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, to help its customers acquire,
engage and retain its patrons. The Company’s tablets and technology offer engaging solutions to establishments with guests
who experience dwell time, such as in bars, restaurants, casinos and senior living centers. 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. The Company’s platform creates connections among the players and venues, and amplifies guests’ positive
experiences, and its in-venue TV network creates one of the largest digital out of home advertising audiences in the United States
and Canada. 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 tablet platform equipment
to certain network subscribers, by selling tablet platform 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
arcade games.
At
September 30, 2019, 2,565 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network.
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 audited consolidated financial statements and notes thereto
contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018. The accompanying condensed
balance sheet as of December 31, 2018 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 nine months ended September 30, 2019 are not necessarily indicative of the results to be anticipated for the entire year ending
December 31, 2019, or any other period.
Liquidity
In
connection with preparing its financial statements as of and for the period ended September 30, 2019, 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.
Under the terms of the
Company’s existing agreements, the Company’s relationship with Buffalo Wild Wings corporate-owned and franchisee-owned
restaurants terminates on November 15, 2019. Although the Company continues to have discussions with Buffalo Wild Wings corporate
and its franchisees to extend the relationship beyond that date, and although the Company has extended its relationship with
certain franchisees, the Company does not expect the relationship with Buffalo Wild Wings corporate or with a majority of
franchisees to be extended. The Company began reducing its operating expenses in anticipation of the termination of existing relationships
and is working on a de-commission plan in anticipation of relationships ending on November 15, 2019.
The
Company continues to explore and evaluate financing alternatives, including additional equity financings and alternative sources
of debt. These efforts are being undertaken to increase the likelihood of the following:
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●
|
the
Company will be able to successfully execute its current long-term operating and strategic plan;
|
|
|
|
|
|
|
●
|
the
Company positions itself to take advantage of market opportunities for growth and to respond to competitive pressures; and
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|
|
|
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●
|
the Company will continue to
meet its covenant of maintaining not less than $2,000,000 at all times in unrestricted
cash in deposit accounts or securities accounts maintained with Avidbank. (See Note 6.)
|
If the Company’s
cash and cash equivalents are not sufficient to meet future capital requirements, and if the Company cannot raise an adequate
amount of capital, it will not be able to successfully execute its current long-term operating and strategic plan or take
advantage of market opportunities for growth and will have to reduce planned capital expenses and further reduce operational cash
uses. Any capital the Company may raise may be on terms that are not as favorable to the Company as they otherwise might be. Any
actions the Company is undertaking or may undertake to reduce planned capital expenses or operational cash uses may not cover
shortfalls in available funds.
Reclassifications
Certain
reclassifications have been made to the prior year’s consolidated balance sheet and statement of cash flows to conform to
the current year presentation. These reclassifications had no effect on previously reported results of operations or retained
earnings.
(2)
RESTRICTED CASH
When
the Company entered the lease for its corporate headquarters, the Company’s bank, Avidbank, issued a $250,000 letter of
credit to the lessor as security, which amount will be reduced by $50,000 on December 1 of each year beginning on December 1,
2019, provided there has been no default under the lease. Avidbank required the Company to deposit $250,000 in a restricted cash
account maintained with the bank, which amount will be reduced as the amount required under the letter of credit is reduced. The
Company recorded the $250,000 deposit as restricted cash on its balance sheet, with $50,000 plus any earned interest being recorded
in short-term restricted cash and the balance being recorded in long-term restricted cash. The amount deposited in the restricted
cash account does not count toward the covenant in the Avidbank loan and security agreement (see Note 6) that requires the Company
to have an aggregate amount of unrestricted cash in deposit accounts or securities accounts maintained with Avidbank of not less
than $2,000,000 at all times.
(3)
Revenue Recognition
The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from
Contracts with Customers (“Topic 606”). 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 arcade player games.
In
general, when multiple performance obligations are present in a customer contract, the transaction price is allocated to the individual
performance obligation 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 relative stand-alone selling prices. All revenues are recognized net of sales tax collected from the
customer.
Revenue
Streams
The
Company disaggregates revenue by material revenue stream as depicted on its statement of operations. The following describes how
the Company recognizes revenue under Topic 606.
Subscription
Revenue - The Company recognizes the recurring subscription fees it receives for its services, which includes the Company’s
content, over time as customers receive and consume the benefits of such services, the Company’s equipment to access the
Company’s 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 up to one year of 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 Company’s 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 will recognize
any revenue related to the performance of such obligations at the point in time the Company performs them.
