Item
1.
Financial Statements
.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except par value amount)
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,635
|
|
|
$
|
3,378
|
|
Accounts receivable, net of allowances of $643 and $463, respectively
|
|
|
1,033
|
|
|
|
714
|
|
Site equipment to be installed
|
|
|
3,991
|
|
|
|
4,866
|
|
Prepaid expenses and other current assets
|
|
|
1,069
|
|
|
|
680
|
|
Total current assets
|
|
|
8,728
|
|
|
|
9,638
|
|
Fixed assets, net
|
|
|
3,753
|
|
|
|
3,678
|
|
Software development costs, net of accumulated amortization of $2,732 and $2,651,
respectively
|
|
|
1,581
|
|
|
|
1,459
|
|
Deferred costs
|
|
|
627
|
|
|
|
775
|
|
Goodwill
|
|
|
978
|
|
|
|
1,004
|
|
Other assets
|
|
|
34
|
|
|
|
16
|
|
Total assets
|
|
$
|
15,701
|
|
|
$
|
16,570
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
521
|
|
|
$
|
390
|
|
Accrued compensation
|
|
|
411
|
|
|
|
646
|
|
Accrued expenses
|
|
|
498
|
|
|
|
418
|
|
Sales taxes payable
|
|
|
92
|
|
|
|
107
|
|
Income taxes payable
|
|
|
19
|
|
|
|
13
|
|
Current portion of long-term debt
|
|
|
1,942
|
|
|
|
5,059
|
|
Current portion of obligations under capital leases
|
|
|
177
|
|
|
|
176
|
|
Current portion of deferred revenue
|
|
|
3,401
|
|
|
|
3,564
|
|
Deferred rent
|
|
|
132
|
|
|
|
182
|
|
Other current liabilities
|
|
|
146
|
|
|
|
192
|
|
Total current liabilities
|
|
|
7,339
|
|
|
|
10,747
|
|
Long-term debt
|
|
|
2,952
|
|
|
|
8
|
|
Long-term obligations under capital leases
|
|
|
114
|
|
|
|
164
|
|
Long-term deferred revenue
|
|
|
50
|
|
|
|
63
|
|
Other liabilities
|
|
|
50
|
|
|
|
52
|
|
Total liabilities
|
|
|
10,505
|
|
|
|
11,034
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Series A 10% cumulative convertible preferred stock, $0.005 par value, $156 liquidation preference, 156 shares authorized; 156 shares issued and outstanding at March 31, 2018 and December 31, 2017
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.005 par value, 15,000 shares authorized at March 31, 2018 and December 31, 2017; 2,521 shares issued and outstanding at March 31, 2018 and December 31, 2017
|
|
|
13
|
|
|
|
13
|
|
Treasury stock, at cost, 10 shares at March 31, 2018 and December 31, 2017
|
|
|
(456
|
)
|
|
|
(456
|
)
|
Additional paid-in capital
|
|
|
134,869
|
|
|
|
134,752
|
|
Accumulated deficit
|
|
|
(129,528
|
)
|
|
|
(129,119
|
)
|
Accumulated other comprehensive income
|
|
|
297
|
|
|
|
345
|
|
Total shareholders’ equity
|
|
|
5,196
|
|
|
|
5,536
|
|
Total liabilities and shareholders’ equity
|
|
$
|
15,701
|
|
|
$
|
16,570
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In
thousands, except per share amounts)
(unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
4,065
|
|
|
$
|
4,226
|
|
Sales-type lease revenue
|
|
|
679
|
|
|
|
185
|
|
Other revenue
|
|
|
1,017
|
|
|
|
820
|
|
Total Revenue
|
|
|
5,761
|
|
|
|
5,231
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Direct operating costs (includes depreciation and amortization of $553 and $491, respectively)
|
|
|
1,967
|
|
|
|
1,843
|
|
Selling, general and administrative
|
|
|
4,021
|
|
|
|
4,134
|
|
Depreciation and amortization (excluding depreciation and amortization included in direct operating costs)
|
|
|
86
|
|
|
|
88
|
|
Total operating expenses
|
|
|
6,074
|
|
|
|
6,065
|
|
Operating loss
|
|
|
(313
|
)
|
|
|
(834
|
)
|
Other (expense) income, net
|
|
|
(94
|
)
|
|
|
750
|
|
Loss before income taxes
|
|
|
(407
|
)
|
|
|
(84
|
)
|
Provision for income taxes
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Net loss
|
|
$
|
(409
|
)
|
|
$
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
2,510
|
|
|
|
2,255
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(409
|
)
|
|
$
|
(90
|
)
|
Foreign currency translation adjustment
|
|
|
(48
|
)
|
|
|
15
|
|
Total comprehensive loss
|
|
$
|
(457
|
)
|
|
$
|
(75
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(409
|
)
|
|
$
|
(90
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
639
|
|
|
|
579
|
|
Provision for doubtful accounts
|
|
|
8
|
|
|
|
26
|
|
Scrap expense
|
|
|
7
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
117
|
|
|
|
117
|
|
Amortization of debt issuance costs
|
|
|
8
|
|
|
|
12
|
|
Issuance of common stock in lieu of cash for bonus compensation
|
|
|
-
|
|
|
|
164
|
|
Loss from disposition of equipment
|
|
|
2
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(327
|
)
|
|
|
(863
|
)
|
Site equipment to be installed
|
|
|
397
|
|
|
|
208
|
|
Prepaid expenses and other assets
|
|
|
(407
|
)
|
|
|
(148
|
)
|
Accounts payable and accrued liabilities
|
|
|
(37
|
)
|
|
|
(450
|
)
|
Income taxes payable
|
|
|
7
|
|
|
|
(22
|
)
|
Deferred costs
|
|
|
148
|
|
|
|
53
|
|
Deferred revenue
|
|
|
(176
|
)
|
|
|
(62
|
)
|
Deferred rent
|
|
|
(50
|
)
|
|
|
(45
|
)
|
Other liabilities
|
|
|
(47
|
)
|
|
|
55
|
|
Net cash used in operating activities
|
|
|
(120
|
)
|
|
|
(466
|
)
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(169
|
)
|
|
|
(97
|
)
|
Software development expenditures
|
|
|
(203
|
)
|
|
|
(152
|
)
|
Net cash used in investing activities
|
|
|
(372
|
)
|
|
|
(249
|
)
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock related to registered direct offering
|
|
|
-
|
|
|
|
1,554
|
|
Principal payments on capital lease
|
|
|
(44
|
)
|
|
|
(38
|
)
|
Payments on long-term debt
|
|
|
(182
|
)
|
|
|
(359
|
)
|
Debt issuance costs on long-term debt
|
|
|
-
|
|
|
|
(22
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(226
|
)
|
|
|
1,135
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(718
|
)
|
|
|
420
|
|
Effect of exchange rate on cash
|
|
|
(25
|
)
|
|
|
7
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,378
|
|
|
|
5,686
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,635
|
|
|
$
|
6,113
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
85
|
|
|
$
|
171
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site equipment transferred to fixed assets
|
|
$
|
472
|
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired under capital lease
|
|
$
|
5
|
|
|
$
|
-
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
BASIS OF PRESENTATION
Description
of Business
NTN
Buzztime, Inc. (the “Company”) was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate
name to NTN Communications, Inc. in 1985. The Company changed its name to NTN Buzztime, Inc. in 2005 to better reflect the growing
role of the Buzztime consumer brand.
