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
March 31, 2020, 1,396 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network. See Note
2 for more information regarding the impact of COVID-19 on these venues and the Company’s subscription revenues.
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, 2019. The accompanying condensed
balance sheet as of December 31, 2019 has been derived from the audited financial statements at that date but does not include
all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three
months ended March 31, 2020 are not necessarily indicative of the results to be anticipated for the entire year ending December
31, 2020, or any other period.
Reclassifications
Certain
reclassifications have been made to the prior period’s financial statements to conform to the current period
presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
The
negative impact of the COVID-19 pandemic on the restaurant and bar industry was abrupt and substantial, and the Company’s
business, cash flows from operations and liquidity suffered, and continues to suffer, materially as a result. In many jurisdictions,
including those in which the Company has many customers and prospective customers, restaurants and bars have been ordered by the
government to shut down or close all on-site dining since the latter half of March 2020. At its peak, approximately 70% of the
Company’s customers requested that their subscriptions to the Company’s services be temporarily suspended. As governmental
orders and restrictions impacting restaurants and bars are eased or lifted, the Company expects the temporary subscription
suspensions to end, however, even in jurisdictions in which such orders and restrictions are eased or lifted, the Company’s
customers could request to continue their subscription suspensions if, for example, such customers choose not to re-open despite
being permitted to do so. The Company has experienced material decreases in subscription revenue, advertising revenue and cash
flows from operations, which it expects to continue for at least as long as the restaurant and bar industry continues to be negatively
impacted by the COVID-19 pandemic, and which may continue thereafter if restaurants and bars seek to reduce their operating costs
or are unable to re-open even if restrictions within their states are eased or lifted. The Company cannot predict with
certainty whether, when or the manner in which the impact of the pandemic will improve, including when restaurants will be permitted
to offer on-site dining or when bars will be permitted to re-open or to what degree, when the Company’s customers
will re-open, or if they will subscribe to the Company’s service if and when they do, or if and when there will
be a resurgence in COVID-19 transmission or infection after the easing or lifting of stay-at-home orders, and if three is, the
impact of such resurgence on the Company’s business. Similarly, the Company cannot predict with certainty the duration
of the negative effects of the pandemic on its business and liquidity, however, unless in the very near term the Company’s
subscription revenue, advertising revenue and cash flows from operations return to pre-pandemic levels and/or the Company raises
substantial capital, the amount of time and the amount of cash the Company has to maintain operations and sustain the negative
effects of the pandemic is very limited. See Item 2 “—Liquidity and Capital Resources,” and “Item
1A. Risk Factors” in Part II of this report for additional information regarding the impact of the pandemic on our business
and outlook.
While
the Company expects the effects of COVID-19 to negatively impact its future results of operations, cash flows and financial position,
the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot
be reasonably estimated at this time. The Company’s consolidated financial statements reflect estimates and assumptions
made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities,
if any, at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting
periods presented. Such estimates and assumptions affect, among other things, the allowance for doubtful accounts, site equipment
to be installed, fixed assets, capitalized software development, goodwill and right-of-use assets. Events and changes in
circumstances arising after the issuance of the financial statements as of and for the three months ended March 31, 2020,
including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods
(3)
|
going
concern uncertainty
|
In
connection with preparing its financial statements as of and for the three months ended March 31, 2020, the Company’s management
evaluated whether there are conditions or events, considered in the aggregate, that are known and reasonably knowable that would
raise substantial doubt about the Company’s ability to continue as a going concern through twelve months after the date
that such financial statements are issued. During the three months ended March 31, 2020, the Company incurred a net loss of $1,218,000,
and the Company’s current liabilities exceeded its current assets at March 31, 2020 by $87,000. As of March 31, 2020, the
Company had $2,221,000 of unrestricted cash and total debt outstanding of $2,000,000, which was the outstanding principal balance
of the Company’s term loan with Avidbank. Under the terms of the amendment to the Company’s loan and security agreement
that the Company entered into with Avidbank on March 12, 2020, during 2020, the Company will be required to make monthly payments
that, if made in accordance with their terms, will result in the Company paying off the term loan by December 31, 2020. See Note
9 for additional information on this term loan.
