Item 1. Business.
Overview
Super League Gaming is a leading gaming community and content
platform that gives everyday gamers and creators multiple ways to
connect and engage with others while enjoying the video games they
love. Powered by patented, proprietary technology systems, Super
League offers players the ability to create gameplay-driven
experiences they can share with friends, the opportunity to watch
live streaming broadcasts and gameplay highlights across digital
and social channels, and the chance to compete in events and
challenges designed to celebrate victories and achievements across
multiple skill levels. With gameplay and content offerings
featuring more than a dozen of the top video game titles in the
world, Super League is building a broadly inclusive, global brand
at the intersection of gaming, experiences and entertainment.
Whether to access its expanding direct audience of young gamers,
creators and esports players, or to leverage the company’s
remote video production division, Virtualis Studios, third parties
ranging from consumer brands, video game publishers, professional
esports teams, traditional sports organizations, video content
producers, and more, are turning to Super League to provide
integrated solutions that drive business growth.
Super League has a mission to empower passionate players and
creators through proprietary tools to create gaming-centric content
that inspires connectivity and engagement for the greater good of
gaming. We offer brands and advertisers the opportunity to create
meaningful connections with one of the most sought-after audiences
in today’s media landscape – the engaged young gamer.
We generate revenues from (i) advertising, serving as a
marketing channel for brands and advertisers to reach their target
audiences of gamers across our network, (ii) content, curating and
distributing esports and entertainment content for our own network
of digital channels and media and entertainment partner channels,
and (iii) direct to consumer offers
including digital subscriptions, digital goods, gameplay access
fees and merchandise sales.
Our Business
We are a leading gaming community and content platform that gives
everyday players and creators multiple ways to connect and engage
with others while enjoying the video games they love. Our platform
offers competitive video gaming experiences, esports entertainment
and social connections to the large and underserved global audience
of what is estimated by Statista to be approximately three billion
gamers by the end of 2021. Our
focus is the avid, everyday, competitive amateur player and
related audience, representing the middle of the esports player
pyramid, as follows:
The
Esports Player Pyramid
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* Based
on the average esports viewer, Nielsen Esports Playbook,
2017.
As a first-mover in defining the esports category for the everyday
gamer since 2015, we believe Super League is on the leading edge of
the rapidly growing competitive video gaming industry, which has
become an established and vital part of the entertainment
landscape. We believe there is a significant opportunity for the
world of mainstream competitive players who want their own esports
experience. These gamers are players who enjoy the competition, the
social interaction and community, and the entertainment value
associated with playing and watching others play.
Super League is a critically important component in providing the
infrastructure for mainstream competitive video gaming content and
gameplay, that is synergistic and accretive to the greater esports
ecosystem. Over the past five years, we believe we have become the
preeminent brand for gamers, by providing a proprietary software
platform that allows them to create, compete, socialize and
spectate gameplay and entertainment, both physically and digitally
online. In addition, our creator and player platform generates a
significant amount of derivative gameplay content for further
syndication beyond our own digital channels.
The fundamental driver of our business model and monetization
strategy is creating deep community engagement through our highly
personalized experiences that, when coupled with the critical mass
of our large digital audiences, provides the depth and volume for
premium content and offer monetization differentiated from a more
traditional, commoditized advertising model. The combination of our
physical venue network and digital programming channels, with Super
League’s cloud-based, digital products platform technology at
the hub, creates the opportunity for not just a share of the
player’s wallet, but also the advertiser’s wallet. We
do this by offering brand sponsors and advertisers a premium
marketing channel to reach elusive Generation Z and Millennial
gamers and creators and offering players ways to access exclusive
tournaments and programming.
Our
products range from offers that speak to a wide market of
competitive gamers through always on, highly participatory and
social gameplay, as well as offers that ladder to our more
heightened competitions and broadcasts. We work closely with
top-tier game publishers and brands to bring premium esports
entertainment to this under-served market of Generation Z and
Millennial for both the players and the viewers.
Digital Properties and Offerings
We have
created and grown our proprietary audience network, comprised of
our expanding content and creator-centric digital properties.
Collectively, Super League has more than 5.0 million registered
users and followers combined, and generated more than 169.0 million
average video views and impressions per month in fiscal
2020.
Our network and media platform includes social media, live
streaming, video-on-demand and website-based offerings that provide
players and creators with multiple forms of content designed to
celebrate their love of play and to support their limitless
creativity. Whether through gameplay highlights, live streamed
esports competitions, original lifestyle programming or custom
designed digital gameplay environments, Super League’s
audience is constantly creating, watching and engaging, making this
otherwise elusive demographic accessible at scale to ourselves and
our partners. In addition, our digital properties provide a level
of scale that can complement our physical esports events, which
bring players and spectators together across the U.S., both
digitally and physically. Live experiences provide another source
of content to augment our digital content library for what we
believe can be a next generation esports and entertainment content
network.
Our
primary digital properties and offerings include:
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Minehut: Attracting younger gamers and creators, Minehut is
an "always on" social and gaming portal for hundreds of thousands
of avid Minecraft players with on average, approximately 350,000
monthly unique users during 2020. Within Minehut is a vibrant
Minecraft community in which players create their own Minecraft
worlds where friends share, socialize and play together. The
Children’s Online Privacy and
Protection Act of 1998 (“COPPA”) compliant
platform offers a way for parents to secure private spaces for
their children’s gameplay to control who they are playing
with along with offering a unique marketing channel for
age-appropriate content. Equally , Minehut is a platform to allow
budding future creators an opportunity to share their content and
build their own player audiences.
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Framerate: Framerate is one of the fastest growing social
video networks in gaming, with multiple channels on Instagram,
Facebook and Tik Tok, as well as original content series on
InstagramTV and FacebookWatch. Targeting more competitive,
young-adult gamers and creators, Framerate, enables any gamer
playing any game, anywhere to submit their own user-generated
highlight reel for recognition. Once submitted, the content becomes
ours to promote, repackage and monetize across other digital
channels. Combined with our proprietary digital channels, we
generate tens of millions of monthly views providing a marketing
channel for sponsors and advertisers to authentically reach gamers
and creators.
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SLG.TV: Focused on the widest breadth of gamers and creators
across all genres, ages and skill levels, SLG.TV offers esports
competitions and entertainment programming following the leagues,
the teams, and players. Content is available in both livestream and
on-demand video on superleague.com along with our branded Twitch,
YouTube and Facebook channels.
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Virtualis Studios: Virtualis Studios is our fully virtual
production studio providing proprietary, state-of-the-art, scalable
solutions for video, television, and branded content. Production
companies in need of experienced teams with a deep understanding of
remote production technologies and systems can rely on Virtualis
Studios’ expertise, developed through years of broadcasting
multi-location esports events. Whether for the creation and
broadcast of premium content, or for monitoring productions from
remote locations, Virtualis Studios supports a broad spectrum of
critical needs in today’s production
environment.
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City Clubs: A network of 24 city clubs in the US, Canada and
Mexico that aggregates gamers and creators across different genres
of games, ages and skill levels for digital and physical
competitions. Our city clubs currently consist of the
following:
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Super League’s City Clubs
Key Performance Indicators (“KPIs”)
The
KPIs driving our business model are related to scalable offers
across our digital and physical footprint of gaming-centric offers
and entertainment. The significant growth we achieved in 2020 in
part, reflects the advancement of our technology platform, and the
acceleration of our audience growth through the expansion of our
digital network of online gameplay and viewing channels. A summary
of KPIs, and related growth for fiscal year 2020, compared to
fiscal year 2019 is as follows:
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2019
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2020
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Growth
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Views and impressions (1)
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120,000,000
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2,031,615,000
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+17X Increase
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Registered users (2)
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950,000
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2,919,000
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+3X Increase
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Engagement hours (3)
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15,000,000
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72,205,000
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+4.8X Increase
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(1)
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Views
and impressions represent number of views of our video content
which is distributed on several platforms.
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(2)
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Registered
users represent individuals who have registered on our platform,
providing applicable identifying information, that have engaged
with our platform at some point.
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(3)
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Engagement
hours represent time spent engaging with Super League in the form
of participating in our experiences, viewing our content, and/or
spending time on our website.
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Monetization
Advertising and Sponsorships
The
highly sought after Millennial and Generation Z audience is
increasingly difficult for brands to reach due to the proliferation
of new content distribution channels, ad-blocking technology and a
sentiment against overt marketing and promotion. Our ability to
uniquely aggregate a diverse user base across age ranges, skill
levels and game titles and embed direct authentic brand
integrations creates a base of high-quality, premium advertising
inventory attractive to brands and advertisers. We stand for
inclusive, fair and fun gameplay and entertainment and believe that
our brand is at the forefront of the mainstreaming of competitive
gaming and esports entertainment, which provides a positive access
point for both endemic and non-endemic brands to reach these
audiences.
Throughout
2020, we experienced significant growth in our audience, increasing
viewership and registered users, and expanded our premium
advertising inventory. We further developed our in-house direct
sales capability to monetize this ad inventory, as well as
increasing revenues generated from programmatic display and video
advertising units. We expect to continue to grow our adverting
pipeline across various verticals with the capability to give
brands and advertisers with targeted, high quality integrations
that warrant premium costs per impressions (“CPM”)
advertising rates.
Advertising and sponsorship revenue primarily consists of direct
sales activity along with programmatic advertising. The various
forms of advertising campaigns for competitive video gaming and
esports entertainment, digitally and physically,
include:
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Master
brand sponsorships;
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Tournament
and game specific sponsorships;
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City
Club sponsorships;
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Custom
digital programs for brands and advertisers both in-stream and
in-game; and
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Video
and display programmatic advertising.
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Content
Content related revenue is generated in connection with our
curation and distribution of esports and entertainment content for
our own network of digital channels and media and entertainment
partner channels. We distribute three primary types of content for
syndication and licensing, including: (1) our own original
programming content, (2) user generated content
(“UGC”), including online gameplay and gameplay
highlights, and (3) the creation of content for third parties
utilizing our remote production and broadcast
technology.
We generate revenues from our proprietary content by utilizing this
content to drive audience growth across our network and expand our
premium advertising inventory. In addition, the UGC can be
repackaged for further syndication and monetization to
third-parties seeking esports and entertainment content for their
own distribution channels. Tens of millions of hours of proprietary
content is generated through our platform per year providing us
with a sizable library of esports entertainment
content.
