purchase price for securing franchises in professional leagues.
 
We believe there is a larger opportunity for the world of amateur esports players. Amateur gamers are the gamers who enjoy the competition, the social interaction and community, and the entertainment value associated with playing and watching others play. According to Nielsen Esports Playbook, 2017, competitive amateur gamers take part in over eight hours of gameplay and watches up to nine hours of esports-related content each week.
 
 
 
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Super League is a critically important component in providing the infrastructure for amateur esports that is synergistic and accretive to the greater esports ecosystem. Over the past four years, we believe we have become the preeminent brand for amateur esports by providing a proprietary, end-to-end platform that allows our gamers to compete, socialize and spectate premium amateur esports gameplay and entertainment both physically and digitally. We celebrate amateur gamers and provide a differentiated way for players and spectators to unite around the games they love for a better, more inclusive social experience previously not available. Not only do we offer premium amateur esports experiences, but also can leverage our derivative gameplay content to become the most comprehensive amateur esports content network. Our premium, competitive gameplay experiences and elite amateur broadcasts, coupled with the expansion of our game title portfolio, our retail venue partner network and our strategic brand sponsorships introduce new gamers into our customer funnel, to drive audience growth and, ultimately, consumer and content monetization.
 
We focus on not just a wide range of gamers across game titles, ages and skill levels, but also a wide range of content-capture beyond just gameplay, which positions Super League as not just a tournament operator, but a lifestyle and media company focused on capturing, generating, aggregating and distributing content across the genre of all things esports. 
 
At its core, our proprietary platform serves two main functions. First, it enables digital and physical experiences which generate gameplay content. In turn, this content library enables a second function, which is multi-platform gameplay and entertainment content distribution. One of those content distribution channels is the physical retail venue itself where our proprietary visualization and broadcast system creates a “stadium screen” and transforms retail spaces into interactive and entertaining amateur esports arenas. In addition, this user-generated content can be distributed on our own premium digital Twitch and YouTube channels as well as finding life on social channels and other brand partner or third-party platforms.
 
Digital and Physical Experiences. We believe that we can monetize our digital and physical experiences in two primary ways:
 
Traditionally, we have created our own gameplay experiences to generate audience and content and attracted brand and sponsorship dollars to those offers. This continues to be a core source of revenue.
 
We also have new potential partners, including game publishers, retailers and brands across various categories who engage us to develop their own customized branded gameplay experiences, powered by our flexible gaming and content technology platform for their own customers. Platform-as-a- Service is emerging as a revenue stream for 2019 and beyond, that can not only deliver strong margin over time, but also adds to our audience and content growth. This is most notably evidenced by our first quarter 2019 activation with Samsung Retail, where Super League’s platform powered a live retail experience, held in New York in March 2019, built around Fortnite and the influencer Ninja, that drove traffic to our website and viewership to our Twitch channel, and our second and third quarter partnerships with Capcom, Ltd. (“Capcom”) and their Street Fighter® V: Arcade Edition title, Sony Pictures Entertainment (“Sony”) related to certain build competitions and related experiences, and Sprint, where we hosted a large scale 5G mobile gaming tournament in Los Angeles as part of Sprint’s 5G market launch.
 
Gameplay and Viewing Content. We also believe that we can monetize our content, comprised of gameplay and viewing, in two primary ways:
 
We can monetize our content commercially through advertising revenues on our own digital channels and by selling our content to third-party broadcasters similar to the content Nickelodeon contracted from Super League in 2018 to supplement their YouTube channel programming. We believe we have only begun to scratch the surface on proprietary and third-party content distribution value that can be derived from our platform.
 
The second way we monetize content is through direct-to-consumer pay walls for access to premium digital and physical experiences and viewing content. We have historically offered a freemium model where consumers can join Super League for free-to-play, casual competitive experiences and charged for access to premium gameplay experiences. We intend to expand our breadth of consumer digital offers in 2019 and have already launched a beta product, a digital monthly subscription offer for our youth demographic.
 
To date, our revenues have been weighted towards experience monetization, however we expect to see content monetization begin to emerge as a revenue opportunity.
 
We focus on five key performance indicators (“KPIs”), as outlined below, to assess our progress and drive revenue growth. The number of game titles and number of retail partner venues drive audience, introducing more players and spectators to Super League’s gaming and content platform. Growth in physical and digital experiences across a wider portfolio can increase the number of registered users and number of gameplay hours which will have a significant impact on our content library. This focus on audience and content generation ultimately impacts our viewership, which has an amplification effect on potential revenue streams and customer acquisition.
 
 
 
 
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Game titles : We ended fiscal 2018 with four game titles in our portfolio and currently have six game titles with the addition Capcom's Street Fighter® V: Arcade Edition during the second quarter of 2019 and Tencent America's PUBG MOBILE, during the third quarter of 2019. We continue to engage in discussions with several other identified titles to further expand our reach across various genres, ages of players and skill levels.
   
Retail Partner Venues: While we are just seeding the build out and monetization of our retail footprint, our national-level announcements with Topgolf and ggCircuit LAN centers provides access to hundreds of physical venue locations. We ended fiscal 2018 with 46 active venues and grew to 96 total active venues as of September 30, 2019.

Registered Users: We ended fiscal 2018 with approximately 300,000 registered users. During the nine months ended September 30, 2019, we increased our registered users by approximately 172%, to 817,000 registered users. Registered users are defined as people who have registered on our platform, providing applicable identifying information, that have engaged with our platform at some point, which could be by participation in a free event or events, or participation in a paid event or events, or some other engagement.
 
Gameplay Hours: As of September 30, 2019, including our live gaming experiences and our expanding digital gameplay channels, we generated 10.73 million hours of gameplay experiences, as compared to approximately 1.8 million full year 2018 gameplay hours.

Viewership: Proving that we can attract viewers to our platform and leverage the audiences our brand partners provide, we generated 58.0 million views during the first nine months of 2019, which was 643% of our full-year 2018 views of 925,000, leveraging our own programming and the significant expansion of our audience reach in connection with the acquisition of Framerate.
 
Initial Public Offering
 
On February 27, 2019, we completed our initial public offering (“IPO”), pursuant to which we issued and sold an aggregate of 2,272,727 shares of our common stock at a public offering price of $11.00 per share pursuant to a registration statement on Form S-1, declared effective by the Securities and Exchange Commission on February 25, 2019 (File No. 333-229144). We raised net proceeds of approximately $22,458,000 after underwriting discounts, commissions and other offering costs of $2,542,000.
 
The principal purposes of the IPO were to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets. We have and continue to use the net proceeds received from the offering for working capital and general corporate purposes, including sales and marketing activities, product development and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that may complement our business and or accelerate our growth. The amounts and timing of our actual expenditures, including expenditure related to sales and marketing and product development will depend on numerous factors, including the status of our product development efforts, our sales and marketing activities, expansion internationally, the amount of cash generated or used by our operations, competitive pressures and other factors described under “Risk Factors” in in our Prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on February 27, 2019, as well as Item II, Part 1A of this Report. Our management has broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds from the IPO.
 
Concurrent with the closing of the IPO on February 27, 2019, in accordance with the related agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding, totaling $13,793,000, was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35.
 
Acquisition of Framerate
 
On June 3, 2019, the Company and SLG Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), entered into an agreement and plan of merger (the “Merger Agreement”) with Framerate, Inc., a Delaware corporation (“Framerate”), pursuant to which Framerate merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation (the “Acquisition”).
 