As
discussed further in Note 16, subsequent to March 31, 2020, the Company received $1,625,100 loan (the “PPP Loan”)
under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the
“CARES Act”) administered by the U.S. Small Business Administration. The Company may use funds from the PPP Loan for
payroll costs, costs used to continue group health care benefits, mortgage interest payments, rent payments, utility payments,
and interest payments on other debt obligations incurred before February 15, 2020. The Company intends to use the entire PPP Loan
for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying
expenses as described in the CARES Act. No assurance is provided that the Company will obtain forgiveness of the PPP Loan
in whole or in part.
As
a result of the impact of the COVID-19 pandemic on the Company’s business and taking into account its current financial
condition and its existing sources of revenue, unless in the very near term the Company’s subscription revenue,
advertising revenue and cash flows from operations returns to pre-pandemic levels and/or the Company raises substantial
capital, the Company believes it will have sufficient cash resources to pay forecasted cash outlays through October 2020,
assuming the Company delivers a significant hardware order as scheduled during the second quarter of 2020, Avidbank does
not take actions to foreclose on the Company’s assets in the event the Company becomes out of compliance with its
financial covenants, and the Company is able to continue to successfully manage its working capital deficit by managing the
timing of payments to its vendors and other third parties.
Based
on the factors described above, management concluded that there is substantial doubt regarding the Company’s ability to
continue as a going concern through the twelve month period subsequent to the issuance date of these financial statements. Management’s
plans for addressing the liquidity shortfall include continuing efforts to raise additional capital through equity financings
and alternative sources of debt. However, there can be no assurances that the Company will be able to raise sufficient capital
when needed, on acceptable terms, or at all.
The
accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result from uncertainty related to the Company’s ability to continue
as a going concern.
At
the commencement date of the Company’s lease for its corporate headquarters on December 1. 2018, 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 9) 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.
On
January 13, 2020, the Company entered into an asset purchase agreement with Sporcle, Inc., a Delaware corporation (“Sporcle”),
pursuant to which the Company agreed to sell to Sporcle all of its assets necessary for Sporcle to conduct the live-hosted knowledge-based
trivia events known as Stump! Trivia and OpinioNation for $1,360,000 in gross proceeds. On the closing date of the transaction
(January 31, 2020), the Company received $1,260,000. The remaining $100,000 is being held back until the one-year
anniversary of the closing date, or January 31, 2021, to satisfy indemnification claims, if any, for which the Company
is liable. The hold-back amount is recorded in accounts receivable in the consolidated balance sheet. The Company recorded
a net gain of approximately $1,265,000 in January 2020.
The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) No. 606, Revenue from Contracts
with Customers. ASC No. 606 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
|
ASC
No. 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 generates revenue by charging subscription fees to partners for access to its 24/7 trivia network, by selling and leasing
tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling digital-out-of-home (DOOH) advertising
direct to advertisers and on national ad exchanges, by licensing its entertainment and trivia content to other entities, and by
providing professional services such as custom game design or development of new platforms on its existing tablet form factor.
Up until February 1, 2020, the Company also generated revenue from hosting live trivia events (see Note 5).
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 follows:
|
|
Three months ended March 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
$
|
|
|
% of Total Revenue
|
|
|
$ Change
|
|
|
% Change
|
|
Subscription revenue
|
|
|
1,999,000
|
|
|
|
83.5
|
%
|
|
|
3,833,000
|
|
|
|
79.3
|
%
|
|
|
(1,834,000
|
)
|
|
|
(47.8
|
)%
|
Hardware revenue
|
|
|
16,000
|
|
|
|
0.7
|
%
|
|
|
205,000
|
|
|
|
4.2
|
%
|
|
|
(189,000
|
)
|
|
|
(92.2
|
)%
|
Other revenue
|
|
|
379,000
|
|
|
|
15.8
|
%
|
|
|
794,000
|
|
|
|
16.5
|
%
|
|
|
(415,000
|
)
|
|
|
(52.3
|
)%
|
Total
|
|
|
2,394,000
|
|
|
|
100.0
|
%
|
|
|
4,832,000
|
|
|
|
100.0
|
%
|
|
|
(2,438,000
|
)
|
|
|
(50.5
|
)%
|
The
following describes how the Company recognizes revenue under ASC No. 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 obtaining 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 installation costs that are of an amount that is less than or equal to the deferred installation
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 to two years because the Company can still recover that excess cost in
the initial term of the contract. The Company amortizes commissions over the longer of the contract term and the expected term
of the customer relationship.
