Item
1.
Financial Statements
.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except par value amount)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,785
|
|
|
$
|
3,378
|
|
Accounts receivable, net of allowances of $405 and $463, respectively
|
|
|
787
|
|
|
|
714
|
|
Site equipment to be installed
|
|
|
3,798
|
|
|
|
4,866
|
|
Prepaid expenses and other current assets
|
|
|
843
|
|
|
|
680
|
|
Total current assets
|
|
|
9,213
|
|
|
|
9,638
|
|
Fixed assets, net
|
|
|
3,922
|
|
|
|
3,678
|
|
Software development costs, net of accumulated amortization of $2,827 and $2,651, respectively
|
|
|
1,696
|
|
|
|
1,459
|
|
Deferred costs
|
|
|
541
|
|
|
|
775
|
|
Goodwill
|
|
|
955
|
|
|
|
1,004
|
|
Other assets
|
|
|
29
|
|
|
|
16
|
|
Total assets
|
|
$
|
16,356
|
|
|
$
|
16,570
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
427
|
|
|
$
|
390
|
|
Accrued compensation
|
|
|
586
|
|
|
|
646
|
|
Accrued expenses
|
|
|
581
|
|
|
|
418
|
|
Sales taxes payable
|
|
|
110
|
|
|
|
107
|
|
Income taxes payable
|
|
|
26
|
|
|
|
13
|
|
Current portion of long-term debt
|
|
|
2,210
|
|
|
|
5,059
|
|
Current portion of obligations under capital leases
|
|
|
167
|
|
|
|
176
|
|
Current portion of deferred revenue
|
|
|
2,849
|
|
|
|
3,564
|
|
Deferred rent
|
|
|
83
|
|
|
|
182
|
|
Other current liabilities
|
|
|
98
|
|
|
|
192
|
|
Total current liabilities
|
|
|
7,137
|
|
|
|
10,747
|
|
Long-term debt
|
|
|
2,510
|
|
|
|
8
|
|
Long-term obligations under capital leases
|
|
|
81
|
|
|
|
164
|
|
Long-term deferred revenue
|
|
|
44
|
|
|
|
63
|
|
Other liabilities
|
|
|
48
|
|
|
|
52
|
|
Total liabilities
|
|
|
9,820
|
|
|
|
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 June 30, 2018 and December 31, 2017
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.005 par value, 15,000 shares authorized at June 30, 2018 and December 31, 2017; 2,866 and 2,521 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
|
14
|
|
|
|
13
|
|
Treasury stock, at cost, 10 shares at June 30, 2018 and December 31, 2017
|
|
|
(456
|
)
|
|
|
(456
|
)
|
Additional paid-in capital
|
|
|
136,383
|
|
|
|
134,752
|
|
Accumulated deficit
|
|
|
(129,660
|
)
|
|
|
(129,119
|
)
|
Accumulated other comprehensive income
|
|
|
254
|
|
|
|
345
|
|
Total shareholders' equity
|
|
|
6,536
|
|
|
|
5,536
|
|
Total liabilities and shareholders' equity
|
|
$
|
16,356
|
|
|
$
|
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue
|
|
$
|
4,041
|
|
|
$
|
4,232
|
|
|
$
|
8,106
|
|
|
$
|
8,458
|
|
Hardware revenue
|
|
|
590
|
|
|
|
223
|
|
|
|
1,269
|
|
|
|
408
|
|
Other revenue
|
|
|
1,020
|
|
|
|
1,094
|
|
|
|
2,037
|
|
|
|
1,914
|
|
Total Revenue
|
|
|
5,651
|
|
|
|
5,549
|
|
|
|
11,412
|
|
|
|
10,780
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating costs (includes depreciation and amortization of $614 and $465 for the three months ended June 30, 2018 and 2017, respectively, and $1,167 and $956 for the six months ended June 30, 2018 and 2017, respectively)
|
|
|
1,937
|
|
|
|
1,631
|
|
|
|
3,904
|
|
|
|
3,474
|
|
Selling, general and administrative
|
|
|
3,658
|
|
|
|
3,858
|
|
|
|
7,679
|
|
|
|
7,992
|
|
Depreciation and amortization (excluding depreciation and amortization included in direct operating costs)
|
|
|
83
|
|
|
|
86
|
|
|
|
169
|
|
|
|
174
|
|
Total operating expenses
|
|
|
5,678
|
|
|
|
5,575
|
|
|
|
11,752
|
|
|
|
11,640
|
|
Operating loss
|
|
|
(27
|
)
|
|
|
(26
|
)
|
|
|
(340
|
)
|
|
|
(860
|
)
|
Other (expense) income, net
|
|
|
(73
|
)
|
|
|
(132
|
)
|
|
|
(167
|
)
|
|
|
618
|
|
Loss before income taxes
|
|
|
(100
|
)
|
|
|
(158
|
)
|
|
|
(507
|
)
|
|
|
(242
|
)
|
Provision for income taxes
|
|
|
(24
|
)
|
|
|
(6
|
)
|
|
|
(26
|
)
|
|
|
(12
|
)
|
Net loss
|
|
$
|
(124
|
)
|
|
$
|
(164
|
)
|
|
$
|
(533
|
)
|
|
$
|
(254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
2,514
|
|
|
|
2,494
|
|
|
|
2,512
|
|
|
|