The
Company delivers interactive entertainment and innovative dining technology to bars and restaurants in North America. Customers
subscribe to the Company’s customizable solution to differentiate themselves via competitive fun by offering guests trivia,
card, sports and single player games, nationwide competitions, and by offering self-service dining features including dynamic
menus, touchscreen ordering and secure payment. The Company’s platform can improve operating efficiencies, create connections
among the players and venues and amplify guests’ positive experiences. Built on an extended network platform, the Company’s
interactive entertainment system has historically allowed multiple players to interact at the venue and also enables competition
between venues, referred to as massively multiplayer gaming. The Company’s current platform, which it refers to as Buzztime
Entertainment On Demand, or BEOND, was commercially launched during 2013 and then scaled during 2014. The Company continues to
enhance its network architecture and the BEOND tablet platform and player engagement paradigms. The Company also continues to
support its legacy network product line, which it refers to as Classic.
The
Company currently generates revenue by charging subscription fees for its service to network subscribers, by leasing equipment
(including tablets used in its BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers,
by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, from providing
professional services (such as developing certain functionality within the Company’s platform for customers), and from pay-to-play
single player games.
At
March 31, 2018, 2,703 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network, of which
approximately 82% were using the BEOND tablet platform.
Basis
of Accounting Presentation
The
accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and
Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments
that are necessary, which are of a normal and recurring nature, for a fair presentation for the periods presented of the financial
position, results of operations and cash flows of the Company and its wholly-owned subsidiaries: IWN, Inc., IWN, L.P., Buzztime
Entertainment, Inc., NTN Wireless Communications, Inc., NTN Software Solutions, Inc., NTN Canada, Inc., and NTN Buzztime, Ltd.,
all of which, other than NTN Canada, Inc., are dormant subsidiaries. All significant intercompany transactions have been eliminated
in consolidation.
These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes
thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017. The accompanying
condensed balance sheet as of December 31, 2017 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for
the three months ended March 31, 2018 are not necessarily indicative of the results to be anticipated for the entire year ending
December 31, 2018, or any other period.
In
connection with preparing the financial statement as of and for the year ended March 31, 2018, the Company evaluated whether there
are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt
about its ability to continue as a going concern within one year after the date that such financial statements are issued. As
a result of such evaluation, the Company believes it will have sufficient cash to meet its operating cash requirements and to
fulfill its debt obligations for at least the next twelve months from the issuance date of such financial statements. To address
the Company’s low stockholders’ equity, to increase the likelihood that it will be able to successfully execute its
operating and strategic plan, and to better position the Company to take advantage of market opportunities for growth, the Company
is continuing to evaluate additional financing alternatives, including additional equity financings and alternative sources of
debt. If the Company’s cash and cash equivalents are not sufficient to meet future cash requirements, the Company may be
required to reduce planned capital expenses, reduce operational cash uses or raise capital on terms that are not as favorable
to the Company as they otherwise might be. Any actions the Company may undertake to reduce planned capital purchases or reduce
expenses may be insufficient to cover shortfalls in available funds. If the Company requires additional capital, it may be unable
to secure additional capital on terms that are acceptable to the Company, or at all.
(2)
Revenue Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. In August 2015, the FASB issued ASU No. 2015-14,
Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date of ASU 2014-09
by one year to fiscal periods beginning after December 15, 2017. The Company adopted the new standard effective January 1, 2018
using the full retrospective approach.
This
update outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides
a five-step analysis in determining when and how revenue is recognized as follows:
|
1.
|
Identify
the contract(s) with customers
|
|
|
|
|
2.
|
Identify
the performance obligations
|
|
|
|
|
3.
|
Determine
the transaction price
|
|
|
|
|
4.
|
Allocate
the transaction price to the performance obligations
|
|
|
|
|
5.
|
Recognize
revenue when the performance obligations have been satisfied
|
Topic
606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration a company expects to receive in exchange for those goods or services.
The
Company has completed the process of evaluating the effect of adopting this update and has determined that the timing and amount
of revenue recognized based on Topic 606 is consistent with the Company’s revenue recognition policy under previous guidance,
and accordingly, there was no transition adoption adjustment necessary upon the adoption of the Topic 606 guidance.
The
Company recognizes revenue from recurring subscription fees for its service earned from its network subscribers, from leasing
equipment (including tablets used in its BEOND tablet platform and the cases and charging trays for the tablets) to certain network
subscribers, from hosting live trivia events, from selling advertising aired on in-venue screens and as part of customized games,
directly from patrons who pay to play or use the Company’s premium game content and from customized professional development
projects.
In
general, when multiple performance obligations are present in a customer contract, the transaction price is allocated to the individual
performance obligations based on the relative stand-alone selling prices, and the revenue is recognized when or as each performance
obligation has been satisfied. Discounts are treated as a reduction to the overall transaction price and allocated to the performance
obligations based on the stand-alone selling prices. All revenues are recognized net of sales tax collected from the customer.
The following describes how the Company recognizes its revenue streams under Topic 606.
Subscription
Revenue
- The Company recognizes its recurring subscription fees over time as customers receive and consume the benefits of
such services, which includes the Company’s content, the Company’s equipment to access the content and the installation
of the equipment. In general, customers pay for the subscription services during the month in which they receive the services.
Due to the timing of providing the services and receiving payment for the services, the Company does not record any unbilled contract
asset. Occasionally, a customer will prepay for up to one year of subscription services, in which case, the Company will record
deferred revenue on the balance sheet related to such prepayment and will recognize the revenue over the time the customer receives
the subscription services. Revenue from installation services is also recorded as deferred revenue and recognized over the longer
of the contract term and the expected term of the customer relationship using the straight line method. The Company has certain
contingent performance obligations with respect to repairing or replacing equipment and would recognize any such revenue at the
point in time the Company performs such services.
