Investing in our common stock involves a high degree of risk. You
should carefully consider the risks described below, as well as the
other information in this Quarterly Report on Form 10-Q, including
our financial statements and the related notes thereto and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” before deciding whether
to invest in our common stock. The occurrence of any of the events
or developments described below could harm our business, financial
condition, operating results, and growth prospects. In such an
event, the market price of our common stock could decline, and you
may lose all or part of your investment. Additional risks and
uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations.
Risks Related to Our Business and Industry
We have incurred significant losses since our inception, and we may
continue to experience losses in the future.
We incurred net losses of $26.0 million and $20.6 million during
the nine months ended September 30, 2019 and the year ended
December 31, 2018, respectively. Noncash expenses (excluding
depreciation and amortization of fixed and intangible assets)
totaled $15.2 million and $8.9 million for the nine months ended
September 30, 2019 and the year ended December 31, 2018,
respectively. As of September 30, 2019, we had an accumulated
deficit of $81.1 million. Moreover, the report of our independent
registered public accounting firm to the financial statements for
our fiscal year ended December 31, 2018, included Prospectus filed
pursuant to Rule 424(b) under the Securities Act with the SEC on
February 27, 2019, contains an explanatory paragraph stating that
our recurring losses from operations, accumulated deficit and cash
used in operating activities raise substantial doubt about our
ability to continue as a going concern. We cannot predict if we will achieve profitability
soon or at all. We expect to continue to expend substantial
financial and other resources on, among other
things:
●
investments
to expand and enhance our esports technology platform and
technology infrastructure, make improvements to the scalability,
availability and security of our platform, and develop new
offerings;
●
sales
and marketing, including expanding our customer acquisition and
sales organization and marketing programs, and expanding our
programs directed at increasing our brand awareness among current
and new customers;
●
investments
in bandwidth to support our video streaming
functionality;
●
contract
labor costs and other expenses to host our leagues and
tournaments;
●
costs
to retain and attract gamers and license first tier game titles,
grow our online gamer community and generally expand our business
operations;
●
hiring
additional employees;
●
expansion
of our operations and infrastructure, both domestically and
internationally; and
●
general
administration, including legal, accounting and other expenses
related to being a public company.
We may not generate sufficient revenue to offset such costs to
achieve or sustain profitability in the future. We expect to
continue to invest heavily in our operations, our online and in
person experiences, business development related to game
publishers, advertisers, sponsors and gamer acquisition, to
accelerate as well as maintain our current market position, support
anticipated future growth and to meet our expanded reporting and
compliance obligations as a public company.
We expect operating losses to continue in the near term in order to
carry out our strategic objectives. We consider historical
operating results, capital resources and financial position, in
combination with current projections and estimates, as part of our
plan to fund operations over a reasonable period of
time.
We believe our current cash position, absent receipt of additional
capital either from operations or that may be available from future
issuance(s) of common stock or debt financings, is not sufficient
to fund our planned operations for the twelve months following the
date of this Report. We intend to continue implementing our
business strategy with the expectation that there will be no
material adverse developments in our business, liquidity or capital
requirements. If one or more of these factors do not occur as
expected, it could have a material adverse impact on our
activities, including (i) reduction or delay of our business
activities, (ii) forced sales of material assets, (iii) defaults on
our obligations, or (iv) insolvency. Our planned investments may
not result in increased revenue or growth of our business. We
cannot assure you that we will be able to generate revenue
sufficient to offset our expected cost increases and planned
investments in our business and platform. As a result, we may incur
significant losses for the foreseeable future, and may not be able
to achieve and/or sustain profitability. If we fail to achieve and
sustain profitability, then we may not be able to achieve our
business plan, fund our business or continue as a going concern.
The financial statements included in this Quarterly Report on Form
10-Q do not contain any adjustments which might be necessary if we
were unable to continue as a going concern.
We are a relatively young company, and we may not be able to
sustain our rapid growth, effectively manage our anticipated future
growth or implement our business strategies.
We have a limited operating history. Although we have experienced
significant growth since our gaming platform for amateur online and
in person gaming experiences was launched, and we established our
amateur city leagues, tournaments and competitions, our historical
growth rate may not be indicative of our future performance due to
our limited operating history and the rapid evolution of our
business model, including a focus on direct to consumer-based
gaming. We may not be able to achieve similar results or accelerate
growth at the same rate as we have historically. As our amateur
city leagues, tournaments and competitions continue to develop, we
may adjust our strategy and business model to adapt. These
adjustments may not achieve expected results and may have a
material and adverse impact on our financial condition and results
of operations.