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 ASC No. 842, 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 the revenue with the customer whose patrons generated the revenue. In cases where the Company determines
that it is the principal and the customer is the agent, the Company recognizes this revenue on a gross basis, with the amount
of revenue shared with the customer as a direct expense. In cases where the Company determines it is the agent and the principal
is the customer, the Company recognizes the revenue on a net basis. 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.
Revenue
Concentrations
The
Company’s customers predominantly range from small independently operated bars and restaurants to bars and restaurants operated
by national chains. This results in diverse venue sizes and locations. As of September 30, 2019, 2,565 venues in the U.S. and
Canada subscribed to the Company’s interactive entertainment network, of which, approximately 47% were Buffalo Wild Wings
corporate-owned restaurants and its franchisees. Under the terms of the Company’s existing agreements, the Company’s
relationship with Buffalo Wild Wings corporate-owned and franchisee-owned restaurants terminates on November 15, 2019. See Note
(1) BASIS OF PRESENTATION—Basis of Accounting Presentation, above and PART II — OTHER INFORMATION, ITEM 1A., Risk
Factors.
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 three and nine months ended September 30, 2019 and 2018, and the percentage of total revenue that
such amount represents for such periods:
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Buffalo
Wild Wings revenue
|
|
$
|
1,676,000
|
|
|
$
|
1,971,000
|
|
|
$
|
5,891,000
|
|
|
$
|
7,209,000
|
|
|
Percent
of total revenue
|
|
|
37
|
%
|
|
|
33
|
%
|
|
|
40
|
%
|
|
|
41
|
%
|
As
of September 30, 2019 and December 31, 2018, approximately $202,000 and $552,000, respectively, was included in accounts receivable
from Buffalo Wild Wings corporate-owned restaurants and its franchisees.
The
geographic breakdown of the Company’s revenue for the three and nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
United
States
|
|
$
|
4,420,000
|
|
|
$
|
5,833,000
|
|
|
$
|
14,144,000
|
|
|
$
|
16,906,000
|
|
|
Canada
|
|
|
160,000
|
|
|
|
171,000
|
|
|
|
494,000
|
|
|
|
510,000
|
|
|
Total
revenue
|
|
$
|
4,580,000
|
|
|
$
|
6,004,000
|
|
|
$
|
14,638,000
|
|
|
$
|
17,416,000
|
|
Contract
Assets and Liabilities
The
Company enters into contracts and may recognize contract assets and liabilities that arise from these contracts. The Company recognizes
revenue and corresponding cash for customers who auto pay via their bank account or credit card, or the Company recognizes a corresponding
accounts receivable for customers the Company invoices. The Company may receive consideration from customers, per the terms of
the contract, prior to transferring goods or services to the customer. In such instances, the Company records a contract liability
and recognizes the contract liability as revenue when all revenue recognition criteria are met. The table below shows the balance
of contract liabilities as of September 30, 2019 and December 31, 2018, including the change during the period.
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|
|
Deferred
Revenue
|
|
|
Balance
at January 1, 2019
|
|
$
|
1,297,000
|
|
|
New
performance obligations
|
|
|
1,156,000
|
|
|
Revenue
recognized
|
|
|
(1,697,000
|
)
|
|
Balance at
September 30, 2019
|
|
|
756,000
|
|
|
Less
non-current portion
|
|
|
(13,000
|
)
|
|
Current
portion at September 30, 2019
|
|
$
|
743,000
|
|
The
Company does not generally recognize revenue in advance of when the contract gives the Company the right to invoice a customer,
and therefore the Company did not recognize any related contract assets as of September 30, 2019.
(4)
Basic and Diluted Earnings Per Common Share
Basic
earnings per share excludes the dilutive effects of options, warrants and other convertible securities. Diluted earnings per share
reflects the potential dilutions of securities that could share in the Company’s earnings. Options, warrants and convertible
preferred stock representing approximately 249,000 and 274,000 shares of common stock were excluded from the computations of diluted
net loss per common share as of September 30, 2019 and 2018, respectively, as their effect was anti-dilutive.