 
 
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Framerate is a cross-platform esports social video network delivering the best in gameplay highlights, news and entertainment to today’s generation of video gamers. The company’s focus on user generated content and social distribution changes the way traditional esports video content is produced, distributed and shared by millions of esports fans worldwide. The acquisition of Framerate represents a strategic step in our audience-building efforts with an average of seven million video views a month built around everyday gamers uploading their personal esports highlight reels for recognition across our wide audience.
 
The Acquisition was consummated on June 6, 2019 when the certificate of merger of Merger Sub and Framerate was filed with the Secretary of State of the State of Delaware (the “Effective Date”). As consideration for the Acquisition, we ratably paid and/or issued to the former shareholders of Framerate an aggregate of $1.5 million in cash and $1.0 million worth of shares of our common stock at a price per share of $7.4395 (the “Closing Shares”).
 
In addition to the issuance of the Closing Shares, the Merger Agreement provides for the issuance of up to an additional $980,000 worth of shares of our common stock at the same price per share as the Closing Shares (the “Earn-Out Shares”) in the event Framerate achieves certain performance-based milestones during the two-year period following the closing of the Acquisition, or June 6, 2021. One-half of the Earn-Out Shares will be issuable on the one-year anniversary of the Effective Date, and the remaining one-half will be issuable on the second anniversary of the Effective Date.
 
The Acquisition was approved by the board of directors of each of Super League Gaming, Inc. and Framerate, and was approved by the stockholders of Framerate. Refer to Note 5 to the condensed financial statements elsewhere within this Report for additional information about the Acquisition.
 
Expanded Agreement with ggCircuit, LLC
 
On September 23, 2019, Super League and ggCircuit, LLC (“ggCircuit”), an esports services company that provides gaming center management software solutions and other esports offerings, entered into an expanded commercial partnership agreement (“Expanded Agreement”) pursuant to which Super League will become the primary consumer-facing brand within ggCircuit’s leading gaming center software platform, known as “ggLeap.” Under the terms of the Expanded Agreement, the consumer facing components of ggLeap, including its leaderboards, its competitive seasons and its local loyalty programs, will be rebranded as “Super League Gaming.” The consumer-facing components of ggLeap and its related offerings will be managed by Super League beginning with the next update of the ggLeap software, targeted for release globally in November 2019. ggLeap is a B2B software platform and B2C application created and owned by ggCircuit. ggLeap is licensed and distributed to owners and operators of video gaming centers throughout the world. It helps gaming centers manage the PCs in their venue, administer loyalty programs for local players, and provides the interface and local operating system through which players log into computers and launch all of their gameplay sessions within the gaming centers where ggLeap is deployed.
 
The November 2019 software platform release is expected to include, among other features, the following new features:
 
1.
A consumer subscription service branded “Super League Prime,” through which players in gaming centers will be able to access special member benefits;
 
2.
A global loyalty program for all players in ggLeap powered gaming centers, that also can be available for gaming centers to deploy as their local loyalty program, through which players will be able to earn Super League points, with subscribers to Super League Prime being able to earn points faster and in more ways than non-subscribers. Super League points will be redeemable for prizes that will include physical and digital goods and services, with customized collections of prizes available locally, nationally and internationally; and
 
3.
An esports events directory that will present players with listings of competitive and social gaming events they can play from within their local gaming centers, including Super League branded events, Super League powered events, events run by the local centers and events run by third party event organizers. Super League will be providing Super League Prime subscribers with access to special events on a regular basis featuring multiple game titles.
 
Pursuant to the terms and conditions of the Expanded Agreement, effective October 1, 2019, these new features, along with all other consumer facing components of ggLeap, will be managed and branded by Super League.
 
 
 
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In consideration for the rights granted by ggCircuit to Super League, including the right to commercially exploit Super League Prime and to feature the “Super League Gaming” brand on the applicable ggCircuit customer platform, Super League will pay an upfront fee of $340,000 and quarterly fees over the term of the Expanded Agreement ranging from $0 to $150,000, based on contractual revenue levels. Pursuant to the terms and conditions of the Expanded Agreement, revenues generated in connection with applicable activities under the Agreement will be shared between Super League and ggCircuit based on contractual revenue sharing percentages. The initial term of the Expanded Agreement commences on the effective date and concludes on the fifth anniversary of the effective date, subject to certain automatic renewal provisions.
 
The upfront fee is included in intangible assets and other, net in the accompanying balance sheet and is being amortized over the initial term of the Expanded Agreement of 5 years, commencing October 1, 2019.
 
Critical Accounting Estimates
 
Our unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these condensed statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these condensed financial statements. The SEC 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 Prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on February 27, 2019. In addition, refer to Note 2 to the condensed 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) we can identify each party’s rights regarding the goods or services to be transferred; (iii) we 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 we will be entitled in exchange for the goods or services that will be transferred to the customer.
 
Super League generates revenues and related cash flows from (i) brand and media sponsorships, (ii) Platform-As-A-Service arrangements, and (iii) direct to consumer offers including tournament fees for participation in our physical and online multiplayer gaming experiences, digital subscriptions and merchandise sales.
 
Brand and Media Sponsorships. We generate brand and media sponsorship revenues primarily from sales of various forms of sponsorships and promotional campaigns for our online platforms and from sponsorship at our in-person esports experiences. Brand and media 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 (including rights to create and post social content and clips), rights to on-screen activations and promotions, display material rights, media rights, hospitality and tickets and merchandising rights. Brand and media sponsorship arrangements typically include contract terms for time periods ranging from several weeks to multi-year arrangements.
 
For brand and media sponsorship 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).
 
 
 
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Platform-As-A-Service. We generate platform-as-a-service (“PaaS”) revenues 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, leveraging the flexibility of, and powered by our Super League gaming and content technology platform. Revenue for PaaS arrangements for one-off branded experiences and/or the development of content tailored specifically for our partners’ distribution channels that provide for contractual delivery or performance date, is recognized when performance is substantially complete and or delivery occurs. Revenue for PaaS arrangements that include performance obligations satisfied over time whereby customers simultaneously receive and consume the benefits under the agreement as we satisfy our performance obligations over the applicable contract term, 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).
 
Direct to Consumer Revenue. Direct to consumer revenues include tournament fees, digital subscriptions and merchandise. Direct to consumer revenues have primarily consisted of the sale of season passes to gamers for participation in our in-person and or online multiplayer gaming experiences. For the periods presented herein, season passes for gaming experiences were primarily comprised of multi-week packages and also include one-time, single experience admissions. For the three and nine months ended September 30, 2019, digital subscription revenues include revenues related to our Minehut asset acquisition in June 2018, which provides various Minecraft server hosting services on a subscription basis to the Minecraft gaming community.
 
Revenue from single experiences is recognized when the experience occurs. Revenue from multi-week packages is recognized over time as the multi-week experiences occur based on estimates of the progress toward complete satisfaction of the applicable offer and related performance obligations.
 
Advertising and Third-Party Content Revenue. We generate content through digital and physical experiences that offer opportunities for generating advertising revenue on our proprietary digital channels. In addition, we license our content to third parties seeking esports content for their own distribution channels.
 
Revenue collected in advance is recorded as deferred revenue until the event occurs or until applicable performance obligations are satisfied as described above.
 