2,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(124
|
)
|
|
$
|
(164
|
)
|
|
$
|
(533
|
)
|
|
$
|
(254
|
)
|
Foreign currency translation adjustment
|
|
|
(43
|
)
|
|
|
41
|
|
|
|
(91
|
)
|
|
|
56
|
|
Total comprehensive loss
|
|
$
|
(167
|
)
|
|
$
|
(123
|
)
|
|
$
|
(624
|
)
|
|
$
|
(198
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Six months ended
June 30,
|
|
|
2018
|
|
2017
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(533
|
)
|
|
$
|
(254
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,336
|
|
|
|
1,130
|
|
Provision for doubtful accounts
|
|
|
36
|
|
|
|
40
|
|
Scrap expense
|
|
|
28
|
|
|
|
24
|
|
Transfer of fixed assets to sales-type lease
|
|
|
10
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
251
|
|
|
|
234
|
|
Amortization of debt issuance costs
|
|
|
17
|
|
|
|
26
|
|
Issuance of common stock in lieu of cash for bonus compensation
|
|
|
-
|
|
|
|
164
|
|
Impairment of capitalized software
|
|
|
12
|
|
|
|
4
|
|
Loss from disposition of equipment
|
|
|
11
|
|
|
|
6
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(108
|
)
|
|
|
127
|
|
Site equipment to be installed
|
|
|
(111
|
)
|
|
|
(218
|
)
|
Prepaid expenses and other assets
|
|
|
(176
|
)
|
|
|
(1,121
|
)
|
Accounts payable and accrued liabilities
|
|
|
145
|
|
|
|
148
|
|
Income taxes payable
|
|
|
14
|
|
|
|
(12
|
)
|
Deferred costs
|
|
|
234
|
|
|
|
55
|
|
Deferred revenue
|
|
|
(734
|
)
|
|
|
2,669
|
|
Deferred rent
|
|
|
(99
|
)
|
|
|
(90
|
)
|
Other liabilities
|
|
|
(94
|
)
|
|
|
(126
|
)
|
Net cash provided by operating activities
|
|
|
239
|
|
|
|
2,806
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(280
|
)
|
|
|
(339
|
)
|
Capitalized development expenditures
|
|
|
(424
|
)
|
|
|
(362
|
)
|
Net cash used in investing activities
|
|
|
(704
|
)
|
|
|
(701
|
)
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock related to registered direct offering
|
|
|
1,381
|
|
|
|
1,773
|
|
Principal payments on capital lease
|
|
|
(88
|
)
|
|
|
(77
|
)
|
Payments on long-term debt
|
|
|
(364
|
)
|
|
|
(2,651
|
)
|
Debt issuance costs on long-term debt
|
|
|
-
|
|
|
|
(22
|
)
|
Payment of preferred stockholders dividends
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Net cash provided by (used in) financing activities
|
|
|
921
|
|
|
|
(985
|
)
|
Net increase in cash and cash equivalents
|
|
|
456
|
|
|
|
1,120
|
|
Effect of exchange rate on cash
|
|
|
(49
|
)
|
|
|
28
|
|
Cash and cash equivalents at beginning of period
|
|
|
3,378
|
|
|
|
5,686
|
|
Cash and cash equivalents at end of period
|
|
$
|
3,785
|
|
|
$
|
6,834
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
173
|
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
17
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site equipment transferred to fixed assets
|
|
$
|
1,151
|
|
|
$
|
729
|
|
|
|
|
|
|
|
|
|
|
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 technology, including performance analytics and secure payment with Europay, MasterCard®
and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple, Android and Samsung Pay.
Most frequently used in bars and restaurants in North America, the Company’s tablets and technology offer engaging solutions
to establishments with guests who experience dwell time, such as casinos, senior living, and more. Casual dining venues subscribe
to the Company’s customizable solution to differentiate themselves via competitive fun by offering guests trivia, card,
sports and arcade games, customized menus and self-service dining features. The Company’s platform improves operating efficiencies,
creates connections among the players and venues, and amplifies guests’ positive experiences. The Company’s tablet
platform was commercially launched during 2013 and then scaled during 2014. The Company also continues to support its legacy network
product line, which it calls its Classic platform.