Additionally, we generate revenues from third-party partners who
seek our patented remote production and broadcast technology to
create content for their own digital channels to drive audience
engagement. From consumer brands and media companies, to game
publishers and professional esports teams, Virtualis Studios offers
a fully virtual, cloud-based production and broadcast studio
providing proprietary, state-of-the-art, scalable solutions
for video, television, and branded content. Virtualis
Studios’ is designed to enable thousands of simultaneous
gameplay and player cam feeds to be live streamed across dozens of
endpoints, and the integration of multiple technology solutions to
ensure any given project can be produced and monitored successfully
on a partially or fully-remote basis.
Direct to Consumer
Direct to consumer revenues are primarily comprised of revenues
generated from our Minehut digital property, which provides various
Minecraft server hosting services on a subscription basis, and
other digital goods to the Minecraft gaming
community. Gamers
and creators typically begin their relationship with Super League
by viewing content on our digital network, registering an email
address, and/or by participating in a free-to-play experience.
Users become more engaged by creating a profile to join our network
of players and creators and share more information about their
gaming interests and other attributes. Joining Super League and
Minehut is free, but we continue to focus on the monetization of
gamers as activity grows, with premium digital offers experiences
to expand their gameplay experience in
the form of digital subscriptions, digital goods and gameplay
access fees.
Our Vision
Our
vision is to make Super League Gaming a vital brand in the lives of
everyday gamers and creators. While the games are digital, our
players are human. In a world of increasing de-socialization, we
believe players and creators are increasingly seeking new ways to
create and share their content and deepen their bonds to each other
in their preferred virtual worlds. Our community platform provides
the tools to allow our players and creators around the world to
compete, socialize, share and spectate competitive video gaming and
esports entertainment.
Industry
The
consumer appetite for esports continues to grow at a rapid pace
with passionate fans across the globe. According to Grandview
Research (2020), the overall value of the global gaming market was $168.0 billion in 2020
and is forecasted to grow to approximately $300.0 billion by 2027,
representing a CAGR of 8% from 2020 to 2027. Key trends
fueling this growth include:
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the
democratization of content creation and rise of live
streaming;
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game
design that is inherently competitive and
cross-platform;
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increased
accessibility through cloud-based gaming and 5G
broadband;
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the
further establishment of professional esports teams and leagues;
and
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multi-generational
and mass participatory gaming.
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Esports,
a term generally used to refer to competitive video game play by
professional players, have been around for as long as the video
game industry itself. However, recent growth in the gaming audience
and player engagement has elevated esports into mainstream culture
with a massive global following that, in some instances, exceeds
the monthly audience of large professional sports leagues.
According to Grandview Research the professional esports market
totaled $1.5 billion in 2020 and is expected to grow to $6.8
billion by 2027, representing a 24% CAGR over the period from 2020
to 2027. The significant growth in viewership, audience reach and
engagement activities, increasing infrastructure for the esports
tournaments, the growth in live streaming of games, and investments
in the space are key factors driving the market growth.
Professionalization in the industry has created value and
opportunities for game developers, gamers, influencers, creators
and event organizers. Millennials are increasingly considering
esports as a professional career and universities and colleges are
starting dedicated esports curriculums to develop skilled
professionals.
Additionally,
there has been significant growth in the global esports audience
since 2017, primarily due to growing awareness, the rise of live
streaming platforms like Twitch and YouTube Gaming Live,
infrastructure developments and the growth of mobile. According to
Newzoo the global esports audience was 454.0 million in 2019, and
is expected to grow to 645.0 million in 2022, representing a 14%
CAGR from 2017 to 2022. In 2020, 93.0 billion minutes were watched
per month on Twitch, and increase of 69%, compared to 2019
(TwitchTracker). In the third quarter of 2020, 33.6 billion minutes
were watched per month on YouTube Gaming Live
(Statista).
Our Opportunity
Despite
the significant growth potential outlined above, there are several
key challenges facing stakeholders in the esports and entertainment
landscape:
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Sponsors and Advertisers are limited in their channels to
reach the “cord cutting” Generation Z and Millennials
due to the increasing fragmentation of content distribution and use
of advertising-blocking technology. Given these demographic groups
consume most content online, brands are challenged to target these
audiences in an authentic way and achieve efficient marketing
spend.
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Mainstream Competitive Players and Creators are a highly
fragmented, often anonymous community with limited ways to find
gamers and creators of similar skill-level and gaming interest
online and locally. In addition, the limited recreational esports
infrastructure results in few experiences with limited clear paths
to the professional esports level for players and creators who wish
to develop and test their skills while forging social
connections.
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Game Publishers must find alternative methods to attract new
gamer and creator audiences to their game titles and offer premium
experiences that drive greater retention. The lack of diversity in
gaming, along with increased competition amongst titles, requires
marketing partnerships to extend the lifecycle and franchise value
of their intellectual property.
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Venue Operators, including restaurants and retailers, must
grow same-store sales in order to capture new sources of
foot-traffic and deeper customer loyalty. Millennials and
Generation Z generally value experiences, but tend to purchase more
content and products online, making them an attractive demographic
to widen a venue’s customer base and improve asset
utilization.
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Professional Esports Teams and Owners have made significant
investments in their teams and must rapidly develop a fanbase to
achieve franchise values similar to traditional sports teams.
However, there is no formal structure to identify the next
generation of esports professionals to build their long-term
rosters to support long-term fan loyalty.
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Our
platform offers the following solutions for these key
stakeholders:
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For Sponsors and Advertisers, our platform provides a highly targeted marketing
channel that offers a relevant path for brands to build affinity
with the hard to reach, yet highly sought after, Generation Z and
Millennial demographics. Based on our player data, we will have the
ability to target audiences based on preferred game titles and
other profile information for more efficient marketing
spend.
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For Mainstream Competitive Players and
Creators, our technology and
tools enable gameplay experiences, social connections and
gaming-centric entertainment for the everyday gamer seeking new
ways to compete or share their content and build their
audience.
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For Game Publishers, our
platform introduces their game titles to new audiences and drives
retention by providing an immersive, premium way to play games,
leading to deeper player engagement.
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For Venue Operators we
provide access to our platform in order to operate esports
experiences that enable these enterprises to attract new foot
traffic, improve day-part utilization and drive same-store sales.
In addition, we expect to provide venue operators with predictive
customer activity information for more targeted offers to existing
customers and our users.
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For Professional Esports Teams and Owners, we cultivate the future professional esports
fanbase through recreational competitive youth and young adult
leagues, while providing an amateur feeder system as a path to the
professional leagues. Looking forward, we will have a comprehensive
set of data and tools to provide player analytics and progress
skill levels.
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Our Scalable Technology Platform
Our proprietary cloud-based platform provides competitive video
gamers and content creators a modernized way to connect, play and
view games in real-time and on-demand. We believe our platform will
allow us to capture a large audience of gamers and their gameplay
and viewing hours. Our platform aggregates a diverse audience of
gamers and creators across multiple game titles and provides users
with access to digital and physical competitive experiences and
broadcasts that are accessible to a broad range of ages and
demographics. Through our platform, we have three core components
that enable differentiated and immersive gameplay at scale for both
online and in-person experiences.
Super League’s Scalable Technology
Components
Our
platform is focused on the customer journey and player discovery.
Gamers and creators are introduced to Super League through our
online digital channels and marketing or through our distributed
network of venue partners, at which point they are encouraged to
register for their profile and/or for an event through
superleague.com or minehut.com. The platform allows for
match-making, statistics and leaderboard management as well as the
ultimate output of a livestream or on-demand broadcasts digitally
and in-venue.
Furthermore
our platform enables digital tools for scale including, but not
limited to data services, event creation and management, ecommerce,
advertising technology, COPPA compliance, search engine
optimization, email and mobile marketing, and our HUD automated,
production and streaming technology. With respect to data services,
the platform ingests from multiple data sources, including game
publisher application programming interfaces (“API”),
and offer a wide variety of gameplay experiences across multiple
environments, often simultaneously, with a vast array of resulting
content publishing opportunities.
Early
in our inception, we utilized a local hardware solution to create
interactive physical spaces, to create in-person gaming experiences
for mainstream competitive gamers. We had two opportunities ahead
of us for both scale and differentiation. Firstly, we further
advanced our in-person event technology to be entirely cloud-based
for scale and more rapid venue partner expansion. Secondly, we
created a second-screen perspective that would make the experience
more immersive for players and entertaining for spectators much
like professional sporting events resulting in our Virtualis
Studios, our patented, fully-remote visualization, production and
broadcast technology.
Virtualis
Studios technology automates and scales various gameplay processes
and functions that would otherwise need to be accomplished
manually. These processes and functions primarily include ways to
ensure that visualizations of gameplay and other value-added data
and graphics are both captured and delivered efficiently and
timely. For example, our proprietary software is used during our
experiences to ensure that we are showing the most interesting
aspects of gameplay, as well as switching to matches that are most
relevant to the competition. Further, we use computer vision
to glean key events, graphics or data from the game screen,
especially when the game publisher might not make such information
available via an API:
Super League’s Gameplay Content Capture and Broadcast
Technology
A more
technical view of Virtualis Studios’ solution, which solves
for minimal latency and lag for a high-quality gaming experience
for both players and viewers is provided below. This level of
broadcast performance makes Virtualis Studios a scalable,
affordable solution for media and entertainment partners for
content product beyond competitive gaming and esports
entertainment.
Super League’s Virtualis Studios
Our Strengths
We differentiate ourselves from potential competition by being a
game and location agnostic software platform with a material
digital audience reach, a large and growing registered user base of
young, highly engaged players and creators, and strong brand,
gaming and venue partners all targeting avid gamers. Our core
strengths include the following:
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Game Publisher Agreements provide access to existing user
bases via partnerships with some of the largest game publishers.
These partnerships bring players into our customer funnel providing
direct to consumer sales opportunities. Our ability to interact
with this highly attractive, engaged user base draws brands and
sponsors to us to reach this otherwise hard-to-reach
demographic.
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Proprietary and Curated Content, reaching in the tens of
millions of hours being generated through our platform per year,
provides us with a unique perspective and library of recreational
esports and entertainment content. This content is currently absent
from the esports and entertainment ecosystem and is highly
complementary and valuable to the needs of large on-demand and
streaming video providers. Furthermore, the majority of this
content is user-generated (“UGC”) with minimal
production costs and can be easily ingested into our library via
tools on our platform.
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Patented Technology allows for intelligent,
scalable content capture enabling us to display the most relevant
gameplay activity in real time along with broad visualization of
active gameplay to facilitate a high quality playing and viewing
experience.
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Over Five Years of Brand and Technology Development provides
us a strong, distinctive lead on followers with no obvious
competitors in the holistic community, league operations and media
platform category that also currently and directly own the
relationship with the gamer.