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common shareholders
|
|
$
|
(351,000
|
)
|
|
$
|
222,000
|
|
|
$
|
(762,000
|
)
|
|
$
|
(319,000
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
2,874,000
|
|
|
|
2,857,000
|
|
|
|
2,870,000
|
|
|
|
2,628,000
|
|
|
Effects
of diluted common shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Weighted
average common shares outstanding - diluted
|
|
|
2,874,000
|
|
|
|
2,857,000
|
|
|
|
2,870,000
|
|
|
|
2,628,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share - basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.27
|
)
|
|
$
|
(0.12
|
)
|
(5)
SHAREHOLDERS’ EQUITY
Equity
Incentive Plans
The
Company’s stock-based compensation plans include the NTN Buzztime, Inc. 2019 Performance Incentive Plan (the “2019
Plan”), the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan (the “2010 Plan”) and the NTN Buzztime,
Inc. 2014 Inducement Plan (the “2014 Plan”). The Company’s board of directors designated its nominating and
corporate governance/compensation committee as the administrator of the foregoing plans (the “Plan Administrator”).
Among other things, the Plan Administrator 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.
At
the Company’s 2019 Annual Meeting of Stockholders, the Company’s stockholders approved the 2019 Plan, which provides
for the issuance of up to 240,000 shares of Company common stock. Awards the under the 2019 Plan may be granted to officers, directors,
employees and consultants of the Company. Stock options granted under the 2019 Plan may either be incentive stock options or nonqualified
stock options, have a term of up to ten years, and are exercisable at a price per share not less than the fair market value on
the date of grant. As of September 30, 2019, there were stock options to purchase approximately 2,000 shares of common stock and
30,000 restricted stock units outstanding under the 2019 Plan.
As
a result of stockholder approval of the 2019 Plan, no future grants will be made under the 2010 Plan. All awards that are outstanding
under the 2010 Plan will continue to be governed by the 2010 Plan until they are exercised or expire in accordance with the terms
of the applicable award or the 2010 Plan. As of September 30, 2019, there were stock options to purchase approximately 59,000
shares of common stock and 67,000 restricted stock units outstanding under the 2010 Plan.
The
2014 Plan 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 and expires in September 2024. As of September 30, 2019, there were stock options to
purchase approximately 85,000 shares of common stock and no restricted stock units outstanding under the 2014 Plan.
Stock-Based
Compensation
The
Company records stock-based compensation in accordance with ASC No. 718, Compensation – Stock Compensation. 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 is
recognized using the straight-line single-option method. On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”)
No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting.
The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
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 stock option awards granted during the three and nine months ended September
30, 2019 and 2018:
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Weighted
average risk-free rate
|
|
|
1.39
|
%
|
|
|
2.82
|
%
|
|
|
1.70
|
%
|
|
|
2.87
|
%
|
|
Weighted average
volatility
|
|
|
95.11
|
%
|
|
|
113.90
|
%
|
|
|
108.83
|
%
|
|
|
113.20
|
%
|
|
Dividend
yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected
term
|
|
|
5.61
years
|
|
|
|
5.92
years
|
|
|
|
5.73
years
|
|
|
|
7.06
years
|
|
The
Company estimates forfeitures, based on historical activity, at the time of grant and revises such estimates if necessary in subsequent
periods if actual forfeiture rates differ from those estimates. Stock-based compensation expense for the three months ended September
30, 2019 and 2018 was approximately $63,000 and $117,000, respectively, and approximately $172,000 and $368,000 for the
nine months ended September 30, 2019 and 2018, respectively, and is expensed in selling, general and administrative expenses and
credited to additional paid-in-capital.
For
the three and nine months ended September 30, 2019 and 2018, the Company granted the following awards:
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Stock
option grants
|
|
|
1,000
|
|
|
|
250
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
Restricted
stock units
|
|
|
30,000
|
|
|
|
-
|
|
|
|
77,000
|
|
|
|
53,000
|
|
No
stock options were exercised during either of the three or nine months ended September 30, 2019 or 2018.
Outstanding
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 or service 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 grant date. The weighted average grant date fair value of the restricted stock units awarded during the three
months ended September 30, 2019 was $2.76 per restricted stock unit. The weighted average grant date fair value of the restricted
stock units awarded during the nine months ended September 30, 2019 and 2018 was $2.95 and $6.04 per restricted stock unit, respectively.
The
30,000 restricted stock units awarded during the three months ended September 30, 2019 is a performance-based award granted
to the Company’s former chief executive officer in connection with his resignation. The award will vest in full upon the
effective date of a change in control transaction in which an individual, entity or group acquires all of the Company’s
then-outstanding equity interests on or before March 17, 2020, or in which an individual, entity or group acquires 51% of our
then-outstanding equity interests on or before March 17, 2020, and then that same individual, entity or group acquires the remaining
equity so that it holds all of the Company’s then-outstanding equity interests on or before June 17, 2020. Continuing service
is not required for vesting to occur. Because a change in control is not considered probable until a change in control occurs,
the Company will not recognize stock compensation expense on this award until such change in control occurs.
