Item
1.
Financial Statements
.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except par value amount)
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,078
|
|
|
$
|
3,378
|
|
Accounts receivable,
net of allowances of $361 and $463, respectively
|
|
|
1,279
|
|
|
|
714
|
|
Site equipment to
be installed
|
|
|
3,600
|
|
|
|
4,866
|
|
Prepaid
expenses and other current assets
|
|
|
572
|
|
|
|
680
|
|
Total current assets
|
|
|
8,529
|
|
|
|
9,638
|
|
Fixed assets, net
|
|
|
3,645
|
|
|
|
3,678
|
|
Software development
costs, net of accumulated amortization of $2,877 and $2,651, respectively
|
|
|
1,840
|
|
|
|
1,459
|
|
Deferred costs
|
|
|
470
|
|
|
|
775
|
|
Goodwill
|
|
|
976
|
|
|
|
1,004
|
|
Other
assets
|
|
|
84
|
|
|
|
16
|
|
Total
assets
|
|
$
|
15,544
|
|
|
$
|
16,570
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
341
|
|
|
$
|
390
|
|
Accrued compensation
|
|
|
360
|
|
|
|
646
|
|
Accrued expenses
|
|
|
792
|
|
|
|
418
|
|
Sales taxes payable
|
|
|
137
|
|
|
|
107
|
|
Income taxes payable
|
|
|
36
|
|
|
|
13
|
|
Current portion
of long-term debt
|
|
|
1,104
|
|
|
|
5,059
|
|
Current portion
of obligations under capital leases
|
|
|
156
|
|
|
|
176
|
|
Current portion
of deferred revenue
|
|
|
2,487
|
|
|
|
3,564
|
|
Deferred rent
|
|
|
33
|
|
|
|
182
|
|
Other
current liabilities
|
|
|
96
|
|
|
|
192
|
|
Total current liabilities
|
|
|
5,542
|
|
|
|
10,747
|
|
Long-term debt
|
|
|
2,977
|
|
|
|
8
|
|
Long-term obligations
under capital leases
|
|
|
48
|
|
|
|
164
|
|
Long-term deferred
revenue
|
|
|
31
|
|
|
|
63
|
|
Other
liabilities
|
|
|
50
|
|
|
|
52
|
|
Total liabilities
|
|
|
8,648
|
|
|
|
11,034
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
Series A 10% cumulative
convertible preferred stock, $0.005 par value, $156 liquidation preference, 156 shares authorized; 156 shares issued and outstanding
at September 30, 2018 and December 31, 2017
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.005 par value, 15,000
shares authorized at September 30, 2018 and December 31, 2017; 2,872 and 2,521 shares issued and outstanding at September
30, 2018 and December 31, 2017, respectively
|
|
|
14
|
|
|
|
13
|
|
Treasury stock,
at cost, 10 shares at September 30, 2018 and
December 31, 2017
|
|
|
(456
|
)
|
|
|
(456
|
)
|
Additional paid-in
capital
|
|
|
136,482
|
|
|
|
134,752
|
|
Accumulated deficit
|
|
|
(129,438
|
)
|
|
|
(129,119
|
)
|
Accumulated
other comprehensive income
|
|
|
293
|
|
|
|
345
|
|
Total
shareholders’ equity
|
|
|
6,896
|
|
|
|
5,536
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
15,544
|
|
|
$
|
16,570
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In
thousands, except per share amounts)
(unaudited)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
revenue
|
|
$
|
4,005
|
|
|
$
|
4,279
|
|
|
$
|
12,111
|
|
|
$
|
12,737
|
|
Hardware revenue
|
|
|
1,158
|
|
|
|
116
|
|
|
|
2,427
|
|
|
|
524
|
|
Other
revenue
|
|
|
841
|
|
|
|
803
|
|
|
|
2,878
|
|
|
|
2,717
|
|
Total Revenue
|
|
|
6,004
|
|
|
|
5,198
|
|
|
|
17,416
|
|
|
|
15,978
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating
costs (includes depreciation and amortization of $657 and $509 for the three months ended September 30, 2018 and 2017, respectively,
and $1,824 and $1,466 for the nine months ended September 30, 2018 and 2017, respectively)
|
|
|
2,115
|
|
|
|
1,539
|
|
|
|
6,019
|
|
|
|
5,013
|
|
Selling, general
and administrative
|
|
|
3,444
|
|
|
|
3,636
|
|
|
|
11,123
|
|
|
|
11,628
|
|
Depreciation
and amortization (excluding depreciation and amortization included in direct operating costs)
|
|
|
75
|
|
|
|
76
|
|
|
|
244
|
|
|
|
250
|
|
Total
operating expenses
|
|
|
5,634
|
|
|
|
5,251
|
|
|
|
17,386
|
|
|
|
16,891
|
|
Operating income (loss)
|
|
|
370
|
|
|
|
(53
|
)
|
|
|
30
|
|
|
|
(913
|
)
|
Other (expense)
income, net
|
|
|
(138
|
)
|
|
|
(122
|
)
|
|
|
(305
|
)
|
|
|
496
|
|
Income (loss) before income taxes
|
|
|
232
|
|
|
|
(175
|
)
|
|
|
(275
|
)
|
|
|
(417
|
)
|
Provision
for income taxes
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
(36
|
)
|
|
|
(21
|
)
|
Net income (loss)
|
|
$
|
222
|
|
|
$
|
(184
|
)
|
|
$
|
(311
|
)
|
|
$
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per common share - basic and diluted
|
|
$
|
0.08
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
- basic and diluted
|
|
|
2,857
|
|
|
|
2,505
|
|
|
|
2,628
|
|
|
|
2,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
222
|
|
|
$
|
(184
|
)
|
|
$
|
(311
|
)
|
|
$
|
(438
|
)
|
Foreign
currency translation adjustment
|
|
|
39
|
|
|
|
80
|
|
|
|
(52
|
)
|
|
|
136
|
|
Total
comprehensive income (loss)
|
|
$
|
261
|
|
|
$
|
(104
|
)
|
|
$
|
(363
|
)
|
|
$
|
(302
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Nine
months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(311
|
)
|
|
$
|
(438
|
)
|
Adjustments to reconcile
net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
2,068
|
|
|
|
1,716
|
|
Provision for doubtful
accounts
|
|
|
53
|
|
|
|
47
|
|
Scrap expense
|
|
|
30
|
|
|
|
30
|
|
Transfer of fixed
assets to sales-type lease
|
|
|
10
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
368
|
|
|
|
347
|
|
Amortization of
debt issuance costs
|
|
|
57
|
|
|
|
39
|
|
Issuance of common
stock in lieu of cash for bonus compensation
|
|
|
-
|
|
|
|
178
|
|
Impairment of capitalized
software
|
|
|
23
|
|
|
|
5
|
|
Loss from disposition
of equipment
|
|
|
30
|
|
|
|
8
|
|
Changes in assets
and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(617
|
)
|
|
|
254
|
|
Site equipment to
be installed
|
|
|
(56
|
)
|
|
|
(3,047
|
)
|
Prepaid expenses
and other assets
|
|
|
40
|
|
|
|
37
|
|
Accounts payable
and accrued liabilities
|
|
|
69
|
|
|
|
(350
|
)
|
Income taxes payable
|
|
|
24
|
|
|
|
(2
|
)
|
Deferred costs
|
|
|
305
|
|
|
|
36
|
|
Deferred revenue
|
|
|
(1,109
|
)
|
|
|
2,521
|
|
Deferred rent
|
|
|
(148
|
)
|
|
|
(140
|
)
|
Other
liabilities
|
|
|
(97
|
)
|
|
|
(185
|
)
|
Net cash provided
by operating activities
|
|
|
739
|
|
|
|
1,056
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(502
|
)
|
|
|
(562
|
)
|
Capitalized
development expenditures
|
|
|
(690
|
)
|
|
|
(556
|
)
|
Net cash used in
investing activities
|
|
|
(1,192
|
)
|
|
|
(1,118
|
)
|
Cash flows provided by (used in) financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term
debt
|
|
|
4,000
|
|
|
|
-
|
|
Payments on long-term
debt
|
|
|
(5,019
|
)
|
|
|
(2,857
|
)
|
Debt issuance costs
on long-term debt
|
|
|
(23
|
)
|
|
|
(22
|
)
|
Principal payments
on capital lease
|
|
|
(132
|
)
|
|
|
(116
|
)
|
Net proceeds from
issuance of common stock
related to registered direct offering
|
|
|
1,375
|
|
|
|
1,773
|
|
Tax withholding
payments for net share settlement of
vested restricted stock units
|
|
|
(12
|
)
|
|
|
-
|
|
Payment
of preferred stockholders dividends
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
181
|
|
|
|
(1,230
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(272
|
)
|
|
|
(1,292
|
)
|
Effect of exchange rate on cash
|
|
|
(28
|
)
|
|
|
70
|
|
Cash and cash
equivalents at beginning of period
|
|
|
3,378
|
|
|
|
5,686
|
|
Cash and cash
equivalents at end of period
|
|
$
|
3,078
|
|
|
$
|
4,464
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow
information:
|
|
|
|
|
|
|
|
|
Cash paid during
the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
255
|
|
|
$
|
301
|
|
Income
taxes
|
|
$
|
17
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
equipment transferred to fixed assets
|
|
$
|
1,292
|
|
|
$
|
1,361
|
|
Equipment
acquired under capital lease
|
|
$
|
5
|
|
|
$
|
-
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
BASIS OF PRESENTATION
Description
of Business
NTN
Buzztime, Inc. (the “Company”) was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate
name to NTN Communications, Inc. in 1985. The Company changed its name to NTN Buzztime, Inc. in 2005 to better reflect the growing
role of the Buzztime consumer brand.
