Super League Enterprise, Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information and Holders Our common stock is listed on the Nasdaq Capital Market under the ticker symbol “SLE.” As of April 1, 2024, we had 274 holders of record of our common stock based upon the records of our transfer agent, which do not include beneficial owners of common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. Dividend Policy We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business. Therefore, we do not currently expect to pay any cash dividends on our common stock for the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board and will depend upon our results of operations, financial condition, capital requirements, general business conditions, and other factors that our board of directors deems relevant. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities. Issuance of Common Stock as Dividends During the fourth quarter of 2023, the Company paid dividends to the holders of the Company’s Series A Convertible Preferred Stock, in the form of 232,981 shares of common stock, as further described in Note 7. Recent Sales of Unregistered Equity Securities No unregistered securities were issued during the years ended December 31, 2023 and 2022 that were not previously reported. Performance Graph As a smaller reporting company, we are not required to provide the performance graph required by Item 201(e) of Regulation S-K. ITEM 6. [Reserved] ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of our operations together with our consolidated financial statements and the notes thereto appearing elsewhere in this Report. This discussion contains forward-looking statements reflecting our current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “ Risk Factors, ” “ Special Note Regarding Forward-Looking Statements ” and elsewhere in this Report. All references to “ Note, ” followed by a number reference from one to twelve herein, refer to the applicable corresponding numbered footnotes to the consolidated financial statements contained elsewhere herein. General Super League Enterprise, Inc. is a leading creator and publisher of content experiences and media solutions across the world’s largest immersive platforms. From open gaming powerhouses such as Roblox, Minecraft and Fortnite Creative, to bespoke worlds built using the most advanced 3D creation tools, Super League’s innovative solutions provide incomparable access to massive audiences who gather in immersive digital spaces to socialize, play, explore, collaborate, shop, learn and create. As a true end-to-end activation partner for dozens of global brands, Super League offers a complete range of development, distribution, monetization and optimization capabilities designed to engage users through dynamic, energized programs. As an originator of new experiences fueled by a network of top developers, a comprehensive set of proprietary creator tools and a future-forward team of creative professionals, Super League accelerates IP and audience success within the fastest growing sector of the media industry. 36 Table of Contents We generate revenue from (i) innovative advertising including immersive game world and experience publishing and in-game media products, (ii) direct to consumer offers, including in-game items, e-commerce, game passes and ticketing and digital collectibles, and (iii) content and technology through the production and distribution of our own, advertiser and third-party content. We operate in one reportable segment to reflect the way management and our chief operating decision maker review and assess the performance of the business. Reverse Stock Split and Name Change On September 7, 2023, the Company filed a Certificate of Amendment (the “Amendment”) to the Company’s Second Amended and Restated Certificate of Incorporation, as Amended (the “Charter”), which became effective September 11, 2023, to change the name of the Company from Super League Gaming, Inc. to Super League Enterprise, Inc. (the “Name Change”) and to effect a reverse stock split of the Company’s issued and outstanding shares of common stock, par value $0.001 per share, at a ratio of 1-for-20 (the “Reverse Split”). The Name Change and the Reverse Split were approved by the Company’s Board of Directors (the “Board”) on July 5, 2023, and approved by the stockholders of the Company on September 7, 2023. Refer to Note 7 for additional information regarding the Reverse Split. All references to common stock, warrants to purchase common stock, options to purchase common stock, restricted stock, share data, per share data and related information contained in the financial statements have been retroactively adjusted to reflect the effect of the Reverse Split for all periods presented. Increase in Authorized Common Stock On May 30, 2023, the Company filed a Certificate of Amendment to its Charter (the “May Amendment”), increasing the number of authorized shares of common stock from 100,000,000 to 400,000,000. The Company’s Board previously approved the May Amendment on March 17, 2023, and the Company obtained the approval of the May Amendment by written consent of its stockholders holding greater than 50% of the voting securities of the Company on April 5, 2023. In connection with the Name Change, the Company also changed its Nasdaq ticker symbol to “SLE” from “SLGG.” Matters Affecting Comparability Impairment Charges. In the fourth quarter of 2023, we recorded a non-cash impairment charge related to our partner relationship related intangible assets, comprised primarily of our Microsoft Minecraft server and InPvP developed technology intangible assets originally acquired in connection with the acquisition of Mobcrush, Inc., in June 2021. The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include significant underperformance relative to expected historical or projected future operating results, and significant changes in the manner of our use of the acquired assets or the strategy in the context of our overall business. Due to underperformance relative to historical and projected future operating results and a decision to deploy resources in other areas of the business, we performed an impairment analysis and determined that the sum of the expected undiscounted future cash flows resulting from the use of the assets was less than the carrying amount of the assets, resulting in an impairment loss totaling $7.1 million, which is recorded in the accompanying consolidated statement of operations for the year ended December 31, 2023. Loss on intangible asset disposal. In June 2023 , the Company assigned the intangible assets originally acquired in connection with the Company’s acquisition of Bannerfy in fiscal year 2021, to the original sellers. The assets were disposed of in connection with management’s review of operations and decision to allocate resources elsewhere. As a result, the Company recorded a write-off of net developed technology related intangible assets acquired in connection with the acquisition of Bannerfy totaling $2.3 million, which is included in “Loss on intangible asset disposal” in the accompanying consolidated statement of operations for the year ended December 31, 2023. Impairment of Goodwill. As described in more detail at Note 2, we performed goodwill impairment tests as of September 30, 2022 and December 31, 2022, resulting in aggregate goodwill impairment charges of $50.3 million for the year ended December 31, 2022. Executive Summary Revenue for the years ended December 31, 2023 (“Fiscal Year 2023”) and 2022 (“Fiscal Year 2022”) totaled $25.1 million and $19.7 million, reflecting a year over year increase of 27%. Excluding product design and software development kit related revenue totaling $919,000 recognized in the first quarter of Fiscal Year 2022, total revenue for Fiscal Year 2023 increased $6.3 million, or 34% compared to the comparable prior year period. Cost of revenue for Fiscal Year 2023 and Fiscal Year 2022 (“Fiscal Years 2023 and 2022”) was $15.3 million and $11.2 million, respectively, reflecting an increase of 37%, driven primarily by the significant increase in Fiscal Year 2023 revenues, compared to the prior year. As a percent of revenue, gross profit for Fiscal Year 2023 decreased to 39%, compared to 43% for the prior year period, driven by partial delivery during the third and fourth quarters of 2023 under a significant custom integration and platform media revenue contract with a customer that had a higher average direct cost profile, compared to the programs that generated revenues during the comparable prior year period, and lower cost one-off product design and software development kit related revenue recognized during the first quarter of Fiscal Year 2022. Total operating expense for Fiscal Year 2023 decreased to $42.6 million compared to $93.5 million in the comparable prior year period. Operating expense for Fiscal Year 2023 included aggregate noncash impairment and loss on intangible asset disposal charges totaling $9.3 million, and Fiscal Year 2022 included a noncash goodwill impairment charge of $50.3 million. Excluding the noncash impairment charges, the decrease in total operating expense reflects decreases in cloud services and other technology platform costs and decreases in personnel, marketing and other corporate costs, resulting from ongoing cost reduction and optimization activities. Excluding noncash stock compensation expense, amortization expense, intangible asset impairment charges, legal settlement charges and mark to market related fair value adjustments, operating expense for Fiscal Year 2023 was $25.1 million, reflecting a 25% reduction in operating expense, compared to the comparable prior year period. 37 Table of Contents Net loss for Fiscal Year 2023, which includes the impact of significant mark to market related credits as described below, and noncash stock compensation, amortization and intangible asset impairment charges, as summarized below, was $30.3 million or $(13.67) per share, compared to a net loss of $85.5 million, or $(45.95) per share, in the comparable prior year period. The calculation of net loss per share for Fiscal Year 2023 included noncash common stock dividend and deemed dividend related direct charges to accumulated deficit totaling $7.9 million, as described at Note 2. Excluding the impact of the noncash common stock dividend and deemed dividend related direct charges to accumulated deficit, net loss per share for Fiscal Year 2023 was $(10.84). During Fiscal Year 2023, we continued to deliver top line revenue growth, including, 52%, 42% and 32% increases in sequential quarterly revenues in the second, third and fourth quarters of Fiscal Year 2023, and 17% (excluding product design and software development kit related revenue in Fiscal Year 2022), 18%, 60% and 34%, increases in revenues compared to the prior year comparable quarter in the first, second, third and fourth quarters of Fiscal Year 2023. During the quarter we continued to demonstrate the effectiveness of our overall strategy, providing us with increasing opportunities to take a greater share of advertisers’ wallet, as demonstrated by larger deal sizes and continued high repeat customer percentages, and our focus on cost reductions and optimization has positively impacted operating leverage. In addition, we continued to focus on our direct sales force and continued to see increases in sales force effectiveness, as demonstrated by larger total revenue wins for our direct sellers. During Fiscal Year 2023, we continued to work with signature Brands and clients, along with the acquisition and integration of Melon, where we are delivering immersive experiences that are not just short-term campaigns, but persistent virtual worlds that we believe will continue to change the magnitude and the distribution of our future revenues, more in-line with a recurring revenue model, more forecastable in nature and less like a traditional advertising model. We are a leading scalable, vertically integrated publishing machine across some of today’s largest digital social platforms and a metaverse innovation engine for the future of the immersive web. Entry into Financing and Security Agreement The Company and its subsidiaries (collectively with the Company, the “Borrowers”), entered into a Financing and Security Agreement (the “SLR Agreement”) with SLR Digital Finance, LLC (“Lender”), effective December 17, 2023 (the “Effective Date”). Pursuant to the SLR Agreement, Lender may, from time to time and in its sole discretion, make certain cash advances to the Company (each an “Advance”, and collectively, “Advances”), against the face amounts of certain uncollected accounts receivable of the Borrowers on an account-by-account basis (each, a “Financed Account”, and collectively, the “Accounts”), at a rate of 85% multiplied by the face value of such Account (the “Advance Rate”), less any reserved funds and any other amounts due to Lender from Borrowers, up to a maximum aggregate Advance amount of $4,000,000 (the “Maximum Amount”)(the Advances on the Accounts is hereinafter, the “Facility”). Upon receipt of any Advance, Borrowers will have assigned all of its rights in such receivables and all proceeds thereof. The proceeds received from the Facility are, and will be, used to fund general working capital needs. The SLR Agreement is effective for 24 months from the Effective Date (the “Term”), automatically extends for successive Terms (each, a “Renewal Term”), and the Borrowers’ are obligated to pay the Lender an early termination fee in the event the SLR Agreement is terminated under certain circumstances prior to the end of any Term or Renewal Term, as more specifically set forth in the SLR Agreement. In connection with the Facility, the Company agreed to, among other things, (i) pay a finance fee equal to 2% of the Maximum Amount, payable in 24 equal monthly installments on the last day of each month of the Term until paid in full, (ii) pay a servicing fee equal to 0.30% multiplied by the actual average daily amount of Advances outstanding at the time of determination (the “Outstanding Amount”) for the applicable month, on the last day of each calendar month during the Term (or so long as any obligations arising under the SLR Agreement are outstanding); (iii) be charged a monthly financing fee (the “Financing Fee”), due upon receipt of full payment of a Financed Account by Lender, equal to 1/12 of (a) the prime rate plus 2% (the “Facility Rate”), multiplied by (b) the amount of the Outstanding Amount; and (iv) utilize the facility such that the monthly average aggregate Advances outstanding is at $400,000 (the “Minimum Utilization”). In the event that Borrower’s monthly utilization is less than the applicable Minimum Utilization for any month, the Financing Fee for such month shall be calculated as if the applicable Minimum Utilization has been satisfied. Furthermore, the SLR Agreement imposes various restrictions on the activities of the Borrowers, including a prohibition on fundamental changes to the Company or its subsidiaries (including certain consolidations, mergers and sales and transfers of assets, and limitations on the ability of the Borrowers to grant liens upon their property or assets). The SLR Agreement includes standard Events of Default (as defined in the SLR Agreement), and provide that, upon the occurrence of certain events of default, Lender may, among other things, immediately collect any obligation owing to Lender under the SLR Agreement, cease advancing money to the Borrowers, take possession of any collateral, and/or charge interest at a rate equal to the lesser of (i) 6% above the Facility Rate, and (ii) the highest default rate permitted by applicable law. As security for the full and prompt payment and performance of any obligations arising under the SLR Agreement, the Borrowers granted to Lender a continuing first priority security interest in all the assets of the Borrowers. The SLR Agreement also provides for customary provisions, including representations, warranties and covenants, indemnification, waiver of jury trial, arbitration, and the exercise of remedies upon a breach or default. 38 Table of Contents Acquisition of Melon, Inc. On May 4, 2023 (the “Melon Closing Date”), we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Melon, Inc., a Delaware corporation (“Melon”), pursuant to which the Company acquired substantially all of the assets of Melon (the “Melon Assets”) (the “Melon Acquisition”). The consummation of the Melon Acquisition (the “Closing”) occurred simultaneously with the execution of the Purchase Agreement. Melon is a development studio building innovative virtual worlds in partnership with powerful consumer brands across music, film, TV, sports, fashion and youth culture. With this acquisition, Super League further strengthens its position as a one-stop solutions provider and strategic operating partner for marquee brands and businesses seeking to expand and activate communities throughout the gaming metaverse. At the Closing, the Company paid an aggregate total of $900,000 to Melon (the “Closing Consideration”), of which $150,000 was paid in cash, and the remaining $750,000 was paid in the form of shares of the Company’s common stock (with a closing date fair value of $722,000), valued at $9.64 (the “Closing Share Price”), the volume weighted average price (“VWAP”) of the Company’s common stock for the five trading days immediately preceding the Melon Closing Date, as quoted on the Nasdaq Capital Market. Refer to the table at Note 5 for calculation of the fair value of consideration paid. Pursuant to the terms and subject to the conditions of the Purchase Agreement, up to an aggregate of $2,350,000 (the “Contingent Consideration”) will be payable to Melon in connection with the achievement of certain revenue milestones for the period from the Closing until December 31, 2023 (the “First Earnout Period”) in the amount of $1,000,000, and for the year ending December 31, 2024 (the “Second Earnout Period) in the amount of $1,350,000 (the “Second Earnout Period” and the First Earnout Period are collectively referred to as the “Earnout Periods”). The Contingent Consideration is payable in the form of cash and common stock, with $600,000 of the aggregate Contingent Consideration being payable in the form of cash, and $1,750,000 payable in the form of common stock, valued at the greater of (a) the Closing Share Price, and (b) the VWAP for the five trading days immediately preceding the end of each respective Earnout Period. Additionally, pursuant to the Purchase Agreement, the Company entered into employment agreements with two former key Melon employees (“Key Melon Employees”), pursuant to which the Key Melon Employees were granted inducement awards consisting of restricted stock unit awards (“RSUs”) to acquire an aggregate of 103,780 shares of its common stock as described at Note 5. Roblox Partner Program On August 2, 2023, we announced that Super League joined the Roblox (NYSE: RBLX) Partner Program. As an early mover in building and distributing creative and impactful programs for brands, in partnership with hundreds of top Roblox developers, joining the Roblox Partner Program will allow Super League to elevate its offerings to include the official Roblox advertising system with Immersive Ads. The added capabilities augment Super League’s powerful end-to-end, innovative solutions, enabling brands to reach the highly engaged audience on Roblox, a global immersive platform where over 66 million people connect and communicate daily. Super League was an early mover in the space, enabling extensive third-party distribution for brands on Roblox by providing hundreds of developers in the community with measurement, monetization, and optimization tools. Through the Roblox Partner Program, Super League is evolving its offering by repurposing its previous ad network to solely focus on Roblox’s Immersive Ads product to enable brands to reach audiences at scale. Super League will be integrating Roblox’s Immersive Ads into its growing suite of cross-platform offerings and capabilities inclusive of experience creation, promotion, distribution, and monetization: ● Highly immersive ad formats for the official Roblox advertising system; ● Bespoke brand integrations into popular experiences; ● Proprietary Pop-Up Shops, interactive characters, and integrated content products; ● First-to-market home grown solution to turn digital in-experience codes into real-world physical redemptions; ● Robust influencer marketing programs; ● In-experience brand lift studies; ● Expert video content creation for Tik Tok, YouTube, and more; and ● Metaverse strategy & innovation consulting. Super League’s inclusion in the Roblox Partner Program, combined with its longstanding dedication to supporting hundreds of Roblox developers with software to help manage and grow their businesses, creates an unparalleled opportunity to achieve massive reach and powerful results for brands. Immediate benefits of being part of the program include access to educational resources and training, along with comprehensive tools, collateral, and insights for brand onboarding and education. 39 Table of Contents LandVault Strategic Partnership In April 2023, we formed a strategic partnership with LandVault, the largest construction company in the metaverse. This created a unique powerful metaverse alliance ready to provide brands with scalable solutions and bridge the gap between Web2 and Web3. Together, we have already launched programs in the UAE specific to virtual tourism and see significant opportunities in this vertical and others across the greater Gulf Cooperation Council (“GCC”) countries. Equity Financings Convertible Preferred Stock Issuances ● Series AAA Convertible Preferred Financing On the dates set forth in the applicable table below, we entered into subscription agreements with accredited investors in connection with the sale of an aggregate of 8,355 shares of newly designated Series AAA and AAA-2 Convertible Preferred Stock, each series having a $0.001 par value and a $1,000 purchase price, hereinafter collectively referred to as “Series AAA Preferred,” and the individual offerings of Series AAA Preferred stock, hereinafter collectively referred to as the “Series AAA Offerings”, raising gross proceeds of $8.4 million, before fees. ● Series AA Convertible Preferred Financing On the dates set forth in the applicable table below, we entered into subscription agreements with accredited investors in connection with the sale of an aggregate of 11,781 shares of newly designated Series AA, AA-2, AA-3, AA-4 and AA-5 Convertible Preferred Stock, each series having a $0.001 par value and a $1,000 purchase price, hereinafter collectively referred to as “Series AA Preferred,” and the individual offerings of Series AA Preferred stock hereinafter collectively referred to as the “Series AA Offerings”, raising gross proceeds of $11.8 million, before fees. ● Series A Convertible Preferred Financing On the dates set forth in the applicable table below, we entered into subscription agreements with accredited investors in connection with the sale of an aggregate of 12,622 shares of newly designated Series A, A-2, A-3, A-4 and A-5 Convertible Preferred Stock, each series having a $0.001 par value and a $1,000 purchase price, hereinafter collectively referred to as “Series A Preferred,” and the individual offerings of Series A Preferred stock, hereinafter, collectively referred to as the “Series A Offerings”, raising gross proceeds of $12.6 million, before fees. In connection with the Series A Offerings, Series AA Offerings, and Series AAA Offerings (collectively, the “Preferred Offerings”), the Company filed Certificates of Designation of Preferences, Rights and Limitations of the respective series stock with the State of Delaware. Use of net proceeds from the Preferred Offerings for the periods presented included working capital, repayment of certain indebtedness and general corporate purposes, including sales and marketing activities and product development. The Company undertook the Preferred Offerings pursuant to certain placement agency agreements (collectively, the “Placement Agency Agreements”) with Aegis Capital Corporation, a New York corporation and registered broker-dealer and member of the Financial Industry Regulatory Authority (the “Placement Agent”), which acted as the Company’s exclusive placement agent for the Offerings. Pursuant to the terms of the Placement Agency Agreements, in connection with the closings of the Offerings, the Company paid the Placement Agent aggregate cash fees, and non-accountable expense allowances as disclosed in the applicable tables below, and issued to the Placement Agent or its designees warrants to purchase shares of common stock as disclosed in the tables below, at the conversion prices disclosed below. Refer to Liquidity and Capital Resources, below, and Note 7 for additional information. Common Stock Issuances On August 21, 2023, we entered into an underwriting agreement (the “Underwriting Agreement”) with Aegis Capital Corp. (the “Underwriter”), relating to the Company’s public offering (the “Common Stock Offering”) of 778,653 shares of its common stock, and pre-funded warrants to purchase 67,500 shares of the Company’s common stock, in lieu of the Company’s common stock (the “Pre-Funded Warrants”, and collectively with the Shares, the “Firm Securities”) to certain investors. Pursuant to the Underwriting Agreement, the Company also granted the Underwriters a 45-day option (“Option”) to purchase an additional 126,923 shares of the Company’s common stock and/or Pre-Funded Warrants (the “Option Securities”, and together with the Firm Securities, the “Securities”). On September 12, 2023, the Underwriter partially exercised its Option and purchased an additional 32,616 shares of common stock at a price of $2.60 per share. The issuance by the Company of the Option Securities resulted in total gross proceeds of approximately $84,800, before deducting underwriting discounts, commissions, and other offering expenses payable by the Company. On August 23, 2023, the Company issued the Firm Securities and closed the Offering at a public price of $2.60 per share, and $2.58 per share underlying each Pre-Funded Warrant, for net proceeds to the Company of approximately $1.8 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. Use of net proceeds from the Common Stock Offering for the periods presented included working capital and general corporate purposes, including sales and marketing activities and product development. 