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A Growing Player, Creator and Viewer Base approaching
critical mass that when coupled with highly customized gaming,
creator and viewing experiences allows us to capture a global,
highly engaged, yet somewhat elusive community that will provide
many new ways to monetize over time.
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Creation of Intangible Brand Value in the quality of our
offer, game titles, brand partners and investor base that validates
our trusted, premium brand and distinctive positioning to drive
value in the fragmented, burgeoning esports landscape.
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Our Growth Strategy
Our
core strategy is to pursue initiatives that promote the viral
growth of our audience, player and creator base, and in doing so,
drive direct to consumer, advertising, and content revenue streams.
Our customer acquisition and retention funnel provide the primary
lens for community growth, engagement and long-term brand
equity.
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Audience and engagement growth driven organically through
compelling proprietary and user-generated content supplemented by
direct marketing, partner and influencer promotion, and search
engine optimization overtime leveraging a network effect as we
reach critical mass across our digital properties.
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Monetizable advertising inventory expansion in addition to
increasing our direct sales force effectiveness, complemented with
quality programmatic advertising, allowing us to both scale and
gain a greater share of large advertisers’ marketing spend
while preserving our premium CPM advertising model.
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Servable market expansion through new partnerships with game
publishers and venues partners, along with the amplification from
our brand and advertising partners, for access to new gamers
domestically and internationally.
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Direct to consumer revenue improvement through a further
expansion of compelling, digital offerings and funnel optimization
to convert more free-to-play gamers into paying consumers for
greater revenue per user to drive up lifetime customer value while
driving down customer acquisition cost.
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Platform licensing exploration allowing media and retail
partners to license our proprietary broadcast and esports
venue-based technology, respectively.
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Opportunistic Acquisitions. We intend to pursue
opportunistic acquisitions that will allow us to add complementary
users, revenues, and/or technology components to accelerate our
gaming-centric community and content platform.
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Intellectual Property and Patents
Similar
to other interactive entertainment and esports companies, our
business depends heavily on the creation, acquisition, licensing,
use and protection of intellectual property. We have developed and
own various intellectual properties, including pending and issued
trademarks, patents, and copyrights. For example, each of our
City Clubs have pending trademarks related to naming and logo. We
also have obtained licenses to valuable intellectual property with
game publishers. We leverage these licenses and service
agreements to operate online and location-based competitions, and
in parallel, use them to generate a wide array of
content.
To
protect our intellectual property, we rely on a combination of
patent applications, published and issued patents,
copyrights, pending and issued trademarks, confidentiality
provisions and procedures, other contractual provisions, trade
secret laws, and restrictions on disclosure. We intend to
vigorously protect our technology and proprietary rights; however,
no assurances can be given that our efforts will be successful.
Even if our efforts are successful, we may incur significant costs
in defending our rights. From time to time, third parties may
initiate litigation against us, alleging infringement of their
proprietary rights or claiming they have not infringed our
intellectual property rights. See the section entitled “Risk
Factors” for additional information regarding the risks we
face with respect to litigation related to intellectual property
claims. As of the date hereof, we have two pending patent
applications and two issued patents, and various trademark
applications, some granted and most of which are currently pending,
covering our technologies and brands, as more specifically set
forth below. We intend to file additional applications for the
grant of patents and registration of our trademarks in the United
States and foreign jurisdictions as our business
expands.
Our
issued patents relate to methods of visualization of gameplay
across a wide array of game titles for the purpose of content
creation and broadcasting. These visualizations manifest as web
streams with related textual, graphical, and video content targeted
for consumption by audiences across various streaming and VOD
platforms such as Twitch and YouTube. To achieve these
visualizations, we leverage patent protected technology that places
“camera” characters into certain games alongside the
competing players, and use the perspective of the
‘camera’ character to provide unique views into the
action. We also have pending patent applications for certain
bleeding edge virtualization methods that allow us to generate, at
scale, many concurrent visualizations from the cloud.
Our Values and Company Culture
Super
League is a gamer-first company, a credo embraced by every
employee. We are committed to enhancing and celebrating the player
and creator experience by providing gameplay experiences and
viewing entertainment that promotes positive play that is
inclusive, fair and fun.
Having
produced thousands of digital and physical experiences in addition
to our always-on offers, Super League speaks to a wide range of
demographic audiences that bring players and creators along with
their families and friends together to celebrate their gameplay and
entertainment content.
Employees and Labor Relations
As of
December 31, 2020, we had 51 full-time and full-time equivalent
employees. Additionally, we occasionally enter into service
agreements with independent contractors, on an as-needed basis, to
perform certain services. As of December 31, 2020, four of our
full-time employees were subject to fixed-term employment
agreements with us, and all other employees served at-will pursuant
to the terms set forth in their offer letters.
We
believe that we maintain a good working relationship with our
employees, and we have not experienced any labor disputes. None of
our employees are represented by labor unions.
Governmental Regulation
Our
online gaming platforms, which target individuals ranging from
elementary school age children to adults, are subject to laws and
regulations relating to privacy and child protection. Through our
website, online platforms and in person gaming activities we may
monitor and collect certain information about child users of these
forums. A variety of laws and regulations have been adopted in
recent years aimed at protecting children using the internet, such
as COPPA. COPPA sets forth, among other things, a number of
restrictions related to what information may be collected with
respect to children under the age of 13, as the kinds of content
that website operators may present to children under such age.
There are also a variety of laws and regulations governing
individual privacy and the protection and use of information
collected from individuals, particularly in relation to an
individual’s personally identifiable information (e.g.,
credit card numbers). We employ a kick-out procedure during user
registration whereby anyone identifying themselves as being under
the age of 13 during the process is not allowed to register for a
player account on our website or participate in any of our online
experiences or tournaments without linking their account to that of
a parent or guardian.
In
addition, as a part of our experiences, we offer prizes and/or gifts as incentives to play. The
federal Deceptive Mail Prevention and Enforcement Act and
certain state prize, gift or sweepstakes statutes may apply to
certain experiences we run from time to time, and other federal and
state consumer protection laws applicable to online collection, use
and dissemination of data, and the presentation of website or other
electronic content, may require us to comply with certain standards
for notice, choice, security and access. We believe that we are in
compliance with any applicable law or regulation when we run these
experiences.
Cost of Compliance with Environmental Laws
We have
not incurred any costs associated with compliance with
environmental regulations, nor do we anticipate any future costs
associated with environmental compliance; however, no assurances
can be given that we will not incur such costs in the
future.
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 Report, 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.
Risk Factor Summary
Our
business operations are subject to numerous risks and
uncertainties, including those outside of our control, that could
cause our business, financial condition or operating results to be
harmed, including risks regarding the following:
Risks Related to Our Business and Industry
●
our significant
past operating losses and any inability to maintain profitability
or accurately predict fluctuations in the future;
●
inability to
sustain or manage our growth, or otherwise implement our business
strategies;
●
a rapidly
developing and relatively new market;
●
loss of advertising
revenue;
●
inability to
maintain an effective revenue model;
●
reduction in
activity by material clients and/or vendors;
●
ineffective
marketing and/or advertising efforts;
●
our ability to
maintain and promote our company culture;
●
competition in our
industry;
●
ability to attract,
maintain, and retain licenses for popular games on our
platforms;
●
ability to enter
into definitive license agreements with certain game
publishers;
●
ability to maintain
and acquire new gamers and creators;
●
our ability to
maintain, enhance, and promote our brand;
●
negative
perceptions about our brand, gaming platform, leagues, tournaments,
and/or competitions;
●
anticipating and
adopting changes to new technologies, business strategies, and/or
methods;
●
actual or perceived
security breaches, as well as errors, vulnerabilities or defects in
our software and/or products, and in software and/or products of
third-party providers;
●
reliance on server
functionality;
●
the
interoperability of our products and services across third-party
services and systems;
●
security breaches
and cyber threats;
●
system failures,
outages, and/or disruption due to certain events and interruptions
by man-made problems;
●
our ability to
hire, retain and motivate highly skilled personnel;
and
●
our reliance on
assumptions and estimates to calculate certain key
metrics.
Regulatory and Legal
●
complex and
evolving U.S. and foreign laws and regulations;
●
changes in tax laws
or regulations regarding us or our customers;
●
decreased levels of
traffic due to intensified government regulation of the Internet
industry;
●
liability in the
event of a violation of privacy regulations, data privacy laws,
and/or child protection laws;
●
lawsuits or
liability arising as a result of the Company providing its products
and/or services; and
●
lawsuits or
liability as a result of content published through our products and
services.
Intellectual Property and Technology
●
current and future
litigation related to intellectual property rights;
●
our failure to
protect our intellectual property rights; and
●
piracy,
unauthorized copying, and other forms of intellectual property
infringement.
Governance Risks and Risks Related to Our Common Stock
●
provisions of
Delaware law and our certificate of incorporation and bylaws could
limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us;
●
low trading volume
of our common stock;
●
the volatility of
the trading price of our common stock;
●
our policy of not
paying cash dividends on our common stock;
●
lessened disclosure
requirements due to our status as an emerging growth company;
and
●
increased
share-based compensation expense due to granted equity
awards.
General Risk Factors
●
actual or
threatened epidemics, pandemics, outbreaks, or other public health
crises;
●
reversal of the
U.S. economic recovery and a return to volatile or recessionary
conditions; and
●
risks generally
associated with the entertainment industry.
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 $18.7 million and $30.7 million during
the years ended December 31, 2020 and 2019, respectively.
Noncash expenses (excluding depreciation and amortization of fixed
and intangible assets) totaled $2.0 million and $16.2 million for
the years ended December 31, 2020 and 2019, respectively. As of
December 31, 2020, we had an accumulated deficit of $104.6 million.
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 creators 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.
|
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, and business development related to game
publishers, advertisers, sponsors and gamer acquisition, to
maintain as well as accelerate our 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 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.
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 and
creators, 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.
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 and
creators 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 creators and
enhance our monetization potential in the long-term. However, this
philosophy of putting our gamers and creators 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 and creators can get
free access to certain live streaming of amateur tournaments, and
gamers and creators 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.
For the years ended December 31, 2020 and 2019, four customers
accounted for 49% and five customers accounted for 69% of revenue,
respectively. At December 31, 2020, two customers accounted for 39%
of accounts receivable. At December 31, 2019, one customer
accounted for 70% of accounts receivable. At December 31,
2020, three vendors accounted for 52% of accounts payable. At
December 31, 2019, one vendor accounted for 21% of accounts
payable.
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.
Our marketing and advertising efforts may fail to resonate with
amateur gamers and creators.
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 and creators. 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.
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 and creators as we expand our gamer footprint, which would
be detrimental to our business operations.
The amateur esports gaming industry is intensely competitive.