Costs
associated with installing the equipment are considered direct costs. Costs associated with sales commissions are considered incremental
costs for fulfilling the contract because such costs would not have been incurred without obtaining the contract. The Company
expects to recover both costs through future fees it collects and both costs are recorded in deferred costs on the balance sheet
and amortized on a straight-line basis. For costs that are of an amount that is less than or equal to the deferred revenue for
the related contract, the amortization period approximates the longer of the contract term and the expected term of the customer
relationship. For any excess costs that exceed the deferred revenue, the amortization period of the excess cost is the initial
term of the contract, which is generally one year because the Company can still recover that excess cost in the initial term of
the contract.
Sales-type
Lease Revenue
– For certain customers that lease equipment under sale-type lease arrangements, the Company recognizes
revenue in accordance with Accounting Standards Codification (“ASC”) No. 840,
Leases.
Such revenue is recognized
at the time of installation based on the net present value of the leased equipment. Interest income is recognized over the life
of the lease for customers who have remaining lease payments to make. In the event a customer under a sales-type lease arrangement
prepays for the lease in full prior to receiving the equipment under the lease, such amounts are recorded in deferred revenue
and recognized as revenue once the equipment has been installed and activated at the customer’s location. The cost of the
leased equipment is recognized at the same time as the revenue.
Live Hosted Trivia Revenue
–
The Company recognizes its live-hosted trivia revenue at a point in time, which is when the event takes place. Some customers
host their own trivia events and the Company provides the game materials. In these cases, the Company recognizes the revenue at
the point in time the Company sends the game materials to the customer. The Company recognizes related costs at the same
point in time the revenue is recognized. Generally, there is no unbilled revenue or deferred revenue associated with live hosted
trivia events.
Advertising
Revenue
– The Company recognizes advertising revenue over the time the advertising campaign airs in its customers locations.
The Company uses the time elapsed output method to measure its progress toward satisfying the performance obligation. When the
Company contracts with an advertising agent, the Company shares in the advertising revenue generated with that agent. In these
cases, the Company generally recognizes revenue on a net basis, as the agent typically has the responsibility for the relationship
with the advertiser and the credit risk. When the Company contracts directly with the advertiser, it will recognize the revenue
on a gross basis and will recognize any revenue share arrangement it has with a third party as a direct expense, as the Company
has the responsibility for the relationship with the advertiser and the credit risk. Generally, there is no unbilled revenue or
deferred revenue associated with the Company’s advertising activities.
Pay-to-Play
Revenue
– The Company recognizes revenue generated from its customers’ patrons who access the Company’s
premium games on the tablets. This revenue is recognized at a point in time based on usage-based royalty revenue guidance. The
Company generally shares in the revenue with the customer whose patrons generated the pay-to-play revenue. The Company has determined
that it is the principal and the customer is the agent, and therefore, the Company recognizes this revenue on a gross basis, with
the amount of revenue shared with the customer as a direct expense. Costs associated with procuring the game license or developing
the games are recognized over the life of the license or expected life of the developed game. Generally, there is no unbilled
revenue or deferred revenue associated with the Company’s pay-to-play games.
Professional
Development Revenue
– Depending on the type of development work the Company is performing, the Company will recognize
revenue, and the associated costs, at the point in time when the Company satisfies each performance obligations, which is generally
when the customer can direct the use of, and obtain substantially all of the remaining benefits of the goods or service provided.
For services provided over time, the corresponding revenue is generally recognized over the time the Company provides such services.
Any payments received in advance of satisfying the performance obligations are recorded as deferred revenue and recognized as
revenue when or as such obligations are satisfied. The Company does not have unbilled revenue assets associated with professional
development services.
(3)
Basic and Diluted Earnings Per Common Share
The
Company computes basic and diluted earnings per common share in accordance with the provisions of FASB ASC No. 260,
Earnings
per Share
. Basic earnings per share excludes the dilutive effects of options, warrants and other convertible securities. Diluted
earnings per share reflects the potential dilution of securities that could share in the Company’s earnings. The total number
of shares of the Company’s common stock subject to options, warrants, and convertible preferred stock that were excluded
from computing diluted net loss per common share was approximately 433,000 and 454,000 shares as of March 31, 2018 and 2017, respectively,
as their effect was anti-dilutive.
(4)
STOCKHOLDERS’ EQUITY
Stock-based
Compensation
The
Company’s stock-based compensation plans include the NTN Buzztime, Inc. 2004 Performance Incentive Plan (the “2004
Plan”), the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan (the “Amended 2010 Plan”) and the NTN
Buzztime, Inc. 2014 Inducement Plan (the “2014 Plan”). The 2004 Plan expired in September 2009. From and after the
date it expired, no awards could be granted under that plan and all awards that had been granted under that plan before it expired
are governed by that plan until they are exercised or expire in accordance with that plan’s terms. The Amended 2010 Plan
provides for the grant of up to 240,000 share-based awards and expires in February 2020. As of March 31, 2018, approximately 59,000
share-based awards were available to be issued under the Amended 2010 Plan. The 2014 Plan, which provides for the grant of up
to 85,000 share-based awards to a new employee as an inducement material to the new employee entering into employment with the
Company, was approved by the nominating and corporate governance/compensation committee of the Company’s board of directors
(the “Committee”) in September 2014 in connection with the appointment of Ram Krishnan as the Company’s Chief
Executive Officer. As of March 31, 2018, there were no share-based awards available to be granted under the 2014 Plan. The Company’s
stock-based compensation plans are administered by the Committee, which selects persons to receive awards and determines the number
of shares subject to each award and the terms, conditions, performance measures, if any, and other provisions of the award.
The
Company records stock-based compensation in accordance with ASC No. 718
, Compensation – Stock Compensation
and ASC
No. 505-50,
Equity – Equity-Based Payments to Non-Employees.
The Company estimates the fair value of stock options
using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite
service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line
single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair
value on the grant date and is periodically re-measured as the underlying awards vest.
The
Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term
of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise
patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate,
the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend
yield assumption is based on the Company’s history and expectation of dividend payouts.
The
Company granted stock options to purchase 2,000 shares of common stock during the three months ended March 31, 2017. There were
no options granted during the three months ended March 31, 2018.