40 Table of Contents The Firm Securities were offered, issued, and sold pursuant to a prospectus supplement and accompanying prospectus filed with the Securities and Exchange Commission (the “SEC”) pursuant to an effective shelf registration statement filed with the SEC on Form S-3 (File No. 333-259347) (the “Registration Statement”) under the Securities Act of 1933, as amended (the “Securities Act”), as supplemented by a prospectus supplement, dated August 23, 2023, relating to the Securities (together with the accompanying base prospectus, dated September 7, 2021, the “Prospectus Supplement”), filed with the SEC pursuant to Rule 424(b) of the Securities Act on August 23, 2023. Refer to “Liquidity and Capital Resources” and Note 7 below for additional information. Compliance with NASDAQ Listing Rule 5550(a)(2) On September 25, 2023, we received a written notice from The Nasdaq Stock Market (“Nasdaq”) informing us that the Company has regained compliance with the minimum bid price requirement under NASDAQ Listing Rule 5550(a)(2) (the “Rule”) for continued listing on the Nasdaq Capital Market. Previously, On October 4, 2022, we received a letter (the “Letter”) from the Listing Qualifications Staff of Nasdaq, indicating that, based upon the closing bid price of our common stock for 30 consecutive business days, the Company was not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Capital Market, as set forth in the Rule, and on April 4, 2023, we received an extension notice letter (the “Extension Notice”) from Nasdaq notifying the Company that Nasdaq has granted the Company a 180-day extension until October 2, 2023 (the “Extension Period”), to regain compliance with the Rule. Sale of Minehut On February 29, 2024, the Company sold its Minehut business unit (“Minehut”) to GamerSafer, Inc., a Delaware corporation (“GamerSafer”), in a transaction approved by the Board of Directors of the Company. Pursuant to the Asset Purchase Agreement entered into by and between GamerSafer and the Company on February 26, 2024 (the “GS Agreement”), the Company will receive $1,000,000 of purchase consideration for Minehut, which amount will be paid by GamerSafer in revenue and royalty sharing over a period of two years, as described in the GS Agreement. Other than with respect to the GS Agreement, there is no relationship between the Company or its affiliates with GamerSafer or its affiliates. The transaction allows Super League to streamline its position in partnering with major brands to build, market, and operate 3D experiences across multiple immersive platforms, including open gaming powerhouses like Minecraft, and aligns with our cost improvement initiative. The two companies will maintain a commercial relationship which ensures that Minehut can remain an ongoing destination available to Super League’s partners. Seasonality Our revenue fluctuates quarterly and is generally higher in the second half of our fiscal year, with the fourth quarter typically representing our highest revenue quarter each year. Advertising spending is traditionally seasonally strong in the second half of each year, reflecting the impact of seasonal back to school, game release and holiday season advertising spending by brands and advertisers. We believe that this seasonality in advertising spending affects our quarterly results, which generally reflect relatively higher advertising revenue in the second half of each year, compared to the first half of the year. Results of Operations for the Fiscal Years Ended December 31, 2023 and 2022 We derived the financial data as of and for the Fiscal Years 2023 and 2022, set forth below, from our audited consolidated financial statements included elsewhere herein, and should be read in conjunction with those audited consolidated financial statements and related notes thereto, as well as the information found under this section. Our historical results are not necessarily indicative of the results to be expected in future periods. All references to “Note,” followed by a number reference from one to twelve herein, refer to the applicable corresponding numbered footnotes to the consolidated financial statements contained elsewhere herein. 41 Table of Contents The following table sets forth a summary of our results of operations for Fiscal Years 2023 and 2022: Fiscal Year Ended December 31, Change 2023 2022 $ % REVENUE $ 25,079,000 $ 19,677,000 $ 5,402,000 27 % COST OF REVENUE 15,297,000 11,162,000 4,135,000 37 % GROSS PROFIT 9,782,000 8,515,000 1,267,000 15 % OPERATING EXPENSE Selling, marketing and advertising 12,450,000 12,036,000 414,000 3 % Engineering, technology and development 9,500,000 15,876,000 (6,376,000 ) (40 )% General and administrative 10,258,000 12,094,000 (1,836,000 ) (15 )% Contingent consideration 1,075,000 3,206,000 (2,131,000 ) (66 )% Loss on intangible asset disposal 2,284,000 - 2,284,000 100 % Impairment of intangible assets and goodwill 7,052,000 50,263,000 (43,211,000 ) (86 )% Total operating expense 42,619,000 93,475,000 (50,856,000 ) (54 )% NET LOSS FROM OPERATIONS (32,837,000 ) (84,960,000 ) (52,123,000 ) (61 )% OTHER INCOME (EXPENSE), NET 2,194,000 (696,000 ) (2,890,000 ) (415 )% Loss before benefit from income taxes (30,643,000 ) (85,656,000 ) (55,013,000 ) (64 )% Benefit from income taxes 313,000 205,000 108,000 53 % NET LOSS $ (30,330,000 ) $ (85,451,000 ) $ (55,121,000 ) (65 )% Comparison of the Results of Operations for the Fiscal Years Ended December 31, 2023 and 2022 Revenue Fiscal Year Ended December 31, Change 2023 2022 $ % Media and advertising $ 10,919,000 $ 12,122,000 $ (1,203,000 ) (10 %) Publishing and content studio 12,732,000 5,744,000 6,988,000 122 % Direct to consumer 1,428,000 1,811,000 (383,000 ) (21 %) $ 25,079,000 $ 19,677,000 $ 5,402,000 27 % Fiscal Year 2023 2022 Number of customers > 10% of revenue / percent of revenue One / 14% - / - By revenue category: Advertising and sponsorships One / 3% - / - Publishing and content studio One / 11% - / - ● Total revenue increased $5.4 million, or 27%, to $25.1 million, compared to $19.7 million in the comparable prior year period. Revenue for Fiscal Year 2022 included $919,000 of product design and software development kit related revenue pursuant to a development agreement with a customer. Excluding product design and software development kit related revenue recognized during Fiscal Year 2022, total revenue for Fiscal Year 2023 increased $6.3 million, or 34% compared to the comparable prior year period. ● Media and advertising revenue decreased $1.2 million, or 10%, to $10.9 million, compared to $12.1 million in the comparable prior year period. The change reflected a $1.6 million increase in on-platform, off-platform and other related media sales revenue, offset by a $2.8 million decrease in influencer marketing related revenues, reflecting a strategic shift in the allocation of resources to higher margin media and custom products. ● Publishing and content studio revenue, excluding product design and software development kit related revenue recognized during Fiscal Year 2022, increased $7.9 million, or 164%, driven primarily by a 253% increase in custom game development and immersive experience related revenues, including revenues for immersive experiences for Kraft Lunchables, Lego, Dave & Busters, Proctor & Gamble, Yas Island, Hamiliton, Arm & Hammer, Universal Pictures, “Trolls Band Together,” Universal Pictures, “Migration”, Canon and Motorola Solutions. Publishing and content studio sales revenue for Fiscal Year 2022 included $919,000 of product design and software development kit related revenue pursuant to a development agreement with a customer. ● Direct to consumer revenue decreased $383,000, or 21%, compared to the comparable prior year period, driven primarily by a 35% decrease in “in-game” platform sales of digital goods within our Mineville, official Microsoft Minecraft partner gaming server digital property, partially offset by a 26% increase in revenues for our Minehut digital property, which provides Minecraft server hosting services on a subscription basis and other digital goods to the Minecraft gaming community. Cost of Revenues Cost of revenue includes direct costs incurred in connection with the satisfaction of performance obligations under our revenue arrangements including internal and third-party engineering, creative, content, broadcast and other personnel, talent and influencers, internal and third-party game developers, content capture and production services, direct marketing, cloud services, software, prizing, and revenue sharing fees. Cost of revenue fluctuates period to period based on the specific programs and revenue streams contributing to revenue each period and the related cost profile of our physical and digital experiences, media and advertising campaigns and publishing and content studio sales activities occurring each period. 42 Table of Contents Cost of revenue increased $4.1 million, or 37%, driven primarily by the 27% increase in related revenues for the fiscal year periods presented. The greater than proportionate change in cost of revenue was driven by partial delivery during the period under a significant custom integration and platform media revenue contract with a customer that had a higher average direct cost profile compared to the programs that generated revenues during the prior year period, and lower cost product design and software development kit related revenue recognized during the first quarter of Fiscal Year 2022. Operating Expense Fiscal Year Ended December 31, Change 2023 2022 $ % Selling, marketing and advertising $ 12,450,000 $ 12,036,000 $ 414,000 3 % Engineering, technology and development 9,500,000 15,876,000 (6,376,000 ) (40 )% General and administrative 10,258,000 12,094,000 (1,836,000 ) (15 )% Contingent consideration 1,075,000 3,206,000 (2,131,000 ) (66 )% Loss on intangible asset disposal 2,284,000 - 2,284,000 100 % Impairment of intangible assets and goodwill 7,052,000 50,263,000 (43,211,000 ) (86 )% Total operating expense $ 42,619,000 $ 93,475,000 $ (50,856,000 ) (54 )% Noncash Stock-Based Compensation Expense Noncash stock-based compensation expense for the periods presented was included in the following operating expense line items: Fiscal Year Ended December 31, Change 2023 2022 $ % Selling, marketing and advertising $ 879,000 $ 1,079,000 $ (200,000 ) (19 )% Engineering, technology and development 219,000 389,000 (170,000 ) (44 )% General and administrative 1,637,000 2,795,000 (1,158,000 ) (41 )% Total noncash stock-based compensation expense $ 2,735,000 $ 4,263,000 $ (1,528,000 ) (36 )% Modifications to Equity-Based Awards On January 1, 2022, the Company issued 67,500 performance stock units (“PSUs”) under the Company’s 2014 Amended and Restated Stock Option and Incentive Plan (the “2014 Plan”), which vest in five equal increments of 13,500 PSUs, based on satisfaction of market based vesting conditions, as described at Note 8. Noncash stock compensation expense related to the PSUs, which is recognized on an accelerated basis over the derived term, totaled $299,000 and $2,142,000 for Fiscal Years 2023 and 2022, respectively. On April 30, 2023, the Board approved the cancellation of the 67,500 PSUs previously granted to certain executives under the 2014 Plan (as described above). In exchange for the cancelled PSUs, the executives were granted an aggregate of 67,500 PSUs, which vest, over a five-year term, upon the Company’s common stock achieving certain VWAP goals as follows: (i) 20% upon achieving a 60-day VWAP of $16.00 per share, (ii) 20% upon achieving a 60-day VWAP of $20.00 per share; (iii) 20% upon achieving a 60-day VWAP of $24.00 per share; (iv) 20% upon achieving a 60-day VWAP of $28.00 per share; and (v) 20% upon achieving a 60-day VWAP of $32.00 per share, in each case, as quoted on the Nasdaq Capital Market (“PSU Modification”). Total incremental compensation cost related to the PSU Modification totaled $540,000 which is recognized over the remaining implied service period, ranging from .69 years to 1.5 years, calculated in connection with the Monte Carlo simulation model used to determine the fair value of the PSUs immediately before and after the modification. Noncash stock compensation expense related to the modified PSUs, which is recognized on an accelerated basis over the derived term, totaled $351,000 for Fiscal Year 2023. On April 30, 2023, the Board approved the cancellation of certain stock options to purchase an aggregate of 58,951 shares of the Company’s common stock previously granted to certain executives and employees under the 2014 Plan, with an average exercise price of approximately $56.40. In addition, the Board approved the cancellation of certain warrants to purchase an aggregate of 26,100 shares of the Company’s common stock previously granted to certain executives and employees, with an average exercise price of approximately $199.80 (“Executive Grant Modification”). In exchange for the cancelled options and warrants, certain executives and employees were granted options to purchase an aggregate of 305,000 shares of common stock under the 2014 Plan, at an exercise price of $9.80 (the closing price of the Company’s common stock as listed on the Nasdaq Capital Market on April 28, 2023, the last trading day before the approval of the awards), with one-third of the options vesting on the April 30, 2023, the grant date, with the remainder vesting monthly over the thirty-six month period thereafter, subject to continued service (“Executive Grant Modifications”). The exercise of the options under these awards was contingent upon the Company receiving approval from its stockholders to increase the number of shares available under the 2014 Plan, which was obtained in connection with the Company’s 2023 annual shareholder meeting. Total incremental compensation cost related to the Executive Grant Modifications totaled $347,000, $112,000 of which related to vested awards as of the modification date and was recognized as expense immediately, and $235,000 related to unvested awards which is recognized prospectively over the remaining service period of 3 years. 