Gamers and creators 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 emerging start-ups, and we expect new competitors to continue to
emerge throughout the amateur esports gaming ecosystem. If our
competitors develop and launch competing amateur city leagues,
tournaments or competitions, or develop a more successful amateur
online gaming platform, our revenue, margins, and profitability
will decline.
The amateur esports gaming industry is very “hit”
driven. We may not have access to “hit” games or
titles.
Select game titles dominate competitive amateur esports and online
gaming, and many new games titles are regularly introduced in each
major industry segment (console, mobile and PC free-to-download).
Despite the number of new entrants, only a very few
“hit” titles account for a significant portion of total
revenue in each segment.
The size and engagement level of our online and
in person gamers are critical to our success and are
closely linked to the quality and popularity of the esports game
publishers with which we have licenses. Esports game publishers on
our gaming platform, including those who have entered into license
agreements with us, may leave us for other gaming platforms or
amateur leagues which may offer better competition, and terms and
conditions than we do. Furthermore, we may lose esports game
publishers if we fail to generate the number of gamers and creators
to our amateur tournaments and competitions expected by such
publishers. In addition, if popular esports game publishers cease
to license their games to us, or our live streams fail to attract
gamers and creators, we may experience a decline in gamer traffic,
direct to consumer opportunities and engagement, which may have a
material and adverse impact on our results of operations and
financial conditions.
Although we have entered into multi-year agreements with certain
publishers, if we fail to license multiple additional
“hit” games or any of our existing
licensed esports game publishers with which we currently have
a license decide to breach the license agreement or choose not to
continue with us once the term of the license agreement expires,
the popularity of our amateur city leagues, tournaments and
competitions may decline and the number of our gamers and creators
may decrease, which could materially and adversely affect our
results of operations and financial condition.
In addition to the esports games we have licensed, we must continue
to attract and retain the most popular esports gaming titles in
order to maintain and increase the popularity of our amateur city
leagues, tournaments and competitions, and ensure the sustainable
growth of our gamer community. We must continue to identify and
enter into license agreements with esports gaming publishers
developing “hit’ games that resonate with our community
on an ongoing basis. We cannot assure you that we can continue to
attract and retain the same level of first-tier esports game
publishers and our ability to do so is critical to our future
success.
We have not entered into definitive license agreements with certain
game publishers that we currently have relationships with, and we
may never do so.
We currently do not have definitive license agreements in place
with game publishers for the use of certain of the game titled
played on our platform, as these publishers currently permit us to
integrate the specifications of the game title with our technology.
We may not ever enter into license agreements with these parties in
the future, instead continuing our relationship with these game
publishers without a license agreement. These game publishers may
unilaterally choose to discontinue their relationship with the
Company, thereby preventing us from offering experiences on our
platform using their game titles, as the case may be. Should those
game publishers choose not to allow us to offer experiences
involving their respective game titles to our users, the
popularity of our amateur city leagues, tournaments and
competitions may decline and the number of our gamers and creators
may decrease, which could materially and adversely affect our
results of operations and financial condition.
If we fail to keep our existing gamers and creators highly engaged,
to acquire new gamers and creators, to successfully implement a
direct to consumer model for our gaming community, our business,
profitability and prospects may be adversely affected.
Our success depends on our ability to maintain and grow the number
of amateur gamers and creators attending and participating in our
in-person and online tournaments and competitions, and using our
gaming platform, and keeping our gamers and creators highly
engaged. Of particular importance is the successful deployment and
expansion of our direct to consumer model to our gaming community
for purposes of creating predictable recurring
revenues.
In order to attract, retain and engage amateur gamers and creators
and remain competitive, we must continue to develop and expand our
city leagues, including internationally, produce engaging
tournaments and competitions, successfully license the newest
“hit” esports games and titles, implement new
technologies and strategies, improve features of our gaming
platform and stimulate interactions in our gamer
community.
A decline in the number of our amateur gamers and creators in our
ecosystem may adversely affect the engagement level of our gamers
and creators, the vibrancy of our gamer community, or the
popularity of our amateur league play, which may in turn reduce our
monetization opportunities, and have a material and adverse effect
on our business, financial condition and results of operations. If
we are unable to attract and retain, or convert gamers and creators
into direct to consumer-based paying gamers and creators, our
revenues may decline, and our results of operations and financial
condition may suffer.
We cannot assure you that our online and in person gaming
platform will remain sufficiently popular with amateur gamers and
creators to offset the costs incurred to operate and expand it. It
is vital to our operations that we remain sensitive and responsive
to evolving gamer preferences and offer first-tier esports game
content that attracts our amateur gamers and creators. We must also
keep providing amateur gamers and creators with new features and
functions to enable superior content viewing, and social
interaction. Further, we will need to continue to develop and
improve our gaming platform and to enhance our brand awareness,
which may require us to incur substantial costs and expenses. If
such increased costs and expenses do not effectively translate into
an improved gamer experience and direct to consumer-based,
long-term engagement, our results of operations may be materially
and adversely affected.
The ability to grow our business is dependent in part on the
success and availability of mass media channels developed by third
parties, as well as our ability to develop commercially successful
content, and amateur tournaments and competitions.
The success of our business is driven in part by the commercial
success and adequate supply of third-party mass media channels for
which we may distribute our content, amateur league tournaments and
competitions, including Twitch, YouTube and ESL.tv. Our success
also depends on our ability to accurately predict which channels
and platforms will be successful with the esports gaming community,
our ability to develop commercially successful content and
distribute via SLG.TV, which is presently available on Twitch,
amateur tournaments and competition for these channels and gaming
platforms and our ability to effectively manage the transition of
our gamers and creators from one generation or demographic to the
next. Additionally, we may enter into certain exclusive licensing
arrangements that affect our ability to deliver or market our
amateur gaming tournaments and competitions on certain channels and
platforms. A channel or platform may not succeed as expected or new
channels or platforms may take market share and gamers and creators
away from platforms for which we have devoted significant
resources. If demand for the channels or platforms for which we are
developing amateur tournaments or competitions is lower than our
expectations, we may be unable to fully recover the investments we
have made, and our financial performance may be harmed.
Alternatively, a channel or platform for which we have not devoted
significant resources could be more successful than we initially
anticipated, causing us to not be able to take advantage of
meaningful revenue opportunities.
If we fail to maintain and enhance our brand or if we incur
excessive expenses in this effort, our business, results of
operations and prospects may be materially and adversely
affected.
We believe that maintaining and enhancing our brand is of
significant importance to the success of our business. A
well-recognized brand is important to increasing the number of
esports gamers and creators and the level of engagement of our
overall gaming community which is critical in enhancing our
attractiveness to advertisers and sponsors. Since we operate in a
highly competitive market, brand maintenance and enhancement
directly affect our ability to maintain and enhance our market
position.
Although we have developed our brand and amateur tournaments and
competitions through word of mouth referrals, key strategic
partners and our esports game publisher licensors, as we expand, we
may conduct various marketing and brand promotion activities using
various methods to continue promoting our brand. We cannot assure
you, however, that these activities will be successful or that we
will be able to achieve the brand promotion effect we
expect.
In addition, any negative publicity in relation to our league
tournaments or competitions, or operations, regardless of its
veracity, could harm our brands and reputation. Negative publicity
or public complaints from gamers and creators may harm our
reputation, and if complaints against us are not addressed to their
satisfaction, our reputation and our market position could be
significantly harmed, which may materially and adversely affect our
business, results of operations and prospects.
Negative gamer perceptions about our brand, gaming platform,
amateur city leagues, tournaments or competitions and/or business
practices may damage our business and increase the costs incurred
in addressing gamer concerns.
Esports gamer expectations regarding the quality, performance and
integrity of our amateur city league tournaments and competitions
are high. Esports gamers and creators may be critical of our brand,
gaming platform, amateur city leagues, tournaments or competitions
and/or business practices for a wide variety of reasons. These
negative gamer reactions may not be foreseeable or within our
control to manage effectively, including perceptions about gameplay
fairness, negative gamer reactions to game content via social media
or other outlets, components and services, or objections to certain
of our business practices. Negative gamer sentiment about our
business practices also can lead to investigations from regulatory
agencies and consumer groups, as well as litigation, which,
regardless of their outcome, may be costly, damaging to our
reputation and harm our business.
Technology changes
rapidly in our business and if we fail to anticipate
or successfully implement new
technologies or adopt new business strategies, technologies or
methods, the quality, timeliness and competitiveness of our amateur
city leagues, tournaments or competition may
suffer.
Rapid technology changes in the esports gaming market require us to
anticipate, sometimes years in advance, which technologies we must
develop, implement and take advantage of in order to be and remain
competitive in the esports gaming market. We have invested, and in
the future may invest, in new business strategies including a
direct to consumer model, technologies, products, or games or
first-tier game titles to continue to persistently engage the
amateur gamer and deliver the best online and
in person gaming experience. Such endeavors may involve
significant risks and uncertainties, and no assurance can be given
that the technology we choose to adopt and the features that we
pursue will be successful. If we do not successfully implement
these new technologies, our reputation may be materially adversely
affected and our financial condition and operating results may be
impacted. We also may miss opportunities to adopt technology, or
develop amateur city leagues, tournaments or competitions that
become popular with gamers and creators, which could adversely
affect our financial results. It may take significant time and
resources to shift our focus to such technologies, putting us at a
competitive disadvantage.
Our development process usually starts with particular gamer
experiences in mind, and a range of technical development and
feature goals that we hope to be able to achieve. We may not be
able to achieve these goals, or our competitors may be able to
achieve them more quickly and effectively than we can based on
having greater operating capital and personnel resources. If we
cannot achieve our technology goals within the original development
schedule, then we may delay their release until these goals can be
achieved, which may delay or reduce revenue and increase our
development expenses. Alternatively, we may be required to
significantly increase the resources employed in research and
development in an attempt to accelerate our development of new
technologies, either to preserve our launch schedule or to keep up
with our competitors, which would increase our development
expenses.
We may experience security breaches and cyber threats.
We continually face cyber risks and threats that seek to damage,
disrupt or gain access to our networks and our gaming platform,
supporting infrastructure, intellectual property and other assets.
In addition, we rely on technological infrastructure, including
third party cloud hosting and broadband, provided by third party
business partners to support the in person and online
functionality of our gaming platform. These business partners are
also subject to cyber risks and threats. Such cyber risks and
threats may be difficult to detect. Both our partners and we
have implemented certain systems and processes to guard against
cyber risks and to help protect our data and systems. However, the
techniques that may be used to obtain unauthorized access or
disable, degrade, exploit or sabotage our networks and gaming
platform change frequently and often are not detected. Our systems
and processes, and the systems and processes of our third-party
business partners, may not be adequate. Any failure to prevent or
mitigate security breaches or cyber risks, or respond adequately to
a security breach or cyber risk, could result in interruptions to
our gaming platform, degrade the gamer experience, cause gamers and
creators to lose confidence in our gaming platform and cease
utilizing it, as well as significant legal and financial
exposure. This could harm our business and reputation, disrupt
our relationships with partners and diminish our competitive
position.