The
Company delivers interactive entertainment and innovative technology, including performance analytics and secure payment with
Europay, MasterCard® and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple,
Android and Samsung Pay. Generally used in bars and restaurants in North America, the Company’s tablets and technology offer
engaging solutions to establishments with guests who experience dwell time, such as casinos 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, customized menus and self-service dining features. The Company’s platform
improves operating efficiencies, creates connections among the players and venues, and amplifies guests’ positive experiences.
The Company’s tablet platform was commercially launched during 2013 and then scaled during 2014. The Company also continues
to support its legacy network product line, which it calls its Classic platform.
The
Company generates revenue by charging subscription fees for its service to network subscribers, by leasing equipment to certain
network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and
as part of customized games, by licensing its content for use with third-party equipment, from providing professional services
(such as developing certain functionality within the Company’s platform for customers), and from pay-to-play single player
games.
At
September 30, 2018, 2,666 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network, of
which approximately 84% were using the tablet platform.
Basis
of Accounting Presentation
The
accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and
Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments
that are necessary, which are of a normal and recurring nature, for a fair presentation for the periods presented of the financial
position, results of operations and cash flows of the Company and its wholly-owned subsidiaries: IWN, Inc., IWN, L.P., Buzztime
Entertainment, Inc., NTN Wireless Communications, Inc., NTN Software Solutions, Inc., NTN Canada, Inc., and NTN Buzztime, Ltd.,
all of which, other than NTN Canada, Inc., are dormant subsidiaries. All significant intercompany transactions have been eliminated
in consolidation.
These
condensed consolidated financial statements should be read with the consolidated financial statements and notes thereto contained
in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017. The accompanying condensed balance
sheet as of December 31, 2017 has been derived from the audited financial statements at that date but does not include all of
the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and
nine months ended September 30, 2018 are not necessarily indicative of the results to be anticipated for the entire year ending
December 31, 2018, or any other period.
In
connection with preparing its financial statements as of and for the period ended September 30, 2018, the Company evaluated whether
there are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial
doubt about its ability to continue as a going concern within twelve months after the date that such financial statements are
issued. The Company believes it has sufficient cash to meet its operating cash requirements and to fulfill its debt obligations
for at least the next twelve months after the date that such financial statements are issued. To increase the likelihood that
the Company will be able to successfully execute its operating and strategic plan and to position the Company to better take advantage
of market opportunities for growth, it is continuing to evaluate additional financing alternatives, including additional equity
financings and alternative sources of debt. If the Company’s cash and cash equivalents are not sufficient to meet future
cash requirements, it may have to reduce planned capital expenses, reduce operational cash uses or raise capital on terms that
are not as favorable to the Company as they otherwise might be. Any actions the Company may undertake to reduce planned capital
purchases or reduce expenses might not cover shortfalls in available funds. If the Company requires additional capital, it may
not secure additional financing on terms acceptable to the Company, or at all.
(2)
Revenue Recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. In August 2015, the FASB issued ASU No. 2015-14,
Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date of ASU 2014-09
by one year to fiscal periods beginning after December 15, 2017.
The Company adopted the new standard
effective January 1, 2018 using the full retrospective approach.
This
update outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides
a five-step analysis in determining when and how revenue is recognized:
1.
Identify the contract(s) with customers
2.
Identify the performance obligations
3.
Determine the transaction price
4.
Allocate the transaction price to the performance obligations
5.
Recognize revenue when the performance obligations have been satisfied
Topic
606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration a company expects to receive in exchange for those goods or services.
The
Company completed the process of evaluating the effect of adopting this update and has determined that the timing and amount of
revenue recognized based on Topic 606 is consistent with the Company’s revenue recognition policy under previous guidance,
and accordingly, there was no transition adoption adjustment necessary upon the adoption of the Topic 606 guidance.
The
Company generates revenue by charging subscription fees for its service to network subscribers, by leasing equipment to certain
network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and
as part of customized games, by licensing its content for use with third-party equipment, from providing professional services
(such as developing certain functionality within the Company’s platform for customers), and from pay-to-play single player
games.
In
general, when multiple performance obligations are present in a customer contract, the transaction price is allocated to the individual
performance 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 stand-alone selling prices. All revenues are recognized net of sales tax collected from the customer.
The following describes how the Company recognizes its revenue streams under Topic 606.
Subscription
Revenue
- The Company recognizes its recurring subscription fees over time as customers receive and consume the benefits of
such services, which includes the Company’s content, the Company’s equipment to access the content and the installation
of the equipment. In general, customers pay for the subscription services during the month in which they receive the services.
Due to the timing of providing the services and receiving payment for the services, the Company does not record any unbilled contract
asset. Occasionally, a customer will prepay for up to one year of subscription services, in which case, the Company will record
deferred revenue on the balance sheet related to such prepayment and will recognize the revenue over the time the customer receives
the subscription services. Revenue from installation services is also recorded as deferred revenue and recognized over the longer
of the contract term and the expected term of the customer relationship using the straight line method. The Company has certain
contingent performance obligations with respect to repairing or replacing equipment and would recognize any such revenue at the
point in time the Company performs such services.
Costs
associated with installing the equipment are considered direct costs. Costs associated with sales commissions are considered incremental
costs for fulfilling the contract because such costs would not have been incurred without obtaining the contract. The Company
expects to recover both costs through future fees it collects and both costs are recorded in deferred costs on the balance sheet
and amortized on a straight-line basis. For costs that are of an amount that is less than or equal to the deferred revenue for
the related contract, the amortization period approximates the longer of the contract term and the expected term of the customer
relationship. For any excess costs that exceed the deferred revenue, the amortization period of the excess cost is the initial
term of the contract, which is generally one year because the Company can still recover that excess cost in the initial term of
the contract.
Sales-type
Lease Revenue
– For certain customers that lease equipment under sale-type lease arrangements, the Company recognizes
revenue in accordance with Accounting Standards Codification (“ASC”) No. 840,
Leases.