43 Table of Contents On May 1, 2023, the Board approved the cancellation of options to purchase an aggregate of 29,224 shares of the Company’s common stock previously granted to its employees under the 2014 Plan, in exchange for newly issued options to purchase an aggregate of 63,900 shares of the Company’s common stock under the 2014 Plan, at an exercise price equal to the closing trading price on May 1, 2023, or $9.81, with a range of zero to one-third of the options vesting on the May 1, 2023, the grant date, dependent upon the tenure of the employee, and the remainder vesting monthly over the forty-eight month period thereafter, subject to continued service (“Employee Grant Modifications”). Unrecognized compensation expense related to the original award as of the date of the Employee Grant Modifications totaled $960,000 which is recognized prospectively over the remaining service period of 4 years. Total incremental compensation cost related to the Employee Grant Modifications totaled $449,000, $101,000 of which related to vested awards as of the modification date and was recognized as expense immediately, and $348,000 related to unvested awards which is recognized prospectively over the remaining service period of 4 years. Intangible Asset Amortization Expense Intangible asset amortization expense for the periods presented was included in the following operating expense line items: Fiscal Year Ended December 31, Change 2023 2022 $ % Sales, marketing and advertising $ 2,125,000 $ 2,104,000 $ 21,000 1 % Engineering, technology and development 2,331,000 2,326,000 5,000 - % General and administrative 782,000 1,199,000 (417,000 ) (35 )% Total amortization expense $ 5,238,000 $ 5,629,000 $ (391,000 ) (7 )% Selling, Marketing and Advertising Selling, marketing and advertising expense increased $414,000 or 3%, primarily due to the following: ● An increase in personnel costs and sales commissions totaling $1.3 million, including an increase in personnel costs totaling $608,000, in connection with the Melon Acquisition, which included the acquisition of ten former Melon full time resources, which are included in our client facing sales and marketing functions. ● The increase was partially offset by a $625,000, or 63% decrease in digital and other marketing and sales consulting expenses during Fiscal Year 2023, in connection with ongoing cost reduction and optimization activities. Engineering, Technology and Development Components of our platform are available on a “free to use,” “always on basis,” and are utilized and offered as an audience acquisition tool, as a means of growing our audience, engagement, viewership, players and community. Engineering, technology and development related operating expenses include the costs described below, incurred in connection with our audience acquisition and viewership expansion activities. Engineering, technology and development related operating expense includes (i) allocated internal engineering personnel expense, including salaries, noncash stock compensation, taxes and benefits, (ii) third-party contract software development and engineering expense, (iii) internal use software cost amortization expense, and (iv) technology platform related cloud services, broadband and other platform expense, incurred in connection with our audience acquisition and viewership expansion activities, including tools and product offering development, testing, minor upgrades and features, free to use services, corporate information technology and general platform maintenance and support. Capitalized internal use software development costs are amortized on a straight-line basis over the software’s estimated useful life. The net increase in engineering, technology and development costs was primarily due to the following: ● Engineering, technology and development costs decreased $6.4 million, or 40% driven primarily by a decrease in cloud services and other technology platform costs totaling $3.3 million, or 58%, and a decrease in product and engineering personnel costs totaling $2.7 million, or 39%, reflecting the impact of ongoing cost reduction and optimization activities. 44 Table of Contents General and Administrative General and administrative expense for the periods presented was comprised of the following: Fiscal Year Ended December 31, Change 2023 2022 $ % Personnel costs $ 2,605,000 $ 2,901,000 $ (296,000 ) (10 )% Office and facilities 202,000 249,000 (47,000 ) (19 )% Professional fees 798,000 1,247,000 (449,000 ) (36 )% Stock-based compensation 1,638,000 2,795,000 (1,157,000 ) (41 )% Depreciation and amortization 866,000 1,306,000 (440,000 ) (34 )% Other 4,149,000 3,596,000 553,000 15 % Total general and administrative expense $ 10,258,000 $ 12,094,000 $ (1,836,000 ) (15 )% The net decrease in general and administrative expense for the periods presented was primarily due to the following: ● Personnel costs decreased due to headcount reductions in various corporate, general and administrative functions in connection with ongoing cost reduction and optimization activities. ● Noncash stock compensation expense included in general and administrative expense decreased primarily due to a reduction in amortization of noncash stock compensation expense in connection with performance-based stock units granted on January 1, 2022, which vest based on the achievement of certain Company stock price targets, as described at Note 8, and are amortized on an accelerated basis in the earlier periods due to the utilization of a Monte Carlo simulation model to determine the estimated fair value of the equity-based award. The decrease also reflects the impact of the PSU Modification, as described above, and the related reduction in the grant date fair market value of the underlying Company common stock, as compared to the original grant date fair market value, which is used as an input to the Monte Carlo simulation model utilized to determine the estimated fair value of the equity-based award on the modification date. ● Professional fees costs decreased primarily due to legal and audit related professional fees incurred in the prior year period in connection with our June 2022 convertible debt financing which were expensed as incurred, a decrease in external legal fees due to the transitioning of the Company’s corporate legal services function from third-party consultant to inhouse, and a reduction in complex transaction related audit fees. ● Depreciation and amortization expense decreased due primarily to certain products and offerings acquired in connection with the Mobcrush Acquisition being rebranded during Fiscal Year 2022. As a result, the Company recorded a write down of trademark related intangible assets acquired in connection with the Mobcrush Acquisition totaling $423,000 during Fiscal Year 2022. ● During the fourth quarter of 2023, the Note Holders (as defined at Note 6) made certain claims arising from an interpretation of certain rights that the Note Holders had pursuant to the terms of the SPA (as defined at Note 6). On March 12, 2024, the Company and the Note Holders (the “Parties”) executed a Mutual General Release and Settlement Agreement (the “Settlement Agreement”) settling all claims between the Parties with respect to the SPA. In consideration for the Settlement Agreement, the Company agreed to issue the Parties an aggregate amount of 500,000 shares of common stock (the “Settlement Payment”). The Company accrued the fair value of the Settlement Payment as of December 31, 2023, resulting in a settlement expense of $760,000 which is included in general and administrative expense in the consolidated statement of operations. Contingent Consideration Super Biz Acquisition The Company hired the Founders of Super Biz Co. (“Super Biz”) in connection with the acquisition of (i) substantially all of the assets of Super Biz (the “Super Biz Assets”), and (ii) the personal goodwill of the founders of Super Biz (the “Founders”) regarding Super Biz’s business (collectively, the “Super Biz Acquisition”). Pursuant to the provisions of the Asset Purchase Agreement entered into for the Super Biz Acquisition (the “Super Biz Purchase Agreement”), in the event that a Founder ceases to be an employee during the period from the October 4, 2021 (the “Super Biz Closing Date”) until December 31, 2022, and for Fiscal Year 2023 (the “Super Biz Earnout Periods”), as a consequence of his resignation without good cause, or termination for cause, the Super Biz Contingent Consideration will be reduced by one-half (50%) for the respective Super Biz Earn Out Period, if and when earned. Under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 - Accounting For Contract Assets And Contract Liabilities From Contracts With Customers (“ASC 805”), a contingent consideration arrangement in which the payments are automatically forfeited if employment terminates is considered to be compensation for post-combination services, and not acquisition consideration. As such, the Contingent Consideration, is accounted for as post-combination services and expensed in the period that payment of any amounts of Contingent Consideration is determined to be probable and reasonably estimable. During Fiscal Year 2022, the Company determined that it was probable that the contingency for the Super Biz Earn Out Periods would be met in accordance with the terms of the Super Biz Purchase Agreement, and the applicable amounts were reasonably estimable. Contingent Consideration is recorded as a liability in the accompanying consolidated balance sheets in accordance with FASB ASC Topic 480 – “Distinguishing Liabilities from Equity” (“ASC 480”), which requires freestanding financial instruments where the company must or could settle the obligation by issuing a variable number of its shares, and the obligation’s monetary value is based solely or predominantly on variations in something other than the fair value of the company's shares, to be recorded as a liability at fair value and re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. 