Stock-based Compensation Expense.
 
Compensation expense for stock-based awards is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense, typically on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity award) which is generally two to four years. Compensation expense for awards with performance conditions that affect vesting is recorded only for those awards expected to vest or when the performance criteria are met. The fair value of restricted stock and restricted stock unit awards is determined by the product of the number of shares or units granted and the grant date market price of the underlying common stock. The fair value of stock option and common stock purchase warrant awards is estimated on the date of grant utilizing the Black-Scholes-Merton option pricing model. The Company accounts for forfeitures of awards as they occur.
 
Grants of equity-based awards (including warrants) to non-employees in exchange for consulting or other services are accounted for using the fair value of the consideration received (i.e., the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable.  
 
Determining the fair value of stock-based awards at the grant date requires significant estimates and judgments, including estimating the market price volatility of our common stock, determination of grant dates, future employee stock option exercise behavior and requisite service periods.
 
Accounting for Business Combinations
 
In connection with the application of purchase accounting for the acquisition of Framerate, as described above, we estimated the fair values of the assets acquired and liabilities assumed. A fair value measurement is determined as the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. In the context of purchase accounting, the determination of fair value often involves significant judgments and estimates by management, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies.  The estimated fair values reflected in the purchase accounting rely on management’s judgment and the expertise of a third-party valuation firm engaged to assist in concluding on the fair value measurements.
 
 
 
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Results of Operations for the Three and Nine Months Ended September 30, 2019 and 2018
 
The following table sets forth a summary of our statements of operations for the three and nine months ended September 30, 2019 and 2018:
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
REVENUES
 $350,000 
 $153,000 
 $822,000 
 $640,000 
 
    
    
    
    
COST OF REVENUES
  192,000 
  70,000 
  379,000 
  375,000 
GROSS PROFIT
  158,000 
  83,000 
 $443,000 
 $265,000 
 
    
    
    
    
OPERATING EXPENSES
    
    
    
    
Selling, marketing and advertising
  215,000 
  327,000 
  687,000 
  996,000 
Technology platform development
  638,000 
  567,000 
  2,030,000 
  1,682,000 
General and administrative
  3,730,000 
  2,747,000 
  13,792,000 
  8,884,000 
Total operating expenses
  4,583,000 
  3,641,000 
  16,509,000 
  11,562,000 
 
    
    
    
    
NET LOSS FROM OPERATIONS
  (4,425,000)
  (3,558,000)
  (16,066,000)
  (11,297,000)
 
    
    
    
    
OTHER INCOME (EXPENSE), NET
  8,000 
  (1,451,000)
  (9,925,000)
  (1,846,000)
 
    
    
    
    
NET LOSS
 $(4,417,000)
 $(5,009,000)
 $(25,991,000)
 $(13,143,000)
 
For the Three Months Ended September 30, 2019 and 2018
 
Revenue
 
 
 
Three Months Ended
September 30,
 
 
 
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Brand and Media Sponsorships
 $147,000 
 $90,000 
 $57,000 
  63%
Platform-as-a-service
  176,000 
  20,000 
  156,000 
 300+%
Advertising and content sales
  19,000 
  - 
  19,000 
  100%
Direct to Consumer
  8,000 
  43,000 
  (35,000)
  (81)%
 
 $350,000 
 $153,000 
 $197,000 
  129%
 
Revenue for the three months ended September 30, 2019 increased $197,000, or 129%, compared to the three months ended September 30, 2018. The change in revenues for the periods presented was comprised of the following:
 
Brand and Media Sponsorships. An increase in brand and media sponsorship revenue primarily attributable to fluctuations in brand and media sponsorship activities period to period, which is based on the specific partnership arrangements with activities during a particular period, the related performance obligations satisfied during the period, the contractual consideration associated with the activities during the period and the timing associated with the execution of new arrangements. Brand and media sponsorship revenues for the three months ended September 30, 2019 was primarily comprised of revenues from our Sony related build competitions and related experiences and our Red Games Lego Brawls live stream sponsorship activation. Brand and media sponsorship revenues for the three months ended September 30, 2018 was primarily comprised of revenues from our Logitech, Inc. brand sponsorships.
 
 
 
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Platform-As-A-Service. We generate PaaS revenues pursuant to arrangements with brand and media partners, retail venues, game publishers and broadcasters that allow our partners to hold amateur esports experiences, and or capture specifically curated gameplay content that is customized for our partners’ distribution channels, leveraging the flexibility of, and powered by our Super League gaming and content technology platform. PaaS revenue for the three months ended September 30, 2019 included revenues from Capcom, Inc. related to our Street Fighter® V: Arcade Edition partnership, from Sony related to certain build competitions and related experiences, from Sprint related to our Sprint 5G LA activation, and from our Cox Paladins gameplay experience held during the period.
 
Advertising and Content Sales. Revenues for the 2019 period presented included revenues from campaigns launched related to our Framerate acquisition and advertising revenues from our Minehut digital property. We expect to continue to expand our revenue generation from the sale of our proprietary and third-party content derived from our technology platform in future periods.
 
Direct to Consumer. The decrease in direct to consumer revenue was primarily due to a decrease in the number of paid experiences offered during the three months ended September 30, 2019 compared to the prior year quarter. In the third quarter of 2019, we offered a combination of paid experiences and experiences that were free to play, consistent with our strategic focus on increasing the volume of new gamers and spectators introduced into our customer funnel, to increase the number of registered users on our platform, drive consumer conversion, and increase the overall awareness of the Super League brand and technology platform offerings. We intend to continue to offer a combination of paid and free to play experiences going forward. Digital subscription revenues included in direct to consumer revenues for the three months ended September 30, 2019 were primarily comprised of subscription revenues related to our Minehut digital property acquired in June 2018, which provides various Minecraft server hosting services on a subscription basis to the Minecraft gaming community.
  
Cost of Revenue
 
 
 
Three Months Ended
September 30,
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Cost of revenue
 $192,000 
 $70,000 
 $122,000 
  174%
 
Cost of revenue for the three months ended September 30, 2019 increased $122,000, or 174%, compared to the three months ended September 30, 2018, relatively consistent with the 129% increase in related revenues for the same periods.
 
Operating Expenses
  
 
 
Three Months Ended
September 30,
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Selling, marketing and advertising
 $215,000 
 $327,000 
 $(112,000)
  (34)%
Technology platform development
  638,000 
  567,000 
  71,000 
  13%
General and administrative expense
  3,730,000 
  2,747,000 
  983,000 
  36%
Total operating expenses
 $4,583,000 
 $3,641,000 
 $942,000 
  26%
 
Selling, Marketing and Advertising. The decrease in selling, marketing and advertising expenses was primarily due to a decrease in amortization of noncash in-kind advertising costs, totaling $186,000, which were initially capitalized pursuant to a June 2017 third-party investment agreement. The investment agreement included in-kind advertising for use in future periods, valued at $1.0 million, as a component of the consideration paid to us in exchange for equity in the Company. The prepaid advertising cost was amortized over an 18-month period ending as of December 31, 2018. The decrease was partially offset by an increase in costs related to contract labor, event operations and other costs to execute various marketing and promotional in-person experiences during the 2019 period focused on widening our customer funnel and attracting increased numbers of registered users to our platform.
 