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. The Company does not expect to recognize revenue under sales-type lease arrangements after the year ended December
31, 2019.
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.
Advertising
Revenue – The Company recognizes advertising revenue either over the time the advertising campaign airs in its customers’
locations or at a point in time by impression. For advertising campaigns that are airing over a specific period of time (regardless
of number of impressions), 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 associated with the Company’s advertising activities.
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.
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. The Company does not expect to recognize live-hosted trivia revenue after January 31, 2020. See Note
5 for more information on the live-hosted trivia product line.
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 March 31, 2019, 2,632 venues in the U.S. and Canada
subscribed to the Company’s interactive entertainment network, of which approximately 46% were Buffalo Wild Wings corporate-owned
restaurants and its franchisees. As of March 31, 2020, the Company’s site count declined to 1,396 venues primarily
due to the termination of its agreements with Buffalo Wild Wings corporate-owned restaurants and most of its franchisees in November
2019 in accordance with their terms.
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 months ended March 31, 2020 and 2019, and the percentage of total revenue that such amount
represents for such periods:
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Buffalo Wild Wings revenue
|
|
$
|
101,719
|
|
|
$
|
1,936,000
|
|
Percent of total revenue
|
|
|
4
|
%
|
|
|
40
|
%
|
As
of March 31, 2020 and December 31, 2019, approximately $178,000 and $158,000, 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 months ended March 31, 2020 and 2019 were as follows:
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
2,249,000
|
|
|
$
|
4,661,000
|
|
Canada
|
|
|
145,000
|
|
|
|
171,000
|
|
Total revenue
|
|
$
|
2,394,000
|
|
|
$
|
4,832,000
|
|
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 January 1, 2020 and March 31, 2020, including the change during the period.
|
|
Deferred Revenue
|
|
Balance at January 1, 2020
|
|
$
|
460,000
|
|
New performance obligations
|
|
|
180,000
|
|
Revenue recognized
|
|
|
(256,000
|
)
|
Balance at March 31, 2020
|
|
|
384,000
|
|
Less non-current portion
|
|
|
(1,000
|
)
|
Current portion at March 31, 2020
|
|
$
|
383,000
|
|
The
Company capitalizes installation costs associated with installing equipment in a customer location and sales commissions as a
deferred cost asset on the balance sheet. For installation costs that are of an amount that is less than or equal to the deferred
installation 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 installation costs that exceed the deferred revenue, the amortization period
of the excess cost is the initial term of the contract, which is generally one to two years because the Company can still recover
that excess cost in the initial term of the contract. The Company amortizes commission costs over the longer of the contract term
and the expected term of the customer relationship. The table below shows the balance of the unamortized installation cost and
sales commissions as of January 1, 2020 and March 31, 2020, including the change during the period.
|
|
Installation Costs
|
|
|
Sales Commissions
|
|
|
Total Deferred Costs
|
|
Balance at January 1, 2020
|
|
$
|
187,000
|
|
|
$
|
87,000
|
|
|
$
|
274,000
|
|
Incremental costs deferred
|
|
|
68,000
|
|
|
|
53,000
|
|
|
|
121,000
|
|
Deferred costs recognized
|
|
|
(92,000
|
)
|
|
|
(64,000
|
)
|
|
|
(156,000
|
)
|
Balance at March 31, 2020
|
|
|
163,000
|
|
|
|
76,000
|
|
|
|
239,000
|
|
(7)
|
Basic
and Diluted Earnings Per Common Share
|
Basic
net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period,
without consideration of potential common shares. Diluted net loss per share is calculated by dividing net loss by the weighted-average
number of common shares outstanding plus potential common shares. Stock options, restricted stock units, and other convertible
securities are considered potential common shares and are included in the calculation of diluted net loss per share using the
treasury method when their effect is dilutive. Options, restricted stock units and convertible preferred stock representing approximately
172,000 and 262,000 shares of common stock were excluded from the computations of diluted net loss per common share for the three
months ended March 31, 2020 and 2019, respectively, as their effect was anti-dilutive.