The
following weighted-average assumptions were used for grants issued during the three months ended March 31, 2017 under the ASC
No. 718 requirements.
|
|
Three months ended
|
|
|
|
March 31, 2017
|
|
Weighted average risk-free rate
|
|
|
1.63
|
%
|
Weighted average volatility
|
|
|
115.0
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Expected life
|
|
|
7.14 years
|
|
No
options were exercised during either of the three months ended March 31, 2018 or 2017.
Grants of restricted stock units are settled in an equal number of shares of common stock on the vesting date
of the award. A stock unit award is settled only to the extent vested. Vesting generally requires the continued employment by the
award recipient through the respective vesting date. Because restricted stock units are settled in an equal number of shares of
common stock without any offsetting payment by the recipient, the measurement of cost is based on the quoted market price of the
stock at the measurement date, which is the date of grant. During the three months ended March 31, 2018, the Company granted 53,000
restricted stock units with a grant date fair value of $6.04 per restricted stock unit. Of the 53,000 restricted stock units, 25,000
and 15,000 were granted to Messrs. Ram Krishnan and Allen Wolff, respectively, and are subject to accelerated vesting provisions
in their respective employment agreements.
ASC
No. 718 requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeiture
rates differ from those estimates. Forfeitures were estimated based on historical activity for the Company. Stock-based compensation
expense for each of the three months ended March 31, 2018 and 2017 was $117,000, and is expensed in selling, general and administrative
expenses and credited to additional paid-in-capital.
(5)
DEBT
Term
Loan
In
November 2017, the Company entered into an amended and restated loan and security agreement (the “Amended and Restated Loan
Agreement”) with East West Bank (“EWB”). The Amended & Restated Loan Agreement amended and restated the
loan and security agreement that the Company entered into with EWB in April 2015 (as the same has been previously amended, the
“Prior Loan Agreement”). The Amended and Restated Loan Agreement provides for a $4,500,000 36-month term loan, which
the Company used to refinance the $4,450,000 that it had outstanding under the Prior Loan Agreement. The Company is required to
make payments on the loan on the last calendar day of each month commencing on December 31, 2017 and through its maturity date,
November 29, 2020. Payments will be interest only until the payment due on June 30, 2018, at which time payments will become principal
plus interest.
The
Company must comply with certain financial covenants, including a minimum fixed charge coverage ratio, minimum liquidity and a
maximum senior leverage ratio. As of December 31, 2017, the Company was in compliance with all covenants except the fixed charge
coverage ratio covenant. In March 2018, the Company entered into an amendment to the Amended and Restated Loan Agreement, which
provided for the following:
|
●
|
EWB
waived the minimum fixed charge coverage ratio covenant default for the fiscal quarter ended December 31, 2017.
|
|
|
|
|
●
|
The
minimum fixed charge coverage ratio covenant was suspended for 2018, and as a result, the Company is not required to satisfy
this covenant until the quarter ending March 31, 2019.
|
|
|
|
|
●
|
A covenant was added under which the Company is required to achieve a minimum Adjusted EBITDA (as defined
below) set forth below for the period indicated:
|
Six Month Period Ending
|
|
Minimum Adjusted EBITDA
|
|
March 31, 2018
|
|
$
|
600,000
|
|
June 30, 2018
|
|
$
|
1,200,000
|
|
September 30, 2018
|
|
$
|
1,600,000
|
|
December 31, 2018
|
|
$
|
1,500,000
|
|
“Adjusted
EBITDA” means (a) EBITDA (which is net income, plus interest expense, plus, to the extent deducted in the calculation of
net income, depreciation expense and amortization expense, plus income tax expense) plus (b) other noncash expenses and charges,
plus (c) to the extent approved by EWB, other onetime charges, plus (d) to the extent approved by EWB, any losses arising
from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business.
As
of March 31, 2018, the Company was in compliance with all covenants.
As
of March 31, 2018, $4,500,000 was outstanding under the Amended and Restated Loan Agreement, of which $1,500,000 is recorded in
current portion of long-term debt and $3,000,000 is recorded in long-term debt on the accompanying consolidated balance sheet.
The Company recorded total debt issuance costs of $59,000, which includes a $45,000 facility fee. The Company is amortizing the
debt issuance costs to interest expense using the effective interest rate method over the life of the loan. As of March 31, 2018,
the unamortized portion of the debt issuance costs was $48,000 and is recorded as a reduction of long term debt. The Company has
no more borrowing availability under the Amended and Restated Loan Agreement.
Equipment
Notes Payable
In
May 2013, the Company entered into a financing arrangement with a lender under which the Company may borrow funds to purchase
certain equipment. Initially, the maximum amount the Company could borrow under this financing arrangement was $500,000. Over
time, the lender increased that maximum amount, and as of March 31, 2018, the maximum amount was $9,690,000, all of which has
been borrowed. In April 2015, the Company used approximately $3,381,000 of the proceeds received under the Prior Loan Agreement
with EWB to pay down a portion of the principal amount the Company had borrowed under this financing arrangement, accrued interest
and a prepayment fee.
The
Company was able to borrow up to the maximum amount available under this financing arrangement in tranches as needed. Each tranche
borrowed through August 2015 incurred interest at 8.32% per annum; the interest for tranches borrowed thereafter was reduced to
rates between 7.32% to 8.05% per annum. With respect to the first $1,000,000 in the aggregate borrowed, principal and interest
payments are due in 36 equal monthly installments. With respect to amounts borrowed in excess of the first $1,000,000 in the aggregate,
the first monthly payment will be equal to 24% of the principal amount outstanding, and the remaining principal and interest due
is payable in 35 equal monthly installments. The Company granted the lender a first security interest in the equipment purchased
with the funds borrowed. This equipment lender entered into a subordination agreement with EWB.
As
of March 31, 2018, $442,000 was outstanding under this financing arrangement, all of which is recorded in current portion of long-term
debt on the accompanying consolidated balance sheet. The Company currently does not expect the lender to lend any additional funds
under this financing arrangement.
(6)
ACCUMULATED OTHER COMPREHENSIVE INCOME
The
United States dollar is the Company’s functional currency, except for its operations in Canada where the functional currency
is the Canadian dollar. The financial position and results of operations of the Company’s foreign subsidiaries are measured
using the foreign subsidiary’s local currency as the functional currency. In accordance with ASC No. 830,
Foreign Currency
Matters
, revenues and expenses of the Company’s foreign subsidiaries have been translated into U.S. dollars using the
weighted average exchange rates during the reporting period, and the assets and liabilities of such subsidiaries have been translated
using the period end exchange rate. Accumulated other comprehensive income includes the accumulated gains or losses from these
foreign currency translation adjustments. As of March 31, 2018 and December 31, 2017, $297,000 and $345,000 of foreign currency
translation adjustments were recorded in accumulated other comprehensive income, respectively.