 
 
-25-
 
Technology Platform Development. Technology platform development costs include (i) allocated personnel costs, including salaries, taxes and benefits related to our internal software developers and engineers, employed by Super League, engaged in the operation, maintenance, management, administration, testing, development and enhancement of our proprietary gaming and content technology platform, and (ii) the amortization of capitalized internal use software costs primarily comprised of capitalized costs for internal and third-party contract software development and engineering resources engaged in developing, upgrading and enhancing our proprietary gaming and content technology platform. Capitalized internal use software development costs are amortized on a straight-line basis over the software’s estimated useful life.
 
The period over period increase primarily reflects an increase in engineering headcount since the end of the prior year in connection with the expansion of our engineering and internal use software development activities. The increase was partially offset by $211,000 of engineering department payroll and payroll related internal use software development costs capitalized during the three months ended September 30, 2019 for internal software development and engineering resources engaged in developing, upgrading and enhancing our proprietary gaming and content technology platform.
 
General and Administrative. General and administrative expense for the periods presented was comprised of the following:
 
 
 
Three Months Ended
September 30,
 
 
 
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Personnel costs
 $1,451,000 
 $1,099,000 
  352,000 
  32%
Office and facilities
  98,000 
  100,000 
  (2,000)
  (2)%
Professional fees
  208,000 
  182,000 
  26,000 
  14%
Stock-based compensation
  737,000 
  764,000 
  (27,000)
  (4)%
Depreciation and amortization
  58,000 
  190,000 
  (132,000)
  (69)%
Other
  1,178,000 
  412,000 
  766,000 
  186%
Total general and administrative expense
 $3,730,000 
 $2,747,000 
 $983,000 
  36%
 
A summary of the main drivers of the net increase in general and administrative expenses for the periods presented is as follows:
 
Increase in personnel costs due primarily to a 16% increase in average headcount (including engineering personnel described under “ Technology Platform Development” above) since the end of the prior year comparable quarter in connection with the continued expansion of our operations, requiring additional internal resources across our engineering, product, operations, and commercial departments. During each of the three months ended September 30, 2019 and 2018, we had average full-time equivalent employees of 53 and 45, respectively.
 
Increase in general and administrative expenses primarily due to a significant increase in directors and officer's insurance premiums in connection with our February 2019 IPO, an increase in other administrative public company costs, and an increase in variable costs associated with our cloud-based technology platform.
 
Other Income (expense)
 
Other income (expense), net, was primarily comprised of interest expense related to convertible notes outstanding during the prior period presented as follows:
 
 
 
Three Months Ended
September 30,
 
 
 
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Accretion of discount on convertible notes
 $- 
 $1,124,000 
  (1,124,000)
  (100%)
Accrued interest expense on convertible notes
  - 
  212,000 
  (212,000)
  (100%)
Accretion of convertible note issuance costs
  - 
  115,000 
  (115,000)
  (100%)
Total interest expense
 $- 
 $1,451,000 
 $(1,451,000)
  (100%)
 
 
 
-26-
 
Interest Expense. Interest expense for the prior period primarily relates to the issuance of 9.00% secured convertible promissory notes, commencing in February 2018 through August 2018, as described below under Liquidity and Capital Resources. Principal and interest as of February 27, 2019, the closing date of the IPO and December 31, 2018 totaled $13,793,000 and $13,606,000, respectively. Concurrent with the closing of the IPO on February 27, 2019, in accordance with the related agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35. As of and subsequent to February 27, 2019, there was no debt outstanding.
 
For the Nine Months Ended September 30, 2019 and 2018
 
Revenue
 
 
 
Nine Months Ended
September 30,
 
 
 
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Brand and Media Sponsorships
 $345,000 
 $421,000 
 $(76,000)
  (18)%)
Platform-as-a-service
  434,000 
  55,000 
  379,000 
  +%300 
Advertising and content sales
  19,000 
  70,000 
  (51,000)
  (73)%
Direct to Consumer
  24,000 
  94,000 
  (70,000)
  (74)%
 
 $822,000 
 $640,000 
 $182,000 
  28%
 
Revenue for the nine months ended September 30, 2019 increased $182,000, or 28%, compared to the nine months ended September 30, 2018. The change in revenues for the periods presented was comprised of the following:
 
Brand and Media Sponsorships. Period over period changes in brand and media sponsorship revenue are attributable to fluctuations in brand and media sponsorship activities period to period, which is based on the specific partnership arrangements with activities during a particular period, the related performance obligations satisfied during the period and the contractual consideration associated with the activities during the period. Brand and media sponsorship revenues for the nine months ended September 30, 2019 included revenues for our Red Bull North America, Inc. (“Red Bull”) brand partnership, Red Bull Allstars experience in April 2019, Logitech G Challenge and Play/Train/Win online tournaments, Sony related build competitions and related experiences and our Red Games Lego Brawls live stream sponsorship activation. Brand and media sponsorship revenues for the nine months ended September 30, 2018 was primarily comprised of revenues from our Logitech, Inc. and Red Bull brand sponsorships and our 2018 Red Bull Allstars experience.
 
Platform-As-A-Service. We generate PaaS revenues pursuant to arrangements with brand and media partners, retail venues, game publishers and broadcasters that allow our partners to hold amateur esports experiences, and or capture specifically curated gameplay content that is customized for our partners’ distribution channels, leveraging the flexibility of, and powered by our Super League gaming and content technology platform. PaaS revenue for the nine months ended September 30, 2019 included revenues from our Samsung Fortnite event held in New York in March 2019, Capcom, Inc. related to our Street Fighter® V: Arcade Edition partnership, Sony related to certain build competitions and related experiences, Sprint related to our Sprint 5G LA activation, and Cox Paladins gameplay experience held during the period.
 
Advertising and Content Sales. Revenues for the 2019 period presented included revenues from campaigns launched related to our Framerate acquisition and advertising revenues from our Minehut digital property. Revenues for the 2018 period presented included revenues from the sale of gameplay and other content generated by us to Nickelodeon (third-party broadcaster) to supplement their YouTube channel programming. We expect to continue to expand our revenue generation from the sale of our proprietary and third-party content derived from our technology platform in future periods.
 
Direct to Consumer. The decrease in direct to consumer revenue was primarily due to a decrease in the number of paid events held during the nine months ended September 30, 2019 as compared to the prior year period. During the nine months ended September 30, 2019, we held paid events and events that were free to play, consistent with our strategic focus on increasing the volume of new gamers and spectators introduced into our customer funnel, to increase the number of registered users on our platform, drive consumer conversion, and increase the overall awareness of the Super League brand and technology platform offerings. We intend to continue to offer a combination of paid and free to play experiences going forward. Digital subscription revenues included in direct to consumer revenues for the nine months ended September 30, 2019 were comprised of subscription revenues related to our Minehut digital property acquired in June 2018, which provides various Minecraft server hosting services on a subscription basis to the Minecraft gaming community.
  
 
 
-27-
 
Cost of Revenue
 
 
 
Nine Months Ended
September 30,
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Cost of revenue
 $379,000 
 $375,000 
 $4,000 
  1%
 
Cost of revenue for the nine months ended September 30, 2019 was relatively consistent, compared to the nine months ended September 30, 2018, as compared to a 28% increase in revenues for the same periods. The trend in cost of sales over the year to date periods presented was primarily due to operational efficiencies and lower direct costs incurred for the nine months ended September 30, 2019 in connection with our physical and digital experiences.
 