The
Company generates revenue by charging subscription fees for its service to network subscribers, by leasing equipment to certain
network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and
as part of customized games, by licensing its content for use with third-party equipment, 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
June 30, 2018, 2,703 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network, of which
approximately 83% were using the 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 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 and
six months ended June 30, 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 its financial statements as of and for the period ended June 30, 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 twelve months after the date that such financial statements are
issued. The Company believes it has sufficient cash to meet its operating cash requirements and to fulfill its debt obligations
for at least the next twelve months after the date that such financial statements are issued. During the three months ended June
30, 2018, the Company issued 345,772 shares of its common stock in a registered direct offering and received net proceeds of approximately
$1,381,000. (See Note 4.) To increase the likelihood that the Company will be able to successfully execute its operating and strategic
plan and to position the Company to better take advantage of market opportunities for growth, it 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, it may have 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 might not cover shortfalls in available funds. If the Company
requires additional capital, it may not secure additional financing on terms 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:
|
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 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 generates revenue by charging subscription fees for its service to network subscribers, by leasing equipment to certain
network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and
as part of customized games, by licensing its content for use with third-party equipment, from providing professional services
(such as developing certain functionality within the Company’s platform for customers), and from pay-to-play single player
games.
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.
Equipment Sales
– The Company recognizes revenue from equipment sales at a point in time, which is when control has been transferred to
the customer, the customer holds legal title and the customer has significant risks and rewards of ownership. Generally, the Company
has determined that any customer acceptance provisions of the equipment is a formality, as the Company has historically demonstrated
the ability to produce and deliver similar equipment. If the Company sells equipment with unique specifications, then customer
control of the equipment will occur upon customer acceptance as defined in the contract, and revenue will be recognized at that
time. Costs associated with the equipment sold is recognized at the same point in 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.
Content
Licensing
– The Company licenses content (trivia packages) to a certain customer, who in turn installs the content on
its equipment that it sells to its customers. The content license is characterized as a “right to use intellectual property
as it exists at the point in time at which the license is granted,” meaning the Company is not expected to undertake activities
that affect the intellectual property or any such activities would not affect the intellectual property the customer is using.
The content license is considered to be on consignment, and the Company retains title of the licensed content throughout the license
period. The Company’s customer has no obligation to pay for the licensed content until the customer sells and installs the
content to its customer. Accordingly, the Company recognizes revenue at the point in time when such installation occurs. The Company
recognizes costs related to developing the content during the period incurred.
Professional
Development Revenue
– Depending on the type of development work the Company is performing, the Company will recognize
revenue, and associated costs, at the point in time when the Company satisfies each performance obligation, 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 before 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 number
of shares of the Company’s common stock subject to options, warrants, and convertible preferred stock excluded from computing
diluted net loss per common share was approximately 433,000 and 394,000 as of June 30, 2018 and 2017, respectively, as their effect
was anti-dilutive.
(4)
STOCKHOLDERS’ EQUITY
Registered
Direct Offering
On
June 27, 2018, the Company entered into a subscription agreement with certain investors relating to the issuance and sale of shares
of the Company’s common stock at a purchase price of $4.50 per share. The offering closed on June 29, 2018. The Company
sold 345,772 shares of its common stock and received net proceeds of approximately $1,381,000, after deducting approximately $175,000
in offering expenses.
The
Company intends to use the net proceeds for general corporate purposes, which may include working capital, general and administrative
expenses, capital expenditures and implementation of its strategic priorities.
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 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 June 30, 2018, approximately 59,000 share-based
awards were available for grant 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 June
30, 2018, there were no share-based awards available for grant 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
following weighted-average assumptions were used for grants issued during the three and six months ended June 30, 2018 and 2017
under the ASC No. 718 requirements:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted average risk-free rate
|
|
|
2.88
|
%
|
|
|
1.61
|
%
|
|
|
2.88
|
%
|
|
|
1.62
|
%
|
Weighted average volatility
|
|
|
113.09
|
%
|
|
|
114.33
|
%
|
|
|
113.09
|
%
|
|
|
114.70
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected life
|
|
|
7.24 years
|
|
|
|
7.38 years
|
|
|
|
7.24 years
|
|
|
|
7.25 years
|
|
The
Company granted stock options to purchase approximately 2,000 shares of common stock during each of the three months ended June
30, 2018 and 2017, and stock options to purchase approximately 2,000 and 4,000 shares of common stock during the six months ended
June 30, 2018 and 2017, respectively. No options were exercised during either of the three or six months ended June 30, 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 six months ended June 30, 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. The Company did not grant restricted stock units during the three months ended June 30, 2018, nor did it
grant restricted stock units during the three or six months ended June 30, 2017.
The
Company estimates forfeitures at the time of grant and revises 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 the three months ended June 30, 2018 and 2017 was $134,000 and $117,000, respectively, and $251,000 and $234,000 for the six
months ended June 30, 2018 and 2017, respectively, 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 with East West Bank (“EWB”),under
which the Company borrowed $4,500,000 in the form of a 36-month term loan, which matures on November 29, 2020. EWB has a first-priority
security interest in all the Company’s existing and future personal property, including its intellectual property, subject
to limited exceptions. The Company has no more borrowing availability under this credit facility.