Such revenue is recognized
at the time of installation based on the net present value of the leased equipment. Interest income is recognized over the life
of the lease for customers who have remaining lease payments to make. In the event a customer under a sales-type lease arrangement
prepays for the lease in full prior to receiving the equipment under the lease, such amounts are recorded in deferred revenue
and recognized as revenue once the equipment has been installed and activated at the customer’s location. The cost of the
leased equipment is recognized at the same time as the revenue.
Equipment
Sales
– The Company recognizes revenue from equipment sales at a point in time, which is when control has been transferred
to the customer, the customer holds legal title and the customer has significant risks and rewards of ownership. Generally, the
Company has determined that any customer acceptance provisions of the equipment is a formality, as the Company has historically
demonstrated the ability to produce and deliver similar equipment. If the Company sells equipment with unique specifications,
then customer control of the equipment will occur upon customer acceptance as defined in the contract, and revenue will be recognized
at that time. Costs associated with the equipment sold is recognized at the same point in time as the revenue.
Live
Hosted Trivia Revenue
– The Company recognizes its live-hosted trivia revenue at a point in time, which is when the
event takes place. Some customers host their own trivia events and the Company provides the game materials. In these cases, the
Company recognizes the revenue at the point in time the Company sends the game materials to the customer. The Company recognizes
related costs at the same point in time the revenue is recognized. Generally, there is no unbilled revenue or deferred revenue
associated with live hosted trivia events.
Advertising
Revenue
– The Company recognizes advertising revenue over the time the advertising campaign airs in its customers locations.
The Company uses the time elapsed output method to measure its progress toward satisfying the performance obligation. When the
Company contracts with an advertising agent, the Company shares in the advertising revenue generated with that agent. In these
cases, the Company generally recognizes revenue on a net basis, as the agent typically has the responsibility for the relationship
with the advertiser and the credit risk. When the Company contracts directly with the advertiser, it will recognize the revenue
on a gross basis and will recognize any revenue share arrangement it has with a third party as a direct expense, as the Company
has the responsibility for the relationship with the advertiser and the credit risk. Generally, there is no unbilled revenue or
deferred revenue associated with the Company’s advertising activities.
Pay-to-Play
Revenue
– The Company recognizes revenue generated from its customers’ patrons who access the Company’s
premium games on the tablets. This revenue is recognized at a point in time based on usage-based royalty revenue guidance. The
Company generally shares in the revenue with the customer whose patrons generated the pay-to-play revenue. The Company has determined
that it is the principal and the customer is the agent, and therefore, the Company recognizes this revenue on a gross basis, with
the amount of revenue shared with the customer as a direct expense. Costs associated with procuring the game license or developing
the games are recognized over the life of the license or expected life of the developed game. Generally, there is no unbilled
revenue or deferred revenue associated with the Company’s pay-to-play games.
Content
Licensing
– The Company licenses content (trivia packages) to a certain customer, who in turn installs the content on
its equipment that it sells to its customers. The content license is characterized as a “right to use intellectual property
as it exists at the point in time at which the license is granted,” meaning the Company is not expected to undertake activities
that affect the intellectual property or any such activities would not affect the intellectual property the customer is using.
The content license is considered to be on consignment, and the Company retains title of the licensed content throughout the license
period. The Company’s customer has no obligation to pay for the licensed content until the customer sells and installs the
content to its customer. Accordingly, the Company recognizes revenue at the point in time when such installation occurs. The Company
recognizes costs related to developing the content during the period incurred.
Professional
Development Revenue
– Depending on the type of development work the Company is performing, the Company will recognize
revenue, and associated costs, at the point in time when the Company satisfies each performance obligation, which is generally
when the customer can direct the use of, and obtain substantially all of the remaining benefits of the goods or service provided.
For services provided over time, the corresponding revenue is generally recognized over the time the Company provides such services.
Any payments received before satisfying the performance obligations are recorded as deferred revenue and recognized as revenue
when or as such obligations are satisfied. The Company does not have unbilled revenue assets associated with professional development
services.
(3)
Basic and Diluted Earnings Per Common Share
The
Company computes basic and diluted earnings per common share in accordance with the provisions of FASB ASC No. 260,
Earnings
per Share
. Basic earnings per share excludes the dilutive effects of options, warrants and other convertible securities. Diluted
earnings per share reflects the potential dilution of securities that could share in the Company’s earnings. The number
of shares of the Company’s common stock subject to options, warrants, and convertible preferred stock excluded from computing
diluted net loss per common share was approximately 419,000 and 393,000 as of September 30, 2018 and 2017, respectively, as their
effect was anti-dilutive.
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
222,000
|
|
|
$
|
(184,000
|
)
|
|
$
|
(311,000
|
)
|
|
$
|
(438,000
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
- basic
|
|
|
2,857,000
|
|
|
|
2,505,000
|
|
|
|
2,628,000
|
|
|
|
2,419,000
|
|
Effects of
diluted common shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average
common shares outstanding - diluted
|
|
|
2,857,000
|
|
|
|
2,505,000
|
|
|
|
2,628,000
|
|
|
|
2,419,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share -
basic
|
|
$
|
0.08
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
Net income (loss) per common share -
diluted
|
|
$
|
0.08
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.18
|
)
|
(4)
SHAREHOLDERS’ EQUITY
Stock-based
Compensation
The
Company’s stock-based compensation plans include the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan (the “Amended
2010 Plan”) and the NTN Buzztime, Inc. 2014 Inducement Plan (the “2014 Plan”). The Amended 2010 Plan provides
for the grant of up to 240,000 share-based awards and expires in February 2020. 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, 2018, approximately 66,000 share-based awards were available for grant under
the Amended 2010 Plan and there were no share-based awards available for grant under the 2014 Plan. The nominating and corporate
governance/compensation committee of the Company’s board of directors administers the Company’s stock-based compensation
plans. Among other things, the committee 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.
Until
September 30, 2018, the Company also maintained the NTN Buzztime, Inc. 2004 Performance Incentive Plan. That plan expired in September
2009 and all awards granted under that plan expired as of September 30, 2018, in accordance with that plan’s terms.
The
Company records stock-based compensation in accordance with ASC No. 718
, Compensation – Stock Compensation
and ASC
No. 505-50,
Equity – Equity-Based Payments to Non-Employees.
The Company estimates the fair value of stock options
using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite
service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line
single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair
value on the grant date and is periodically re-measured as the underlying awards vest.
The
Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term
of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise
patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate,
the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend
yield assumption is based on the Company’s history and expectation of dividend payouts.
The
following weighted-average assumptions were used for the stock options granted during the three and nine months ended September
30, 2018 and 2017 under the ASC No. 718 requirements:
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Weighted average risk-free rate
|
|
|
2.82
|
%
|
|
|
2.22
|
%
|
|
|
2.87
|
%
|
|
|
1.77
|
%
|
Weighted average volatility
|
|
|
113.90
|
%
|
|
|
114.12
|
%
|
|
|
113.20
|
%
|
|
|
114.56
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected term
|
|
|
5.92
years
|
|
|
|
7.29
years
|
|
|
|
7.06
years
|
|
|
|
7.26
years
|
|
The
Company granted stock options to purchase approximately 250 and 1,000 shares of common stock during the three months ended September
30, 2018 and 2017, respectively, and stock options to purchase approximately 2,000 and 5,000 shares of common stock during the
nine months ended September 30, 2018 and 2017, respectively. No options were exercised during either of the three or nine months
ended September 30, 2018 or 2017.
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 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. During the nine months ended September 30, 2018, the Company granted 53,000 restricted stock units
with a grant date fair value of $6.04 per restricted stock unit. Of the 53,000 restricted stock units, 25,000 and 15,000 were
granted to Messrs. Ram Krishnan and Allen Wolff, respectively, and are subject to accelerated vesting provisions in their respective
employment agreements. The Company did not grant restricted stock units during the three months ended September 30, 2018, nor
did it grant restricted stock units during the three or nine months ended September 30, 2017.
Under
the 2010 Plan, 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. During the three and nine months ended September 30, 2018, approximately 9,000
restricted stock units vested and were settled, and as a result of employees electing to satisfy applicable withholding taxes
by having the Company withhold shares, approximately 6,000 shares of common stock were issued.