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.
The
2019 Plan provides for the issuance of up to 240,000 shares of Company common stock. Awards 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 March 31, 2020, there were stock options to purchase approximately 2,000
shares of common stock and 108,000 restricted stock units outstanding under the 2019 Plan.
As
a result of stockholder approval of the 2019 Plan in June 2019, 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 March 31, 2020, there were stock options to purchase approximately
32,000 shares of common stock and 18,000 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 March 31, 2020, there were no equity grants 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.
The
Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term
of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise
patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate,
the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend
yield assumption is based on the Company’s history and expectation of dividend payouts.
The
Company did not grant any stock options and no options were exercised during the three months ended March 31, 2020 or 2019.
The
Company estimates forfeitures, based on historical activity, at the time of grant and revised if necessary in subsequent periods
if actual forfeiture rates differ from those estimates. Stock-based compensation expense for employees during the three months
ended March 31, 2020 and 2019 was $39,000 and $59,000, respectively, and is expensed in selling, general and administrative expenses
and credited to the additional paid-in-capital account.
Outstanding
restricted stock units (“RSUs”) are settled in an equal number of shares of common stock on the vesting date of the
award. An RSU 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 RSUs 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. For the three months ended March 31, 2020 and 2019, the Company granted the following awards:
Three months ended
|
|
RSUs Granted
|
|
|
Weighted averge grant date fair value per RSU
|
|
|
Vesting terms
|
March 31, 2020
|
|
|
153,000
|
|
|
$
|
2.43
|
|
|
12.5% every three months from grant date over two years
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
47,000
|
|
|
$
|
3.72
|
|
|
16.67% on six month anniversary of grant date, then equal monthly installments over following 30 months
|
The
following table shows the number of RSUs that vested and were settled during the three months ended March 31, 2020 and 2019, 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 RSUs, 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 March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Restricted stock units vested and settled
|
|
|
4,000
|
|
|
|
4,000
|
|
Common stock issued, net of shares withheld
|
|
|
3,000
|
|
|
|
3,000
|
|
Term
Loan
In
September 2018, the Company entered into a loan and security agreement with Avidbank for a 48-month term loan in the amount of
$4,000,000, under which the Company was obligated to make monthly principal payments of approximately $83,000 plus accrued and
unpaid interest. In February 2020, the Company made a pre-payment on the term loan of approximately $150,000 following the sale
of all of the Company’s assets used to conduct the live-hosted knowledge-based trivia events known as Stump! Trivia and
OpinioNation in January 2020 (see Note 5). On March 12, 2020, the Company entered into an amendment to the loan and security agreement.
In connection with entering into the amendment, the Company made a $433,000 payment on its term loan, which included the $83,333
monthly principal payment plus accrued interest for March 2020 and a $350,000 principal prepayment, thereby reducing the outstanding
principal balance of its term loan to $2,000,000 as of March 31, 2020.
The
Company incurred approximately $26,000 of debt issuance costs related to loan and security agreement and its amendment, of
which approximately $3,000 was related to the amendment. The debt issuance costs are being 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 March 31,
2020 and December 31, 2019 was $10,000 and $11,000, respectively, and is recorded as a reduction of long-term debt.
Under
the terms of the amendment, the Company’s financial covenants were changed, the maturity date of its term loan was changed
from September 28, 2022 to December 31, 2020, and commencing on April 30, 2020, the Company must make principal plus accrued interest
payments on the last day of each month, such that its term loan will be repaid by December 31, 2020. The principal payment the
Company must make each month will be $125,000 for each of April, May and June, $300,000 for each of July, August, September, October
and November, and $125,000 for December.
Under
the terms of the original loan and security agreement, the Company’s adjusted earnings before interest, taxes, depreciation
and amortization (“EBITDA”) was required to be at least $1,000,000 for the trailing six-month period as of the last
day of each fiscal quarter and the aggregate amount of unrestricted cash it had in deposit accounts or securities accounts maintained
with Avidbank must be not less than $2,000,000 at all times.