45 Table of Contents The change in accrued Super Biz Contingent Consideration and the related impact on our consolidated statement of operations for the periods presented was comprised of the following: Fiscal Year Ended December 31, 2023 2022 Beginning balance $ 3,206,000 $ - Change in fair value 137,000 (174,000 ) Current period accrued contingent consideration 1,750,000 3,380,000 Contingent consideration payments (2) (3,423,000 ) - Accrued contingent consideration (1) $ 1,670,000 $ 3,206,000 (1) As of December 31, 2023, includes 27,968 shares of common stock valued at $1.52, the closing price of our common stock as of the applicable period end date. As of December 31, 2022, included 49,399 shares of common stock valued at $6.72, the closing price of our common stock as of December 31, 2022. (2) In April 2023, the Company paid accrued contingent consideration related to the Initial Earn Out Period, comprised of $2.9 million of cash payments and payment of 49,399 shares of our common stock valued at $548,000. Melon Acquisition On May 4, 2023, (the “Melon Acquisition Date”), Super League entered into the Melon Purchase Agreement with Melon, pursuant to which the Company acquired substantially all of the Melon Assets in the Melon Acquisition. Pursuant to the terms and subject to the conditions of the Purchase Agreement, the Melon Contingent Consideration will be payable to Melon in connection with the achievement of certain revenue milestones for the Earnout Periods. The Melon Contingent Consideration is payable in the form of cash and common stock, with $600,000 of the aggregate Melon Contingent Consideration being payable in the form of cash, and $1,750,000 payable in the form of common stock, valued at the greater of (a) the Closing Share Price, and (b) the VWAP for the five trading days immediately preceding the end of each respective Earnout Period. In accordance with the acquisition method of accounting, the financial results of Super League presented herein include the financial results of Melon subsequent to the Melon Closing Date. Disclosure of revenue and net loss for Melon on a stand-alone basis for the applicable periods presented is not practical due to the integration of Melon activities, including sales, products, advertising inventory, resource allocation and related operating expense, with those of the consolidated Company upon acquisition, consistent with Super League operating in one reporting segment. The Company determined that the Melon Acquisition constitutes a business acquisition as defined by ASC 805. Accordingly, the assets acquired, and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition, totaling approximately $47,000, were expensed as incurred pursuant to the acquisition method of accounting in accordance with ASC 805. Super League’s preliminary purchase price allocation was based on an evaluation of the appropriate fair values of the assets acquired and liabilities assumed and represents management’s best estimate based on available data. Fair values are determined based on the requirements of ASC 820. The following table summarizes the determination of the fair value of the purchase price consideration paid in connection with the Melon Acquisition: Cash consideration at closing $ 150,000 Equity consideration at closing – shares of common stock 77,833 Super League closing stock price per share on the Melon Closing Date $ 9.28 Fair value of equity consideration issued at closing $ 722,000 722,000 Fair value of contingent consideration at closing 1,350,000 Fair value of total consideration issued at closing $ 2,222,000 The purchase price allocation was based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in connection with the Melon Acquisition, as follows: Amount Assets Acquired and Liabilities Assumed: Accounts receivable and other assets $ 36,000 Liabilities assumed (188,000 ) Identifiable intangible assets 510,000 Identifiable net assets acquired 358,000 Goodwill 1,864,000 Total purchase price $ 2,222,000 46 Table of Contents The following table presents details of the fair values of the acquired intangible assets of Melon: Estimated Useful Life (in years) Amount Developed technology 5 $ 250,000 Developer relationships 2 50,000 Customer relationships 6 190,000 Trade names / trademarks 0.5 20,000 Total intangible assets acquired $ 510,000 Contingent consideration is recorded as a liability in the accompanying consolidated balance sheets in accordance with ASC 480, which requires freestanding financial instruments where the company must or could settle the obligation by issuing a variable number of its shares, and the obligation's monetary value is based solely or predominantly on variations in something other than the fair value of the company's shares, to be recorded as a liability at fair value and re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The estimated fair value of the Melon Contingent Consideration was $538,000 at December 31, 2023. The fair value of the Melon Contingent Consideration on the respective valuation dates was determined utilizing a Monte Carlo simulation model and measured using Level 3 inputs, as described at Note 2. Assumptions utilized in connection with utilization of the Monte Carlo simulation model for the periods presented included risk free interest rates ranging from 4.04 % to 5.35%, volatility rates ranging from 70% to 85%, and a discount rate of 30%. The change in fair value, which is included in contingent consideration expense in the accompanying statement of operations for the year ended December 31, 2023 was comprised of the following: Fiscal Year Ended December 31, 2023 Initial balance – Melon Acquisition Date $ 1,350,000 Change in fair value (682,000 ) Current period accrued contingent consideration 61,000 Post closing adjustments (2) (191,000 ) Accrued contingent consideration (1) $ 538,000 (1) Includes total contingent consideration for the First Earn Out Period totaling $333,000, including 72,118 shares of common stock valued at $1.52, the closing price of our common stock as of the applicable period end date. (2) The Melon Purchase Agreement provided for adjustments to the calculated Melon Contingent Consideration amounts to account for advanced payments made to Melon from customers prior to the Melon Acquisition Date, for which the corresponding work was not performed as of the Melon Acquisition Date. Loss on intangible asset disposal In June 2023 , the Company assigned the intangible assets originally acquired in connection with the Company’s acquisition of Bannerfy in fiscal year 2021, to the original sellers. The assets were disposed of in connection with management’s review of operations and decision to allocate resources elsewhere. As a result, the Company recorded a disposal of net developed technology related intangible assets acquired in connection with the acquisition of Bannerfy totaling $2,284,000, which is included in “Loss on intangible asset disposal” in the accompanying consolidated statement of operations for the year ended December 31, 2023. Intangible Asset Impairment Impairment Charges. In the fourth quarter of Fiscal Year 2023 we recorded a non-cash impairment charge related to our partner relationship related intangible assets, comprised of our Microsoft Minecraft server and InPvP developed technology intangible assets originally acquired in connection with the acquisition of Mobcrush, Inc. in June 2021. The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include significant underperformance relative to expected historical or projected future operating results, and significant changes in the manner of our use of the acquired assets or the strategy in the context of our overall business. Due to underperformance relative to historical and projected future operating results and a decision to deploy resources in other areas of the business, we performed an impairment analysis and determined that the sum of the expected undiscounted future cash flows resulting from the use of the assets was less than the carrying amount of the assets, resulting in an impairment loss totaling $7.1 million, which is recorded in the accompanying consolidated statement of operations for Fiscal Year 2023. The fair value was determined using a discounted cash flow approach, with cash flow projections over the remaining life of the intangible assets of five years and a discount rate of 16% based on the Company’s estimated cost of capital. The impairment charge was based on the difference between the calculated fair value of the intangible assets totaling $860,000 and the carrying value of the applicable intangible assets which totaled $7,912,000 as of December 31, 2023. 47 Table of Contents Impairment of Goodwill As described at Note 2, we performed goodwill impairment tests as of September 30, 2022 and December 31, 2022 (“Measurement Dates”). We utilized the market capitalization of the Company (Level 1 observable input) as of the respective Measurement Dates to estimate the fair value of the Company’s single reporting unit. The estimated market capitalization was determined by multiplying the applicable measurement date stock prices and the common shares outstanding as of the respective Measurement Dates. The market capitalization approach was utilized to estimate the fair value of our single reporting unit due to the significance of the decline in stock price as of the respective Measurement Dates, resulting in a market capitalization that was below the net book value of our single reporting unit as of the respective Measurement Dates. As of September 30, 2022, based on the analysis, the estimated fair value of our reporting unit was $25.2 million, compared to a carrying value of our single reporting unit of $67.3 million resulting in a goodwill impairment charge of $42.0 million, which was reflected in the consolidated statement of operations for the third quarter of Fiscal Year 2022. As of December 31, 2022, based on the analysis, the estimated fair value of our reporting unit was $12.6 million, compared to a carrying value of our single reporting unit of $27.5 million, resulting in a fourth quarter 2022 goodwill impairment charge of $8.3 million, reflecting the write down of the remaining balance of goodwill for our single reporting unit. Other Income (Expense) Change in Fair Value of Warrant Liability The Placement Agent Warrants issued in connection with the Preferred Offerings include provisions that are triggered in the event of the occurrence of a Fundamental Transaction, as defined in the underlying warrant agreement, which contemplates the potential for certain transactions that result in a third-party acquiring more than 50% of the outstanding shares of common stock of the Company for cash or other assets. Given the existence of multiple classes of voting stock for the Company, as described herein, the Fundamental transaction provisions in the warrant agreements could result in a 50% or more change in ownership of outstanding common stock, without a 50% change in voting interests. As such, the Placement Agent Warrants are not eligible for the scope exception under ASC 815, “Derivatives and Hedging,” (“ASC 815”), and therefore, the fair value of the Placement Agent Warrants are recorded as a liability at fair value on the consolidated balance sheet and re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The change in warrant liability and the related income statement impact for the applicable periods was comprised of the following: Fiscal Year Ended December 31, 2023 Beginning balance $ - Initial fair value of Series A and AA Preferred warrant liability – grant date 2,804,000 Initial fair value of Series AAA Preferred (including warrants issued in connection with the Exchange) warrant liability – grant date 1,665,000 Change in fair value (1) (2,898,000 ) Fair value of warrant liability $ 1,571,000 (1) Reflected in the consolidated statement of operations for the applicable period. Loss on Exchange of Placement Agent Warrants In December 2023, as further described in Note 7, with respect to shares of Series AAA Preferred Stock issued in exchange for shares of Series A Preferred and Series AA Preferred, in the Series AAA Offerings (the “Exchange”), the Placement Agent exchanged previously issued Placement Agent Warrants to purchase 88,403 shares of common stock of the Company that were issued in connection with the Company’s Series A Offerings and Series AA Offerings, at exercise prices ranging from $7.60 to $13.41 per share, for new Placement Agent Warrants to purchase a total of 347,428 shares of common stock at an exercise price of $1.674 per share and 199,778 shares of common stock at an exercise price of $1.71 per share. The terms of the new Placement Agent Warrants and the original placement agent warrants (recorded as a liability under ASC 815) was determined to be substantially different based on an analysis of the fair value of each instrument immediately before and after the modification, resulting in a loss on extinguishment recognized in current earnings totaling $681,000. Convertible Debt On May 16, 2022, the Company entered into a securities purchase agreement with three institutional investors providing for the sale and issuance of a new series of senior convertible notes in the aggregate original principal amount of $4,320,000 (of which 8% was an original issue discount) which accrues interest at a guaranteed annual rate of 9% per annum, as described below and at Note 6. Convertible note related interest expense for Fiscal Year 2022 totaled $670,000, which was comprised of interest expense totaling $389,000, and the amortization of original issue discount totaling $280,000. 