The
Company estimates forfeitures at the time of grant and revises if necessary in subsequent periods if actual forfeiture rates differ
from those estimates. Forfeitures were estimated based on historical activity for the Company. Stock-based compensation expense
for the three months ended September 30, 2018 and 2017 was $117,000 and $113,000, respectively, and $368,000 and $347,000 for
the nine months ended September 30, 2018 and 2017, respectively, and is expensed in selling, general and administrative expenses
and credited to additional paid-in-capital.
(5)
DEBT
Term
Loan
On
September 28, 2018, the Company entered into a loan and security agreement with Avidbank. The following is a summary of the material
terms of that agreement:
|
●
|
Avidbank
loaned the Company $4,000,000 as a one-time 48-month term loan, all of which the Company used to pay-off the $4,050,000 of
principal it borrowed from East West Bank (“EWB”). The Company used its cash on hand to pay the remaining $50,000
it borrowed from EWB plus accrued and unpaid interest.
|
|
|
|
|
●
|
The
Company must make monthly principal payments of $83,333.33 plus accrued and unpaid interest on the last business day of each
month commencing on October 31, 2018 and through the loan’s maturing date, September 30, 2022.
|
|
|
|
|
●
|
Other
than during the continuance of an event of default, the loan bears interest at a variable rate per annum equal to the prime
rate as set forth in
The Wall Street Journal
plus 1.75%.
|
|
|
|
|
●
|
The
Company granted and pledged to Avidbank a first-priority security interest in all its existing and future personal property.
|
|
|
|
|
●
|
The
Company must comply with these financial covenants:
|
|
|
|
|
|
|
o
|
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.
|
|
|
|
|
|
|
|
|
o
|
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.
|
|
●
|
Subject
to customary exceptions, the Company is prohibited from borrowing additional indebtedness.
|
|
|
|
|
●
|
The
Company paid $20,000 to Avidbank as a facility fee upon entering into the loan and security agreement.
|
|
|
|
|
●
|
If
the Company prepays the loan before September 28, 2019, it must pay a prepayment fee of 1.75% of the principal amount repaid,
and if the Company prepays the loan after such date but before September 28, 2020, it must pay a prepayment fee of 1.00% of
the principal amount prepaid. There is no prepayment fee if the Company prepays the loan after September 28, 2020.
|
The
loan and security agreement includes customary representations, warranties and covenants (affirmative and negative), including
restrictive covenants that, subject to specified exceptions, limit the Company’s ability to: dispose of its business or
property; merge or consolidate with or into any other business organization; incur or prepay additional indebtedness; create or
incur any liens on its property; declare or pay any dividend or make a distribution on any class of the Company’s stock;
or enter specified material transactions with its affiliates.
The
loan and security agreement also includes customary events of default, including: payment defaults; breaches of covenants following
any applicable cure period; material breaches of representations or warranties; the occurrence of a material adverse effect; events
relating to bankruptcy or insolvency; and the occurrence of an unsatisfied material judgment against the Company. Upon the occurrence
of an event of default, Avidbank may declare all outstanding obligations immediately due and payable, do such acts as it considers
necessary or reasonable to protect its security interest in the collateral, and take such other actions as are set forth in the
loan and security agreement.
As
of September 30, 2018, $4,000,000 remained outstanding, with $1,000,000 recorded in current portion of long-term debt and the
remaining $3,000,000 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 will be amortized to interest expense beginning in
October 2018 using the effective interest rate method over the life of the loan. The debt issuance costs are recorded as a reduction
of long term debt. As of September 30, 2018, the Company was in compliance with all covenants.
In
connection with entering into the loan and security agreement with Avidbank, the amended and restated loan and security agreement
the Company entered into with EWB on November 29, 2017, as amended on March 12, 2018, terminated on September 28, 2018.
Equipment
Notes Payable
In
May 2013, the Company entered into a financing arrangement with a lender under which the Company may borrow funds to purchase
certain equipment. Initially, the maximum amount the Company could borrow under this financing arrangement was $500,000. Over
time, the lender increased that maximum amount, and as of September 30, 2018, the maximum amount was $9,690,000, all of which
has been borrowed. In April 2015, the Company used approximately $3,381,000 of the proceeds borrowed under a prior credit facility
with EWB to pay down a portion of the principal amount the Company had borrowed under this financing arrangement, accrued interest
and a prepayment fee.
The
Company was able to borrow up to the maximum amount available under this financing arrangement in tranches as needed. Each tranche
borrowed through August 2015 incurred interest at 8.32% per annum; the interest for tranches borrowed thereafter was reduced to
rates between 7.32% to 8.05% per annum. With respect to the first $1,000,000 in the aggregate borrowed, principal and interest
payments are due in 36 equal monthly installments. With respect to amounts borrowed in excess of the first $1,000,000 in the aggregate,
the first monthly payment will be equal to 24% of the principal amount outstanding, and the remaining principal and interest due
is payable in 35 equal monthly installments. The Company granted the lender a first security interest in the equipment purchased
with the funds borrowed. This equipment lender entered into a subordination agreement with EWB.
As
of September 30, 2018, $104,000 was outstanding under this financing arrangement, all of which is recorded in current portion
of long-term debt on the accompanying consolidated balance sheet. The Company does not expect the lender to lend any additional
funds under this financing arrangement.
(6)
NEW LEASE
In
August 2018, the Company entered into an agreement to lease approximately 16,000 square feet of office space in Carlsbad, California.
The Company intends to relocate its corporate headquarters to this new location. The term of the lease is from December 2018 through
April 2026. The Company has a one-time option to renew the lease for an additional five-year extension. Base rent is abated by
50% for months two through nine of the term. Base rent escalates annually beginning in December 2019 by approximately 3.5% per
year. The Company will pay its share of the lessor’s operating expenses, which includes utilities, insurance, taxes, and
other operating expenses. The minimum annual rent payments under this lease are as follows:
Year
Ending December 31,
|
|
|
Minimum
Payments
|
|
2018
|
|
|
$
|
47,000
|
|
2019
|
|
|
|
377,000
|
|
2020
|
|
|
|
584,000
|
|
2021
|
|
|
|
604,000
|
|
2022
|
|
|
|
625,000
|
|
Thereafter
|
|
|
|
2,249,000
|
|
Total
|
|
|
$
|
4,486,000
|
|
The
lease requires the Company to issue a letter of credit to the lessor in the amount of $250,000 as security, which amount will
reduce by $50,000 each year beginning December 1, 2019, provided there has been no default under the lease. The Company is currently
working with Avidbank to issue the letter of credit, which the Company expects will be issued during the fourth quarter of 2018.
Avidbank will require the Company to deposit $250,000 in a restricted cash account maintained with the bank, which amount will
reduce in alignment with the amount required under the letter of credit each year. The Company will record the $250,000 deposit
as restricted cash on its balance sheet once the deposit has been made, which the Company expects to occur during the fourth quarter
of 2018. The amount deposited in such account will not count toward the covenant under the Avidbank loan and security agreement
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.
The Company’s existing
office lease of approximately 28,000 square feet in Carlsbad, California expires in November 2018.
(7)
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, 2018 and December 31, 2017, $293,000 and $345,000 of foreign currency translation
adjustments were recorded in accumulated other comprehensive income, respectively.
(8)
RECENT ACCOUNTING PRONOUNCEMENTS
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, and in July 2018, the FASB issued ASU No. 2018-11,
Leases (Topic 842)
: Targeted Improvements. These updates require 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 assets, which is an asset that represents the lessee’s right to use, or control the use of, a
specified asset for the lease term. These updates are effective for fiscal periods beginning after December 15, 2018 (which is
January 1, 2019 for the Company), including interim periods within those fiscal years. 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. Although the Company has not completed its assessment of the full impact on its consolidated
financial statements of the adoption of Topic 842, the Company currently believes that the most significant changes will be related
to the recognition of a right-to-use asset and corresponding lease liability on its consolidated balance sheet for the new facility
lease described in Note 6.