Successful exploitation of our networks and gaming platform can
have other negative effects upon the gamer experience we offer. In
particular, the virtual economies that exist in certain of our
licensed game publishers’ games are subject to abuse,
exploitation and other forms of fraudulent activity that can
negatively impact our business. Virtual economies involve the
use of virtual currency and/or virtual assets that can be used or
redeemed by a player within a particular online game or
service.
Our business could be adversely affected if our data privacy and
security practices are not adequate, or perceived as being
inadequate, to prevent data breaches, or by the application of data
privacy and security laws generally.
In the course of our business, we may collect, process, store and
use gamer and other information, including personally identifiable
information, passwords and credit card information, the latter of
which is subject to PCI-DSS compliance. Although we take measures
to protect this information from unauthorized access, acquisition,
disclosure and misuse, our security controls, policies and
practices may not be able to prevent the improper or unauthorized
access, acquisition or disclosure of such information. The
unauthorized access, acquisition or disclosure of this information,
or a perception that we do not adequately secure this information
could result in legal liability, costly remedial measures,
governmental and regulatory investigations, harm our profitability
and reputation and cause our financial results to be materially
affected. In addition, third party vendors and business partners
receive access to information that we collect. These vendors and
business partners may not prevent data security breaches with
respect to the information we provide them or fully enforce our
policies, contractual obligations and disclosures regarding the
collection, use, storage, transfer and retention of personal data.
A data security breach of one of our vendors or business partners
could cause reputational harm to them and/or negatively impact our
ability to maintain the credibility of our gamer
community.
Data privacy, data protection, localization, security and
consumer-protection laws are evolving, and the interpretation and
application of these laws in the United States, Europe (including
compliance with the General Data Protection Regulation), and
elsewhere often are uncertain, contradictory and changing. It is
possible that these laws may be interpreted or applied in a manner
that is averse to us or otherwise inconsistent with our practices,
which could result in litigation, regulatory investigations and
potential legal liability or require us to change our practices in
a manner adverse to our business. As a result, our reputation and
brand may be harmed, we could incur substantial costs, and we could
lose both gamers and creators and revenue.
We depend on servers to operate our games with online features and
our proprietary online gaming service. If we were to lose server
functionality for any reason, our business may be negatively
impacted.
Our business relies on the continuous operation of servers, some of
which are owned and operated by third parties. Although we strive
to maintain more than sufficient server capacity, and provide for
active redundancy in the event of limited hardware failure, any
broad-based catastrophic server malfunction, a significant
service-disrupting attack or intrusion by hackers that circumvents
security measures, a failure of disaster recovery service or the
failure of a company on which we are relying for server capacity to
provide that capacity for whatever reason could degrade or
interrupt the functionality of our platform, and could prevent the
operation of our platform for both in-person and online gaming
experiences.
We also rely on networks operated by third parties to support
content on our platform, including networks owned and operated by
game publishers. An extended interruption to any of these services
could adversely affect the use of our platform, which would have a
negative impact on our business.
Further, insufficient server capacity could also negatively impact
our business. Conversely, if we overestimate the amount of server
capacity required by our business, we may incur additional
operating costs.
Our online gaming platform and games offered through our gaming
platform may contain defects.
Our online gaming platform and the games offered through our gaming
platform are extremely complex and are difficult to develop and
distribute. We have quality controls in place to detect defects in
our gaming platform before they are released. Nonetheless, these
quality controls are subject to human error, overriding, and
reasonable resource or technical constraints. Further, we have not
undertaken independent third-party testing, verification or
analysis of our gaming platform and associated systems and
controls. Therefore, our gaming platform and quality controls and
preventative measures we have implemented may not be effective in
detecting all defects in our gaming platform. In the event a
significant defect in our gaming platform and associated systems
and controls is realized, we could be required to offer refunds,
suspend the availability of our city league competitions and other
gameplay, or expend significant resources to cure the defect, each
of which could significantly harm our business and operating
results.
We may experience system failures, outages and/or disruptions of
the functionality of our platform. Such failures, delays and other
problems could harm our reputation and business, cause us to lose
customers and expose us to customer liability.
We may experience system failures, outages and/or disruptions of
our infrastructure, including information technology system
failures and network disruptions, cloud hosting and broadband
availability at in person and online experiences. Our
operations could be interrupted or degraded by any damage to or
failure of:
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our computer software or hardware, or our customers’ or
suppliers’ computer software or hardware;
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our network, our customers’ networks or our suppliers’
networks; or
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our connections and outsourced service arrangements with third
parties.
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Our systems and operations are also vulnerable to damage or
interruption from:
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power loss, transmission cable cuts and other telecommunications
and utility failures;
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hurricanes, fires, earthquakes, floods and other natural
disasters
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a terrorist attack in the U.S. or in another country in which we
operate;
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interruption of service arising from facility migrations, resulting
from changes in business operations including acquisitions and
planned data center migrations;
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computer viruses or software defects;
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loss or misuse of proprietary information or customer data that
compromises security, confidentiality or integrity; or
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errors by our employees or third-party service
providers.
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From time to time in the ordinary course of our business, our
network nodes and other systems experience temporary outages. As a
means of ensuring continuity in the services we provide to our
community and partners, we have invested in system
redundancies via partnerships with industry leading cloud service
providers, proactive alarm monitoring and other back-up
infrastructure, though we cannot assure you that we will be able to
re-route our services over our back-up facilities and provide
continuous service to customers in all circumstances without
material degradation. Because many of our services play a critical
role for our community and partners, any damage to or failure of
the infrastructure we rely on could disrupt or degrade the
operation of our network, our platform and the provision of our
services and result in the loss of current and potential community
members and/or partners and harm our ability to conduct normal
business operations.
We use third-party services and technologies in connection with our
business, and any disruption to the provision of these services and
technologies to us could result in negative publicity and a
slowdown in the growth of our users, which could materially and
adversely affect our business, financial condition and results of
operations.
Our business partially depends on services provided by, and
relationships with, various third parties, including cloud hosting
and broadband providers, among others. To this end, when our cloud
hosting and broadband vendors experience outages, our esports
gaming services will be negatively impacted and alternative
resources will not be immediately available. In addition, certain
third-party software we use in our operations is currently publicly
available free of charge. If the owner of any such software decides
to charge users or no longer makes the software publicly available,
we may need to incur significant costs to obtain licensing, find
replacement software or develop it on our own. If we are unable to
obtain licensing, find or develop replacement software at a
reasonable cost, or at all, our business and operations may be
adversely affected.
We exercise no control over the third-party vendors that we rely
upon for cloud hosting, broadband and software service. If such
third parties increase their prices, fail to provide their services
effectively, terminate their service or agreements or discontinue
their relationships with us, we could suffer service interruptions,
reduced revenues or increased costs, any of which may have a
material adverse effect on our business, financial condition and
results of operations.
Growth and engagement of our gamer community depends upon effective
interoperability with mobile operating systems, networks, mobile
devices and standards that we do not control.
We make our services available across a variety of mobile operating
systems and devices. We are dependent on the interoperability of
our services with popular mobile devices and mobile operating
systems that we do not control, such as Android and iOS. Any
changes in such mobile operating systems or devices that degrade
the functionality of our services or give preferential treatment to
competitive services could adversely affect usage of our services.
In order to deliver high quality services, it is important that our
services work well across a range of mobile operating systems,
networks, mobile devices and standards that we do not control. We
may not be successful in developing relationships with key
participants in the mobile industry or in developing services that
operate effectively with these operating systems, networks, devices
and standards. In the event that it is difficult for our users to
access and use our services, particularly on their mobile devices,
our user growth and user engagement could be harmed, and our
business and operating results could be adversely
affected.
Our business depends substantially on the continuing efforts of our
executive officers, key employees and qualified personnel, and our
business operations may be severely disrupted if we lose their
services.
Our future success depends substantially on the continued efforts
of our executive officers and key employees. If one or more of our
executive officers or key employees were unable or unwilling to
continue their services with us, we might not be able to replace
them easily, in a timely manner, or at all. Since the esports
gaming industry is characterized by high demand and intense
competition for talents, we cannot assure you that we will be able
to attract or retain qualified staff or other highly skilled
employees. In addition, as the Company is relatively young, our
ability to train and integrate new employees into our operations
may not meet the growing demands of our business which may
materially and adversely affect our ability to grow our business
and hence our results of operations.
If any of our executive officers and key employees terminates their
services with us, our business may be severely disrupted, our
financial condition and results of operations may be materially and
adversely affected and we may incur additional expenses to recruit,
train and retain qualified personnel. If any of our executive
officers or key employees joins a competitor or forms a competing
company, we may lose gamers and creators, know-how and
key professionals and staff members. Certain of our executive
officers and key employees have entered into a non-solicitation and
non-competition agreements with us. However, certain provisions
under the non-solicitation and non-competition agreement may
be deemed legally invalid or unenforceable. If any dispute arises
between our executive officers and us, we cannot assure you that we
would be able to enforce
these non-compete agreements.
The preparation of our financial statements involves the use of
good faith estimates, judgments and assumptions, and our financial
statements may be materially affected if such good faith estimates,
judgments or good faith assumptions prove to be
inaccurate.
Financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”) typically require the use of good faith
estimates, judgments and assumptions that affect the reported
amounts. Often, different estimates, judgments and assumptions
could reasonably be used that would have a material effect on such
financial statements, and changes in these estimates, judgments and
assumptions may occur from period to period over time. Significant
areas of accounting requiring the application of management’s
judgment include, but are not limited to, determining the fair
value of assets, share-based compensation and the timing and amount
of cash flows from assets. These estimates, judgments and
assumptions are inherently uncertain and, if our estimates were to
prove to be wrong, we would face the risk that charges to income or
other financial statement changes or adjustments would be required.
Any such charges or changes would require a restatement of our
financial statements and could harm our business, including our
financial condition and results of operations and the price of our
securities. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” for a
discussion of the accounting estimates, judgments and assumptions
that we believe are the most critical to an understanding of our
financial statements and our business.
Regulatory and Legal Risk Factors
Our business is subject to regulation, and changes in applicable
regulations may negatively impact our business.