Under
the terms of the amendment, the minimum EBITDA covenant was replaced with a monthly minimum asset coverage ratio covenant, which
the Company refers to as the ACR covenant, and the minimum liquidity covenant was amended to provide that the aggregate amount
of unrestricted cash the Company has in deposit accounts or securities accounts maintained with Avidbank must be at all times
not less than the principal balance outstanding under the term loan. Under the ACR covenant, the ratio of (i) the Company’s
unrestricted cash at Avidbank as of the last day of a calendar month plus 75% of its outstanding accounts receivable accounts
that are within 90 days of invoice date to (ii) the outstanding principal balance of the term loan on such day must be no less
than 1.25 to 1.00. As of March 31, 2020, the Company was in compliance with both of those covenants.
On
January 1, 2019, the Company adopted ASC No. 842, Leases (“ASC No. 842”). ASC No. 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.
ASC
No. 842 also allows lessees and lessors to elect certain practical expedients. The Company elected the following practical expedients:
|
●
|
Transitional
practical expedients:
|
|
○
|
The
Company need not reassess whether any expired or existing contracts are or contain leases.
|
|
○
|
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).
|
|
○
|
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:
|
|
○
|
The
timing and patterns of transfer for the lease component and nonlease component associated with that lease component are the
same; and
|
|
○
|
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 finance 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 ASC No. 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 finance leases under ASC No. 842 did not have a material
change from the balances of the finance lease liabilities and assets recorded prior to the adoption of ASC No. 842. There was
also no cumulative effect adjustment to retained earnings as a result of the transition to ASC No. 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 ASC No. 842 did not have a material impact on the Company’s consolidated statement of operations.
The
tables below show the beginning balances of the operating lease right-of-use assets and liabilities as of January 1, 2019 and
the ending balances as of March 31, 2020, including the changes during the periods.
|
|
Operating lease right-of-use assets
|
|
Operating lease right-of use assets at January 1, 2020
|
|
$
|
2,101,000
|
|
Amortization of operating lease right-of-use assets
|
|
|
(73,000
|
)
|
Write-off of right-of-use asset related
to asset sale (Note 5)
|
|
|
(26,000
|
)
|
Operating lease right-of-use assets at March 31, 2020
|
|
$
|
2,002,000
|
|
|
|
Operating lease liabilities
|
|
Operating lease liabilities at January 1, 2020
|
|
$
|
3,300,000
|
|
Principal payments on operating lease liabilities
|
|
|
(106,000
|
)
|
Write-off of lease liability related
to asset sale (Note 5)
|
|
|
(27,000
|
)
|
Operating lease liabilities at March 31, 2020
|
|
|
3,167,000
|
|
Less non-current portion
|
|
|
(2,782,000
|
)
|
Current portion at March 31, 2020
|
|
$
|
385,000
|
|
As
of March 31, 2020, the Company’s operating leases have a weighted-average remaining lease term of 6.0 years and a weighted-average
discount rate of 7.25%. The maturities of the operating lease liabilities are as follows:
|
|
As of
|
|
|
|
March 31, 2020
|
|
2020
|
|
$
|
450,000
|
|
2021
|
|
|
613,000
|
|
2022
|
|
|
634,000
|
|
2023
|
|
|
655,000
|
|
2024
|
|
|
670,000
|
|
Thereafter
|
|
|
931,000
|
|
Total operating lease payments
|
|
|
3,953,000
|
|
Less imputed interest
|
|
|
(786,000
|
)
|
Present value of operating lease liabilities
|
|
$
|
3,167,000
|
|
For
the three months ended March 31, 2020 and 20198, total lease expense under operating leases was approximately $134,000 and $135,000,
respectively, and was recorded in selling, general and administrative expenses.
The
tables below show the beginning balances of the finance lease right-of-use assets and liabilities as of January 1, 2020 and the
ending balances as of March 31, 2020, including the changes during the periods. The Company’s finance lease right-of-use
assets are included in “Fixed assets, net” on the accompanying consolidated balance sheet.