In
March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118
. This ASU incorporates SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which
addresses the accounting implications of the major tax reform legislation, Public Law No. 115-97, commonly referred to as the
Tax Cuts and Jobs Act (the “2017 Tax Act”), enacted on December 22, 2017. SAB 118 allows a company to record provisional
amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. The Company
continues to analyze the effect that the 2017 Tax Act will have on its consolidated financial statements.
In
the first quarter of 2018, the Company adopted ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The standard
clarifies the presentation of restricted cash and cash equivalents and requires companies to include restricted cash and cash
equivalents in the beginning and ending balances of cash and cash equivalents on the statement of cash flows. The standard also
requires additional disclosures to describe the amount and detail of the restriction by balance sheet line item. Accordingly,
the Company will include the $250,000 restricted cash described in Note 6 as a component of cash, cash equivalents and restricted
cash on its balance sheet once such deposit is made into a restricted cash account, which is expected to occur during the fourth
quarter of 2018.
In
June 2018, the FASB issued ASU No. 2018-07 (Topic 718),
Improvements to Nonemployee Share-Based Payment Accounting.
This
ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees
and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with
the accounting for employee share-based compensation. The guidance is effective for fiscal years beginning after December 15,
2018 (which is January 1, 2019 for the Company), including interim reporting periods within that fiscal year. Early adoption is
permitted, but no earlier than an entity’s adoption date of Topic 606. The Company does not expect that the adoption of
this ASU will have a significant impact on its consolidated financial statements.
(9)
CONCENTRATIONS OF RISK
Significant
Customer
The
table below sets forth the approximate amount of revenue the Company generated from Buffalo Wild Wings corporate-owned restaurants
and its franchisees during the periods indicated and the percentage of total revenue that such amount represents for such periods:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
$
|
1,971,000
|
|
|
$
|
2,033,000
|
|
|
$
|
7,209,000
|
|
|
$
|
6,517,000
|
|
% of total revenue
|
|
|
33
|
%
|
|
|
39
|
%
|
|
|
41
|
%
|
|
|
41
|
%
|
As
of September 30, 2018 and December 31, 2017, approximately $200,000 and $191,000, respectively, was included in accounts receivable
from Buffalo Wild Wings corporate-owned restaurants and its franchisees.
Sole
Equipment Supplier
The
Company purchases the tablets, cases and charging trays used for its tablet platform from one unaffiliated third-party manufacturer.
The Company has no alternative manufacturer for its tablets and has no alternative manufacturer or device for the cases or charging
trays.
Item
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
report and the documents incorporated by reference, if any, contain “forward-looking statements” – that is statements
related to future events, results, performance, prospects and opportunities, including statements related to our strategic plans
and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry trends and
our financial position. Forward-looking statements are based on information currently available to us, on our current expectations,
estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions of management.
Forward looking statements often contain words such as “expects,” “anticipates,” “could,”
“targets,” “projects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” “may,” “will,” “would,” and similar expressions. In addition, any
statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and
other characterizations of future events or circumstances, are forward-looking statements. Forward-looking statements by their
nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ
materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or
contribute to such differences include (1) our ability to compete effectively within the highly competitive interactive games,
entertainment and marketing services industries, (2) the impact of new products and technological change, especially in the mobile
and wireless markets, on our operations and competitiveness, (3) our ability to maintain or improve our relationship with Buffalo
Wild Wings, who together with its franchisees accounted for a significant portion of our revenues, (4) our ability to adequately
protect our proprietary rights and intellectual property, (5) our ability to raise additional funds on favorable terms; we have
borrowed substantially all amounts available to us under existing credit facilities and, subject to limited exceptions, our loan
and security agreement with Avidbank prohibits us from borrowing additional amounts from other lenders, (6) our ability to satisfy
our payment obligations and comply with financial and other covenants under our loan agreement with Avidbank, which lender has
a first-priority security interest in all our existing and future personal property, including our intellectual property, subject
to limited exceptions; (7) our ability to meet financial and other growth expectations of our investors, analysts and other market
participants and commentators, including expectations relating to our site count, cash flow and EBITDA; (8) our ability to maintain
an adequate supply of the tablet and related equipment used in our tablet platform, (9) our ability to significantly grow our
subscription revenue and implement our other business strategies, (10) our ability to successfully and efficiently manage
the design, manufacturing and assembly process of the tablet and related equipment used in our tablet platform and (11)
the other risks and uncertainties described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2017, and described in other documents we file from time to time with the Securities and Exchange
Commission, or SEC, including this report and our other Quarterly Reports on Form 10-Q. Readers are urged not to place undue reliance
on the forward-looking statements in this report or incorporated by reference herein, which speak only as of the date of this
report. Except as required by law, we undertake no obligation to revise or update any such forward-looking statement to reflect
future events or circumstances.
INTRODUCTION
Management’s
discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read with,
the accompanying unaudited condensed consolidated financial statements and notes, included in Item 1 of this Quarterly Report
on Form 10-Q, to help provide an understanding of our financial condition, the changes in our financial condition and our results
of operations. All dollar amounts in this discussion are rounded to the nearest thousand. Our discussion is organized as follows:
|
●
|
Overview
and Highlights
. This section generally describes our business and significant events and transactions we believe are important
in understanding our financial condition and results of operations.
|
|
|
|
|
●
|
Critical
Accounting Policies
. This section lists our significant accounting policies, including any material changes in our critical
accounting policies, estimates and judgments during the three and nine months ended September 30, 2018 from those described
in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of
our Annual Report on Form 10-K for the year ended December 31, 2017.
|
|
|
|
|
●
|
Results
of Operations
. This section provides an analysis of our results of operations presented in the accompanying unaudited
condensed consolidated statements of operations by comparing the results for the three and nine months ended September 30,
2018 to the results for the three and nine months ended September 30, 2017.
|
|
|
|
|
●
|
Liquidity
and Capital Resources
. This section provides an analysis of our historical cash flows, and our future capital requirements.
|
|
|
|
|
●
|
Recent
Accounting Pronouncements.
This section provides information related to new or updated accounting guidance that may impact
our consolidated financial statements.
|
|
|
|
|
●
|
Off-Balance
Sheet Arrangements
. This section provides information related to any off-balance sheet arrangement we may have that would
affect our consolidated finance statements.
|
OVERVIEW
AND HIGHLIGHTS
About
Our Business and How We Talk About It
We
deliver interactive entertainment and innovative technology, including performance analytics and secure payment with Europay,
MasterCard® and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple, Android
and Samsung Pay. Generally used in bars and restaurants in North America, our tablets and technology offer engaging solutions
to establishments with guests who experience dwell time, such as casinos and senior living centers. Casual dining venues subscribe
to our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade
games, customized menus and self-service dining features. Our platform improves operating efficiencies, creates connections among
the players and venues, and amplifies guests’ positive experiences. Our tablet platform was commercially launched during
2013 and then scaled during 2014. We also continue to support our legacy network product line, which we call our Classic platform.
We
generate revenue by charging subscription fees for our service to network subscribers, by leasing equipment to certain network
subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and as part
of customized games, by licensing our content for use with third-party equipment, from providing professional services (such as
developing certain functionality within our platform for customers), and from pay-to-play single player games.
Since
2015, over 115 million games have been played on our network annually, and as of September 30, 2018, approximately 56% of our
network subscriber venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Buffalo Wings
& Rings, Old Chicago, Native Grill & Wings, Houlihans, Beef O’Brady’s, Boston Pizza, and Arooga’s.
We
own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks
to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our
property. Other trademarks are the property of their respective owners.
Unless
otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us”
and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers”
or “customers” refer to venues that subscribe to our network service; (c) to “consumers” or “players”
refer to the individuals that engage in our games, events, and entertainment experiences available at our customers’ venues
and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant) of our customers at which
our games, events, and entertainment experiences are available to consumers.