Operating Expenses
 
 
 
Nine Months Ended
September 30,
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Selling, Marketing and Advertising
 $687,000 
 $996,000 
 $(309,000)
  (31)%
Technology Platform Development
  2,030,000 
  1,682,000 
  348,000 
  21%
General and Administrative
  13,792,000 
  8,884,000 
  4,908,000 
  55%
Total operating expenses
 $16,509,000 
 $11,562,000 
 $4,947,000 
  43%
 
Selling, Marketing and Advertising. The decrease in selling, marketing and advertising expenses was primarily due to the decrease in amortization of noncash in-kind advertising costs, totaling $481,000, which were initially capitalized pursuant to a June 2017 third-party investment agreement. The investment agreement included in-kind advertising for use in future periods, valued at $1.0 million, as a component of the consideration paid to us in exchange for equity in the Company. The prepaid advertising cost was amortized over an 18-month period ending as of December 31, 2018. The decrease was partially offset by an increase in marketing expense due to an increase in marketing and promotional experiences during the nine months ended September 30, 2019 focused on widening our customer funnel and attracting increased numbers of registered users to our platform as described above. The increase included increased costs related to contract labor, influencers, event operations, content capture and other costs to execute various marketing and promotional experiences during the period.
  
Technology Platform Development. Technology platform development costs include (i) allocated personnel costs, including salaries, taxes and benefits related to our internal software developers and engineers, employed by Super League, engaged in the operation, maintenance, management, administration, testing, development and enhancement of our proprietary gaming and content technology platform, and (ii) the amortization of capitalized internal use software costs primarily comprised of capitalized costs for internal and third-party contract software development and engineering resources engaged in developing, upgrading and enhancing our proprietary gaming and content technology platform. Capitalized internal use software development costs are amortized on a straight-line basis over the software’s estimated useful life.
 
The period over period increase primarily reflects an increase in engineering headcount since the end of the prior year in connection with the expansion of our engineering and internal use software development activities. The increase was partially offset by $211,000 of engineering department payroll and payroll related internal use software development costs capitalized during the three months ended September 30, 2019 for internal software development and engineering resources engaged in developing, upgrading and enhancing our proprietary gaming and content technology platform.
 
 
 
-28-
 
General and Administrative. General and administrative expense for the periods presented was comprised of the following:
 
 
 
Nine Months Ended
September 30,
 
 
 
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Personnel costs
 $4,346,000 
 $3,686,000 
 $660,000 
  18%
Office and facilities
  303,000 
  269,000 
  34,000 
  13%
Professional fees
  599,000 
  677,000 
  (78,000)
  (12)%
Stock-based compensation
  5,266,000 
  2,452,000 
  2,814,000 
  115%
Depreciation and amortization
  371,000 
  610,000 
  (239,000)
  (39)%
Other
  2,907,000 
  1,190,000 
  1,717,000 
  144%
Total general and administrative expense
 $13,792,000 
 $8,884,000 
 $4,908,000 
  55%
 
A summary of the main drivers of the net increase in general and administrative expenses for the periods presented is as follows:
 
Personnel costs for the nine months ended September 30, 2019 included approximately $405,000 of management performance-based bonuses paid in connection with the achievement of certain performance targets during the 2019 period, including the closing of the IPO and other operational performance targets. The increase in personnel costs also reflects a 16% increase in average headcount (including engineering personnel described under “Technology Platform Development” above) compared to the prior year period in connection with the continued expansion of our operations requiring additional internal resources across our engineering, product, operations, and commercial departments. During the nine months ended September 30, 2019 and September 30, 2018, we had average full-time equivalent employees of 51 and 44, respectively.
 
Increase in office and facilities expense due to the increase in leased office space commencing in June 2018 in connection with the expansion of our SuperLeagueTV studio operations.
 
Increase in noncash stock compensation expense primarily due to certain performance options and warrants previously granted to two of our executives, which vested upon the achievement of certain performance targets, pursuant to October 2018 amended employee agreements and vesting conditions in the underlying equity grant agreements. Performance targets included the completion of our IPO in February 2019 and other operational performance targets. During the nine months ended September 30, 2019, 300,000 of performance-based stock options and warrants vested with a weighted-average grant date fair value of $8.50, resulting in noncash stock compensation expense of $2,549,000 during the nine months ended September 30, 2019. The remaining increase reflects compensation expense related to equity based on awards granted in connection with the increase in head count described above.
 
Increase in other general and administrative expenses primarily due to a significant increase in directors and officer's insurance premiums in connection with our February 2019 IPO, an increase in other administrative public company costs, and an increase in variable costs associated with our cloud-based technology platform.
 
 
 
-29-
 
Other Income (expense)
 
Other income (expense), net, was primarily comprised of interest expense related to the convertible notes outstanding during the periods presented as follows:
 
 
 
Nine Months Ended
September 30,
 
 
 
 
 
 
 
 
 
2019
 
 
2018
 
 
 $ Change
 
 
% Change
 
Accretion of discount on convertible notes
 $2,475,000 
 $1,394,000 
  1,081,000 
  78%
Accrued interest expense on convertible notes
  187,000 
  311,000 
  (124,000)
  (40)%
Accretion of convertible note issuance costs
  209,000 
  143,000 
  66,000 
  46%
Beneficial conversion feature
  7,067,000 
  - 
  7,067,000 
  100%
Total interest expense
 $9,938,000 
 $1,848,000 
 $8,090,000 
 
>300 %
 
 
Interest Expense. Interest expense for the periods presented primarily relates to the issuance of 9.00% secured convertible promissory notes, commencing in February 2018 through August 2018, as described below under Liquidity and Capital Resources. Principal and interest as of February 27, 2019, the closing date of the IPO and December 31, 2018 totaled $13,793,000 and $13,606,000, respectively. Concurrent with the closing of the IPO on February 27, 2019, in accordance with the related agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35. As of and subsequent to February 27, 2019, there was no debt outstanding. As a result of the automatic conversion of the 2018 Notes (defined below) and the application of conversion accounting, the Company recorded an immediate charge to interest expense of $1,384,000, representing the write-off of the unamortized balance of debt discounts associated with the 2018 warrants and cash commissions and warrants issued to third parties. Unamortized debt discounts at September 30, 2019 and December 31, 2018 totaled $0 and $2,684,000, respectively.
 
The non-detachable conversion feature embedded in the 2018 Notes provides for a conversion rate that was below market value at the commitment date, and therefore, represented a beneficial conversion feature (“BCF”). The BCF is generally recognized separately at issuance by allocating a portion of the debt proceeds equal to the intrinsic value of the BCF to additional paid-in capital. The resulting convertible debt discount is recognized as interest expense using the effective yield method. However, the conversion feature associated with the 2018 Notes was not exercisable until the consummation of an initial public offering by the Company of its common stock, and therefore, was not required to be recognized in earnings until the IPO related contingency was resolved, which occurred on the IPO Closing Date. The commitment date is the IPO Closing Date and the commitment date stock price was $11.00 per share. The intrinsic value of the BCF on the IPO Closing Date, which was limited to the net proceeds allocated to the debt on a relative fair value basis, was approximately $7,067,000, and was reflected as additional interest expense in the condensed statement of operations for the nine months ended September 30, 2019.
 
Liquidity and Capital Resources
 
General
 
Cash totaled $12.6 million and $2.8 million at September 30, 2019 and December 31, 2018, respectively.
 