As
of June 30, 2018, $4,500,000 was outstanding under this credit facility, of which $1,950,000 was recorded in current portion of
long-term debt and $2,550,000 was recorded in long-term debt on the accompanying consolidated balance sheet. The Company’s
monthly payments were interest only until June 30, 2018, at which time such payment became principal and interest. EWB automatically
withdraws the applicable payment from the Company’s bank account when due. The first principal payment was due June 30,
2018, a Saturday. Accordingly, EWB debited the Company’s account in July for such payment. As a result, the amount of long-term
debt on the accompanying consolidated balance sheet as of June 30, 2018 includes the amount of principal payment due on such date.
The
Company must satisfy financial covenants under this credit facility, including minimum liquidity, maximum senior leverage ratio
and 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
|
|
As
of June 30, 2018, the Company was in compliance with all covenants. Beginning with the quarter ending March 31, 2019, the Company
must satisfy a minimum fixed charge coverage ratio in lieu of the minimum Adjusted EBITDA covenant.
“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.
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 June 30, 2018, the
unamortized portion of the debt issuance costs was $40,000 and is recorded as a reduction of long term debt.
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 June 30, 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 borrowed under a prior credit facility 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 June 30, 2018, $260,000 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 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 June 30, 2018 and December 31, 2017, $254,000 and $345,000 of foreign currency
translation adjustments were recorded in accumulated other comprehensive income, respectively.
(7)
RECENT ACCOUNTING PRONOUNCEMENTS
In
June 2018, the FASB issued ASU No. 2018-07 (Topic 718),
Improvements to Nonemployee Share-Based Payment Accounting.
This
ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees
and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with
the accounting for employee share-based compensation. The guidance is effective for fiscal years beginning after December 15,
2018 (which is January 1, 2019 for the Company), including interim reporting periods within that fiscal year. Early adoption is
permitted, but no earlier than an entity’s adoption date of Topic 606. The Company does not expect that the adoption of
this ASU will have a significant impact on its consolidated financial statements.
(8)
CONCENTRATIONS OF RISK
Significant
Customer
The
table below sets forth the approximate amount of revenue the Company generated from Buffalo Wild Wings corporate-owned restaurants
and its franchisees during the periods indicated and the percentage of total revenue that such amount represents for such periods:
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenue
|
|
$
|
2,475,000
|
|
|
$
|
2,379,000
|
|
|
$
|
5,273,000
|
|
|
$
|
4,484,000
|
|
% of total revenue
|
|
|
44
|
%
|
|
|
43
|
%
|
|
|
46
|
%
|
|
|
42
|
%
|
As
of June 30, 2018 and December 31, 2017, approximately $159,000 and $191,000, respectively, was included in accounts receivable
from Buffalo Wild Wings corporate-owned restaurants and its franchisees.
Sole
Equipment Supplier
The
Company purchases the tablets, cases and charging trays used for its tablet platform from one unaffiliated third-party manufacturer.
The Company has no alternative manufacturer for its tablets and has no alternative manufacturer or device for the cases or charging
trays.
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 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 adequately
protect our proprietary rights and intellectual property, (5) our ability to raise additional funds 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, (6) our ability
to satisfy our payment obligations and comply with financial and other covenants under our amended and restated loan agreement
with East West Bank, which lender has a first-priority security interest in all our existing and future personal property, including
our intellectual property, subject to limited exceptions; (7) our ability to meet financial and other growth expectations of our
investors, analysts and other market participants and commentators, including expectations relating to our site count, cash flow
and EBITDA; (8) our ability to maintain an adequate supply of the tablet and related equipment used in our tablet platform, (9)
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 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 in this report or incorporated by reference herein, which speak only as
of the date of this report. Except as required by law, we undertake no 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 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 generally describes our business and significant events
and transactions we believe are important in understanding our financial condition and
results of operations.
|
|
|
|
|
●
|
Critical
Accounting Policies
. This section lists our significant accounting policies, including
any material changes in our critical accounting policies, estimates and judgments during
the three months ended June 30, 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 and six months ended June 30, 2018 to the results for the three
and six months ended June 30, 2017.
|
|
|
|
|
●
|
Liquidity
and Capital Resources
. This section provides an analysis of our historical cash flows,
and our future capital requirements.
|
OVERVIEW
AND HIGHLIGHTS
About
Our Business and How We Talk About It
We deliver interactive
entertainment and innovative technology, including performance analytics and secure payment with Europay, MasterCard® and
Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple, Android and Samsung Pay.
Most frequently used in bars and restaurants in North America our tablets and technology offer engaging solutions to establishments
with guests who experience dwell time, such as casinos, senior living, and more. Casual dining venues subscribe to our customizable
solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games, customized
menus and self-service dining features. Our platform improves operating efficiencies, creates connections among the players and
venues, and amplifies guests’ positive experiences. Our tablet platform was commercially launched during 2013 and then scaled
during 2014. We also continue to support our legacy network product line, which we call our Classic platform.