In connection with
the resignation of the Company’s former chief executive officer, the vesting of 10,000 of his restricted stock
units was accelerated, 5,000 in September 2019 and 5,000 in October 2019. The modification of this award resulted in the
Company recognizing stock compensation expense for the accelerated vesting of restricted stock units in the period in which
the vesting was accelerated.
With the exception of the
performance-based award and the acceleration of vesting of restricted stock units discussed above, all restricted stock
units granted vest as to 16.67% of the total underlying shares on the six month anniversary of the grant date and as to the balance
of the total underlying shares in 30 substantially equal monthly installments, beginning on the seven month anniversary of the
grant date, subject to accelerated vesting in the event of a change in control.
The
following table shows the number of restricted stock units that vested and were settled during the three and nine months ended
September 30, 2019 and 2018, as well as the number of shares of common stock issued upon settlement. In lieu of paying cash to
satisfy withholding taxes due upon the settlement of vested restricted stock units, an employee may elect to have shares of common
stock withheld that would otherwise be issued at settlement, the value of which is equal to the amount of withholding taxes payable.
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Restricted
stock units vested and settled
|
|
|
18,000
|
|
|
|
9,000
|
|
|
|
29,000
|
|
|
|
9,000
|
|
|
Common
stock issued, net of shares withheld
|
|
|
12,000
|
|
|
|
6,000
|
|
|
|
19,000
|
|
|
|
6,000
|
|
(6)
DEBT
Term
Loan
In
September 2018, the Company entered into a loan and security agreement with Avidbank for a one-time 48-month term loan in the
amount of $4,000,000. The Company makes monthly electronic principal payments initiated by Avidbank of approximately $83,000 plus
accrued and unpaid interest. As of September 30, 2019, $3,000,000 of the term loan was outstanding, with $1,000,000 recorded in
current portion of long-term debt and the remaining $2,000,000 recorded as long-term debt on the Company’s balance sheet.
The Company recorded debt issuance costs of $23,000, which includes the $20,000 facility fee. The debt issuance costs are amortized
to interest expense using the effective interest rate method over the life of the loan. The unamortized balance of the debt issuance
costs as of September 30, 2019 was approximately $13,000 and is recorded as a reduction of long-term debt. The Company must comply
with the following financial covenants:
|
|
●
|
EBITDA
(as defined below) must be at least $1,000,000 for the trailing six-month period as of the last day of each fiscal quarter.
“EBITDA” means (a) net profit (or loss), after provision for taxes, plus (b) interest expense, plus (c) to the
extent deducted in the calculation of net profit (or loss), depreciation expense and amortization expense, plus (d) income
tax expense, plus (e) to the extent approved by Avidbank, other noncash expenses and charges, other onetime charges, and any
losses arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business.
|
|
|
|
|
|
|
●
|
The
aggregate amount of unrestricted cash the Company has in deposit accounts or securities accounts maintained with Avidbank
must be not less than $2,000,000 at all times.
|
As
of September 30, 2019, the Company was in compliance with both of these financial covenants.
(7)
LEASES
On
January 1, 2019, the Company adopted ASC No. 842, Leases (“Topic 842”). Topic 842 primarily requires lessees
to recognize at the lease commencement date a lease liability, which is the lessee’s obligation to make lease payments arising
from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right
to use, or control the use of, a specified asset for the lease term. Lessees and lessors must either (i) apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements or (ii) recognize a cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. Applying a full retrospective transition approach is not allowed. The Company elected to use the cumulative-effect
transition method upon adoption.
Topic
842 also allows lessees and lessors to elect certain practical expedients. The Company elected the following practical expedients:
|
|
●
|
Transitional
practical expedients, which must be elected as a package and applied consistently to all of the Company’s leases:
|
|
|
o
|
The
Company need not reassess whether any expired or existing contracts are or contain leases.
|
|
|
|
|
|
|
o
|
The
Company need not reassess the lease classification for any expired or existing leases (that is, all existing leases that were
classified as operating leases in accordance with the previous guidance will be classified as operating leases, and all existing
leases that were classified as capital leases in accordance with the previous guidance will be classified as finance leases).
|
|
|
|
|
|
|
o
|
The
Company need not reassess initial direct costs for any existing leases.
|
|
|
●
|
Hindsight
practical expedient. The Company elected the hindsight practical expedient in determining the lease term (that is, when considering
lessee options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of the Company’s
right-of-use assets.