We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2019 and December 31, 2018, we had working capital of approximately $12.5 million and ($8.0) million, respectively, and sustained cumulative losses since inception attributable to common stockholders of approximately $81.1 million. Total noncash charges included in accumulated deficit since inception, primarily related to noncash stock compensation, restricted stock units issued in connection with a license agreement, amortization of the discount on the 2018 Notes (defined below) and in-kind advertising expense, totaled approximately $32.9 million. On February 27, 2019, we completed our IPO, pursuant to which we issued and sold an aggregate of 2,272,727 shares of our common stock at a public offering price of $11.00 per share pursuant to a registration statement on Form S-1, declared effective by the Securities and Exchange Commission on February 25, 2019 (File No. 333-229144). We raised net proceeds of approximately $22,458,000 after underwriting discounts, commissions and other offering costs of $2,542,000. During Fiscal 2018, the Company issued 9.00% secured convertible promissory notes, as described below, in an aggregate principal amount of approximately $13,000,000. Concurrent with the closing of the IPO on February 27, 2019, in accordance with the related agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding was automatically converted into shares of the Company’s common stock as described below. Approximately 1.3 million of the warrants issued in conjunction with the 2018 Notes are callable at the election of the Company at any time following the completion of our IPO.
 
 
 
-30-
 
To date, our principal sources of capital used to fund our operations have been the net proceeds we received from sales of equity securities and proceeds received from the issuance of convertible debt, as described herein. We have and will continue to use significant capital for the growth and development of our business. Our management team expects operating losses to continue in the near term in connection with the pursuit of our strategic objectives. As such, we believe our current cash position, absent receipt of additional capital either from operations or that may be available from future issuance(s) of common stock or debt financings, is not sufficient to fund our planned operations for the twelve months following the date of this Report. We believe these conditions raise substantial doubt about our ability to continue as a going concern. In addition, we may encounter unforeseen difficulties that may deplete our capital resources more rapidly than anticipated, including those set forth under the heading “Risk Factors” included in Item II, Part 1A of this Report.
 
We are focused on expanding our service offering through internal development, collaborations, and through strategic acquisitions. We are continually evaluating potential asset acquisitions and business combinations. To finance such acquisitions, we may find it necessary to raise additional equity capital, incur additional 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 September 30, 2019 and 2018
 
The following table summarizes the change in cash balances for the periods presented:
 
 
 
Nine Months Ended
September 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Net cash used in operating activities
 $(10,142,000)
 $(7,880,000)
Net cash used in investing activities
  (2,524,000)
  (449,000)
Net cash provided by financing activities
  22,478,000 
  12,611,000 
Increase (decrease) in cash
  9,812,000 
  4,282,000 
Cash at beginning of period
  2,774,000 
  1,709,000 
Cash at end of period
 $12,586,000 
 $5,991,000 
 
Cash Flows from Operating Activities. Net cash used in operating activities during the nine months ended September 30, 2019 was $10,142,000, which primarily reflected our net GAAP loss of $25,991,000, net of adjustments to reconcile net GAAP loss to net cash used in operating activities of $15,849,000, which included $5,266,000 of noncash stock compensation charges, $2,871,000 of noncash accrued interest and accretion of debt discount, $7,067,0000 of noncash interest expense related to the recognition of the beneficial conversion feature upon the automatic conversion of the 2018 Notes upon close of the IPO, and depreciation and amortization of $657,000. Changes in working capital primarily reflected the impact of the prepayment of increased directors and officer’s insurance premiums in connection with the consummation of our IPO and the settlement of payables in the ordinary course. Net cash used in operating activities during the nine months ended September 30, 2018 was $7,880,000, which primarily reflected our net loss of $13,143,000, net of adjustments to reconcile net loss to net cash used in operating activities of $5,263,000, which included $2,451,000 of non-cash stock compensation, noncash amortization of prepaid in-kind advertising totaling $481,000 and $791,000 of non-cash depreciation and amortization charges. Changes in working capital primarily reflected increases in receivables and the settlement of payables in the ordinary course of business during the period.
 
 
 
-31-
 
Cash Flows from Investing Activities. Cash flows from investing activities were comprised of the following for the periods presented:
 
 
 
Nine Months Ended
September 30,
 
 
 
2019
 
 
2018
 
 
 
    
 
Cash paid for acquisition of Framerate
 $(1,491,000)
 $- 
Purchase of property and equipment
  (56,000)
  (190,000)
Capitalization of software development costs
  (839,000)
  (192,000)
Acquisition of other intangible and other assets
  (138,000)
  (67,000)
Net cash used in investing activities
 $(2,524,000)
 $(449,000)
 
Acquisition of Framerate. On June 3, 2019, the Company and Merger Sub, entered into the Merger Agreement with Framerate, pursuant to which Framerate merged with and into Merger Sub, with Merger Sub continuing as the surviving corporation. The Acquisition was consummated on the Effective Date when the certificate of merger of Merger Sub and Framerate was filed with the Secretary of State of the State of Delaware. As consideration for the Acquisition, we ratably paid and/or issued to the former shareholders of Framerate an aggregate of $1.5 million in cash and $1.0 million worth of shares of our common stock, at a price per share of $7.4395, which price was equal to the volume weighted average price of our common stock over the five trading days preceding the date of the Merger Agreement, as reported on the Nasdaq Capital Market.
 
In addition to the issuance of the Closing Shares, the Merger Agreement provides for the issuance of up to an additional $980,000 worth of shares of our common stock at the same price per share as the Closing Shares in the event Framerate achieves certain performance-based milestones during the two-year period following the closing of the Acquisition, or June 6, 2021. One-half of the Earn-Out Shares will be issuable on the one-year anniversary of the Effective Date, and the remaining one-half will be issuable on the second anniversary of the Effective Date.
 
The Acquisition was approved by the board of directors of each of Super League Gaming, Inc. and Framerate, and was approved by the stockholders of Framerate.
 
Cash Flows from Financing Activities. Cash flows from financing activities were comprised of the following for the periods presented:
 
 
 
Nine Months Ended
September 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock, net of issuance costs
 $22,458,000 
 $- 
Proceeds from convertible notes payable, net of issuance cost
  - 
  12,611,000 
Proceeds from common stock purchase warrant exercises
  20,000 
  - 
Net cash provided by financing activities
 $22,478,000 
 $12,611,000 
 
Initial Public Offering. On February 27, 2019, we completed our IPO, pursuant to which we issued and sold an aggregate of 2,272,727 shares of our common stock at a public offering price of $11.00 per share. We raised net proceeds of approximately $22,458,000 after deducting underwriting discounts, commissions and other offering costs of $2,542,00. We currently intend to use the net proceeds received from the offering for working capital and general corporate purposes, including sales and marketing activities, product development and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that may compliment or business and or accelerate or growth. The amounts and timing of our actual expenditure, including expenditure related to sales and marketing and product development will depend on numerous factors, including the status of our product development efforts, our sales and marketing activities, expansion internationally, the amount of cash generated or used by our operations, competitive pressures and other factors described under “Risk Factors” in our Prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on February 27, 2019, as well as Item II, Part 1A of this Report. Our management has broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the net proceeds from the IPO.
 