In addition, our rapid growth and expansion have placed, and continue to
place, significant strain on our management and resources. This
level of significant growth may not be sustainable or achievable at
all in the future. We believe that our continued growth will depend
on many factors, including our ability to develop new sources of
revenues, diversify monetization methods including our direct to
consumer offerings, attract and retain competitive gamers, increase
engagement, continue developing innovative technologies,
tournaments and competitions in response to shifting demand in
esports and online gaming, increase brand awareness, and expand
into new markets. We cannot assure you that we will achieve any of
the above, and our failure to do so may materially and adversely
affect our business and results of operations.
We are subject to risks associated with operating in a rapidly
developing industry and a relatively new market.
Many elements of our business are unique, evolving and relatively
unproven. Our business and prospects depend on the continuing
development of live streaming of competitive esports gaming. The
market for esports and amateur online gaming competition is
relatively new and rapidly developing and are subject to
significant challenges. Our business relies upon our ability to
cultivate and grow an active gamer community, and our ability to
successfully monetize such community through tournament fees,
digital subscriptions for our esports gaming services, and
advertising and sponsorship opportunities. In addition, our
continued growth depends, in part, on our ability to respond to
constant changes in the esports gaming industry, including rapid
technological evolution, continued shifts in gamer trends and
demands, frequent introductions of new games and titles and the
constant emergence of new industry standards and practices.
Developing and integrating new games, titles, content, products,
services or infrastructure could be expensive and time-consuming,
and these efforts may not yield the benefits we expect to achieve
at all. We cannot assure you that we will succeed in any of these
aspects or that the esports gaming industry will continue to grow
as rapidly as it has in the past.
We generate a portion of our revenues from advertising and
sponsorship. If we fail to attract more advertisers and sponsors to
our gaming platform or tournaments or competitions, or if
advertisers or sponsors are less willing to advertise with or
sponsor us, our revenues may be adversely affected.
We generate a growing portion of our revenues from advertising and
sponsorship, which we expect to further develop and expand in the
near future as online viewership of our esports gaming offerings
expand. Our revenues from advertising and sponsorship partly depend
on the continual development of the online advertising industry and
advertisers’ willingness to allocate budgets to online
advertising in the esports gaming industry. In addition, companies
that decide to advertise or promote online may utilize more
established methods or channels, such as more established internet
portals or search engines, over advertising on our gaming platform.
If the online advertising and sponsorship market does not continue
to grow, or if we are unable to capture and retain a sufficient
share of that market, our ability to increase our current level of
advertising and sponsorship revenue and our profitability and
prospects may be materially and adversely affected.
Furthermore, our core and long-term priority of optimizing the
gamer experience and satisfaction may limit our gaming
platform’s ability to generate revenues from advertising and
sponsorship. For example, in order to provide our gamers with an
uninterrupted competitive gaming experience, we do not place
significant amounts of advertising on our streaming interface or
insert pop-up advertisements during streaming. While this
decision could adversely affect our operating results in the
short-term, we believe it enables us to provide a superior gamer
experience on our gaming platform, which will help us expand and
maintain our current base of gamers and enhance our monetization
potential in the long-term. However, this philosophy of putting our
gamers first may also negatively impact our relationships with
advertisers, sponsors or other third parties, and may not result in
the long-term benefits that we expect, in which case the success of
our business and operating results could be harmed.
Our revenue model may not remain effective and we cannot guarantee
that our future monetization strategies will be successfully
implemented or generate sustainable revenues and
profit.
We generate revenues from advertising and sponsorship of our league
tournaments, and through the operation of our live streaming gaming
platform using a revenue model whereby gamers can get free access
to certain live streaming of amateur tournaments, and gamers pay
fees to compete in league competition. We have generated, and
expect to continue to generate, a substantial portion of revenues
using this revenue model in the near term. We are, however,
particularly focused on implementing a direct to consumer model for
our expanding gamer base. Although our business has experienced
significant growth in recent years, there is no guarantee that our
direct to consumer packages will gain significant traction to
maximize our growth rate in the future, as the demand for our
offerings may change, decrease substantially or dissipate, or we
may fail to anticipate and serve gamer demands
effectively.
The loss of or a substantial reduction in activity by one or more
of our largest customers and/or vendors could materially and
adversely affect our business, financial condition and results of
operations.
During the nine months ended September 30, 2019 and the year ended
December 31, 2018, (i) five customers accounted for 90% of our
revenue and four customers accounted for 82%, respectively, (ii)
four customers accounted for 87% and three customers accounted for
96% of accounts receivable, respectively, and (iii) one vendor
accounted for 46% and three vendors accounted for
43% of accounts payable, respectively.
The loss of or a substantial reduction in activity by one or more
of our largest customers could materially and adversely affect our
business, financial condition and results of
operations.