(7)
RECENT ACCOUNTING PRONOUNCEMENTS
In
March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118
. This ASU incorporates SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which
addresses the accounting implications of the major tax reform legislation, Public Law No. 115-97, commonly referred to as the
Tax Cuts and Jobs Act (the “2017 Tax Act”), enacted on December 22, 2017. SAB 118 allows a company to record provisional
amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. The Company
continues to analyze the 2017 Tax Act.
(8)
CONCENTRATIONS OF RISK
Significant
Customer
For
the three months ended March 31, 2018 and 2017, the Company generated approximately $2,798,000 and $2,105,000, respectively, of
total revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees, which represented approximately 49% and
40% of total revenue for those periods, respectively. As of March 31, 2018 and December 31, 2017, approximately $504,000 and $191,000,
respectively, was included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and its franchisees.
Sole
Equipment Supplier
The
Company currently purchases the tablets, cases and charging trays used in its BEOND tablet platform from one unaffiliated third-party
manufacturer. The Company currently does not have an alternative manufacturer for its tablets or an alternative manufacturer or
device for the tablet cases or tablet charging trays. The Company no longer purchases playmakers for its Classic platform.
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
report and the documents incorporated herein by reference, if any, contain “forward-looking statements” – that
is statements related to future events, results, performance, prospects and opportunities, including statements related to our
strategic plans and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry
trends and our financial position. Forward-looking statements are based on information currently available to us, on our current
expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions
of management. Forward looking statements often contain words such as “expects,” “anticipates,” “could,”
“targets,” “projects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” “may,” “will,” “would,” and similar expressions. In addition, any
statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and
other characterizations of future events or circumstances, are forward-looking statements. Forward-looking statements by their
nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ
materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or
contribute to such differences include (1) our ability to compete effectively within the highly competitive interactive games,
entertainment and marketing services industries, (2) the impact of new products and technological change, especially in the mobile
and wireless markets, on our operations and competitiveness, (3) our ability to maintain or improve our relationship with Buffalo
Wild Wings, who together with its franchisees accounted for a significant portion of our revenues, (4) our ability to maintain
an adequate supply of the tablet and related equipment used in our BEOND tablet platform, (5) our ability to adequately protect
our proprietary rights and intellectual property, (6) our ability to raise additional funds in the future on favorable terms;
we have borrowed substantially all amounts available to us under existing credit facilities and, subject to limited exceptions,
our loan and security agreement with East West Bank prohibits us from borrowing additional amounts from other lenders, (7) our
ability to significantly grow our subscription revenue and implement our other business strategies, (8) our ability to successfully
and efficiently manage the design, manufacturing and assembly process of the tablet and related equipment used in our BEOND tablet
platform and (9) the other risks and uncertainties described in Part I, Item 1A “Risk Factors” of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2017, and described in other documents we file from time to time with the
Securities and Exchange Commission, or SEC, including this report and our other Quarterly Reports on Form 10-Q. Readers are urged
not to place undue reliance on the forward-looking statements contained in this report or incorporated by reference herein, which
speak only as of the date of this report. Except as required by law, we do not undertake any obligation to revise or update any
such forward-looking statement to reflect future events or circumstances.
INTRODUCTION
Management’s
discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read in
conjunction with, the accompanying unaudited condensed consolidated financial statements and notes, included in Item 1 of this
Quarterly Report on Form 10-Q, to help provide an understanding of our financial condition, the changes in our financial condition
and our results of operations. All dollar amounts in this discussion are rounded to the nearest thousand. Our discussion is organized
as follows:
|
●
|
Overview
and Highlights
. This section provides a general description of our business and significant events and transactions that
we believe are important in understanding our financial condition and results of operations.
|
|
|
|
|
●
|
Critical
Accounting Policies
. This section provides a listing of our significant accounting policies, including any material changes
in our critical accounting policies, estimates and judgments during the three months ended March 31, 2018 from those described
in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of
our Annual Report on Form 10-K for the year ended December 31, 2017.
|
|
|
|
|
●
|
Results
of Operations
. This section provides an analysis of our results of operations presented in the accompanying unaudited
condensed consolidated statements of operations by comparing the results for the three months ended March 31, 2018 to the
results for the three months ended March 31, 2017.
|
|
|
|
|
●
|
Liquidity
and Capital Resources
. This section provides an analysis of our historical cash flows, as well as our future capital requirements.
|
OVERVIEW
AND HIGHLIGHTS
About
Our Business and How We Talk About It
We
deliver interactive entertainment and innovative dining technology to bars and restaurants in North America. Customers subscribe
to our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and single
player games, nationwide competitions, and by offering self-service dining features including dynamic menus, touchscreen ordering
and secure payment. Our platform can improve operating efficiencies, create connections among the players and venues and amplify
guests’ positive experiences. Built on an extended network platform, our interactive entertainment system has historically
allowed multiple players to interact at the venue and more recently allows for competition between venues, referred to as massively
multiplayer gaming. Our current platform, which we refer to as Buzztime Entertainment On Demand, or BEOND, was commercially launched
during 2013 and then scaled during 2014. We continue to enhance our network architecture and the BEOND tablet platform and player
engagement paradigms. We also continue to support our legacy network product line, which we refer to as Classic.
We
currently generate revenue by charging subscription fees for our service to our network subscribers, by leasing equipment (including
tablets used in our BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers, by
hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, from providing professional
services (such as developing certain functionality within our platform for customers), and from pay-to-play single player games.
Since
2015, over 115 million games have been played on our network annually, and as of March 31, 2018, approximately 56% of our network
subscriber venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Buffalo Wings &
Rings, Old Chicago, Native Grill & Wings, Houlihans, Beef O’Brady’s, Boston Pizza, and Arooga’s.
We
own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks
to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our
property. Other trademarks are the property of their respective owners.
Unless
otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us”
and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers”
or “customers” refer to venues that subscribe to our network service; (c) to “consumers” or “players”
refer to the individuals that engage in our games, events, and entertainment experiences available at our customers’ venues
and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant) of our customers at which
our games, events, and entertainment experiences are available to consumers.
Our Strategy and
Business Updates
Grow
business beyond restaurant and bar industry
. One of our major initiatives is to expand our business beyond the restaurant
and bar industry. During the first quarter of 2018, we agreed to sell our tablets to a third-party who will use our tablets and
operating system to deliver their services in a non-restaurant or bar industry. Earlier in 2017, we began a relationship with
a third-party who is licensing our trivia content for use in casino gaming machines and is leasing our tablets for use in retail
settings to complete loyalty/reward program transactions.