Our
Strategy and Business Updates
Grow
business beyond restaurant and bar industry
. One of our major initiatives has been and continues to be to expand our
business beyond the restaurant and bar industry through partnerships and product extensions. During the first quarter of 2018,
we agreed to sell our tablets to a third-party who will use our tablets and operating system to deliver their services in local
jails. In July 2018, we entered into a revenue share agreement with this partner, under which our partner will make our single
player games available for a fee to inmates. Earlier in 2017, we began a relationship with a third-party who is licensing our
trivia content for use in casino gaming machines and is leasing our tablets for use in retail settings to complete loyalty/reward
program transactions.
Launch
expanded product offerings
. We continue to focus on developing new experiences and new products that we believe will
help differentiate our offerings from those of our competitors and will provide us the ability to scale our business
beyond our traditional entertainment offering.
New
Site Hub
. A piece of the equipment we install in our customers’ venues is a personal computer that acts as a server
from which our content is streamed to the tablets within the venue. We are working on a smaller form factor for the personal computer
that, besides being physically smaller, would be available at a lower cost and would reduce labor-intensive installation costs.
We believe that the site hub will lead to new opportunities, which could include the ability to display video, highlights, dynamic
web content, and app content, in addition to delivering our historical offerings within venues. We are currently testing the first
version of the site hub in-house and are working toward making it commercially available during the first quarter of 2019.
Mobile
Offerings.
|
●
|
Mobile Live.
We are developing a mobile version of our live trivia product that allows customers and trivia hosts to
start their own trivia events. These events usually take place in a single venue and the experience is tied to that venue.
Our mobile live product is intended to improve the experience by replacing pen and paper, providing more impressions and registrations,
and allowing our customers to know who is participating in the event.
|
|
|
|
|
●
|
Mobile
Trivia
.
We are
developing a version of our system that allows players to use their own mobile device to play our network games inside our
customers’ venues.
|
When
these mobile offerings become available commercially, they will be our easiest to adopt, lowest cost of entry solutions, and may
serve as a test for a venue contemplating a more significant investment.
Single
Player Games
. During the second quarter of 2018, we released our first internally-built single player arcade game,
Buzztime Soccer,
for our tablet platform, and we expect to release several more internally-built single player games in
the coming weeks. Previously, we purchased these games from third party aggregators, sometimes at significant cost.
Buffalo
Wild Wings
. In March 2017, Buffalo Wild Wings chose us to be its provider of digital menu, order, and payment functionality.
In November 2017, we expected to begin rolling out our improved tablet platform system at certain Buffalo Wild Wings locations
during the first quarter of 2018 and, after an initial set of locations was running smoothly, throughout the rest of the Buffalo
Wild Wings corporate and franchise locations with which we had partnered. Due to the acquisition of Buffalo Wild Wings by Arby’s
Restaurant Group, Inc. (which renamed itself Inspire Brands Inc.) in February 2018 and to the associated changes with Buffalo
Wild Wings’ operations, the rollout of our expanded functionality tablet platform system was put on hold to allow its new
ownership to assess all the programs at Buffalo Wild Wings. The order, payment and guest insights functionality available through
our improved tablet system was deployed in a pilot study at 31 Buffalo Wild Wings locations between April 2018 and September 2018.
In October 2018, Buffalo Wild Wings informed us that it determined not to rollout our order, payment and guest insights functionality
and that its relationship with us would continue in accordance with existing agreements we entered into in the ordinary course
of business, and which terminate in accordance with their terms in November 2019.
Advertising
Partnerships
. We believe that if we lower the price of our tablet platform, we can acquire more market share. One way to lower
the price is by subsidizing our costs through advertising. We are currently working with advertising sales companies to help us
improve our advertisement sales and with an advertisement technology company to improve our ad loading, management, and delivery
and testing capabilities.
Recent
Developments
New
Term Loan
In
September 2018, we entered into a loan and security agreement with Avidbank that provides for a one-time $4,000,000 48-month term
loan, all of which we used to pay-off the $4,050,000 of principal we borrowed from East West Bank (“EWB”). We used
our cash on hand to pay the remaining $50,000 we borrowed from EWB plus accrued and unpaid interest. We granted and pledged to
Avidbank a first-priority security interest in all our existing and future personal property, and, subject to customary exceptions,
we are prohibited from borrowing additional indebtedness. We must comply with these 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 we have in deposit accounts or securities accounts maintained with Avidbank must be
not less than $2,000,000 at all times.
|
In
connection with entering into the loan and security agreement with Avidbank, the amended and restated loan and security agreement
we entered into with EWB on November 29, 2017, as amended on March 12, 2018, terminated on September 28, 2018.
Non-compliance
with NYSE American continued listing standard
As
previously reported, in March 2018, we received a letter from the NYSE Regulation Inc. stating that we were not in compliance
with NYSE American LLC listing standards, specifically, Section 1003(a)(iii) of the Company Guide, because we reported stockholders’
equity of less than $6 million as of December 31, 2017 and had net losses in five of our most recent fiscal years ended December
31, 2017. In April 2018, we submitted a plan to NYSE Regulation advising of actions we have taken or will take to regain compliance
with Section 1003(a)(iii) by March 20, 2019. In April 2018, NYSE Regulation notified us that it has accepted our plan and granted
us a plan period that extends through March 20, 2019 to regain compliance with Section 1003(a)(iii).
The
listing of our common stock on the NYSE American is being continued during the plan period pursuant to an extension. The NYSE
Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance
with Section 1003(a)(iii) by March 20, 2019 or if we do not make progress consistent with our plan during the plan period, NYSE
Regulation staff will initiate delisting proceedings as appropriate. See “PART II—ITEM 1A. RISK FACTORS—“Our
common stock could be delisted or suspended from trading on the NYSE American if we do not regain compliance with continued listing
criteria with which we are currently not compliant or if we fail to meet any other continued listing criteria,” below. Consistent
with the initiatives outlined in our plan to regain compliance, we raised approximately $1.4 million in a registered direct offering
that closed in June 2018. In order for NYSE Regulation to determine that we have regained compliance, we must have stockholders’
equity of $6 million or more for two consecutive quarters. After giving effect to the amount raised in the offering and our financial
results for the second and third quarters of 2018, we believe we are on the path to regaining compliance with Section 1003(a)(iii).
NYSE Regulation will determine if and when we have regained compliance.
CRITICAL
ACCOUNTING POLICIES
The
discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis,
we evaluate our estimates, including those related to deferred costs and revenues, depreciation of fixed assets, the provision
for income taxes including the valuation allowance, stock-based compensation, bad debts, investments, impairment of software development
costs, goodwill, fixed assets, intangible assets and contingencies, including the reserve for sales tax inquiries. We base our
estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting
policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results
and require management’s most subjective judgments.
There
have been no material changes in our critical accounting policies, estimates and judgments during the three and nine months ended
September 30, 2018 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2017, except for
Revenue from
Contracts with Customers (Topic 606)
. We have
completed the process of evaluating the effect
of adopting Topic 606 and have determined that the timing and amount of revenue recognized based on Topic 606 is consistent with
our revenue recognition policy under previous guidance, and accordingly, there was no transition adoption adjustment necessary
upon the adoption of the Topic 606 guidance
. (See Note 2 to the accompanying unaudited condensed consolidated financial
statements.)
RESULTS
OF OPERATIONS
Three
and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017
We
recognized net income of $222,000 and incurred a net loss of $311,000 for the three and nine months ended September 30, 2018,
respectively, compared to incurring a net loss of $184,000 and $438,000 for the three and nine months ended September 30, 2017.