We
generate revenue by charging subscription fees for our service to network subscribers, by leasing equipment to certain network
subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and as part
of customized games, by licensing our content for use with third-party equipment, 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 June 30, 2018, approximately 55% 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
through partnerships and product extensions. 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 local jails. In July 2018, we entered into a revenue
share agreement with this partner, under which our partner will make our single player games available for a fee to inmates. 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
Site 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, besides being physically smaller, would be available at a lower cost and would reduce labor-intensive installation costs.
We believe that the site hub will lead to new opportunities, which could include the ability to display video, highlights, dynamic
web content, and app content, in addition to delivering our historical offerings within venues. We are currently testing the first
version of the site hub in-house and are working toward making it commercially available by the end of 2018 or early 2019.
Mobile
Only Offerings.
|
●
|
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. We released this product for select use cases and plan to have more use cases
in the coming months.
|
|
|
|
|
●
|
Tablet-free
system
. We are developing a version of our system that allows players to use their
own mobile device to play our network games inside our customers’ venues.
|
When
these mobile offerings become available commercially, they will be our easiest to adopt, lowest cost of entry solutions, and may
serve as a test for a venue contemplating a more significant investment.
Single
Player Games
. During the second quarter, we released our first internally-built single player arcade game,
Buzztime Soccer,
for our tablet platform, and we expect to release several more internally-built single player games in the coming weeks. Previously,
we purchased these 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. In November 2017,
we expected to begin rolling out our improved tablet platform system at certain Buffalo Wild Wings locations during the first
quarter of 2018 and, after an initial set of locations was running smoothly, throughout the rest of the Buffalo Wild Wings corporate
and franchise locations with which we had partnered. 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 associated changes with Buffalo Wild Wings’
operations, the rollout of our expanded functionality tablet platform system 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. Our updated tablet platform system is currently live at 31 Buffalo
Wild Wings locations with our order, payment and guest insights functionality. 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, and that our discussions
with Inspire Brands have been going well. At this time we are not certain to what extent or which of our offerings, if any, will
fit within its updated brand strategy, or when it will make this determination. Aside from existing contractual obligations under
agreements we have entered into in the ordinary course of business, Inspire Brands has no obligation to continue or to expand
our current relationship. We continue to believe our player engagement and loyalty as well as expanded product offerings will
offer us a way to continue supporting the Buffalo Wild Wings brand under the Inspire Brands umbrella.
Advertising
Partnerships
. We believe that if we lower the price of our tablet platform, we can 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
Registered
Direct Offerings
On
June 27, 2018, we entered into a subscription agreement with certain investors relating to the issuance and sale of shares of
our common stock at a purchase price of $4.50 per share. The offering closed on June 29, 2018. We sold 345,772 shares of our common
stock and received net proceeds of approximately $1,381,000, after deducting approximately $175,000 in offering expenses.
We
intend to use the net proceeds of the offering for general corporate purposes, which may include working capital, general and
administrative expenses, capital expenditures and implementation of its strategic priorities.
Non-compliance
with NYSE American continued listing standard
As
previously reported, in March 2018, we received a letter from the NYSE Regulation Inc. stating that we were not in compliance
with NYSE American LLC listing standards, specifically, Section 1003(a)(iii) of the Company Guide, 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. In April 2018, we submitted a plan to NYSE Regulation advising of actions we have taken or will take to regain compliance
with Section 1003(a)(iii) by March 20, 2019. In April 2018, NYSE Regulation notified us that it has accepted our plan and granted
us a plan period that extends through March 20, 2019 to regain compliance with Section 1003(a)(iii).
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. Raising
capital in the offering described above is consistent with the initiatives outlined in our plan to regain compliance, and after
giving effect to that offering, we believe we are on the path to regaining compliance with Section 1003(a)(iii). NYSE Regulation
will determine if and when we have regained compliance. In order for it to determine that we have regained compliance, we must
have stockholders’ equity of $6 million or more for two consecutive quarters.
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. In accordance with the terms of the amended and restated loan and security agreement, beginning with
the payment due on June 30, 2018, our payments under this credit facility became principal and interest, whereas they have historically
been interest only.
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 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 and six months ended
June 30, 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
and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017
We
incurred a net loss of $124,000 and $533,000 for the three and six months ended June 30, 2018, respectively, compared to a net
loss of $164,000 and $254,000 for the three and six months ended June 30, 2017.