|
|
Finance lease right-of-use assets
|
|
Finance lease right-of use assets at January 1, 2020
|
|
$
|
41,000
|
|
Depreciation of finance lease right-of-use assets
|
|
|
(5,000
|
)
|
Finance lease right-of-use assets at March 31, 2020
|
|
$
|
36,000
|
|
|
|
Finace lease liabilities
|
|
Finance lease liabilities at January 1, 2020
|
|
$
|
41,000
|
|
Principal payments on finance lease liabilities as of March 31, 2020
|
|
|
(5,000
|
)
|
Finance lease liabilities at March 31, 2020
|
|
|
36,000
|
|
Less non-current portion
|
|
|
(21,000
|
)
|
Current portion at March 31, 2020
|
|
$
|
15,000
|
|
As
of March 31, 2020, the Company’s finance leases have a weighted-average remaining lease term of 1.7 years and a weighted-average
discount rate of 5.52%. The maturities of the finance lease liabilities are as follows:
|
|
As of
|
|
|
|
March 31, 2020
|
|
2020
|
|
|
17,000
|
|
2021
|
|
|
21,000
|
|
Total Finance lease payments
|
|
|
38,000
|
|
Less imputed interest
|
|
|
(2,000
|
)
|
Present value of Finance lease liabilities
|
|
$
|
36,000
|
|
For
the three months ended March 31, 2020 and 2019, total lease costs under finance leases were approximately $6,000 and $22,000,
respectively.
As
Lessor
ASC
No. 842 did not make fundamental changes to lease accounting guidance for lessors. Therefore there was no financial statement
impact due to the adoption of ASC No. 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 ASC No. 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. The Company does not anticipate entering into any sales-type lease arrangements after December 31, 2019.
(11)
|
DISPOSITION
OF SITE EQUIPMENT TO BE INSTALLED AND FIXED ASSETS
|
Site
equipment to be installed consists of fixed assets related to the Company’s tablet platform that have not yet been placed
in service and are stated at cost. These assets remain in site equipment to be installed until they are deployed at the Company’s
customer sites. For tablet platform customers that are under sales-type lease arrangements, the cost of the equipment is recognized
in direct costs upon installation. For all other tablet platform customers, the cost of the equipment is reclassified to fixed
assets upon installation and depreciated over its estimated useful life. The Company evaluates the recoverability of site equipment
to be installed and fixed assets for impairment whenever events or circumstances indicate that the carrying amounts of such assets
may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset or asset group to estimated undiscounted
future net cash flows expected to be generated. If the carrying amount of the asset or asset group is not recoverable on an undiscounted
cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined
through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent
appraisals, as considered necessary.
Based
on the Company’s on-going review of its equipment in site equipment to be installed and in fixed assets, the Company determined
that it would no longer be deploying some of the Company’s older tablets, related cases and card readers. Accordingly, the
Company wrote off approximately $188,000 related to this equipment during the three months ended March 31, 2020. The expense associated
with this write-off is in direct operating costs in the Company’s consolidated statement of operations. Due to uncertainty
of the longer-term impact COVID-19 will have on the Company’s business, the Company did not record any additional equipment
write-offs for the three months ended March 31, 2020, but will continue to monitor the recoverability of these assets and recognize
any additional write-offs during the period in which it determines that impairment exists.
(12)
|
SOFTWARE
DEVELOPMENT COSTS
|
The
Company capitalizes costs related to developing certain software programs in accordance with ASC No. 350, Intangibles –
Goodwill and Other. When the Company deploys the programs, it begins to recognize costs related to the programs on a straight-line
basis over the programs’ estimated useful lives, generally two to three years. Amortization expense relating to capitalized
software development costs totaled $149,000 and $97,000 for the three months ended March 31, 2020 and 2019, respectively. As of
March 31, 2020 and December 31, 2019, approximately $144,000 and $177,000, respectively, of capitalized software costs were not
subject to amortization as the development of various software projects was not complete.
The
Company performed its quarterly review of software development projects for the three months ended March 31, 2020 and 2019, and
determined to abandon various software development projects that the Company concluded were no longer a current strategic fit
or for which it determined that the marketability of the content had decreased due to obtaining additional information regarding
the specific industry for which the content was intended. As a result, the Company recognized an impairment of $138,000 and $1,000
for the three months ended March 31, 2020 and 2019, respectively. Impairment of capitalized software is shown separately on the
Company’s consolidated statement of operations. Due to uncertainty of the longer-term impact COVID-19 will have on the Company’s
business, the Company did not record any additional software development impairment charges for the three months ended March 31,
2020, but will continue to monitor the recoverability of these assets and recognize any additional write-offs during the period
in which it determines that impairment exists.