Revenue
The
table below summarizes our revenue by type for the period indicated:
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total Revenue
|
|
|
$
|
|
|
%
of Total Revenue
|
|
|
$
Change
|
|
|
%
Change
|
|
Subscription revenue
|
|
|
4,005,000
|
|
|
|
67
|
%
|
|
|
4,279,000
|
|
|
|
82
|
%
|
|
|
(274,000
|
)
|
|
|
(6
|
%)
|
Hardware revenue
|
|
|
1,158,000
|
|
|
|
19
|
%
|
|
|
116,000
|
|
|
|
2
|
%
|
|
|
1,042,000
|
|
|
|
898
|
%
|
Other revenue
|
|
|
841,000
|
|
|
|
14
|
%
|
|
|
803,000
|
|
|
|
16
|
%
|
|
|
38,000
|
|
|
|
5
|
%
|
Total
|
|
|
6,004,000
|
|
|
|
100
|
%
|
|
|
5,198,000
|
|
|
|
100
|
%
|
|
|
806,000
|
|
|
|
16
|
%
|
|
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
%
of Total Revenue
|
|
|
|
$
|
|
|
|
%
of Total Revenue
|
|
|
|
$
Change
|
|
|
|
%
Change
|
|
Subscription revenue
|
|
|
12,111,000
|
|
|
|
70
|
%
|
|
|
12,737,000
|
|
|
|
80
|
%
|
|
|
(626,000
|
)
|
|
|
(5
|
%)
|
Hardware revenue
|
|
|
2,427,000
|
|
|
|
14
|
%
|
|
|
524,000
|
|
|
|
3
|
%
|
|
|
1,903,000
|
|
|
|
363
|
%
|
Other revenue
|
|
|
2,878,000
|
|
|
|
16
|
%
|
|
|
2,717,000
|
|
|
|
17
|
%
|
|
|
161,000
|
|
|
|
6
|
%
|
Total
|
|
|
17,416,000
|
|
|
|
100
|
%
|
|
|
15,978,000
|
|
|
|
100
|
%
|
|
|
1,438,000
|
|
|
|
9
|
%
|
Subscription
revenue decreased for the three and nine months ended September 30, 2018 primarily due to lower average site count and lower average
revenue per site when compared to the same periods in 2017. If we don’t extend the Buffalo Wild Wings relationship beyond
November 2019 or add network subscribers to sufficiently offset the subscription revenue we currently receive from Buffalo Wild
Wings corporate-owned restaurants and its franchisees, we expect our subscription revenue to materially decrease beginning in
the first quarter of 2020, which is the first full quarter after our existing agreements with Buffalo Wild Wings corporate-owned
restaurants and its franchisees terminate in accordance with their terms. See Note 9 to the accompanying unaudited condensed consolidated
financial statements. During the three and nine months ended September 30, 2018, hardware revenue increased primarily due to the
sale in the third quarter of 2018 of our tablets to a third-party who is using our tablets and operating system to deliver its
services in local jails. We expect the amount of hardware revenue under sales-type lease arrangements to increase during each
of the fourth quarter of 2018 and first quarter of 2019 as tablet sales under sales-type lease arrangements are recognized (and
we would recognize a corresponding decrease in deferred revenue). We are uncertain if we will enter into sales-type lease arrangements
thereafter. We expect the amount of hardware revenue under other equipment sale contracts to fluctuate quarter to quarter in correlation
with customer contracts. We do not expect to enter into an equipment sale contract similar to the one we entered into with the
third-party who is using our tablets and operating system to deliver its services in local jails every quarter or even annually.
Other revenue increased for the three and nine months ended September 30, 2018 due primarily to an increase in advertising and
professional services when compared to the same periods in 2017.
Geographic
breakdown of our site count for network subscribers was:
|
|
Network
Subscribers
as
of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
|
2,521
|
|
|
|
2,599
|
|
Canada
|
|
|
145
|
|
|
|
135
|
|
Total
|
|
|
2,666
|
|
|
|
2,734
|
|
Direct
Costs and Gross Margin
A
comparison of direct costs and gross margin for the period indicated is shown in the table below:
|
|
Three
months ended
September
30,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
%
Change
|
|
Revenues
|
|
$
|
6,004,000
|
|
|
$
|
5,198,000
|
|
|
$
|
806,000
|
|
|
|
16
|
%
|
Direct Costs
|
|
|
2,115,000
|
|
|
|
1,539,000
|
|
|
|
576,000
|
|
|
|
37
|
%
|
Gross
Margin
|
|
$
|
3,889,000
|
|
|
$
|
3,659,000
|
|
|
$
|
230,000
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin Percentage
|
|
|
65
|
%
|
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
%
Change
|
|
Revenues
|
|
$
|
17,416,000
|
|
|
$
|
15,978,000
|
|
|
$
|
1,438,000
|
|
|
|
9
|
%
|
Direct Costs
|
|
|
6,019,000
|
|
|
|
5,013,000
|
|
|
|
1,006,000
|
|
|
|
20
|
%
|
Gross
Margin
|
|
$
|
11,397,000
|
|
|
$
|
10,965,000
|
|
|
$
|
432,000
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin Percentage
|
|
|
65
|
%
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
For
the three months ended September 30, 2018, the increase in direct costs was primarily due to increased equipment expense of $557,000
related to higher hardware revenue and increased depreciation expense of $147,000 for capitalized site equipment and software
development programs, offset by a decrease in other miscellaneous direct costs of $129,000 when compared to the same period in
2017.
For
the nine months ended September 30, 2018, the increase in direct costs was primarily due to increased equipment expense of $933,000
related to higher sale-type lease revenue and equipment sales and increased depreciation expense of $359,000 for capitalized site
equipment and software development programs offset by decreased freight expense of $134,000 and other miscellaneous direct costs
of $151,000 when compared to the same period in 2017.
Operating
Expenses
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
%
Change
|
|
Selling, general and administrative
|
|
$
|
3,444,000
|
|
|
$
|
3,636,000
|
|
|
$
|
(192,000
|
)
|
|
|
(5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (non-direct)
|
|
$
|
75,000
|
|
|
$
|
76,000
|
|
|
$
|
(1,000
|
)
|
|
|
(1
|
%)
|
|
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
Change
|
|
|
|
%
Change
|
|
Selling, general and administrative
|
|
$
|
11,123,000
|
|
|
$
|
11,628,000
|
|
|
$
|
(505,000
|
)
|
|
|
(4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (non-direct)
|
|
$
|
244,000
|
|
|
$
|
250,000
|
|
|
$
|
(6,000
|
)
|
|
|
(2
|
%)
|
Selling,
General and Administrative Expenses
The
decrease in selling, general and administrative expenses for the three months ended September 30, 2018 was primarily due to decreased
payroll and related expense of $272,000, offset by increased professional fees of $64,000 when compared to the same period in
2017.
The
decrease in selling, general and administrative expenses for the nine months ended September 30, 2018 was primarily due to decreased
payroll and related expense of $651,000, decreased marketing expense of $126,000 and decreased operating supplies expenses of
$53,000, offset by increased professional fees of $316,000, in each case, when compared to the same period in 2017.
Depreciation
and Amortization Expense
The
decrease in depreciation and amortization expense for the three and nine months ended September 30, 2018 compared to the same
periods in 2017 was primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.
Other
(Expense) Income, Net
|
|
Three
months ended
September
30,
|
|
Decrease
in other
|
|
|
|
2018
|
|
|
2017
|
|
|
expense,
net
|
|
Total other (expense) income,
net
|
|
$
|
(138,000
|
)
|
|
$
|
(122,000
|
)
|
|
$
|
(16,000
|
)
|
|
|
Nine
months ended
September
30,
|
|
Increase
in other
|
|
|
|
2018
|
|
|
2017
|
|
|
expense,
net
|
|
Total other (expense) income,
net
|
|
$
|
(305,000
|
)
|
|
$
|
496,000
|
|
|
$
|
(801,000
|
)
|
For
the three months ended September 30, 2018, the increase in other expense, net was primarily related to decreased interest expense
resulting from lower debt balances and increased foreign currency exchange losses related to the operations of our Canadian subsidiary.
For
the nine months ended September 30, 2018, the increase in other expense, net was primarily related to the receipt of a one-time
payment from a supplier during the 2017 period related to a supply chain matter that was resolved in exchange for such payment
and the absence of a similar event during the 2018 period.