Revenue
The
table below summarizes our revenue by type for the period indicated:
|
|
Three months ended June 30,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
$
|
|
% of Total
Revenue
|
|
$
|
|
% of Total
Revenue
|
|
$
Change
|
|
%
Change
|
Subscription revenue
|
|
|
4,041,000
|
|
|
|
72
|
%
|
|
|
4,232,000
|
|
|
|
76
|
%
|
|
|
(191,000
|
)
|
|
|
(5
|
)%
|
Hardware revenue
|
|
|
590,000
|
|
|
|
10
|
%
|
|
|
223,000
|
|
|
|
4
|
%
|
|
|
367,000
|
|
|
|
165
|
%
|
Other revenue
|
|
|
1,020,000
|
|
|
|
18
|
%
|
|
|
1,094,000
|
|
|
|
20
|
%
|
|
|
(74,000
|
)
|
|
|
(7
|
)%
|
Total
|
|
|
5,651,000
|
|
|
|
100
|
%
|
|
|
5,549,000
|
|
|
|
100
|
%
|
|
|
102,000
|
|
|
|
2
|
%
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
$
|
|
% of Total
Revenue
|
|
$
|
|
% of Total
Revenue
|
|
$
Change
|
|
%
Change
|
Subscription revenue
|
|
|
8,106,000
|
|
|
|
71
|
%
|
|
|
8,458,000
|
|
|
|
78
|
%
|
|
|
(352,000
|
)
|
|
|
(4
|
)%
|
Hardware revenue
|
|
|
1,269,000
|
|
|
|
11
|
%
|
|
|
408,000
|
|
|
|
4
|
%
|
|
|
861,000
|
|
|
|
211
|
%
|
Other revenue
|
|
|
2,037,000
|
|
|
|
18
|
%
|
|
|
1,914,000
|
|
|
|
18
|
%
|
|
|
123,000
|
|
|
|
6
|
%
|
Total
|
|
|
11,412,000
|
|
|
|
100
|
%
|
|
|
10,780,000
|
|
|
|
100
|
%
|
|
|
632,000
|
|
|
|
6
|
%
|
Subscription
revenue decreased for the three and six months ended June 30, 2018 primarily due to lower average site count and lower average
revenue per site when compared to the same periods in 2017. During the three and six months ended June 30, 2018, hardware revenue
increased primarily due to more installations of our tablet platform for certain customers under sales-type lease arrangements
when compared to the same periods in 2017. Additionally, we began selling equipment during the three months ended June 30, 2018,
which accounts for $39,000 of the increase in hardware revenue when compared to the same period in 2017. We expect the amount
of hardware revenue to continue fluctuating in correlation with customer contracts under sales-type lease arrangements and with
other equipment sale contracts. Other revenue increased for the three and six months ended June 30, 2018 due primarily to an increase
in professional services when compared to the same periods in 2017.
Geographic
breakdown of our site count for network subscribers was:
|
|
Network Subscribers
as of June 30,
|
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
|
2,561
|
|
|
|
2,628
|
|
Canada
|
|
|
142
|
|
|
|
140
|
|
Total
|
|
|
2,703
|
|
|
|
2,768
|
|
Direct
Costs and Gross Margin
A
comparison of direct costs and gross margin for the period indicated is shown in the table below:
|
|
Three months ended
June 30,
|
|
|
|
|
|
%
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Revenues
|
|
$
|
5,651,000
|
|
|
$
|
5,549,000
|
|
|
$
|
102,000
|
|
|
|
2
|
%
|
Direct Costs
|
|
|
1,937,000
|
|
|
|
1,631,000
|
|
|
|
306,000
|
|
|
|
19
|
%
|
Gross Margin
|
|
$
|
3,714,000
|
|
|
$
|
3,918,000
|
|
|
$
|
(204,000
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin Percentage
|
|
|
66
|
%
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
|
|
|
%
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Revenues
|
|
$
|
11,412,000
|
|
|
$
|
10,780,000
|
|
|
$
|
632,000
|
|
|
|
6
|
%
|
Direct Costs
|
|
|
3,904,000
|
|
|
|
3,474,000
|
|
|
|
430,000
|
|
|
|
12
|
%
|
Gross Margin
|
|
$
|
7,508,000
|
|
|
$
|
7,306,000
|
|
|
$
|
202,000
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin Percentage
|
|
|
66
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
For
the three months ended June 30, 2018, the increase in direct costs was primarily due to increased equipment expense of $311,000
related to higher sale-type lease revenue and equipment sales, increased depreciation expense of $149,000 for capitalized site
equipment and software development programs and increased service provider fees of $14,000, offset by decreases in freight expense
of $47,000, direct wages of $62,000 and license fees of $53,000 when compared to the same period in 2017.
For
the six months ended June 30, 2018, the increase in direct costs was primarily due to increased equipment expense of $376,000
related to higher sale-type lease revenue and equipment sales, increased depreciation expense of $211,000 for capitalized site
equipment and software development programs and increased service provider fees of $35,000, offset by decreases in freight expense
of $111,000, direct wages of $56,000 and license fees of $34,000 when compared to the same period in 2017.