Our marketing and advertising efforts may fail to resonate with
amateur gamers.
Our amateur city league tournaments and competitions are marketed
through a diverse spectrum of advertising and promotional programs
such as online and mobile advertising, marketing through websites,
event sponsorship and direct communications with our gaming
community including via email, blogs and other electronic means. An
increasing portion of our marketing activity is taking place on
social media platforms that are either outside, or not totally
within, our direct control. Changes to gamer preferences,
marketing regulations, privacy and data protection laws, technology
changes or service disruptions may negatively impact our ability to
reach target gamers. Our ability to market our amateur city league
tournaments and competitions is dependent in part upon the success
of these programs. If the marketing for our amateur city league
tournaments and competitions fails to resonate and expand with the
gamer community, or if advertising rates or other media placement
costs increase, our business and operating results could be
harmed.
We have a unique community culture that is vital to our success.
Our operations may be materially and adversely affected if we fail
to maintain this community culture as we expand in our addressable
gamer communities.
We have cultivated an interactive and vibrant online social gamer
community centered around amateur online and in person gaming. We
ensure a superior gamer experience by continuously improving the
user interface and features of our gaming platform along with
offering a multitude of competitive and recreational gaming
experiences with first tier esports games. We believe that
maintaining and promoting a vibrant community culture is critical
to retaining and expanding our gamer community. We have taken
multiple initiatives to preserve our community culture and values.
Despite our efforts, we may be unable to maintain our community
culture and cease to be the preferred platform for our target
gamers as we expand our gamer footprint, which would be detrimental
to our business operations.
The amateur esports gaming industry is intensely competitive.
Gamers may prefer our competitors’ amateur leagues,
competitions or tournaments over our own.
Competition in the amateur esports gaming industry generally is
intense. Our competitors range from established leagues and
championships owned directly, as well as leagues franchised by,
well known and capitalized game publishers and developers,
interactive entertainment companies and diversified media companies
to 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 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, 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 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.
Although we have relationships with Supercell, Epic Games, Tencent
America and Capcom for experiences involving Clash Royale,
Fortnite, PUBG MOBILE and Street Fighter® V: Arcade
Edition, respectively, we currently do
not have definitive license agreements in place with respect to
these relationships. We currently anticipate that we will enter
into license agreements with both parties in the future, however no
assurances can be given as to when we will be able to come to terms
agreeable to both parties, if ever. In the event that we are not
able to come to mutually agreeable terms and enter into definitive
license agreements with Supercell, Epic Games, Tencent America
and/or Capcom, they may unilaterally choose to discontinue their
relationship with the Company, thereby preventing us from offering
experiences on our platform using Clash Royale Fortnite, PUBG
MOBILE and/or Street Fighter® V: Arcade
Edition, as the case may be. Should
Supercell, Epic Games, Tencent America and/or Capcom choose not to
allow us to offer experiences involving Clash Royale, Fortnite,
PUBG MOBILE and/or Street Fighter® V: Arcade Edition
to our users, the popularity of
our amateur city leagues, tournaments and competitions may decline
and the number of our gamers may decrease, which could materially
and adversely affect our results of operations and financial
condition.
If we fail to keep our existing gamers highly engaged, to acquire
new gamers, 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 attending and participating in our in-person and
online tournaments and competitions, and using our gaming platform,
and keeping our gamers 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 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 in our ecosystem may
adversely affect the engagement level of our gamers, 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 into direct to consumer-based paying
gamers, 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 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. We must also keep providing amateur
gamers 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 SuperLeagueTV, 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 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 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.
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.
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 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 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 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, 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 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 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:
●
our
computer software or hardware, or our customers’ or
suppliers’ computer software or hardware;
●
our
network, our customers’ networks or our suppliers’
networks; or
●
our
connections and outsourced service arrangements with third
parties.
Our systems and operations are also vulnerable to damage or
interruption from:
●
power
loss, transmission cable cuts and other telecommunications and
utility failures;
●
hurricanes,
fires, earthquakes, floods and other natural
disasters;
●
a
terrorist attack in the U.S. or in another country in which we
operate;
●
interruption
of service arising from facility migrations, resulting from changes
in business operations including acquisitions and planned data
center migrations;
●
computer
viruses or software defects;
●
loss
or misuse of proprietary information or customer data that
compromises security, confidentiality or integrity; or
●
errors
by our employees or third-party service providers.
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, 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.
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.
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.
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.
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 to exchange
information and engage in various other online activities. Although
we require our gamers 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. 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 before
they are posted or streamed. Therefore, it is possible that gamers
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, 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.
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.