Launch
expanded product offerings
. We continue to focus on bringing new experiences and promotions to our customers. We are developing
new products that we believe will help differentiate our offerings from those of our competitors, and which are expected to provide
an ability to scale our business beyond our traditional entertainment offering.
New Hub
. A piece
of the equipment we install in our customers’ venues is a personal computer that acts as a server from which our content
is streamed to the tablets within the venue. We are working on a smaller form factor for the personal computer that, in addition
to being physically smaller, would be less expensive and would reduce labor-intensive installation costs. We believe that this
“hub” will lead to new opportunities, which could include the ability to display video, highlights, dynamic web content,
and app content, in addition to being able to deliver our historical offerings within venues.
Mobile
Live Trivia
. We have completed a market-ready, mobile version of our live trivia product that allows customers, trivia hosts,
and individuals to start their own trivia events. When mobile trivia becomes available, it will be our easiest to adopt, lowest
cost of entry solution, and may serve as a test for a venue contemplating a more significant investment.
Single
Player Games
. We will be releasing new single player games that we have developed for our BEOND tablet platform. Previously,
we purchased these types of games from third party aggregators, sometimes at significant cost.
Buffalo
Wild Wings
. In March 2017, Buffalo Wild Wings chose us to be its provider of digital menu, order, and payment functionality.
Due to the acquisition of Buffalo Wild Wings by Arby’s Restaurant Group, Inc. (which renamed itself Inspire Brands Inc.)
in February 2018 and to the attendant changes with Buffalo Wild Wings’ operations, the rollout of our expanded functionality
was put on hold to allow its new ownership to assess all the programs at Buffalo Wild Wings. Since that time, we have been working
with Inspire Brands as it integrates Buffalo Wild Wings into its portfolio and determines its brand priorities. We restarted order,
payment and guest insights, and are currently live at 31 Buffalo Wild Wings locations. We continue to believe that a long-term
relationship with Inspire Brands presents numerous opportunities as it intends to add several more brands to its portfolio.
Advertising
Partnerships
. We believe that if we lower the price of our BEOND tablet platform, we will be able to acquire more market share.
One way to lower the price is by subsidizing our costs through advertising. We are currently working with advertising sales companies
to help us improve our advertisement sales and with an advertisement technology company to improve our ad loading, management,
and delivery and testing capabilities.
Recent
Developments
Non-compliance with
NYSE American continued listing standard
On April 26, 2018,
the NYSE Regulation Inc. notified us that it has accepted our plan to regain compliance with Section 1003(a)(iii) of the Company
Guide
(the “Company Guide”) and granted
us a plan period that extends through March 20, 2019 to regain compliance.
As previously reported, we are not in compliance with NYSE American LLC listing standards, specifically, Section 1003(a)(iii),
because we reported stockholders’ equity of less than $6 million as of December 31, 2017 and had net losses in five
of our most recent fiscal years ended December 31, 2017.
The listing of our
common stock on the NYSE American is being continued during the plan period pursuant to an extension. The NYSE Regulation
staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in
compliance with Section 1003(a)(iii) by March 20, 2019 or if we do not make progress consistent with our plan during
the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate.
See
“PART II—ITEM 1A. RISK FACTORS—“Our common stock could be delisted or suspended from trading on the NYSE
American if we do not regain compliance with continued listing criteria with which we are currently not compliant or if we fail
to meet any other continued listing criteria,” below.
Amendment
to East West Bank Credit Facility
In March 2018, we entered
into an amendment to the amended and restated loan and security agreement we entered into with East West Bank on November 29,
2017. This amendment (i) waived our minimum fixed charge coverage ratio covenant default for the fiscal quarter ended December
31, 2017; (ii) suspended the minimum fixed charge coverage ratio covenant until the quarter ending March 31, 2019; and (iii) added
a minimum adjusted EBITDA covenant on a trailing six-month period ending March 31, 2018, June 30, 2018, September 30, 2018
and December 31, 2018. See “—Liquidity and Capital Resources,” below for additional information.
CRITICAL
ACCOUNTING POLICIES
The
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis,
we evaluate our estimates, including those related to deferred costs and revenues, depreciation of fixed assets, the provision
for income taxes including the valuation allowance, stock-based compensation, bad debts, investments, impairment of software development
costs, goodwill, fixed assets, intangible assets and contingencies, including the reserve for sales tax inquiries. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical
accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition
and results and require management’s most subjective judgments.
There
have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March
31, 2018 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
section of our Annual Report on Form 10-K for the year ended December 31, 2017, except for
Revenue from Contracts with Customers
(Topic 606)
. We have completed the process of evaluating the effect of adopting Topic 606 and have determined that the timing
and amount of revenue recognized based on Topic 606 is consistent with our revenue recognition policy under previous guidance,
and accordingly, there was no transition adoption adjustment necessary upon the adoption of the Topic 606 guidance. (See Note
2 to the accompanying unaudited condensed consolidated financial statements.)
RESULTS
OF OPERATIONS
Three
months ended March 31, 2018 compared to the three months ended March 31, 2017
We
incurred a net loss of $409,000 for the three months ended March 31, 2018 compared to a net loss of $90,000 for the three months
ended March 31, 2017.
Revenue
The
table below summarizes our revenue by type for the period indicated:
|
|
Three months ended March 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
Change
|
|
|
%
Change
|
|
Subscription revenue
|
|
|
4,065,000
|
|
|
|
70.6
|
%
|
|
|
4,226,000
|
|
|
|
80.8
|
%
|
|
|
(161,000
|
)
|
|
|
(3.8
|
%)
|
Sales-type lease revenue
|
|
|
679,000
|
|
|
|
11.8
|
%
|
|
|
185,000
|
|
|
|
3.5
|
%
|
|
|
494,000
|
|
|
|
267.0
|
%
|
Other revenue
|
|
|
1,017,000
|
|
|
|
17.6
|
%
|
|
|
820,000
|
|
|
|
15.7
|
%
|
|
|
197,000
|
|
|
|
24.0
|
%
|
Total
|
|
|
5,761,000
|
|
|
|
100.0
|
%
|
|
|
5,231,000
|
|
|
|
100.0
|
%
|
|
|
530,000
|
|
|
|
10.1
|
%
|
Subscription
revenue decreased for the three months ended March 31, 2018 primarily due to lower average site count when compared to the same
period in 2017. During the three months ended March 31, 2018, sales-type lease revenue increased due to more installations of
our BEOND tablet platform for certain customers under sales-type lease arrangements when compared to the same period in 2017.