Operating Expenses
|
|
Three months ended
June 30,
|
|
|
|
|
|
%
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Selling, general and administrative
|
|
$
|
3,658,000
|
|
|
$
|
3,858,000
|
|
|
$
|
(200,000
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (non-direct)
|
|
$
|
83,000
|
|
|
$
|
86,000
|
|
|
$
|
(3,000
|
)
|
|
|
(3
|
)%
|
|
|
Six months ended
June 30,
|
|
|
|
|
|
%
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Selling, general and administrative
|
|
$
|
7,679,000
|
|
|
$
|
7,992,000
|
|
|
$
|
(313,000
|
)
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (non-direct)
|
|
$
|
169,000
|
|
|
$
|
174,000
|
|
|
$
|
(5,000
|
)
|
|
|
(3
|
)%
|
Selling,
General and Administrative Expenses
The
decrease in selling, general and administrative expenses for the three months ended June 30, 2018 was primarily due to decreased
payroll and related expense of $213,000, decreased hardware and software expenses of $46,000 and decreased marketing expense of
$33,000, offset by increased professional fees of $94,000, in each case, when compared to the same period in 2017.
The
decrease in selling, general and administrative expenses for the six months ended June 30, 2018 was primarily due to decreased
payroll and related expense of $379,000, decreased marketing expense of $100,000 and decreased operating supplies expenses of
$37,000, offset by increased professional fees of $252,000, in each case, when compared to the same period in 2017.
Depreciation
and Amortization Expense
The
decrease in depreciation and amortization expense for the three and six months ended June 30, 2018 compared to the same periods
in 2017 was primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.
Other
(Expense) Income, Net
|
|
Three months ended
June 30,
|
|
|
Decrease in other
|
|
|
|
2018
|
|
|
2017
|
|
|
expense, net
|
|
Total other (expense) income, net
|
|
$
|
(73,000
|
)
|
|
$
|
(132,000
|
)
|
|
$
|
59,000
|
|
|
|
Six months ended
June 30,
|
|
|
Increase in other
|
|
|
|
2018
|
|
|
2017
|
|
|
expense, net
|
|
Total other (expense) income, net
|
|
$
|
(167,000
|
)
|
|
$
|
618,000
|
|
|
$
|
(785,000
|
)
|
For
the three months ended June 30, 2018, the decrease in other expense, net was primarily related to decreased interest expense resulting
from lower debt balances and increased foreign currency exchange gains related to the operations of our Canadian subsidiary.
For
the six months ended June 30, 2018, the increase in other expense, 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
|
|
Three months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Provision for income taxes
|
|
$
|
(24,000
|
)
|
|
$
|
(6,000
|
)
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Provision for income taxes
|
|
$
|
(26,000
|
)
|
|
$
|
(12,000
|
)
|
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 compared 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 a substitute for, or superior to, net loss calculated in accordance with GAAP.
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net loss per GAAP
|
|
$
|
(124,000
|
)
|
|
$
|
(164,000
|
)
|
|
$
|
(533,000
|
)
|
|
$
|
(254,000
|
)
|
Interest expense, net
|
|
|
94,000
|
|
|
|
123,000
|
|
|
|
187,000
|
|
|
|
282,000
|
|
Income tax provision
|
|
|
24,000
|
|
|
|
6,000
|
|
|
|
26,000
|
|
|
|
12,000
|
|
Depreciation and amortization
|
|
|
697,000
|
|
|
|
551,000
|
|
|
|
1,336,000
|
|
|
|
1,130,000
|
|
EBITDA
|
|
$
|
691,000
|
|
|
$
|
516,000
|
|
|
$
|
1,016,000
|
|
|
$
|
1,170,000
|
|
LIQUIDITY
AND CAPITAL RESOURCES
As
of June 30, 2018, we had cash and cash equivalents of $3,785,000 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 with East West Bank (“EWB”), under
which we borrowed $4,500,000 in the form of a 36-month term loan, which matures on November 29, 2020. EWB has a first-priority
security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions.
We have no more borrowing availability under this credit facility.
As
of June 30, 2018, $4,500,000 was outstanding under this credit facility, of which $1,950,000 was recorded in current portion of
long-term debt and $2,550,000 was recorded in long-term debt on the accompanying consolidated balance sheet. Our monthly payments
were interest only until June 30, 2018, at which time such payments became principal and interest. EWB automatically withdraws
the applicable payment from our bank account when due. The first principal payment was due June 30, 2018, a Saturday. EWB debited
our bank account in July for such payment. As a result, the amount of long-term debt on the accompanying consolidated balance
sheet as of June 30, 2018 includes the amount of the principal due on such date.
We
must satisfy financial covenants under this credit facility, including minimum liquidity, maximum senior leverage ratio and 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
|
|
As
of June 30, 2018, we were in compliance with all covenants. Beginning with the quarter ending March 31, 2019, we must satisfy
a minimum fixed charge coverage ratio in lieu of the minimum Adjusted EBITDA covenant.