|
|
|
|
|
|
|
●
|
As
a lessor, the Company elected to not separate nonlease components from lease components when both of the following are met:
|
|
|
o
|
The
timing and patterns of transfer for the lease component and nonlease component associated with that lease component are the
same; and
|
|
|
|
|
|
|
o
|
The
lease component, if accounted for separately, would be classified as an operating lease.
|
As
Lessee
The
Company has entered into operating leases for office and production facilities and equipment under agreements that expire at various
dates through 2026. Certain of these leases contain renewal provisions and escalating rental clauses and generally require the
Company to pay utilities, insurance, taxes and other operating expenses. The Company also has property held under financing leases
that expire at various dates through 2021. The Company’s leases do not contain any residual value guarantees or material
restrictive covenants.
Upon
adoption of Topic 842, the Company recognized on its consolidated balance sheet as of January 1, 2019 an initial measurement of
approximately $3,458,000 of operating lease liabilities, and approximately $2,336,000 of corresponding operating right-of use
assets, net of tenant improvement allowances. The initial measurement of the financing leases under Topic 842 did not have a material
change from the balances of the financing lease liabilities and assets recorded prior to the adoption of Topic 842. There was
also no cumulative effect adjustment to retained earnings as a result of the transition to Topic 842. The Company recorded the
initial recognition of the operating leases as a supplemental noncash financing activity on the accompanying consolidated
statement of cash flows. The adoption of Topic 842 did not have a material impact on the Company’s consolidated statement
of operations.
The
tables below show the initial measurement of the operating lease right-of-use assets and liabilities as of January 1, 2019 and
the balances as of September 30, 2019, including the changes during the periods.
|
|
|
Operating
lease
right-of-use
assets
|
|
|
Initial
measurement at January 1, 2019
|
|
$
|
3,458,000
|
|
|
Less
tenant improvement allowance
|
|
|
(1,122,000
|
)
|
|
Net
right-of-use assets at January 1, 2019
|
|
|
2,336,000
|
|
|
Initial
measurement of new operating lease
right-of-use-assets
|
|
|
57,000
|
|
|
Less
amortization of operating lease right-of-use
assets
|
|
|
(217,000
|
)
|
|
Operating
lease right-of-use assets at
September 30, 2019
|
|
$
|
2,176,000
|
|
|
|
|
Operating
lease
liabilities
|
|
|
Initial
measurement at January 1, 2019
|
|
$
|
3,458,000
|
|
|
Initial
measurement of new operating lease
liabilities
|
|
|
57,000
|
|
|
Less
principal payments on operating lease
liabilities
|
|
|
(111,000
|
)
|
|
Operating
lease liabilities at September 30, 2019
|
|
|
3,404,000
|
|
|
Less
non-current portion
|
|
|
(2,992,000
|
)
|
|
Current
portion at September 30, 2019
|
|
$
|
412,000
|
|
As
of September 30, 2019, the Company’s operating leases have a weighted-average remaining lease term of 6.5 years and a weighted-average
discount rate of 7.25%. The maturities of the operating lease liabilities are as follows:
|
|
|
As
of
|
|
|
|
|
September
30, 2019
|
|
|
2019
|
|
$
|
165,000
|
|
|
2020
|
|
|
635,000
|
|
|
2021
|
|
|
620,000
|
|
|
2022
|
|
|
634,000
|
|
|
2023
|
|
|
655,000
|
|
|
Thereafter
|
|
|
1,601,000
|
|
|
Total operating lease payments
|
|
|
4,310,000
|
|
|
Less imputed
interest
|
|
|
(906,000
|
)
|
|
Present value
of operating lease liabilities
|
|
$
|
3,404,000
|
|
Total
lease expense was approximately $137,000 and $132,000 for the three months ended September 30, 2019 and 2018, respectively, and
approximately $407,000 and $396,000 for the nine months ended September 30, 2019 and 2018, respectively. Lease expense was recorded
in selling, general and administrative expenses.