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
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 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 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 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 to exchange
information and engage in various other online activities. Although
we require our gamers 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. 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 before
they are posted or streamed. Therefore, it is possible that gamers
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, 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 our Common Stock
Although out 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 this 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 this 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
this offering. Factors that could cause fluctuations in the trading
price of our common stock include:
●
changes
to our industry, including demand and regulations;
●
we
may not be able to compete successfully against current and future
competitors;
●
competitive
pricing pressures;
●
our
ability to obtain working capital financing as
required;
●
additions
or departures of key personnel;
●
sales
of our common stock;
●
our
ability to execute our business plan;
●
operating
results that fall below expectations;
●
loss
of any strategic relationship, sponsor or licensor;
●
any
major change in our management;
●
changes
in accounting standards, procedures, guidelines, interpretations or
principals; and
●
economic,
geo-political and other external factors.
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 this offering. If the market price of our common
stock after this 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 on your investment will only occur if our stock price
appreciates.
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.
Upon expiration of lock-up agreements between the
underwriters of our IPO and our officers, directors and certain
holders of our common stock in late-August 2019, a substantial
number of shares of our common stock could be sold into the public
market, which could depress our stock price.
Our officers, directors and certain holders of our common stock,
options and warrants, which represents substantially all of our
outstanding shares of common stock immediately prior to completion
of our IPO, entered into lock-up agreements with the
underwriters of our IPO which prohibit, subject to certain limited
exceptions, the disposal or pledge of, or the hedging against, any
of their common stock or securities convertible into or
exchangeable for shares of common stock for a period through August
26, 2019, subject to extension in certain circumstances. The market
price of our common stock could decline as a result of sales by our
stockholders in the market after the expiration of
the lock-up period, or the perception that these sales
could occur. After these lock-up period expires, many of
our stockholders will have an opportunity to sell their stock for
the first time. These factors could also make it difficult for us
to raise additional capital by selling stock.
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:
●
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;
●
reduced
disclosure obligations regarding executive compensation in our
periodic reports and annual report on Form 10-K; and
●
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.
We could be an emerging growth company for up to five
years following the completion of this offering. Our status as
an emerging growth company will end as soon as any of the
following takes place:
●
the
last day of the fiscal year in which we have more than $1.07
billion in annual revenue;
●
the
date we qualify as a “large accelerated filer,” with at
least $700 million of equity securities held by
non-affiliates;
●
the
date on which we have issued, in any three-year period, more than
$1.0 billion in non-convertible debt securities; or
●
the
last day of the fiscal year ending after the fifth anniversary of
the completion of this offering.
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.
We will incur increased costs as a result of being a public
company, particularly after we cease to qualify as an
“emerging growth company.”
Upon completion of this offering, we will become a public company
and expect to incur significant legal, accounting and other
expenses that we did not incur as a private company.
The Sarbanes-Oxley Act, as well as rules subsequently
implemented by the SEC and Nasdaq, impose various requirements on
the corporate governance practices of public companies. We expect
these rules and regulations to increase our legal and financial
compliance costs and to make some corporate activities more
time-consuming and costly. We expect to incur significant expenses
and devote substantial management effort toward ensuring compliance
with the requirements of Section 404 of
the Sarbanes-Oxley Act and the other rules and
regulations of the SEC. For example, as a result of becoming a
public company, we will need to adopt policies regarding internal
controls and disclosure controls and procedures. We also expect
that operating as a public company will make it more difficult and
more expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same
or similar coverage. In addition, we will incur additional costs
associated with our public company reporting requirements. It may
also be more difficult for us to find qualified persons to serve on
our board of directors or as executive officers. We are currently
evaluating and monitoring developments with respect to these rules
and regulations, and we cannot predict or estimate with any degree
of certainty the amount of additional costs we may incur or the
timing of such costs.
In the past, stockholders of a public company often brought
securities class action suits against the company following periods
of instability in the market price of that company’s
securities. If we were involved in a class action suit, it could
divert a significant amount of our management’s attention and
other resources from our business and operations, which could harm
our results of operations and require us to incur significant
expenses to defend the suit. Any such class action suit, whether or
not successful, could harm our reputation and restrict our ability
to raise capital in the future. In addition, if a claim is
successfully made against us, we may be required to pay significant
damages, which could have a material adverse effect on our
financial condition and results of operations.
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.
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, President Trump signed tax
legislation into law, commonly referred to as the Tax Cuts and Jobs
Act of 2017, that contains 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, causing all of our
deferred income tax assets and liabilities, including NOLs, to be
measured using the new rate and which value is 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.
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 nine months ended September 30, 2019 and the year ended
December 31, 2018, we recorded share-based compensation expense of
$2.73 million and $2.5 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.