We expect the amount of sales-type lease revenue to continue fluctuating in correlation with customer contracts under sales-type
lease arrangements. Other revenue increased for the three months ended March 31, 2018 due primarily to an increase in professional
services when compared to the same period in 2017.
Geographic
breakdown of our site count for network subscribers was as follows:
|
|
Network Subscribers
as of March 31,
|
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
|
2,567
|
|
|
|
2,643
|
|
Canada
|
|
|
136
|
|
|
|
145
|
|
Total
|
|
|
2,703
|
|
|
|
2,788
|
|
Direct
Costs and Gross Margin
A
comparison of direct costs and gross margin for the period indicated is shown in the table below:
|
|
For the three months ended
March 31,
|
|
|
|
|
|
%
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Revenues
|
|
$
|
5,761,000
|
|
|
$
|
5,231,000
|
|
|
$
|
530,000
|
|
|
|
10.1
|
%
|
Direct Costs
|
|
|
1,967,000
|
|
|
|
1,843,000
|
|
|
|
124,000
|
|
|
|
6.7
|
%
|
Gross Margin
|
|
$
|
3,794,000
|
|
|
$
|
3,388,000
|
|
|
$
|
406,000
|
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin Percentage
|
|
|
65.9
|
%
|
|
|
64.8
|
%
|
|
|
|
|
|
|
|
|
The
increase in direct costs for the three months ended March 31, 2018 compared to the same period in 2017 was primarily due to increased
equipment expense related to higher sale-type lease revenue, increased depreciation expense for capitalized site equipment and
software development programs, increased service provider fees and increased costs associated with professional development revenues.
These increases were offset by a decrease in freight expense.
Operating
Expenses
|
|
For the three months ended
March 31,
|
|
|
|
|
|
%
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Selling, general and administrative
|
|
$
|
4,021,000
|
|
|
$
|
4,134,000
|
|
|
$
|
(113,000
|
)
|
|
|
(2.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (non-direct)
|
|
$
|
86,000
|
|
|
$
|
88,000
|
|
|
$
|
(2,000
|
)
|
|
|
(2.3
|
)%
|
Selling,
General and Administrative Expenses
The
decrease in selling, general and administrative expenses for the three months ended March 31, 2018 was primarily due to decreased
payroll and related expense of $166,000, decreased marketing expense of $65,000 primarily due to lower trade show costs and decreased
miscellaneous expenses of $40,000, offset by increased professional fees of $158,000 when compared to the same period in 2017.
Depreciation
and Amortization Expense
The
decrease in depreciation and amortization expense for the three months ended March 31, 2018 compared to the same period in 2017
was primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.
Other
(Expense) Income, Net
|
|
For the three months ended
March 31,
|
|
|
Increase in other
|
|
|
|
2018
|
|
|
2017
|
|
|
expense, net
|
|
Total other (expense) income, net
|
|
$
|
(94,000
|
)
|
|
$
|
750,000
|
|
|
$
|
(844,000
|
)
|
The
decrease in other income, net was primarily related to the receipt of a one-time payment from a supplier during the 2017 period
related to a supply chain matter that was resolved in exchange for such payment and the absence of a similar event during the
2018 period.
Income
Taxes
|
|
For the three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Provision for income taxes
|
|
$
|
(2,000
|
)
|
|
$
|
(6,000
|
)
|
During
2018, we expect to incur state income tax liability related to our U.S. operations and income tax liability in Canada related
to our operations in Canada. We have established a full valuation allowance for substantially all deferred tax assets, including
our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable
income to realize these assets. The effective tax rate differs from the statutory tax rate due primarily to our full valuation
allowance.
EBITDA—Consolidated Operations
Earnings
before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance
with GAAP. Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is
included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other
interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation
and amortization charges in comparison to their net income or loss calculation in accordance with GAAP.
The
table below shows a reconciliation of our consolidated net loss calculated in accordance with GAAP to EBITDA for the period indicated.
EBITDA should not be considered as substitutes for, or superior to, net loss calculated in accordance with GAAP.
|
|
For the three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss per GAAP
|
|
$
|
(409,000
|
)
|
|
$
|
(90,000
|
)
|
Interest expense, net
|
|
|
93,000
|
|
|
|
159,000
|
|
Income tax provision
|
|
|
2,000
|
|
|
|
6,000
|
|
Depreciation and amortization
|
|
|
639,000
|
|
|
|
579,000
|
|
EBITDA
|
|
$
|
325,000
|
|
|
$
|
654,000
|
|
LIQUIDITY
AND CAPITAL RESOURCES
As
of March 31, 2018, we had cash and cash equivalents of $2,635,000 compared to cash and cash equivalents of $3,378,000 as of December
31, 2017.
In
November 2017, we entered into an amended and restated loan and security agreement (the “Amended and Restated Loan Agreement”)
with East West Bank (“EWB”). The Amended & Restated Loan Agreement amended and restated the loan and security
agreement that we entered into with EWB in April 2015 (as the same has been previously amended, the “Prior Loan Agreement”).
The Amended and Restated Loan Agreement provides for a $4,500,000 36-month term loan, which we used to refinance the $4,450,000
that we had outstanding under the Prior Loan Agreement. The loan matures on November 29, 2020. We make payments
on the loan on the last calendar day of each month. Payments are interest only until the payment due on June 30, 2018,
at which time we are required to make principal plus interest payments.
We
must comply with certain financial covenants, including a minimum fixed charge coverage ratio, minimum liquidity and a maximum
senior leverage ratio. As of December 31, 2017, we were in compliance with all covenants except the fixed charge coverage ratio
covenant. In March 2018, we entered into an amendment to the Amended and Restated Loan Agreement, which provided for the following:
●
EWB waived the minimum fixed charge coverage ratio covenant default for the fiscal quarter ended December 31, 2017.
●
The minimum fixed charge coverage ratio covenant was suspended for 2018, and as a result, we are not required to satisfy this covenant until the quarter ended March 31, 2019.