The
Company’s goodwill balance of $696,000 as of December 31, 2019 relates to the excess of costs over the fair value of assets
the Company acquired in 2003 related to its Canadian business (the “Reporting Unit”). In the Company’s evaluation
of impairment indicators as of March 31, 2020, it determined that the uncertainty relating to COVID-19’s impact on the Reporting
Unit’s future operating results represented an indicator of impairment. Accordingly, the Company compared the estimated
fair value of the Reporting Unit to its carrying value at March 31, 2020, determined that a full impairment loss was warranted
and recognized an impairment charge of $662,000 for the three months ended March 31, 2020. There was no goodwill impairment recorded
for the three months ended March 31, 2019.
In
addition to the impairment loss recognized, fluctuations in the amount of goodwill shown on the accompanying balance sheets can
occur due to changes in the foreign currency exchange rates used when translating NTN Canada’s financial statement from
Canadian dollars to US dollars during consolidation. The following table shows the changes in the carrying amount of goodwill
for the three months ended March 31, 2020.
Goodwill balance at January 1, 2020
|
|
$
|
696,000
|
|
Effects of foreign currency
|
|
|
(34,000
|
)
|
Goodwill impairment
|
|
|
(662,000
|
)
|
Goodwill balance at March 31, 2020
|
|
$
|
-
|
|
(14)
|
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 March 31, 2020 and December 31, 2019, $164,000 and $268,000 of foreign currency
translation adjustments were recorded in accumulated other comprehensive income, respectively.
(15)
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In
December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2019-12, Income Taxes (Topic
740) – Simplifying the Accounting for Income Taxes. This ASU enhances and simplifies various aspect of the income tax
accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business
combination, ownership changes in investments, methodology for calculating income taxes in an interim period when a year-to-date
loss exceeds the anticipated loss for the year and interim-period accounting for enacted changes in tax law. The amendment will
be effective for public companies with fiscal years beginning after December 15, 2020, (which will be January 1, 2021 for the
Company); early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated
financial statements.
In
November 2019, the FASB issued ASU No. 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts
with Customers (Topic 606) (“ASU No. 2019-08”). This ASU requires that an entity measure and classify share-based
payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction
price is required to be measured on the basis of the grant-date fair value of the share-based payment award in accordance with
Topic 718. The grant date is the date at which a grantor (supplier) and a grantee (customer) reach a mutual understanding of the
key terms and conditions of a share-based payment award. The classification and subsequent measurement of the award are subject
to the guidance in Topic 718 unless the share-based payment award is subsequently modified and the grantee is no longer a customer.
The standard is effective for fiscal years beginning after December 15, 2019 (which was January 1, 2020 for the Company). The
adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In
November 2018, 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 was January 1, 2020 for the Company). The adoption of this standard did not have
a material impact on the Company’s 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 was January 1, 2020 for the Company) and can be applied either retrospectively
or prospectively to all implementation costs incurred after the date of adoption. The adoption of this ASU did not have a material
impact on the Company’s 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 was January 1, 2020 for the Company). The adoption
of this ASU did not have a significant impact on the Company’s 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.
Paycheck
Protection Program Loan
On
April 18, 2020, the Company issued a note in the principal amount of $1,625,100 to Level One Bank
evidencing the PPP Loan the Company received under CARES Act administered by the
U.S. Small Business Administration.
The
PPP Loan matures on April 18, 2022 and bears interest at a rate of 1.0% per annum. The Company must make monthly interest only
payments beginning on November 18, 2020. One final payment of all unforgiven principal plus any accrued unpaid interest is due
at maturity. Under the terms of the PPP, the Company may prepay the PPP Loan at any time with no prepayment penalties. The Company
may use funds from the PPP Loan for payroll costs, costs used to continue group health care benefits, mortgage interest payments,
rent payments, utility payments, and interest payments on other debt obligations incurred before February 15, 2020. The Company
intends to use the entire PPP Loan for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be
forgiven if they are used for qualifying expenses as described in the CARES Act. No assurance is provided that the Company will
obtain forgiveness of the loan in whole or in part.