Super League Gaming: Triple-Digit Revenue Growth, But Significant Cash Destruction

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About: Super League Gaming (SLGG)
by: Villamayor Capital
Summary

Super League Gaming is an amateur esports community and content platform providing experiences to a massive audience of 2.3 billion gamers.

The company has applied to list the common stock on the Nasdaq Capital Market under the symbol SLGG. It intends to raise $25 million.

Assuming 2018 revenues of $0.85 million, the company would be growing revenues at 322% y/y.

The CFO was below -$8.3 million in both 2017 and 2016. If the company is not able to increase the CFO, it will need to raise further capital soon.

The float is not expected to be large. As a result, the amount of share price volatility could be very significant. Investors could make tons of money or lose tons of money in a short period of time.

Reporting triple-digit revenue growth in 2018, Super League Gaming (SLGG) could be an interesting name in 2019. Growth investors should study this company carefully. If the revenue growth can continue at the same level, many people will be interested in the company’s business model. Having said this, the amount of cash destruction in 2018 does not seem to justify a position in this name. Keep in mind that with the current level of CFO, Super League Gaming may soon need additional capital. If the company sells further equity, stock dilution could make the stock decline in the future.

Source: Prospectus

The image below provides the list of underwriters. Investors interested in acquiring shares should contact one of these companies:

Source: Prospectus

Business

Founded in 2014, Super League Gaming is an amateur esports community and content platform providing experiences to a massive audience of 2.3 billion gamers. Super League’s cloud-based technology platform offers broadcasting services to gamers and a network where they can establish connections with each other while improving their skills.

Source: Esportsobserver

Casting itself as a first-mover in defining the amateur esports industry, the company has been able to sign partnerships with well-known players in this industry. The prospectus mentions agreements with Microsoft (MSFT), Riot Games, Inc. and contracts signed with Supercell and Epic Games. For those investors who don’t know these companies, check some of the games owned by those partners: Minecraft, League of Legends, Clash Royale, and Fortnite.

Source: Company’s Website

Targeting generation Z and millennials, the company makes revenues through a monthly subscription for the more casual competitive player. In addition, gamers can also acquire a semi-annual season pass, which also offers access to the company’s city leagues, membership rewards, and other offers for more advanced players. The company’s website offers a list of players including different rankings, teams, and games. The images below provide further details on this matter:

Source: Company’s Website

Source: Company’s Website

When users log in, they can purchase access to events, provide information about themselves, read their gaming stats and customize their avatar. The amount of information that users can upload can be compared with that of Facebook (FB) or any other social media. The images below provide further details on the amount of customization that users can do:

Source: Company’s Website

Source: Company’s Website

In addition, the company offers access to SuperLeagueTV, a community supported by Twitch where the company offers live stream gameplay and video-on-demand. As of January 8, 2019, the amount of videos uploaded is not quite large. The image below provides further details on this matter:

Source: Twitch

The company also offers some of its videos on YouTube. The image below provides certain details about the videos that are shown on YouTube. Please note that the company does not seem to provide a link on its website directing users to YouTube. Readers should feel free to perform their own due diligence on the company’s videos.

Source: YouTube

Assessment Of The Website

According to SimilarWeb, Super League Gaming receives approximately 74k visitors per month. The average visit duration is not that large, equal to only 2 minutes. In addition, the number of pages per visit is equal to only 1.76. The numbers for social media platforms are usually much higher. The image below provides further details on this matter:

Source: SimilarWeb

It seems quite beneficial that many of the visitors, 56.90%, go directly to the page. These are visitors that know the name of the site. It shows that the company has already built a certain reputation. 28.45% of visitors come from search engines and Super League pays only for 7.62% of this traffic. It means that the company is well ranked by Google (NASDAQ:GOOG) (NASDAQ:GOOGL). It does not need to pay a lot of money to get traffic. The images below provide further details on this matter:

Source: SimilarWeb

Source: SimilarWeb

In 2018, Revenue Growth Was Quite Impressive

With revenues of $0.269 million and $0.201 million reported in 2016 and 2017, respectively, the company did not report massive revenue growth until 2018. Keep in mind that in the nine months ended September 30, 2018, Super League reported revenues of $0.639 million. Assuming full-year 2018 revenues of $0.85 million, the company would be growing revenues at 322% y/y.

With growing revenues, it is also quite interesting that the amount of expenses has not increased a lot in 2018. After net losses of -$12 million and -$14.9 million in 2016 and 2017, respectively, for the nine months ended September 30, 2018, the company reported a net loss of -$13.14 million. Super League seems to be able to increase its revenues while maintaining the same amount of expenses. It is a beneficial feature. The image below provides further details on this matter:

Source: Prospectus

Source: Prospectus

With that said about the amount of expenses, the company is losing cash at a high rate which value investors will not appreciate. The CFO was below -$8.3 million in both 2017 and 2016. The image below provides further details on this matter:

Source: Prospectus

Balance Sheet

While revenues increased in 2018, the company is not profitable. The company’s balance sheet shows that the assets/liabilities ratio decreased from 10x in 2017 to 0.85x in September 2018. As of September 30, 2018, Super League reported cash in hand of $5.9 million. However, with a CFO of more than -$8 million in 2018, the company should not be able to continue its operations without the proceeds from the IPO. The images below provide further details on the statements reported in 2016, 2017, and 2018:

Source: Prospectus

Source: Prospectus

Source: Prospectus

With that said, perhaps the most worrying feature is interest being paid by Super League. In 2018, the company reported 9% convertible debt notes with a face value of $10 million. Certain investors will believe that this amount of interest is too elevated. The lines below provide further details on this matter:

Source: Prospectus

Use Of Proceeds And Conversion Of Securities

The use of proceeds reported in the prospectus are beneficial. The company will not use the proceeds to pay debt or to acquire shares from existing shareholders. Certain investors may consider that the following is a boilerplate text. Form your own idea:

Source: Prospectus

It is very beneficial that the company expects to convert its 9.00% secured convertible promissory notes as the IPO goes live. The equity structure will not only remain very clean, but shareholders should also not fear the stock dilution from these securities.

“On a pro forma basis, giving effect to the automatic conversion of all outstanding principal and accrued but unpaid interest on our outstanding 9.00% secured convertible promissory notes, totaling $13.3 million at September 30, 2018.” Source: Prospectus

Not That Many Institutional Investors

The assessment of shareholders does not seem that beneficial as the company has not been able to distribute a large amount of shares between institutional investors. Directors own more than 50.9% of the total outstanding shares as shown by the image below:

Source: Prospectus

There are two institutional shareholders based in Cayman and Singapore. The image below provides further details on this matter:

Source: Prospectus

With this information in mind, the float is not expected to be large. As a result, the amount of share price volatility could be very significant. Investors could make tons of money or lose tons of money in a short period of time. This is a risk that investors will need to take into account.

Conclusion

With massive revenue growth in 2018, Super League Gaming could surprise a lot in 2019. If the company is able to maintain the same revenue growth in the future, growth investors should be very interested in this name. Having said that, the main issue of the company is its massive cash destruction. If the company is not able to increase the CFO, it will need to raise further capital soon, which could lead to stock dilution and share price depreciation. With this in mind, as of today, the company does not represent a real opportunity.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.