48 Table of Contents Benefit for Income Taxes In June 2023, the Company assigned the intangible assets originally acquired in connection with the Company’s acquisition of Bannerfy, Ltd. (“Bannerfy”)(the “Bannerfy Acquisition”) in 2021, to the original sellers, as described at Note 4. The Bannerfy Acquisition was treated for tax purposes as a nontaxable transaction and, as such, the historical tax bases of the acquired assets and assumed liabilities, net operating losses, and other tax attributes of Bannerfy carried over, with no step-up to fair value of the underlying tax bases of the acquired net assets. The acquisition method of accounting included the establishment of a net deferred tax liability resulting from book tax basis differences related to assets acquired and liabilities assumed on the date of acquisition. When an acquisition of a group of assets is purchased in a transaction that is not accounted for as a business combination under FASB ASC Topic 805 – Business Combinations (“ASC 805”), a difference between the book and tax bases of the assets arises. FASB ASC Topic 740 – Income Taxes (“ASC 740”), required the use of simultaneous equations to determine the assigned value of the asset and the related deferred tax asset or liability. As a result of the disposal of the Bannerfy intangible assets, the Company fully amortized the related remaining net deferred tax liability, resulting in a $313,000 tax benefit reflected in the consolidated statement of operations for the year ended December 31, 2023. Liquidity and Capital Resources General Cash and cash equivalents totaled approximately $7.6 million and $2.5 million at December 31, 2023 and 2022, respectively. The change in cash and cash equivalents for the periods presented reflects the impact of operating, investing and financing cash flow related activities, as described below. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred net losses of $30.3 million and $85.5 million for Fiscal Year 2023 and 2022, respectively, and had an accumulated deficit of $249.0 million as of December 31, 2023. Noncash stock compensation, amortization and impairment charges for Fiscal Year 2023 and 2022 totaled $17.3 million and $60.1 million, respectively. For Fiscal Years 2023 and 2022, net cash used in operating activities totaled $15.5 million and $19.8 million, respectively. To date, our principal sources of capital used to fund our operations and growth have been the net proceeds received from equity and debt financings. We have and will continue to use significant capital for the growth and development of our business, and, as such, we expect to seek additional capital either from operations or that may be available from future issuance(s) of common stock or debt financings, to fund our planned operations. Accordingly, our results of operations and the implementation of our long-term business strategies have been and could continue to be adversely affected by general conditions in the global economy, including conditions that are outside of our control. The most recent global financial crisis caused by severe geopolitical conditions, including conflicts abroad, and the lingering effects of COVID-19 and threats of other outbreaks, have resulted in extreme volatility, disruptions and downward pressure on stock prices and trading volumes across the capital and credit markets in which we traditionally operate. A severe or prolonged economic downturn could result in a variety of risks to our business and could have a material adverse effect on us, including limiting our ability to obtain additional funding from the capital and credit markets. In management’s judgement, these conditions raise substantial doubt about the ability of the Company to continue as a going concern as contemplated by FASB ASC 205-40, “Going Concern,” (“ASC 205”). Management ’ s Plans The Company experienced significant growth during the periods presented through organic and inorganic growth activities, including the expansion of our premium advertising inventory and quarter over quarter and year over year increases in recognized revenue across our primary revenue streams. In Fiscal Year 2023, we acquired Melon, as described above, and focused on the continued expansion of our service offerings and revenue growth opportunities through internal development, collaborations, and through opportunistic strategic acquisitions, as well as management and reduction of costs. Management continues to explore alternatives for raising capital to facilitate our growth and execute our business strategy, including strategic partnerships and or other forms of equity or debt financings. We may continue to evaluate potential strategic acquisitions. To finance such strategic acquisitions, we may find it necessary to raise additional equity capital, incur debt, or both. Any efforts to seek additional funding could be made through issuances of equity or debt, or other external financing. However, additional funding may not be available on favorable terms, or at all. The capital and credit markets have experienced extreme volatility and disruption periodically and such volatility and disruption may occur in the future. If we fail to obtain additional financing when needed, we may not be able to execute our business plans which, in turn, would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies. Recent Series AAA Convertible Preferred Financing On the dates set forth in the table below, we entered into subscription agreements with accredited investors in connection with the sale and exchange of an aggregate of 8,355 shares of newly designated Series AAA and AAA-2 Convertible Preferred Stock, each series having a $0.001 par value and a $1,000 purchase price, hereinafter collectively referred to as “Series AAA Preferred,” and the individual offerings of Series AAA Preferred stock hereinafter collectively referred to as the Series AAA Offerings, as follows: Date Series Design- ation Conversion Price – At Issuance (2) Shares Gross Proceeds Fees Net Proceeds Conversion Shares – At Issuance Placement Agent Warrants (1) November 30, 2023 Series AAA $ 1.674 5,377 $ 5,377,000 $ 645,000 $ 4,732,000 3,212,000 466,000 December 22, 2023 Series AAA-2 $ 1.71 2,978 2,978,000 357,000 2,621,000 1,742,000 253,000 Total 8,355 $ 8,355,000 $ 1,002,000 $ 7,353,000 4,954,000 719,000 (1) Issued upon final closing of the Series AAA Preferred Stock offering, effective as of the respective closing dates. Use of net proceeds from the Series AAA Offerings for the periods presented included working capital and general corporate purposes, including sales and marketing activities and product development. See Note 6 for additional information. 49 Table of Contents Cash Flows for the Fiscal Years Ended December 31, 2023 and 2022 The following table summarizes the change in cash and cash equivalents for the periods presented: Fiscal Year Ended December 31, 2023 2022 Net cash used in operating activities $ (15,489,000 ) $ (19,826,000 ) Net cash used in investing activities (825,000 ) (1,690,000 ) Net cash provided by financing activities 21,441,000 9,465,000 Increase (decrease) in cash and cash equivalents 5,127,000 (12,051,000 ) Cash and cash equivalents, at beginning of period 2,482,000 14,533,000 Cash and cash equivalents, at end of period $ 7,609,000 $ 2,482,000 Cash Flows from Operating Activities. Net cash used in operating activities during Fiscal Year 2023, primarily reflected our net loss, net of adjustments to reconcile net loss to net cash used in operating activities, which included noncash stock compensation charges of $2,735,000, depreciation and amortization charges of $5,376,000, intangible asset impairment charges of $7,052,000, disposal of intangible asset charges of $2,284,000, net changes in fair value of warrant liabilities of ($2,898,000) and net changes in working capital of $116,000. Changes in working capital primarily reflected the impact of the settlement of receivables and payables in the ordinary course and the payment of the cash portion of the Super Biz Contingent Consideration, as described above. Net cash used in operating activities for Fiscal Year 2022 primarily reflected our net loss for Fiscal Year 2022, net of adjustments to reconcile net loss to net cash used in operating activities, which included $50,263,000 of goodwill impairment charges, $4,263,000 of noncash stock compensation charges, depreciation and amortization of $5,403,000, and a write down of a trademark related intangible asset totaling $423,000. Changes in working capital primarily reflected the impact of the settlement of receivables and payables in the ordinary course. Cash Flows from Investing Activities. Cash flows from investing activities were comprised of the following for the periods presented: Fiscal Year Ended December 31, 2023 2022 Cash paid in connection with the acquisition of Melon, net $ (150,000 ) $ - Purchase of property and equipment (8,000 ) (149,000 ) Purchase of third-party game properties - (500,000 ) Capitalization of software development costs (650,000 ) (923,000 ) Acquisition of other intangible and other assets (17,000 ) (118,000 ) Net cash used in investing activities $ (825,000 ) $ (1,690,000 ) Melon Acquisition. On May 4, 2023, we entered into an Asset Purchase Agreement with Melon, pursuant to which the Company acquired substantially all of the assets of Melon, as described above. At the Closing, the Company paid an aggregate total of $900,000 to Melon, of which $150,000 was paid in cash, and the remaining $750,000 was paid in the form of shares of the Company’s common stock, valued at the Closing Share Price, as described above. Capitalized Internal Use Software Costs . Software development costs incurred to develop internal-use software during the application development stage are capitalized and amortized on a straight-line basis over the software’s estimated useful life, which is generally three years. Software development costs incurred during the preliminary stages of development are charged to expense as incurred. Maintenance and training costs are charged to expense as incurred. Upgrades or enhancements to existing internal-use software that result in additional functionality are capitalized and amortized on a straight-line basis over the applicable estimated useful life. Purchase of Third-Party Game Property. In June 2022, we purchased Anime Battlegrounds X , a highly rated game on Roblox, from a third-party game developer. The total purchase price of $500,000 was capitalized and is being amortized over the estimated useful life of 5 years. Cash Flows from Financing Activities . Cash flows from financing activities were comprised of the following for the periods presented: Fiscal Year Ended December 31, 2023 2022 Proceeds from issuance of preferred stock, net of issuance costs $ 19,295,000 $ 8,926,000 Proceeds from issuance of common stock, net of issuance costs 1,885,000 320,000 Proceeds from convertible notes, net - 4,000,000 Payments on convertible notes (539,000 ) (3,781,000 ) Proceeds from common stock options and purchase warrant exercises 800,000 - Net cash provided by financing activities $ 21,441,000 $ 9,465,000 50 Table of Contents Equity Financings Issuances of Convertible Preferred Stock During Fiscal Years 2023 and 2022, we entered into subscription agreements with accredited investors relating to offerings with respect to the sale of an aggregate of 32,758 newly designated series of convertible preferred stock (including Series A Preferred, Series AA Preferred, and Series AAA Preferred), each series having a $0.001 par value and a $1,000 purchase price, hereinafter collectively referred to as “Convertible Preferred,” and the individual offerings of Convertible Preferred stock hereinafter collectively referred to as the Preferred Offerings, as follows: Series AAA Convertible Preferred Offerings Date Series Design- ation Conversion Price – At Issuance Shares Gross Proceeds Fees Net Proceeds Conversion Shares – At Issuance Placement Agent Warrants (1) November 30, 2023 Series AAA $ 1.674 5,377 $ 5,377,000 $ 645,000 $ 4,732,000 3,212,000 466,000 December 22, 2023 Series AAA-2 $ 1.71 2,978 2,978,000 357,000 2,621,000 1,742,000 253,000 Total 8,355 $ 8,355,000 $ 1,002,000 $ 7,353,000 4,954,000 719,000 (1) Issued upon final closing of the Series AAA Offerings, effective as of the respective closing dates. Series AA Convertible Preferred Offerings Date Series Design- ation Original Conversion Price – At Issuance (2) Shares Gross Proceeds Fees Net Proceeds Conversion Shares – At Issuance Placement Agent Warrants (1) April 19, 2023 Series AA $ 9.43 7,680 $ 7,680,000 $ 966,000 $ 6,714,000 814,000 114,000 April 20, 2023 Series AA-2 $ 10.43 1,500 1,500,000 130,000 1,370,000 144,000 13,000 April 28, 2023 Series AA-3 $ 9.50 1,025 1,025,000 133,000 892,000 108,000 15,000 May 5, 2023 Series AA-4 $ 9.28 1,026 1,026,000 133,000 893,000 111,000 16,000 May 26, 2023 Series AA-5 $ 10.60 550 550,000 72,000 478,000 52,000 7,000 Total 11,781 $ 11,781,000 $ 1,434,000 $ 10,347,000 1,229,000 165,000 (1) Issued on May 26, 2023, effective as of the applicable closing date, upon final closing of the Series AA Offerings. (2) The conversion price for Series AA Preferred outstanding as of August 23, 2023, totaling 10,706 shares of Series AA Preferred, was adjusted to $2.60 as a result of the Series AA Down Round Feature described at Note 7. The Conversion price for Series AA Preferred outstanding as of November 30, 2023, totaling 7,322 shares of Series AA Preferred, was adjusted as described at Note 7, as a result of the Series AA Down Round Feature described at Note 7. Series A Convertible Preferred Offerings Date Series Design- ation Conversion Price Shares Gross Proceeds Fees Net Proceeds Conversion Shares Placement Agent Warrants (1) November 22, 2022 Series A $ 12.40 5,359 $ 5,359,000 $ 752,000 $ 4,607,000 432,000 62,000 November 28, 2022 Series A-2 $ 13.29 1,297 1,297,000 169,000 1,128,000 98,000 14,000 November 30, 2022 Series A-3 $ 13.41 1,733 1,733,000 225,000 1,508,000 129,000 18,000 December 22, 2022 Series A-4 $ 7.60 1,934 1,934,000 251,000 1,683,000 254,000 36,000 January 31, 2023 Series A-5 $ 11.09 2,299 2,299,000 299,000 2,000,000 207,000 30,000 Total 12,622 $ 12,622,000 $ 1,696,000 $ 10,926,000 1,120,000 160,000 (1) Issued on May 26, 2023, effective as of the applicable closing date, upon final closing of the Series A Offerings. Use of net proceeds from the Preferred Offerings include the repayment of certain indebtedness and working capital and general corporate purposes, including sales and marketing activities and product development. As disclosed at Note 6, in the event the Company consummated a subsequent equity financing during the term of the Notes, the Company was required, at the option of the Note Holders, to use 50% of the gross proceeds raised from such sale to redeem all or any portion of the Notes outstanding upon closing of such equity financing. For Fiscal Years 2023 and 2022, $719,000 and $3,782,000, respectively, of the Series A Offerings net proceeds were utilized in connection with the redemption of the Notes. 