The
tables below show the initial measurement of the financing lease right-of-use assets and liabilities as of January 1, 2019 and
the balances as of September 30, 2019, including the changes during the periods. The Company’s financing lease right-of-use
assets are included in “Fixed assets, net” on the accompanying consolidated balance sheet.
|
|
|
Financing
lease
right-of-use
assets
|
|
|
Initial measurement at January 1, 2019
|
|
$
|
80,000
|
|
|
Less depreciation
of financing lease right-of-use assets
|
|
|
(33,000
|
)
|
|
Financing lease
right-of-use assets at September 30, 2019
|
|
$
|
47,000
|
|
|
|
|
Financing
lease
liabilities
|
|
|
Initial measurement at January 1, 2019
|
|
$
|
86,000
|
|
|
Less principal
payments on financing lease liabilities
|
|
|
(39,000
|
)
|
|
Financing lease liabilities as of September 30, 2019
|
|
|
47,000
|
|
|
Less non-current
portion
|
|
|
(25,000
|
)
|
|
Current portion at September 30,
2019
|
|
$
|
22,000
|
|
As
of September 30, 2019, the Company’s financing leases have a weighted-average remaining lease term of 2.1 years and a weighted-average
discount rate of 5.51%. The maturities of the financing lease liabilities are as follows:
|
|
|
As
of
|
|
|
|
|
September
30, 2019
|
|
|
2019
|
|
$
|
6,000
|
|
|
2020
|
|
|
23,000
|
|
|
2021
|
|
|
21,000
|
|
|
Total financing lease payments
|
|
|
50,000
|
|
|
Less imputed
interest
|
|
|
(3,000
|
)
|
|
Present value
of financing lease liabilities
|
|
$
|
47,000
|
|
For
the three months ended September 30, 2019 and 2018, total lease costs under financing leases were approximately $10,000 and $48,000,
respectively. For the nine months ended September 30, 2019 and 2018, total lease costs under financing leases were approximately
$41,000 and $143,000, respectively.
As
Lessor
Topic
842 did not make fundamental changes to lease accounting guidance for lessors. Therefore there was no financial statement impact
due to the adoption of Topic 842. As a lessor, the Company has two types of customer contracts that involve leases: right-to-use
operating leases and sales-type leases.
Right-to-use
operating leases. Certain customers enter into contracts to obtain subscription services from the Company, which includes
the Company’s content (nonlease component) and equipment installed in the customer locations so the customer can access
the content (lease component). The timing and pattern of the transfer of both the subscription services and the equipment are
the same, that is, the Company’s subscription services are made available to its customer at the same time as the equipment
is installed. Additionally, the Company has determined that the lease component of these customer contracts is an operating lease.
Accordingly, the Company has concluded that these contracts qualify for the practical expedient permitted under Topic 842 to not
separate the nonlease component from the related lease component. Instead, the Company treats the combined component as a single
performance obligation under Topic 606, Revenue from Contracts with Customers, as the Company has concluded that the nonlease
component (subscription services) is the predominant component of the combined component.
Sales-type
leases. As with the contracts under right-of-use operating leases, certain customers enter into contracts to obtain subscription
services from the Company, which includes the Company’s content (nonlease component) and equipment installed in the customer
locations so the customer can access the content (lease component). Generally, the equipment lease term is for three years and
the customer prepays its lease in full. After the lease term, the lessee may purchase the equipment for a nominal fee or lease
new equipment. Although the timing and pattern of the transfer of both the subscription services and the equipment may be the
same, the provisions of the contract related to the equipment results in a sales-type lease, and therefore, the Company cannot
treat both the nonlease component and the lease component as a combined component. Accordingly, the nonlease component is accounted
for under Topic 606 and the sales-type lease is accounted for under Topic 842 and separately disaggregated on the Company’s
statement of operations.
(8)
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
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 September 30, 2019 and December 31, 2018, $247,000 and $200,000 of foreign currency translation
adjustments were recorded in accumulated other comprehensive income, respectively.
(9)
RECENT ACCOUNTING PRONOUNCEMENTS
In
November 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2018-18, Collaborative Arrangements
(Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This ASU requires certain transactions between participants
in a collaborative arrangement to be accounted for as revenue under the new revenue standard when the participant is a customer.
The standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for the Company).
The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns
the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal
years beginning after December 15, 2019 (which will be January 1, 2020 for the Company) and can be applied either retrospectively
or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted at any time. The
Company does not expect that the adoption of this ASU will have a significant impact on its consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement. This ASU modifies certain disclosure requirements on fair value measurements. The
standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for the Company). The
Company is evaluating the impact that the adoption of this standard will have on its
consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current
guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The ASU requires an entity
to establish an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting
date. This ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual
rights to receive cash. For smaller reporting companies, the effective date for this standard has been delayed and will be effective
for fiscal years beginning after December 15, 2022 (which will be January 1, 2023 for the Company). The Company is evaluating
the impact that the adoption of this standard will have on its consolidated financial statements.