We are subject to a number of foreign and domestic laws and
regulations that affect companies conducting business on the
Internet. In addition, laws and regulations relating to user
privacy, data collection, retention, electronic commerce, virtual
items and currency, consumer protection, content, advertising,
localization, and information security have been adopted or are
being considered for adoption by many jurisdictions and countries
throughout the world. These laws could harm our business by
limiting the products and services we can offer consumers or the
manner in which we offer them. The costs of compliance with these
laws may increase in the future as a result of changes in
interpretation. Furthermore, any failure on our part to comply with
these laws or the application of these laws in an unanticipated
manner may harm our business and result in penalties or significant
legal liability.
In addition, we include modes in our gaming platform that allow
players to compete against each other. Although we structure and
operate these skill-based competitions with applicable laws in
mind, our skill-based competitions in the future could become
subject to evolving rules and regulations and expose us to
significant liability, penalties and reputational
harm.
Changes in tax laws or regulations that are applied adversely to us
or our customers may have a material adverse effect on our
business, cash flow, financial condition or results of
operations.
New income, sales, use or other tax laws, statutes, rules,
regulations or ordinances could be enacted at any time, which could
affect the tax treatment of our earnings and adversely affect our
operations, and our business and financial performance. Further,
existing tax laws, statutes, rules, regulations or ordinances could
be interpreted, changed, modified or applied adversely to us.
For example, on December 22, 2017, tax legislation was signed
into law that contained many significant changes to the U.S. tax
laws. The new legislation reduced the corporate income tax
rate from 34% to 21% effective January 1, 2018, resulting in our
deferred income tax assets and liabilities, including NOLs, to be
measured using the new rate as reflected in the valuation of these
assets as of December 31, 2017. As a result, the value of our
deferred tax assets decreased by approximately $4.3 million and the
related valuation allowance has been reduced by the same amount.
Our analysis and interpretation of this legislation is ongoing.
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 our financial statements provided
herein. There may, however, be additional tax impacts identified in
subsequent fiscal periods in accordance with subsequent
interpretive guidance issued by the SEC or the Internal Revenue
Service. 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 in the financial
statements included herein for tax attributes that are incomplete
or subject to change.
The foregoing items could have a material adverse effect on our
business, cash flow, financial condition or results of
operations. 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 impact of this tax
legislation on holders of our common stock is also uncertain and
could be adverse. We urge our stockholders and investors to consult
with our legal and tax advisors with respect to this legislation
and the potential tax consequences of investing in or holding our
common stock.
Our online activities are subject to various laws and regulations
relating to privacy and child protection, which, if violated, could
subject us to an increased risk of litigation and regulatory
actions.
In addition to our gaming platform, we use third-party
applications, websites, and social media platforms to promote our
amateur tournaments and competitions and engage gamers, as well as
monitor and collect certain information about gamers in our online
forums. A variety of laws and regulations have been adopted in
recent years aimed at protecting children using the internet such
as the Children’s Online Privacy and Protection Act of 1998
(“COPPA”). COPPA sets forth, among other things, a
number of restrictions on what website operators can present to
children under the age of 13 and what information can be collected
from them. COPPA is of particular concern to us, and in an effort
to minimize our risk of potential exposure, we retained a COPPA
expert as a consultant and have posted a compliant privacy policy,
terms of use and various other policies on our website. We
undertake significant effort to implement certain precautions to
ensure that access to our gaming platform for competitive gameplay
is COPPA compliant. Despite our efforts, no assurances can be given
that such measures will be sufficient to completely avoid exposure
and COPPA violations, any of which could expose us to significant
liability, penalties, reputational harm and loss of revenue, among
other things.
The laws and regulations concerning data privacy are continually
evolving. Failure to comply with these laws and regulations could
harm our business.
Consumers are able to play our licensed game titles online, using
our platform. We collect and store information about our consumers
both personally identifying and non-personally identifying
information. Numerous federal, state and international laws address
privacy, data protection and the collection, storing, sharing, use,
disclosure and protection of personally identifiable information
and other user data. Numerous states already have, and are looking
to expand, data protection legislation requiring companies like
ours to consider solutions to meet differing needs and expectations
of creators and attendees. Outside the United States, personally
identifiable information and other user data is increasingly
subject to legislation and regulations in numerous jurisdictions
around the world, the intent of which is to protect the privacy of
information that is collected, processed and transmitted in or from
the governing jurisdiction. Foreign data protection, privacy,
information security, user protection and other laws and
regulations are often more restrictive than those in the United
States. In particular, the European Union and its member states
traditionally have taken broader views as to types of data that are
subject to privacy and data protection laws and regulations and
have imposed greater legal obligations on companies in this regard.
For example, in April 2016, European legislative bodies adopted the
General Data Protection Regulation (“GDPR”), which
became effective on May 25, 2018. The GDPR applies
to any company established in the European Union as well as to
those outside of the European Union if they collect and use
personal data in connection with the offering of goods or services
to individuals in the European Union or the monitoring of their
behavior. The GDPR enhances data protection obligations
for processors and controllers of personal data, including, for
example, expanded disclosures about how personal information is to
be used, limitations on retention of information, mandatory data
breach notification requirements and onerous new obligations on
service providers. Non-compliance with
the GDPR may result in monetary penalties of up to
€20 million or 4% of annual worldwide revenue, whichever
is higher. In addition, some countries are considering or have
passed legislation implementing data protection requirements or
requiring local storage and processing of data or similar
requirements that could increase the cost and complexity of
delivering our services. The GDPR and other changes in
laws or regulations associated with the enhanced protection of
certain types of personal data could greatly increase our cost of
providing our products and services or even prevent us from
offering certain services in jurisdictions in which we operate. The
European Commission is also currently negotiating a new ePrivacy
Regulation that would address various matters, including provisions
specifically aimed at the use of cookies to identify an
individual’s online behavior, and any such ePrivacy
Regulation may provide for new compliance obligations and
significant penalties. Any of these changes to European Union data
protection law or its interpretation could disrupt and/or harm our
business.
Further, following a referendum in June 2016 in which voters in the
United Kingdom approved an exit from the European Union, the United
Kingdom government has initiated a process to leave the European
Union, which has created uncertainty with regard to the regulation
of data protection in the United Kingdom. In particular, although a
Data Protection Bill designed to be consistent with
the GDPR is pending in the United Kingdom’s
legislative process, it is unclear whether the United Kingdom will
enact data protection laws or regulations designed to be consistent
with the GDPR and how data transfers to and from the
United Kingdom will be regulated. The interpretation and
application of many privacy and data protection laws are, and will
likely remain, uncertain, and it is possible that these laws may be
interpreted and applied in a manner that is inconsistent with our
existing data management practices or product features. Although
player interaction on our platform is subject to our privacy
policies, end user license agreements (“EULAs”), and
terms of service, if we fail to comply with our posted privacy
policies, EULAs, or terms of service, or if we fail to comply with
existing privacy-related or data protection laws and regulations,
it could result in proceedings or litigation against us by
governmental authorities or others, which could result in fines or
judgments against us, damage our reputation, impact our financial
condition and/or harm our business.
In addition to government regulation, privacy advocacy and industry
groups may propose new and different self-regulatory standards that
either legally or contractually apply to us. Any inability to
adequately address privacy, data protection and data security
concerns or comply with applicable privacy, data protection or data
security laws, regulations, policies and other obligations could
result in additional cost and liability to us, damage our
reputation, inhibit sales and harm our business. Further, our
failure, and/or the failure by the various third-party service
providers and partners with which we do business, to comply with
applicable privacy policies or federal, state or similar
international laws and regulations or any other obligations
relating to privacy, data protection or information security, or
any compromise of security that results in the unauthorized release
of personally identifiable information or other user data, or the
perception that any such failure or compromise has occurred, could
damage our reputation, result in a loss of creators or attendees,
discourage potential creators and attendees from trying our
platform and/or result in fines and/or proceedings by governmental
agencies and/or users, any of which could have an adverse effect on
our business, results of operations and financial condition. In
addition, given the breadth and depth of changes in data protection
obligations, ongoing compliance with evolving interpretation of
the GDPR and other regulatory requirements requires time
and resources and a review of the technology and systems currently
in use against the requirements of GDPR and other
regulations.
We may be held liable for information or content displayed on,
retrieved from or linked to our gaming platform, or distributed to
our users.
Our interactive live streaming platform enables gamers and creators
to exchange information and engage in various other online
activities. Although we require our gamers and creators to register
their real name, we do not require user identifications used and
displayed during gameplay to contain any real-name information, and
hence we are unable to verify the sources of all the information
posted by our gamers and creators. In addition, because a majority
of the communications on our online and in person gaming
platform is conducted in real time, we are unable to examine the
content generated by gamers and creators before they are posted or
streamed. Therefore, it is possible that gamers and creators may
engage in illegal, obscene or incendiary conversations or
activities, including publishing of inappropriate or illegal
content that may be deemed unlawful. If any content on our platform
is deemed illegal, obscene or incendiary, or if appropriate
licenses and third-party consents have not been obtained, claims
may be brought against us for defamation, libel, negligence,
copyright, patent or trademark infringement, other unlawful
activities or other theories and claims based on the nature and
content of the information delivered on or otherwise accessed
through our platform. Moreover, the costs of compliance may
continue to increase when more content is made available on our
platform as a result of our growing base of gamers and creators,
which may adversely affect our results of operations.
Intensified government regulation of the Internet industry could
restrict our ability to maintain or increase the level of traffic
to our gaming platform as well as our ability to capture other
market opportunities.
The Internet industry is increasingly subject to strict scrutiny.
New laws and regulations may be adopted from time to time to
address new issues that come to the authorities’ attention.
We may not timely obtain or maintain all the required licenses or
approvals or make all the necessary filings in the future. We also
cannot assure you that we will be able to obtain the required
licenses or approvals if we plan to expand into other Internet
businesses. If we fail to obtain or maintain any of the required
licenses or approvals or make the necessary filings, we may be
subject to various penalties, which may disrupt our business
operations or derail our business strategy, and materially and
adversely affect our business, financial condition and results of
operations.
From time to time we may become involved in legal
proceedings.
From time to time we may become subject to legal proceedings,
claims, litigation and government investigations or inquiries,
which could be expensive, lengthy, disruptive to normal business
operations and occupy a significant amount of our employees’
time and attention. In addition, the outcome of any legal
proceedings, claims, litigation, investigations or inquiries may be
difficult to predict and could have a material adverse effect on
our business, operating results, or financial
condition.
Risks Related to Intellectual Property
We may be subject to claims of infringement of third-party
intellectual property rights.