“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.
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 case-by-case, considering such factors as it considers relevant,
including the amount outstanding under this financing arrangement. Through June 30, 2018, we borrowed $9,690,000. As of June 30,
2018, $260,000 was outstanding, all of which is recorded in current portion of long-term debt on the accompanying consolidated
balance sheet. We 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 period ended June 30, 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 twelve months after the date that such financial statements are issued.
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 date that such financial statements are issued. During the three months ended June 30, 2018, we
issued 345,772 shares of our common stock in a registered direct offering and received net proceeds of approximately $1,381,000.
To increase the likelihood that we will be able to successfully execute our operating and strategic plan and to better position
the company 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 do not meet our future
cash requirements, we may have 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 might not cover shortfalls in available funds. If we require additional capital, we may not secure additional financing
on terms acceptable to us, or at all.
Working
Capital
As
of June 30, 2018, we had working capital (current assets in excess of current liabilities) of $2,076,000 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 June 30, 2018:
|
|
Increase
(Decrease)
|
|
Working capital as of December 31, 2017
|
|
$
|
(1,109,000
|
)
|
Changes in current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
|
407,000
|
|
Accounts receivable, net of allowance
|
|
|
73,000
|
|
Site equipment to be installed
|
|
|
(1,068,000
|
)
|
Prepaid expenses and other current assets
|
|
|
163,000
|
|
Change in total current assets
|
|
|
(425,000
|
)
|
Changes in current liabilities:
|
|
|
|
|
Accounts payable
|
|
|
37,000
|
|
Accrued compensation
|
|
|
(60,000
|
)
|
Accrued expenses
|
|
|
163,000
|
|
Sales taxes payable
|
|
|
3,000
|
|
Income taxes payable
|
|
|
13,000
|
|
Current portion of long-term debt
|
|
|
(2,849,000
|
)
|
Current portion of obligations under capital leases
|
|
|
(9,000
|
)
|
Deferred revenue
|
|
|
(715,000
|
)
|
Deferred rent
|
|
|
(99,000
|
)
|
Other current liabilities
|
|
|
(94,000
|
)
|
Change in total current liabilities
|
|
|
(3,610,000
|
)
|
Net change in working capital
|
|
|
3,185,000
|
|
Working capital as of June 30, 2018
|
|
$
|
2,076,000
|
|
Cash
Flows
Cash
flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows,
are summarized as follows:
|
|
Six months ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
239,000
|
|
|
$
|
2,806,000
|
|
Investing activities
|
|
|
(704,000
|
)
|
|
|
(701,000
|
)
|
Financing activities
|
|
|
921,000
|
|
|
|
(985,000
|
)
|
Effect of exchange rates
|
|
|
(49,000
|
)
|
|
|
28,000
|
|
Net increase in cash and cash equivalents
|
|
$
|
407,000
|
|
|
$
|
427,000
|
|
Net
cash provided by operations.
The decrease in cash provided by operating activities was primarily due to receiving a prepayment
during the 2017 period from Buffalo Wild Wings for equipment and services to be delivered in the future. We did not receive a
similar prepayment during the same period in 2018.
Our
largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $398,000 to $5,301,000 for
the six month months ended June 30, 2018 from $5,699,000 for the same period in 2017, primarily due to a reduction in incentive
compensation and headcount.
Our
primary source of cash is cash we generate from customers. Cash received from customers decreased $4,088,000 to $11,185,000 for
the six months ended June 30, 2018 from $15,274,000 for the same period in 2017. This decrease was primarily related to the prepayment
from Buffalo Wild Wings described above.
Net
cash used in investing activities.
Our net cash used in investing activities for the six months ended June 30, 2018, which
is related to capitalized software development expenditures and capital expenditures, was flat compared to the same period in
2017.
Net
cash provided by (used in) financing activities.
The $1,906,000 increase in cash provided by financing activities was primarily
attributable to a decrease of $2,287,000 in principal payments on our long-term debt for the six months ended June 30, 2018 compared
to the same period in 2017, offset by a $392,000 reduction in net proceeds received from common stock offerings. We received $1,381,000
in net proceeds from our common stock offering that closed in June 2018, and we received an aggregate of $1,773,000 in net proceeds
from our common stock offerings that closed in March and April 2017.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
June 2018, the FASB issued ASU No. 2018-07 (Topic 718),
Improvements to Nonemployee Share-Based Payment Accounting.
This
ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees
and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with
the accounting for employee share-based compensation. The guidance is effective for fiscal years beginning after December 15,
2018 (which is January 1, 2019 for us), including interim reporting periods within that fiscal year. Early adoption is permitted,
but no earlier than an entity’s adoption date of Topic 606. We do not expect that the adoption of this ASU will have a significant
impact on our consolidated financial statements.
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.