51 Table of Contents Issuances of Common Stock On August 21, 2023, we entered into the Underwriting Agreement with the Underwriter (as defined above), relating to the Company’s Common Stock Offering of the Firm Securities to certain investors. Pursuant to the Underwriting Agreement, the Company also granted the Underwriters the Option to purchase the Option Securities. On September 12, 2023, the Underwriter partially exercised its Option and purchased an additional 32,616 shares of common stock at a price of $2.60 per share. The issuance by the Company of the Option Securities resulted in total gross proceeds of approximately $84,800, before deducting underwriting discounts, commissions, and other offering expenses payable by the Company. On August 23, 2023, the Company issued the Firm Securities and closed the Offering at a public price of $2.60 per share, and $2.58 per share underlying each Pre-Funded Warrant, for net proceeds to the Company of approximately $1.8 million after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. Each Pre-Funded Warrant had an exercise price per share of common stock equal to $0.001 per share. The exercise price and the number of shares of common stock issuable upon exercise of each Pre-Funded Warrant was subject to appropriate adjustments in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock. Under the Pre-Funded Warrants, a holder would not be entitled to exercise any portion of any Pre-Funded Warrant that, upon giving effect to such exercise, would cause: (i) the aggregate number of shares of common stock beneficially owned by such holder (together with its affiliates) to exceed 4.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise; or (ii) the combined voting power of the Company’s securities beneficially owned by such holder (together with its affiliates) to exceed 4.99% of the combined voting power of all of the Company’s securities outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Pre-Funded Warrant, which percentage may be changed at the holder’s election to a higher or lower percentage not in excess of 9.99% upon 61 days’ notice to the Company. In addition, in certain circumstances, upon a fundamental transaction, a holder of Pre-Funded Warrants would be entitled to receive, upon exercise of the Pre-Funded Warrants, the kind and amount of securities, cash or other property that such holder would have received had they exercised the Pre-Funded Warrants immediately prior to the fundamental transaction. The Pre-Funded Warrants were fully exercised as of August 29, 2023. The Firm Securities were offered, issued, and sold pursuant to a prospectus supplement and accompanying prospectus filed with the SEC pursuant to the Registration Statement under the Securities, as supplemented by the Prospectus Supplement, filed with the SEC pursuant to Rule 424(b) of the Securities Act on August 23, 2023. Account Receivable Financing Facility The Borrowers entered into the SLR Agreement with the Lender, effective on the Facility Effective Date. Pursuant to the SLR Agreement, Lender may, from time to time and in its sole discretion, make certain Advances, against the face amounts of certain Accounts, at the Advance Rate, less any reserved funds and any other amounts due to Lender from Borrowers, up to the Maximum Amount.” Upon receipt of any Advance, Borrowers will have assigned all of its rights in such receivables and all proceeds thereof. The proceeds received from the Facility will be used to fund general working capital needs. The SLR Agreement is effective for the Term, automatically extends for successive Renewal Terms, and the Borrowers’ are obligated to pay the Lender an early termination fee in the event the SLR Agreement is terminated under certain circumstances prior to the end of any Term or Renewal Term, as more specifically set forth in the SLR Agreement. In connection with the AR Facility, the Company agreed to, among other things, (i) pay a finance fee equal to 2% of the Maximum Amount, payable in 24 equal monthly installments on the last day of each month of the Term until paid in full, (ii) pay a servicing fee equal to 0.30% multiplied by the Outstanding Amount for the applicable month, on the last day of each calendar month during the Term (or so long as any obligations arising under the SLR Agreement are outstanding); (iii) be charged the Financing Fee, due upon receipt of full payment of a Financed Account by Lender, equal to 1/12 of (a) the Facility Rate, multiplied by (b) the amount of the Outstanding Amount; and (iv) utilize the facility such that the monthly average aggregate Advances outstanding is at or above the Minimum Utilization. In the event that Borrower’s monthly utilization is less than the applicable Minimum Utilization for any month, the Financing Fee for such month shall be calculated as if the applicable Minimum Utilization has been satisfied. As security for the full and prompt payment and performance of any obligations arising under the SLR Agreement, the Borrowers granted to Lender a continuing first priority security interest in all the assets of the Borrowers. The SLR Agreement also provides for customary provisions, including representations, warranties and covenants, indemnification, waiver of jury trial, arbitration, and the exercise of remedies upon a breach or default. Transfers of financial assets that do not qualify for sale accounting are reported as collateralized borrowings. Financing and servicing fees calculated with reference to amounts advanced under the AR Facility are included in interest expense. The commitment fee, based on the maximum facility amount and payable irrespective of drawdowns, is expensed on a straight line basis over the term of the AR Facility. Total amounts advanced under the AR Facility from the Facility Effective Date to December 31, 2023 totaled $800,000. Interest expense and commitment fee expense for the year ended December 31, 2023 totaled $3,000 and $3,000, respectively. Refer to Note 6 for additional information. 52 Table of Contents Convertible Debt On May 16, 2022, as summarized above and further described at Note 6, the Company entered into a securities purchase agreement with three institutional investors, providing for the sale and issuance of a new series of senior convertible notes in the aggregate original principal amount of $4,320,000, of which 8% is an original issue discount. During the third and fourth quarters of Fiscal Year 2022 we made convertible note redemption payments totaling $3,782,000. As of December 31, 2023, the outstanding balance of the Notes and related accrued interest totaled $719,000, which was subsequently paid in full in the first quarter of 2023. Equity Distribution Agreement On September 3, 2021, we entered into an Equity Distribution Agreement (the “Sales Agreement”) with two investment banks (the “Agents”), pursuant to which we could offer and sell, from time to time, through the Agents (the “ATM Offering”), up to $75 million of shares of our common stock (the “Shares”), as described at Note 7. Under the Sales Agreement, the Agents were able to sell the Shares by any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act. Any Shares offered and sold in the ATM Offering were issued pursuant to our Registration Statement on Form S-3 filed with the SEC on September 7, 2021. During Fiscal Year 2022 the Company issued 16,182 shares of common stock, at an average price of $19.80, raising net proceeds of $312,000, under the Sales Agreement. The term of the ATM Offering terminated on November 16, 2022, one year from the date that the Form S-3 was declared effective by the SEC. The net proceeds from sales of Shares pursuant to the ATM Offering were used primarily for the repayment of certain indebtedness, working capital and general corporate purposes. Contractual Obligations and Off-Balance Sheet Commitments and Arrangements As of December 31, 2023, other than as described herein, we had no significant commitments for capital expenditures, nor do we have any committed lines of credit, other committed funding or long-term debt, and no guarantees. As of December 31, 2023 we maintain approximately 3,200 square feet of office space, 1,650 square feet of which is on a month-to-month basis, and 1,550 square feet of which is subject to a two-year lease, commencing on August 1, 2021. We have not entered into any off-balance sheet financial guarantees or other off-balance sheet commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements included elsewhere herein. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us. Contingencies Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Recent Accounting Pronouncements Refer to Note 2 to the accompany consolidated financial statements contained elsewhere in this Report. Critical Accounting Estimates Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of our financial statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in our financial statements. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the audited financial statements and notes thereto included elsewhere herein. The following accounting policies were identified during the periods presented, based on activities occurring during the periods presented, as critical and requiring significant judgments and estimates. 53 Table of Contents Revenue Recognition The Company generates revenue from (i) innovative advertising including immersive game world and experience publishing and in-game media products, (ii) content and technology through the production and distribution of our own, advertiser and third-party content, and (iii) direct to consumer offers, including in-game items, e-commerce, game passes and digital collectibles. Revenue is recognized when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services and when the customer obtains control of the good or service. In this regard, revenue is recognized when: (i) the parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations; (ii) the entity can identify each party’s rights regarding the goods or services to be transferred; (iii) the entity can identify the payment terms for the goods or services to be transferred; (iv) the contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract); and (v) it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. We make estimates and judgments when determining whether we will collect substantially all of the consideration to which we will be entitled in exchange for the goods or services that will be transferred to the customer. We assess the collectability of receivables based on several factors, including past transaction history and the creditworthiness of our customers. If it is determined that collection is not reasonably assured, amounts due are recognized when collectability becomes reasonably assured, assuming all other revenue recognition criteria have been met, which is generally upon receipt of cash for transactions where collectability may have been an issue. Management’s estimates regarding collectability impact the actual revenue recognized each period and the timing of the recognition of revenue. Our assumptions and judgments regarding future collectability could differ from actual events and thus materially impact our financial position and results of operations. Depending on the complexity of the underlying revenue arrangement and related terms and conditions, significant judgments, assumptions and estimates may be required to determine each parties rights regarding the goods or services to be transferred, each parties performance obligations, whether performance obligations are satisfied at a point in time or over time, estimates of completion methodologies, the timing of satisfaction of performance obligations, whether we are a principal or agent in the arrangement and the appropriate period or periods in which, or during which, the completion of the earnings process and transfer of control occurs. Depending on the magnitude of specific revenue arrangements, if different judgments, assumptions and estimates are made regarding revenue arrangements in any specific period, our periodic financial results may be materially affected. Accounting for Business Combinations We account for our business combinations under the acquisition method of accounting. Identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Additionally, contingent consideration is recorded at fair value on the acquisition date and classified as a liability. Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interest in the acquiree exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets acquired, liabilities assumed and noncontrolling interest requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. In addition, when we have acquisitions where substantially all of the fair value of assets acquired is concentrated in a single asset or group of similar assets, we account for the acquisitions as asset acquisitions. Impairment of Long-Lived Assets The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; significant adverse changes in legal factors or in the business climate, including adverse regulatory actions or assessments; and significant decline in our stock price for a sustained period. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Other assets of a reporting unit that are held and used may be required to be tested for impairment when certain events trigger interim goodwill impairment tests. In such situations, other assets, or asset groups, are tested for impairment under their respective standards and the other assets’ or asset groups’ carrying amounts are adjusted for impairment before testing goodwill for impairment as described below. 54 Table of Contents Significant judgements and estimates may be required in connection with determining the number of reporting units; determining intangible asset groupings; if, and in what period a triggering event has occurred requiring and impairment review; determining the nature timing and extent of undiscounted cash flows, including revenue forecasts and related growth rates and applicable costs; residual values if any; and discount rates and other inputs used in connection with the calculation of the fair values of applicable asset groups. Variations in any of these judgements and estimates could have a material impact on our financial results. In the fourth quarter of Fiscal Year 2023 we recorded a non-cash impairment charge related to our partner relationship related intangible assets, comprised of our Microsoft Minecraft server and InPvP developed technology intangible assets originally acquired in connection with the acquisition of Mobcrush, Inc. in June 2021. The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include significant underperformance relative to expected historical or projected future operating results, and significant changes in the manner of our use of the acquired assets or the strategy in the context of our overall business. Due to underperformance relative to historical and projected future operating results and a decision to deploy resources in other areas of the business, we performed an impairment analysis and determined that the sum of the expected undiscounted future cash flows resulting from the use of the assets was less than the carrying amount of the assets, resulting in an impairment loss totaling $7.1 million, which is recorded in the accompanying consolidated statement of operations for Fiscal Year 2023. The fair value was determined using a discounted cash flow approach, with cash flow projections over the remaining life of the intangible assets of five years and a discount rate of 16% based on the Company’s estimated cost of capital. Goodwill Goodwill represents the excess of the purchase price of the acquired business over the acquisition date fair value of the net assets acquired. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December 31) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We consider our market capitalization and the carrying value of our assets and liabilities, including goodwill, when performing our goodwill impairment tests. We operate in one reporting segment. When conducting the Company’s annual or interim goodwill impairment assessment, we have the option to initially perform a qualitative evaluation of whether it is more likely than not that goodwill is impaired. The Company is also permitted to bypass the qualitative assessment and proceed directly to the quantitative test. In evaluating whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we consider the guidance set forth in FASB ASC Topic 350 - Intangibles Goodwill and Other (“ASC 350”) which requires an entity to assess relevant events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, financial performance and other relevant events or circumstances. When conducting the Company’s annual or interim goodwill impairment assessment, we have the option to initially perform a qualitative evaluation of whether it is more likely than not that goodwill is impaired. The Company is also permitted to bypass the qualitative assessment and proceed directly to the quantitative test. In evaluating whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we consider the guidance set forth in FASB ASC Topic 350 - Intangibles Goodwill and Other (“ASC 350”) which requires an entity to assess relevant events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, financial performance and other relevant events or circumstances. For the year ended December 31, 2023: ● December 31, 2023 Goodwill Impairment Testing : At December 31, 2023, the Company bypassed the optional qualitative assessment and performed a quantitative goodwill impairment test. We utilized the market capitalization of the Company as of December 31, 2023, a Level 1 input, to estimate the fair value of the Company’s single reporting unit. Based on the analysis, the estimated fair value of our reporting unit was $29.1 million, compared to a carrying value of our single reporting unit of $10.0 million as of December 31, 2023. Based on the analysis, the fair value of our single reporting unit exceeded its carrying value as of December 31, 2023, and therefore, the Company concluded that goodwill was not “more likely than not” impaired as of December 31, 2023. For the year ended December 31, 2022: As of January 1, 2022, goodwill totaled $50,263,000. During the year ended December 31, 2022, goodwill impairment charges totaled $50,263,000, and were comprised of the following: ● September 30, 2022 Goodwill Impairment Testing At September 30, 2022, prior to the completion of our goodwill impairment testing, the goodwill balance totaled $50,263,000. At September 30, 2022, from a qualitative standpoint, we considered the Company’s history of reported losses and negative cash flows from operating activities, and also considered the sustained downturn in industry and macroeconomic conditions, including inflationary pressures and potential reductions in advertising spending and the sustained downturn of the broader mid-cap and micro-cap equity markets in the third quarter of Fiscal Year 2022. We also considered that the Company experienced significant inorganic and organic growth in the year ended December 31, 2021, including the impact of the acquisitions of Mobcrush, Bannerfy and Super Biz on our premium advertising inventory, product offerings to advertisers, applicable current period revenue recognized and future revenue generating opportunities. 55 Table of Contents However, the Company's stock price had been volatile, and the volatility continued during the three months ended September 30, 2022, declining 34% to $13.60 as of September 30, 2022, reflecting a market capitalization that was approximately 38% of the Company’s September 30, 2022 net book value. To assess whether the decline in our market capitalization was an indicator requiring an interim goodwill impairment test, we considered the significance of the decline and the length of time our common stock had been trading at a depressed value along with the macro factors described above. The significance of the decline is consistent with the broader microcap market. As of September 30, 2022 the decline in our stock price and other factors were deemed to be sustained, and therefore a triggering event requiring a goodwill impairment test as of September 30, 2022 was deemed to have occurred. We utilized the market capitalization of the Company as of September 30, 2022, a Level 1 input as described above, to estimate the fair value of the Company’s single reporting unit. The estimated market capitalization was determined by multiplying our September 30, 2022 stock price and the common shares outstanding as of September 30, 2022. The market capitalization approach was utilized to estimate the fair value of our single reporting unit as of September 30, 2022, due to the significance of the decline in stock price as of September 30, 2022, resulting in a market capitalization that was 38% of the net book value of our single reporting unit. Based on the analysis, the estimated fair value of our reporting unit was $25.2 million, compared to a carrying value of our single reporting unit of $67.3 million as of September 30, 2022. As such, the fair value of our single reporting unit was deemed to be below its carrying value as of September 30, 2022, resulting in a goodwill impairment charge of $42.0 million in the third quarter of 2022, which was reflected in the consolidated statement of operations for the year ended December 31, 2022. ● December 31, 2022 Goodwill Impairment Testing At December 31, 2022, prior to the completion of our goodwill impairment testing, the goodwill balance totaled $8.3 million. At December 31, 2022, from a qualitative standpoint, we considered the factors described above under “September 30, 2022 Goodwill Impairment Testing,” including the applicable current period reported loss and negative cash flows from operating activities, and the sustained downturn in industry and macroeconomic conditions, including inflationary pressures and potential reductions in advertising spending and the sustained downturn of the broader mid-cap and micro-cap equity markets in the fourth quarter of Fiscal Year 2022. Similarly, given the Company’s recent significant growth, management did not believe that the December 31, 2022 market capitalization of the Company was indicative of any fundamental change in the Company’s underlying business or future prospects as of the December 31, 2022 measurement date. The Company's stock price had been volatile, and the volatility continued during the three months ended December 31, 2022, declining 50% from the September 30, 2022 closing price to $6.72 as of December 31, 2022, reflecting a market capitalization that was approximately 46% of the Company’s December 31, 2022 net book value. As of December 31, 2022 the decline in our stock price and other factors were deemed to be sustained, and therefore a triggering event requiring a goodwill impairment test as of December 31, 2022 was deemed to have occurred. We utilized the market capitalization of the Company as of December 31, 2022, a Level 1 input, to estimate the fair value of the Company’s single reporting unit. Based on the analysis, the estimated fair value of our reporting unit was $12.6 million, compared to a carrying value of our single reporting unit of $27.5 million as of December 31, 2022. As such, the fair value of our single reporting unit was deemed to be below its carrying value as of December 31, 2022, resulting in an additional goodwill impairment charge of $8.3 million for the year ended December 31, 2022, reflecting the write down of the remaining balance of goodwill for our single reporting unit. Relaxed Ongoing Reporting Requirements Upon the completion of our initial public offering, we elected to report as an “emerging growth company” (as defined in the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies,” including but not limited to: ● not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; ● taking advantage of extensions of time to comply with certain new or revised financial accounting standards; ● being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and ● being exempt from the requirement to hold a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. 56 Table of Contents We are subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies,” and our stockholders could receive less information than they might expect to receive from more mature public companies. We expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an “emerging growth company” for up to five years, although if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.