From time to time, third parties may claim that we have infringed
their intellectual property rights. For example, patent holding
companies may assert patent claims against us in which they seek to
monetize patents they have purchased or otherwise obtained.
Although we take steps to avoid knowingly violating the
intellectual property rights of others, it is possible that third
parties still may claim infringement.
Existing or future infringement claims against us, whether valid or
not, may be expensive to defend and divert the attention of our
employees from business operations. Such claims or litigation could
require us to pay damages, royalties, legal fees and other costs.
We also could be required to stop offering, distributing or
supporting esports games, our gaming platform or other features or
services which incorporate the affected intellectual property
rights, redesign products, features or services to avoid
infringement, or obtain a license, all of which could be costly and
harm our business.
In addition, many patents have been issued that may apply to
potential new modes of delivering, playing or monetizing
interactive entertainment software products and services, such as
those offered on our gaming platform or that we would like to offer
in the future. We may discover that future opportunities to provide
new and innovative modes of game play and game delivery to gamers
and creators may be precluded by existing patents that we are
unable to license on reasonable terms.
Our technology, content and brands are subject to the threat of
piracy, unauthorized copying and other forms of intellectual
property infringement.
We regard our technology, content and brands as proprietary and
take measures to protect our technology, content and brands and
other confidential information from infringement. Piracy and other
forms of unauthorized copying and use of our technology, content
and brands are persistent, and policing is difficult. Further, the
laws of some countries in which our products are or may be
distributed either do not protect our intellectual property rights
to the same extent as the laws of the United States or are poorly
enforced. Legal protection of our rights may be ineffective in such
countries. In addition, although we take steps to enforce and
police our rights, factors such as the proliferation of technology
designed to circumvent the protection measures used by our business
partners or by us, the availability of broadband access to the
Internet, the refusal of Internet service providers or platform
holders to remove infringing content in certain instances, and the
proliferation of online channels through which infringing product
is distributed all have contributed to an expansion in unauthorized
copying of our technology, content and brands.
Third parties may register trademarks or domain names or purchase
internet search engine keywords that are similar to our registered
trademark or pending trademarks, brands or websites, or
misappropriate our data and copy our gaming platform, all of which
could cause confusion, divert gamers and creators away from our
gaming platform and league tournaments, or harm our
reputation.
Competitors and other third parties may purchase
(i) trademarks that are similar to our trademarks and
(ii) keywords that are confusingly similar to our brands or
websites in Internet search engine advertising programs and in the
header and text of the resulting sponsored links or advertisements
in order to divert gamers and creators from us to their websites.
Preventing such unauthorized use is inherently difficult. If we are
unable to prevent such unauthorized use, competitors and other
third parties may continue to drive potential gamers and creators
away from our gaming platform to competing, irrelevant or
potentially offensive platforms, which could harm our reputation
and cause us to lose revenue.
We may not be able to prevent others from unauthorized use of our
intellectual property, which could harm our business and
competitive position.
We regard our registered trademark and pending trademarks, service
marks, pending patents, domain names, trade secrets, proprietary
technologies and similar intellectual property as critical to our
success. We rely on trademark and patent law, trade secret
protection and confidentiality and license agreements with our
employees and others to protect our proprietary
rights.
We have invested significant resources to develop our own
intellectual property and acquire licenses to use and distribute
the intellectual property of others on our gaming platform. Failure
to maintain or protect these rights could harm our business. In
addition, any unauthorized use of our intellectual property by
third parties may adversely affect our current and future revenues
and our reputation.
Policing unauthorized use of proprietary technology is difficult
and expensive. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. Further, we require every
employee and consultant to execute proprietary information and
invention agreements prior to commencing work. Despite our efforts
to protect our proprietary rights, third parties may attempt to
copy or otherwise obtain and use our intellectual property or seek
court declarations that they do not infringe upon our intellectual
property rights. Monitoring unauthorized use of our intellectual
property is difficult and costly, and we cannot assure you that the
steps we have taken will prevent misappropriation of our
intellectual property. From time to time, we may have to resort to
litigation to enforce our intellectual property rights, which could
result in substantial costs and diversion of our
resources.
Our patent and trademark applications may not be granted and our
patent and trademark rights, once patents are issued and trademarks
are registered, may be contested, circumvented, invalidated or
limited in scope, and our patent and trademark rights may not
protect us effectively once issued and registered, respectively. In
particular, we may not be able to prevent others from developing or
exploiting competing technologies and trademarks, which could have
a material and adverse effect on our business operations, financial
condition and results of operations.
Currently, we have three patent applications pending, one
registered trademark and eighteen pending trademark applications,
along with licenses from game publishers to utilize their
proprietary games. For our pending patent applications and we
cannot assure you that we will be granted patents pursuant to our
pending applications as well as future patent applications we
intend to file. Even if our patent applications succeed, it is
still uncertain whether these patents will be contested,
circumvented or invalidated in the future. In addition, the rights
granted under any issued patents may not provide us with sufficient
protection or competitive advantages. The claims under any patents
that issue from our patent applications may not be broad enough to
prevent others from developing technologies that are similar or
that achieve results similar to ours. It is also possible that the
intellectual property rights of others will bar us from licensing
and from exploiting any patents that issue from our pending
applications. Numerous U.S. and foreign issued patents and pending
patent applications owned by others exist in the fields in which we
have developed and are developing our technology. These patents and
patent applications might have priority over our patent
applications and could subject our patent applications to
invalidation. Finally, in addition to those who may claim priority,
any of our pending patent and trademark applications may also be
challenged by others on the basis that they are otherwise invalid
or unenforceable.
We may be held liable for information or content displayed on,
retrieved from or linked to our gaming platform, or distributed to
our users.
Our interactive live streaming platform enables gamers and creators
to exchange information and engage in various other online
activities. Although we require our gamers and creators to register
their real name, we do not require user identifications used and
displayed during gameplay to contain any real-name information, and
hence we are unable to verify the sources of all the information
posted by our gamers and creators. In addition, because a majority
of the communications on our online and in person gaming
platform is conducted in real time, we are unable to examine the
content generated by gamers and creators before they are posted or
streamed. Therefore, it is possible that gamers and creators may
engage in illegal, obscene or incendiary conversations or
activities, including publishing of inappropriate or illegal
content that may be deemed unlawful. If any content on our platform
is deemed illegal, obscene or incendiary, or if appropriate
licenses and third-party consents have not been obtained, claims
may be brought against us for defamation, libel, negligence,
copyright, patent or trademark infringement, other unlawful
activities or other theories and claims based on the nature and
content of the information delivered on or otherwise accessed
through our platform. Moreover, the costs of compliance may
continue to increase when more content is made available on our
platform as a result of our growing base of gamers and creators,
which may adversely affect our results of operations.
Intensified government regulation of the Internet industry could
restrict our ability to maintain or increase the level of traffic
to our gaming platform as well as our ability to capture other
market opportunities.
The Internet industry is increasingly subject to strict scrutiny.
New laws and regulations may be adopted from time to time to
address new issues that come to the authorities’ attention.
We may not timely obtain or maintain all the required licenses or
approvals or make all the necessary filings in the future. We also
cannot assure you that we will be able to obtain the required
licenses or approvals if we plan to expand into other Internet
businesses. If we fail to obtain or maintain any of the required
licenses or approvals or make the necessary filings, we may be
subject to various penalties, which may disrupt our business
operations or derail our business strategy, and materially and
adversely affect our business, financial condition and results of
operations.
Governance Risks and Risks Related to our Common Stock
Our amended and restated bylaws designate a state or federal court
located within the State of Delaware as the exclusive forum for
certain litigation that may be initiated by our stockholders, which
could limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us.
Pursuant to our amended and restated bylaws, unless we consent in
writing to the selection of an alternative forum, the sole and
exclusive forum for (i) any derivative action or proceeding
brought on our behalf, (ii) any action asserting a claim of
breach of a fiduciary duty owed by any of our directors, officers
or other employees to us or our stockholders, (iii) any action
asserting a claim against us arising pursuant to any provision of
the Delaware General Corporation Law, or (iv) any action
asserting a claim against us that is governed by the internal
affairs doctrine shall be a state or federal court located within
the State of Delaware, in all cases subject to the court’s
having personal jurisdiction over indispensable parties named as
defendants. Any person or entity purchasing or otherwise acquiring
any interest in shares of our capital stock shall be deemed to have
notice of and consented to this provision. The forum
selection clause in our amended and restated bylaws may have
the effect of discouraging lawsuits against us or our directors and
officers and may limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us.
Because the applicability of the exclusive forum provision is
limited to the extent permitted by law, we believe that the
exclusive forum provision would not apply to suits brought to
enforce any duty or liability created by the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), the
Securities Act of 1933, as amended (the “Securities
Act”), any other claim for which the federal courts have
exclusive jurisdiction or concurrent jurisdiction over all suits
brought to enforce any duty or liability created by the Securities
Act. We note that there is uncertainty as to whether a court would
enforce the provision and that investors cannot waive compliance
with the federal securities laws and the rules and regulations
thereunder. Although we believe this provision benefits us by
providing increased consistency in the application of Delaware law
in the types of lawsuits to which it applies, the provision may
have the effect of discouraging lawsuits against our directors and
officers.
Although our common stock is listed on the Nasdaq Capital Market,
our shares are likely to be thinly traded for some time and an
active market may never develop.
Although our common stock is listed on the Nasdaq Capital
Market, it is likely that
initially there will be a very limited trading market for our
common stock, and we cannot ensure that a robust trading market
will ever develop or be sustained. Our shares of common stock may
be thinly traded, and the price, if traded, may not reflect our
actual or perceived value. There can be no assurance that there
will be an active market for our shares of common stock in the
future. The market liquidity will be dependent on the perception of
our operating business, competitive forces, state of the esports
gaming industry, growth rate and becoming cash flow profitable on a
sustainable basis, among other things. We may, in the future, take
certain steps, including utilizing investor awareness campaigns,
press releases, road shows, and conferences to increase awareness
of our business and any steps that we might take to bring us to the
awareness of investors may require we compensate financial public
relations firms with cash and/or stock. There can be no assurance
that there will be any awareness generated or the results of any
efforts will result in any impact on our trading volume.
Consequently, investors may not be able to liquidate their
investment or liquidate it at a price that reflects the value of
the business and trading may be at an inflated price relative to
the performance of our company due to, among other things,
availability of sellers of our shares. If a market should develop,
the price may be highly volatile. Because there may be a low price
for our shares of common stock, many brokerage firms or clearing
firms may not be willing to effect transactions in the securities
or accept our shares for deposit in an account. Even if an investor
finds a broker willing to effect a transaction in the shares of our
common stock, the combination of brokerage commissions, transfer
fees, taxes, if any, and any other selling costs may exceed the
selling price. Further, many lending institutions will not permit
the use of low-priced shares of common stock as collateral for any
loans.