●
A covenant was added under which we are required to achieve the minimum Adjusted EBITDA (as defined below) set forth below for
the period indicated:
Six Month Period Ending
|
|
Minimum Adjusted EBITDA
|
|
March 31, 2018
|
|
$
|
600,000
|
|
June 30, 2018
|
|
$
|
1,200,000
|
|
September 30, 2018
|
|
$
|
1,600,000
|
|
December 31, 2018
|
|
$
|
1,500,000
|
|
“Adjusted
EBITDA” means (a) EBITDA (which is net income, plus interest expense, plus, to the extent deducted in the calculation of
net income, depreciation expense and amortization expense, plus income tax expense) plus (b) other noncash expenses and charges,
plus (c) to the extent approved by EWB, other onetime charges, plus (d) to the extent approved by EWB, any losses arising
from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business.
As
of March 31, 2018, we were in compliance with all covenants.
As
of March 31, 2018, $4,500,000 was outstanding under the Amended and Restated Loan Agreement, of which $1,500,000 is recorded in
current portion of long-term debt and $3,000,000 is recorded in long-term debt on the accompanying consolidated balance sheet.
We recorded total debt issuance costs of $59,000, which includes a $45,000 facility fee. We are amortizing the debt issuance costs
to interest expense using the effective interest rate method over the life of the loan. As of March 31, 2018, the unamortized
portion of the debt issuance costs was $48,000 and is recorded as a reduction of long term debt. We have no more borrowing availability
under the Amended and Restated Loan.
We
have another financing arrangement with an equipment lender under which we may request funds to finance the purchase of certain
capital equipment. The lender determines whether to extend such funds on a case-by-case basis, taking into account such factors
as the lender considers relevant, including the amount outstanding under this financing arrangement. Through March 31, 2018, we
borrowed $9,690,000. As of March 31, 2018, $442,000 was outstanding, all of which is recorded in current portion of long-term
debt on the accompanying consolidated balance sheet. We currently do not expect the lender to lend any additional funds under
this financing arrangement.
In
connection with preparing the financial statement as of and for the year ended March 31, 2018, we evaluated whether there are
conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt
about our ability to continue as a going concern within one year after the date that such financial statements are issued. As
a result of such evaluation, we believe we will have sufficient cash to meet our operating cash requirements and to fulfill our
debt obligations for at least the next twelve months from the issuance date of such financial statements. To address our low stockholders’
equity, to increase the likelihood that we will be able to successfully execute our operating and strategic plan, and to position
us to better take advantage of market opportunities for growth, we are continuing to evaluate additional financing alternatives,
including additional equity financings and alternative sources of debt. If our cash and cash equivalents are not sufficient to
meet future cash requirements, we may be required to reduce planned capital expenses, reduce operational cash uses or raise capital
on terms that are not as favorable to us as they otherwise might be. Any actions we may undertake to reduce planned capital purchases
or reduce expenses may be insufficient to cover shortfalls in available funds. If we require additional capital, we may be unable
to secure additional capital on terms that are acceptable to us, or at all.
Working
Capital
As
of March 31, 2018, we had working capital (current assets in excess of current liabilities) of $1,389,000 compared to negative
working capital (current liabilities in excess of current assets) of $1,109,000 as of December 31, 2017. The following table shows
our change in working capital from December 31, 2017 to March 31, 2018.
|
|
Increase
(Decrease)
|
|
Working capital as of December 31, 2017
|
|
$
|
(1,109,000
|
)
|
Changes in current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
|
(743,000
|
)
|
Accounts receivable, net of allowance
|
|
|
319,000
|
|
Site equipment to be installed
|
|
|
(875,000
|
)
|
Prepaid expenses and other current assets
|
|
|
389,000
|
|
Change in total current assets
|
|
|
(910,000
|
)
|
Changes in current liabilities:
|
|
|
|
|
Accounts payable
|
|
|
131,000
|
|
Accrued compensation
|
|
|
(235,000
|
)
|
Accrued expenses
|
|
|
80,000
|
|
Sales taxes payable
|
|
|
(15,000
|
)
|
Income taxes payable
|
|
|
6,000
|
|
Current portion of long-term debt
|
|
|
(3,117,000
|
)
|
Current portion of obligations under capital leases
|
|
|
1,000
|
|
Deferred revenue
|
|
|
(163,000
|
)
|
Deferred rent
|
|
|
(50,000
|
)
|
Other current liabilities
|
|
|
(46,000
|
)
|
Change in total current liabilities
|
|
|
(3,408,000
|
)
|
Net change in working capital
|
|
|
2,498,000
|
|
Working capital as of March 31, 2018
|
|
$
|
1,389,000
|
|
Cash
Flows
Cash
flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows,
are summarized as follows:
|
|
For the three months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(120,000
|
)
|
|
$
|
(466,000
|
)
|
Investing activities
|
|
|
(372,000
|
)
|
|
|
(249,000
|
)
|
Financing activities
|
|
|
(226,000
|
)
|
|
|
1,135,000
|
|
Effect of exchange rates
|
|
|
(25,000
|
)
|
|
|
7,000
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(743,000
|
)
|
|
$
|
427,000
|
|
Net
cash used in operations.
The decrease in cash used in operating activities was due to a decrease in operating assets and liabilities
of $780,000, offset by an increase in net loss of $434,000, after giving effect to adjustments made for non-cash transactions
during the three months ended March 31, 2018 compared to the same period in 2017.
Our
largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $175,000 to $2,933,000 for
the three months ended March 31, 2018 from $3,108,000 for the same period in 2017, primarily due to a reduction in incentive compensation.
Our
primary source of cash is cash we generate from customers. Cash received from customers decreased $158,000 to $5,511,000 for the
three months ended March 31, 2018 from $5,669,000 for the same period in 2017. This decrease was primarily related to the timing
of a payment from a customer. We received such payment in April 2018, whereas we received the similar payment in March 2017
during the 2017 period.
Net
cash used in investing activities.
The $123,000 increase in cash used in investing activities was primarily due to increased
software development expenditures and capital expenditures.
Net
cash (used in) provided by financing activities.
The $1,361,000 increase in cash used in financing activities was primarily
attributable to the following:
|
●
|
During
the three months ended March 31, 2017, we received net proceeds of $1,554,000 from our common stock offering in March 2017;
there was no similar event during the same period in 2018; and
|
|
|
|
|
●
|
During
the three months ended March 31, 2018, our payments on long-term debt decreased by $177,000 compared to the same period in
2017.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
In
March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2018-05,
Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
.
This ASU incorporates SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses the accounting implications
of the major tax reform legislation, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “2017
Tax Act”), enacted on December 22, 2017. SAB 118 allows a company to record provisional amounts during a measurement period
not to extend beyond one year of the enactment date and was effective upon issuance. We continue to analyze the 2017 Tax Act.
OFF-BALANCE
SHEET ARRANGEMENTS
We
have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial
condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.