 
 
-32-
 
Concurrent with the closing of the IPO on February 27, 2019, in accordance with the related agreements, all outstanding principal and interest for the 9.00% convertible notes outstanding, totaling $13,793,000, was automatically converted into 1,475,164 shares of the Company’s common stock at a conversion price of $9.35. As of September 30, 2019, there is no debt outstanding.
 
Pursuant to the related underwriting agreement, in connection with the completion of the IPO, for the purchase price of $50.00, we issued a warrant to purchase shares of our common stock equal to 3.0% of the shares sold in the IPO, or 68,182 shares, at an exercise price of $11.00 per share (the “Underwriters’ Warrants”). The Underwriters’ Warrants are exercisable during the period commencing from the date of the close of the IPO and ending five years from the closing date of the IPO. The Underwriters’ Warrants represent additional noncash offering costs, with an estimated grant date fair value of $547,000, which was reflected in additional-paid-in capital when issued and as a corresponding offering cost in the condensed statement of shareholders equity for the nine months ended September 30, 2019.
 
Convertible Debt Issuances. In February and April 2018, we issued 9.00% secured convertible promissory notes with a collective face value of $3,000,000 (the “Initial 2018 Notes”). The Initial 2018 Notes (i) accrued simple interest at the rate of 9.00% per annum, (ii) matured on the earlier of December 31, 2018 or the close of a $15,000,000 equity financing (“Qualifying Equity Financing”) by us, and (iii) all outstanding principal and accrued interest was automatically convertible into equity or equity-linked securities sold in a Qualifying Equity Financing based upon a conversion rate equal to (x) a 10% discount to the price per share of a Qualifying Equity Financing, with (y) a floor of $10.80 per share. In addition, the holders of the Initial 2018 Notes were collectively issued warrants to purchase approximately 55,559 shares of common stock, at an exercise price of $10.80 per share and a term of five years (the “Initial 2018 Warrants”).
 
In May through August 2018, we issued additional 9.00% secured convertible promissory notes with a collective face value of $10,000,000 (the “Additional 2018 Notes”). In May 2018, all of the Initial 2018 Notes and related accrued interest, totaling $3,056,182, were converted into the Additional 2018 Notes, resulting in an aggregate principal amount of $13,056,182 (hereinafter collectively, the “2018 Notes”). The holders of the converted Initial 2018 Notes retained their respective Initial 2018 Warrants
 
The 2018 Notes (i) accrued simple interest at the rate of 9.00% per annum, (ii) matured on the earlier of the closing of an IPO of our common stock on a national securities exchange or April 30, 2019, and (iii) all outstanding principal and accrued interest was automatically convertible into shares of common stock upon the closing of an IPO at the lesser of (x) $10.80 per share or (y) a 15% discount to the price per share of the IPO. In addition, the holders of the 2018 Notes were collectively issued 1,396,383 warrants to purchase common stock equal to 100% of the aggregate principal amount of the 2018 Notes divided by $9.35 per share (the “2018 Warrants”). The number of 2018 Warrants ultimately issued is subject to adjustment upon the closing of an IPO and will be determined by dividing 100% of the face value of the 2018 Notes by the lesser of (x) $10.80 per share or (y) a 15% discount to the price per share of the IPO. The 2018 Warrants are exercisable for a term of five years, commencing on the close of an IPO, at an exercise price equal to the lesser of (x) $10.80 per share or (y) a 15% discount to the IPO price per share and are callable at our election at any time following the closing of an IPO.
 
Refer to Note 6 to the accompany condensed financial statements elsewhere in this Report for additional information.
 
Contractual Obligations
 
As of September 30, 2019, except as described below, 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. The operating lease for our corporate headquarters expired on May 31, 2017 and was subsequently amended to operate on a month-to-month basis.
 
In consideration for the rights granted by ggCircuit to Super League in connection with the Expanded Agreement described above, including the right to commercially exploit Super League Prime and to feature the “Super League Gaming” brand on the applicable ggCircuit customer platform, Super League will pay an upfront fee of $340,000 and quarterly fees over the term of the Expanded Agreement ranging from $0 to $150,000, based on contractual revenue levels.
 
 
 
 
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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 financial statements included elsewhere in this prospectus. 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.
 
Recent Accounting Pronouncements
 
Refer to Note 2 to the accompany condensed financial statements contained elsewhere in this Report.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
In the ordinary course of our business, we are not currently exposed to market risk of the sort that may arise from changes in interest rates or foreign currency exchange rates, or that may otherwise arise from transactions in derivatives.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our CEO and our CFO each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
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PART II
 
OTHER INFORMATION
 
ITEM  1.     LEGAL PROCEEDINGS
 
None.
 
ITEM  1A.   RISK FACTORS
 
 
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Quarterly Report on Form 10-Q, including our financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, operating results, and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
 
Risks Related to Our Business and Industry
 
We have incurred significant losses since our inception, and we may continue to experience losses in the future.
 
We incurred net losses of $26.0 million and $20.6 million during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.  Noncash expenses (excluding depreciation and amortization of fixed and intangible assets) totaled $15.2 million and $8.9 million for the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $81.1 million. Moreover, the report of our independent registered public accounting firm to the financial statements for our fiscal year ended December 31, 2018, included Prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on February 27, 2019, contains an explanatory paragraph stating that our recurring losses from operations, accumulated deficit and cash used in operating activities raise substantial doubt about our ability to continue as a going concern. We cannot predict if we will achieve profitability soon or at all. We expect to continue to expend substantial financial and other resources on, among other things:
 
investments to expand and enhance our esports technology platform and technology infrastructure, make improvements to the scalability, availability and security of our platform, and develop new offerings;
 
sales and marketing, including expanding our customer acquisition and sales organization and marketing programs, and expanding our programs directed at increasing our brand awareness among current and new customers;
 
investments in bandwidth to support our video streaming functionality;
 
contract labor costs and other expenses to host our leagues and tournaments;
 
costs to retain and attract gamers and license first tier game titles, grow our online gamer community and generally expand our business operations;
 
hiring additional employees;
 
expansion of our operations and infrastructure, both domestically and internationally; and
 
general administration, including legal, accounting and other expenses related to being a public company.
 
 
 
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We may not generate sufficient revenue to offset such costs to achieve or sustain profitability in the future. We expect to continue to invest heavily in our operations, our online and in person experiences, business development related to game publishers, advertisers, sponsors and gamer acquisition, to accelerate as well as maintain our current market position, support anticipated future growth and to meet our expanded reporting and compliance obligations as a public company.
 
We expect operating losses to continue in the near term in order to carry out our strategic objectives. We consider historical operating results, capital resources and financial position, in combination with current projections and estimates, as part of our plan to fund operations over a reasonable period of time.
  
We believe our current cash position, absent receipt of additional capital either from operations or that may be available from future issuance(s) of common stock or debt financings, is not sufficient to fund our planned operations for the twelve months following the date of this Report. We intend to continue implementing our business strategy with the expectation that there will be no material adverse developments in our business, liquidity or capital requirements. If one or more of these factors do not occur as expected, it could have a material adverse impact on our activities, including (i) reduction or delay of our business activities, (ii) forced sales of material assets, (iii) defaults on our obligations, or (iv) insolvency. Our planned investments may not result in increased revenue or growth of our business. We cannot assure you that we will be able to generate revenue sufficient to offset our expected cost increases and planned investments in our business and platform. As a result, we may incur significant losses for the foreseeable future, and may not be able to achieve and/or sustain profitability. If we fail to achieve and sustain profitability, then we may not be able to achieve our business plan, fund our business or continue as a going concern. The financial statements included in this Quarterly Report on Form 10-Q do not contain any adjustments which might be necessary if we were unable to continue as a going concern.
 