Our stock price may be volatile, and you could lose all or part of
your investment.
The trading price of our common stock following our offering may
fluctuate substantially and may be higher or lower than the initial
public offering price. This may be especially true for companies
with a small public float. The trading price of our common stock
following our offering will depend on several factors, including
those described in this “Risk
Factors” section, many of
which are beyond our control and may not be related to our
operating performance. These fluctuations could cause you to lose
all or part of your investment in our common stock since you might
be unable to sell your shares at or above the price you paid in the
offering. Factors that could cause fluctuations in the trading
price of our common stock include:
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changes to our industry,
including demand and regulations;
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we may not be able to compete
successfully against current and future
competitors;
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competitive pricing
pressures;
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our ability to obtain working
capital financing as required;
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additions or departures of key
personnel;
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sales of our common stock;
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our ability to execute our business plan;
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operating results that fall below expectations;
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loss of any strategic relationship, sponsor or
licensor;
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any major change in our management;
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changes in accounting standards, procedures, guidelines,
interpretations or principals; and
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economic, geo-political and other external factors.
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In addition, the stock market in general, and the market for
technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies.
Broad market and industry factors, as well as general economic,
political and market conditions such as recessions or interest rate
changes, may seriously affect the market price of our common stock,
regardless of our actual operating performance. These fluctuations
may be even more pronounced in the trading market for our stock
shortly following our offering. If the market price of our common
stock after our offering does not exceed the initial public
offering price, you may not realize any return on your investment
in us and may lose some or all of your investment.
In addition, in the past, following periods of volatility in the
overall market and the market prices of particular companies’
securities, securities class action litigations have often been
instituted against these companies. Litigation of this type, if
instituted against us, could result in substantial costs and a
diversion of our management’s attention and resources. Any
adverse determination in any such litigation or any amounts paid to
settle any such actual or threatened litigation could require that
we make significant payments.
If securities industry analysts do not publish research reports on
us, or publish unfavorable reports on us, then the market price and
market trading volume of our common stock could be negatively
affected.
Any trading market for our common stock will be influenced in part
by any research reports that securities industry analysts publish
about us. We may not obtain any future research coverage by
securities industry analysts. In the event we are covered by
research analysts, and one or more of such analysts downgrade our
securities, or otherwise reports on us unfavorably, or discontinues
coverage of us, the market price and market trading volume of our
common stock could be negatively affected.
We have not paid cash dividends in the past and do not expect to
pay dividends in the future. Any return on investment will likely
be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not
anticipate doing so in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial
condition and other business and economic factors affecting us at
such time as our board of directors may consider relevant. If we do
not pay dividends, our common stock may be less valuable because a
return
Since we do not anticipate paying any cash dividends on our capital
stock in the foreseeable future, stock price appreciation, if any,
will be your sole source of gain.
We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business. In addition,
the terms of any future debt agreements may preclude us from paying
dividends. As a result, appreciation, if any, in the market price
of our common stock will be your sole source of gain for the
foreseeable future.
Future issuances of debt securities, which would rank senior to our
common stock upon our bankruptcy or liquidation, and future
issuances of preferred stock, which would rank senior to our common
stock for the purposes of dividends and liquidating distributions,
may adversely affect the level of return you may be able to achieve
from an investment in our common stock.
In the future, we may attempt to increase our capital resources by
offering debt securities. In the event of a bankruptcy or
liquidation, holders of our debt securities, and lenders with
respect to other borrowings we may make, would receive
distributions of our available assets prior to any distributions
being made to holders of our common stock. Moreover, if we issue
preferred stock in the future, the holders of such preferred stock
could be entitled to preferences over holders of common stock in
respect of the payment of dividends and the payment of liquidating
distributions. Because our decision to issue debt or preferred
securities in any future offering, or borrow money from lenders,
will depend in part on market conditions and other factors beyond
our control, we cannot predict or estimate the amount, timing or
nature of any such future offerings or borrowings. Holders of our
common stock must bear the risk that any such future offerings we
conduct or borrowings we make may adversely affect the level of
return they may be able to achieve from an investment in our common
stock.
We are an emerging growth company, and any decision on our
part to comply only with certain reduced reporting and disclosure
requirements applicable to emerging growth companies could make our
common stock less attractive to investors.
We are an emerging growth company, and, for as long as we
continue to be an emerging growth company, we may choose to
take advantage of exemptions from various reporting requirements
applicable to other public companies that are not “emerging
growth companies,” including:
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not
being required to have our independent registered public accounting
firm audit our internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act;
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reduced
disclosure obligations regarding executive compensation in our
periodic reports and annual report on Form 10-K; and
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exemptions
from the requirements of holding a non-binding advisory vote on
executive compensation and stockholder approval of any golden
parachute payments not previously approved.
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We
could be an emerging growth company for up to five years following
the completion of our offering. Our status as an emerging
growth company will end as soon as any of the following takes
place:
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the
last day of the fiscal year in which we have more than $1.07
billion in annual revenue;
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the
date we qualify as a “large accelerated filer,” with at
least $700 million of equity securities held by
non-affiliates;
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the
date on which we have issued, in any three-year period, more than
$1.0 billion in non-convertible debt securities; or
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the
last day of the fiscal year ending after the fifth anniversary of
the completion of our offering.
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We cannot predict if investors will find our common stock less
attractive if we choose to rely on the exemptions afforded emerging
growth companies. If some investors find our common stock less
attractive because we rely on any of these exemptions, there may be
a less active trading market for our common stock and the market
price of our common stock may be more volatile.
Under the JOBS Act, emerging growth companies can also delay
adopting new or revised accounting standards until such time as
those standards apply to private companies. We have elected to use
this extended transition period for complying with new or revised
accounting standards that have different effective dates for public
and private companies until the earlier of the date we (i) are no
longer an emerging growth company or
(ii) affirmatively and irrevocably opt out of the extended
transition period provided in the JOBS Act. As a result, our
financial statements may not be comparable to companies that comply
with new or revised accounting pronouncements as of public company
effective dates.
Because of our status as an emerging growth company, you will not
be able to depend on any attestation from our independent
registered public accounting firm as to our internal control over
financial reporting for the foreseeable future.
Our independent registered public accounting firm will not be
required to attest to the effectiveness of our internal control
over financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act until the later of the year following our first
annual report required to be filed with the SEC or the date we are
no longer an “emerging growth company” as defined in
the JOBS Act. Accordingly, you will not be able to depend on any
attestation concerning our internal control over financial
reporting from our independent registered public accounting firm
for the foreseeable future. Subsequent to the time frame
above, our independent registered public accounting firm will not
be required to attest to the effectiveness of our internal control
over financial reporting pursuant to the Sarbanes-Oxley
Act until such time that the Company becomes an
“accelerated filer,” as defined by the
SEC.
We have granted, and may continue to grant, share incentive awards,
which may result in increased share-based compensation
expenses.
We adopted our Amended and Restated 2014 Stock Option and Incentive
Plan (the “2014 Plan”) in October 2014, for purposes of
granting share-based compensation awards to employees, directors
and consultants to incentivize their performance and align their
interests with ours. We account for compensation costs for all
share-based awards issued under the 2014 Plan using a fair-value
based method and recognize expenses in our statements of
comprehensive loss in accordance with GAAP. Under the 2014 Plan, we
are authorized to grant options to purchase shares of common stock
of our Company, restricted share units to receive shares of common
stock and restricted shares of common stock. For the year ended
December 31, 2020 and 2019, we recorded share-based compensation
expense of $2.0 million and $6.2 million, respectively, primarily
related to issuances and vesting of awards under the 2014
Plan.
We believe the granting of share incentive awards is important to
our ability to attract and retain employees, and we will continue
to grant share incentive awards to employees in the future. As a
result, our expenses associated with share-based compensation may
increase, which may have an adverse effect on our results of
operations.
General Risk Factors
Actual or threatened epidemics, pandemics, outbreaks, or other
public health crises may adversely affect our
business.
Our business could be materially and adversely affected by the
risks, or the public perception of the risks, related to an
epidemic, pandemic, outbreak, or other public health crisis, such
as the recent outbreak of novel coronavirus (COVID-19). The risk,
or public perception of the risk, of a pandemic or media coverage
of infectious diseases could cause a decrease to the attendance of
our in person gaming experiences, or cause certain of our partners,
such as Wanda Theaters in China, to avoid holding in person events.
Moreover, an epidemic, pandemic, outbreak or other public health
crisis, such as COVID-19, could cause members of our Action Squad,
in whom we rely to manage the logistics of our in person
experiences, or on-site employees of partners to avoid any
involvement with our in person experiences or other events, which
would adversely affect our ability to hold such events. The
ultimate extent of the impact of any epidemic, pandemic or other
health crisis on our business, financial condition and results of
operations will depend on future developments, which are highly
uncertain and cannot be predicted, including new information that
may emerge concerning the severity of such epidemic, pandemic or
other health crisis and actions taken to contain or prevent their
further spread, among others. These and other potential impacts of
an epidemic, pandemic or other health crisis, such as COVID-19,
could therefore adversely affect our business, financial condition
and results of operations.
A reversal of the U.S. economic recovery and a return to volatile
or recessionary conditions in the United States or abroad could
adversely affect our business or our access to capital markets in a
material manner.
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, and, as
such, we expect to seek additional capital either from operations
or that may be available from future issuance(s) of common stock or
debt financings, to fund our planned
operations.
Accordingly, our results of operations and the implementation of
our long-term business strategy could be adversely affected by
general conditions in the global economy, including conditions that
are outside of our control, such as the impact of health and safety
concerns from the current outbreak of COVID-19. The most recent
global financial crisis caused by COVID-19 resulted in extreme
volatility and disruptions in the capital and credit markets. A
severe or prolonged economic downturn could result in a variety of
risks to our business and could have a material adverse effect on
us, including limiting our ability to obtain additional capital
from the capital markets. We could also be adversely affected by
such factors as changes in foreign currency rates and weak economic
and political conditions in each of the countries in which we
operate.
Our business is subject to risks generally associated with the
entertainment industry.
Our business is subject to risks that are generally associated with
the entertainment industry, many of which are beyond our control.
These risks could negatively impact our operating results and
include the popularity, price to play, and timing of release of our
esports licensed games, economic conditions that adversely affect
discretionary consumer spending, changes in gamer demographics, the
availability and popularity of other forms of entertainment, and
critical reviews and public tastes and preferences, which may
change rapidly and cannot necessarily be predicted.