We are a relatively young company, and we may not be able to sustain our rapid growth, effectively manage our anticipated future growth or implement our business strategies.
 
We have a limited operating history. Although we have experienced significant growth since our gaming platform for amateur online and in person gaming experiences was launched, and we established our amateur city leagues, tournaments and competitions, our historical growth rate may not be indicative of our future performance due to our limited operating history and the rapid evolution of our business model, including a focus on direct to consumer-based gaming. We may not be able to achieve similar results or accelerate growth at the same rate as we have historically. As our amateur city leagues, tournaments and competitions continue to develop, we may adjust our strategy and business model to adapt. These adjustments may not achieve expected results and may have a material and adverse impact on our financial condition and results of operations.
 
In addition, our rapid growth and expansion have placed, and continue to place, significant strain on our management and resources. This level of significant growth may not be sustainable or achievable at all in the future. We believe that our continued growth will depend on many factors, including our ability to develop new sources of revenues, diversify monetization methods including our direct to consumer offerings, attract and retain competitive gamers, increase engagement, continue developing innovative technologies, tournaments and competitions in response to shifting demand in esports and online gaming, increase brand awareness, and expand into new markets. We cannot assure you that we will achieve any of the above, and our failure to do so may materially and adversely affect our business and results of operations.
 
We are subject to risks associated with operating in a rapidly developing industry and a relatively new market.
 
Many elements of our business are unique, evolving and relatively unproven. Our business and prospects depend on the continuing development of live streaming of competitive esports gaming. The market for esports and amateur online gaming competition is relatively new and rapidly developing and are subject to significant challenges. Our business relies upon our ability to cultivate and grow an active gamer community, and our ability to successfully monetize such community through tournament fees, digital subscriptions for our esports gaming services, and advertising and sponsorship opportunities. In addition, our continued growth depends, in part, on our ability to respond to constant changes in the esports gaming industry, including rapid technological evolution, continued shifts in gamer trends and demands, frequent introductions of new games and titles and the constant emergence of new industry standards and practices. Developing and integrating new games, titles, content, products, services or infrastructure could be expensive and time-consuming, and these efforts may not yield the benefits we expect to achieve at all. We cannot assure you that we will succeed in any of these aspects or that the esports gaming industry will continue to grow as rapidly as it has in the past.
 
 
 
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We generate a portion of our revenues from advertising and sponsorship. If we fail to attract more advertisers and sponsors to our gaming platform or tournaments or competitions, or if advertisers or sponsors are less willing to advertise with or sponsor us, our revenues may be adversely affected.
 
We generate a growing portion of our revenues from advertising and sponsorship, which we expect to further develop and expand in the near future as online viewership of our esports gaming offerings expand. Our revenues from advertising and sponsorship partly depend on the continual development of the online advertising industry and advertisers’ willingness to allocate budgets to online advertising in the esports gaming industry. In addition, companies that decide to advertise or promote online may utilize more established methods or channels, such as more established internet portals or search engines, over advertising on our gaming platform. If the online advertising and sponsorship market does not continue to grow, or if we are unable to capture and retain a sufficient share of that market, our ability to increase our current level of advertising and sponsorship revenue and our profitability and prospects may be materially and adversely affected.
 
Furthermore, our core and long-term priority of optimizing the gamer experience and satisfaction may limit our gaming platform’s ability to generate revenues from advertising and sponsorship. For example, in order to provide our gamers with an uninterrupted competitive gaming experience, we do not place significant amounts of advertising on our streaming interface or insert pop-up advertisements during streaming. While this decision could adversely affect our operating results in the short-term, we believe it enables us to provide a superior gamer experience on our gaming platform, which will help us expand and maintain our current base of gamers and enhance our monetization potential in the long-term. However, this philosophy of putting our gamers first may also negatively impact our relationships with advertisers, sponsors or other third parties, and may not result in the long-term benefits that we expect, in which case the success of our business and operating results could be harmed.
 
Our revenue model may not remain effective and we cannot guarantee that our future monetization strategies will be successfully implemented or generate sustainable revenues and profit.
 
We generate revenues from advertising and sponsorship of our league tournaments, and through the operation of our live streaming gaming platform using a revenue model whereby gamers can get free access to certain live streaming of amateur tournaments, and gamers pay fees to compete in league competition. We have generated, and expect to continue to generate, a substantial portion of revenues using this revenue model in the near term. We are, however, particularly focused on implementing a direct to consumer model for our expanding gamer base. Although our business has experienced significant growth in recent years, there is no guarantee that our direct to consumer packages will gain significant traction to maximize our growth rate in the future, as the demand for our offerings may change, decrease substantially or dissipate, or we may fail to anticipate and serve gamer demands effectively.
 
The loss of or a substantial reduction in activity by one or more of our largest customers and/or vendors could materially and adversely affect our business, financial condition and results of operations.
 
During the nine months ended September 30, 2019 and the year ended December 31, 2018, (i) five customers accounted for 90% of our revenue and four customers accounted for 82%, respectively, (ii) four customers accounted for 87% and three customers accounted for 96% of accounts receivable, respectively, and (iii) one vendor accounted for 46% and three vendors accounted for 43% of accounts payable, respectively. The loss of or a substantial reduction in activity by one or more of our largest customers could materially and adversely affect our business, financial condition and results of operations.
 
Our marketing and advertising efforts may fail to resonate with amateur gamers.
 
Our amateur city league tournaments and competitions are marketed through a diverse spectrum of advertising and promotional programs such as online and mobile advertising, marketing through websites, event sponsorship and direct communications with our gaming community including via email, blogs and other electronic means. An increasing portion of our marketing activity is taking place on social media platforms that are either outside, or not totally within, our direct control. Changes to gamer preferences, marketing regulations, privacy and data protection laws, technology changes or service disruptions may negatively impact our ability to reach target gamers. Our ability to market our amateur city league tournaments and competitions is dependent in part upon the success of these programs. If the marketing for our amateur city league tournaments and competitions fails to resonate and expand with the gamer community, or if advertising rates or other media placement costs increase, our business and operating results could be harmed.
 
 
 
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We have a unique community culture that is vital to our success. Our operations may be materially and adversely affected if we fail to maintain this community culture as we expand in our addressable gamer communities.
 
We have cultivated an interactive and vibrant online social gamer community centered around amateur online and in person gaming. We ensure a superior gamer experience by continuously improving the user interface and features of our gaming platform along with offering a multitude of competitive and recreational gaming experiences with first tier esports games. We believe that maintaining and promoting a vibrant community culture is critical to retaining and expanding our gamer community. We have taken multiple initiatives to preserve our community culture and values. Despite our efforts, we may be unable to maintain our community culture and cease to be the preferred platform for our target gamers as we expand our gamer footprint, which would be detrimental to our business operations.
 
The amateur esports gaming industry is intensely competitive. Gamers may prefer our competitors’ amateur leagues, competitions or tournaments over our own.
 
Competition in the amateur esports gaming industry generally is intense. Our competitors range from established leagues and championships owned directly, as well as leagues franchised by, well known and capitalized game publishers and developers, interactive entertainment companies and diversified media companies to