Income
Taxes
|
|
Three
months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Provision for income taxes
|
|
$
|
(10,000
|
)
|
|
$
|
(9,000
|
)
|
|
|
Nine
months ended September 30,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Provision for income taxes
|
|
$
|
(36,000
|
)
|
|
$
|
(21,000
|
)
|
During
2018, we expect to incur state income tax liability related to our U.S. operations and income tax liability in Canada related
to our operations in Canada. We have established a full valuation allowance for substantially all deferred tax assets, including
our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable
income to realize these assets. The effective tax rate differs from the statutory tax rate due primarily to our full valuation
allowance.
EBITDA—Consolidated
Operations
Earnings
before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance
with GAAP. Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is
included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other
interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation
and amortization charges compared to their net income or loss calculation in accordance with GAAP.
The
table below shows a reconciliation of our consolidated net income (loss) calculated in accordance with GAAP to EBITDA for the
period indicated. EBITDA should not be considered a substitute for, or superior to, net income (loss) calculated in accordance
with GAAP.
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income (loss) per GAAP
|
|
$
|
222,000
|
|
|
$
|
(184,000
|
)
|
|
$
|
(311,000
|
)
|
|
$
|
(438,000
|
)
|
Interest expense, net
|
|
|
118,000
|
|
|
|
106,000
|
|
|
|
305,000
|
|
|
|
388,000
|
|
Income tax provision
|
|
|
10,000
|
|
|
|
9,000
|
|
|
|
36,000
|
|
|
|
21,000
|
|
Depreciation
and amortization
|
|
|
732,000
|
|
|
|
586,000
|
|
|
|
2,068,000
|
|
|
|
1,716,000
|
|
EBITDA
|
|
$
|
1,082,000
|
|
|
$
|
517,000
|
|
|
$
|
2,098,000
|
|
|
$
|
1,687,000
|
|
LIQUIDITY
AND CAPITAL RESOURCES
As
of September 30, 2018, we had cash and cash equivalents of $3,078,000 compared to cash and cash equivalents of $3,378,000 as of
December 31, 2017.
In
September 2018, we entered into a loan and security agreement with Avidbank, under which we borrowed $4,000,000 in the form of
a one-time 48-month term loan, all of which we used to pay-off the $4,050,000 of principal we borrowed from East West Bank (“EWB”).
We used our cash on hand to pay the remaining $50,000 we borrowed from EWB plus accrued and unpaid interest. The amended and restated
loan and security agreement we entered into with EWB on November 29, 2017, as amended on March 12, 2018, terminated in connection
with such payments.
As
of September 30, 2018, $4,000,000 was outstanding under the Avidbank term loan, with $1,000,000 recorded in current portion of
long-term debt and the remaining $3,000,000 recorded as long-term debt on our balance sheet. We recorded debt issuance costs of
$23,000, which includes the $20,000 facility fee. The debt issuance costs will be amortized to interest expense beginning in October
2018 using the effective interest rate method over the life of the loan. The debt issuance costs are recorded as a reduction of
long term debt.
We
must comply with these financial covenants under the loan and security agreement:
|
o
|
Our
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
|
|
|
|
|
o
|
The
aggregate amount of unrestricted cash we have in deposit accounts or securities accounts maintained with Avidbank must be
not less than $2,000,000 at all times.
|
As
of September 30, 2018, we were in compliance with all covenants.
Subject
to customary exceptions, under the loan and security agreement, we are prohibited from borrowing additional indebtedness. We granted
and pledged to Avidbank a first-priority security interest in all our existing and future personal property. We paid $20,000 to
Avidbank as a facility fee upon entering into the loan and security agreement. If we prepay the Avidbank loan before September
28, 2019, we must pay a prepayment fee of 1.75% of the principal amount repaid, and if we prepay the loan after such date but
before September 28, 2020, we must pay a prepayment fee of 1.00% of the principal amount prepaid. There is no prepayment fee if
we prepay the loan after September 28, 2020.
The
loan and security agreement includes customary representations, warranties and covenants (affirmative and negative), including
restrictive covenants that, subject to specified exceptions, limit our ability to: dispose of our business or property; merge
or consolidate with or into any other business organization; incur or prepay additional indebtedness; create or incur any liens
on its property; declare or pay any dividend or make a distribution on any class of our stock; or enter specified material transactions
with our affiliates.
The
loan and security agreement also includes customary events of default, including: payment defaults; breaches of covenants following
any applicable cure period; material breaches of representations or warranties; the occurrence of a material adverse effect; events
relating to bankruptcy or insolvency; and the occurrence of an unsatisfied material judgment against us. Upon the occurrence of
an event of default, Avidbank may declare all outstanding obligations immediately due and payable, do such acts as it considers
necessary or reasonable to protect its security interest in the collateral, and take such other actions as are set forth in the
loan and security agreement.
In
connection with preparing the financial statement as of and for the period ended September 30, 2018, we evaluated whether there
are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt
about our ability to continue as a going concern within twelve months after the date that such financial statements are issued.
We believe we will have sufficient cash to meet our operating cash requirements and to fulfill our debt obligations for at least
the next twelve months from the date that such financial statements are issued. To increase the likelihood that we will be able
to successfully execute our operating and strategic plan and to better position the company take advantage of market opportunities
for growth, we are continuing to evaluate additional financing alternatives, including additional equity financings and alternative
sources of debt. If our cash and cash equivalents do not meet our future cash requirements, we may have to reduce planned capital
expenses, reduce operational cash uses or raise capital on terms that are not as favorable to us as they otherwise might be. Any
actions we may undertake to reduce planned capital purchases or reduce expenses might not cover shortfalls in available funds.
If we require additional capital, we may not secure additional financing on terms acceptable to us, or at all.
Working
Capital
As
of September 30, 2018, we had working capital (current assets in excess of current liabilities) of $2,987,000 compared to negative
working capital (current liabilities in excess of current assets) of $1,109,000 as of December 31, 2017. The following table shows
our change in working capital from December 31, 2017 to September 30, 2018:
|
|
Increase
(Decrease)
|
|
Working capital as of December 31, 2017
|
|
$
|
(1,109,000
|
)
|
Changes in current
assets:
|
|
|
|
|
Cash and cash equivalents
|
|
|
(300,000
|
)
|
Accounts receivable,
net of allowance
|
|
|
565,000
|
|
Site equipment to
be installed
|
|
|
(1,266,000
|
)
|
Prepaid
expenses and other current assets
|
|
|
(108,000
|
)
|
Change in total
current assets
|
|
|
(1,109,000
|
)
|
Changes in current
liabilities:
|
|
|
|
|
Accounts payable
|
|
|
(49,000
|
)
|
Accrued compensation
|
|
|
(286,000
|
)
|
Accrued expenses
|
|
|
374,000
|
|
Sales taxes payable
|
|
|
30,000
|
|
Income taxes payable
|
|
|
23,000
|
|
Current portion
of long-term debt
|
|
|
(3,955,000
|
)
|
Current portion
of obligations under capital leases
|
|
|
(20,000
|
)
|
Deferred revenue
|
|
|
(1,077,000
|
)
|
Deferred rent
|
|
|
(149,000
|
)
|
Other
current liabilities
|
|
|
(96,000
|
)
|
Change
in total current liabilities
|
|
|
(5,205,000
|
)
|
Net
change in working capital
|
|
|
4,096,000
|
|
Working capital as of September
30, 2018
|
|
$
|
2,987,000
|
|
Cash
Flows
Cash
flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows,
are summarized as follows:
|
|
Nine months ended September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
739,000
|
|
|
$
|
1,056,000
|
|
Investing activities
|
|
|
(1,192,000
|
)
|
|
|
(1,118,000
|
)
|
Financing activities
|
|
|
181,000
|
|
|
|
(1,230,000
|
)
|
Effect
of exchange rates
|
|
|
(28,000
|
)
|
|
|
70,000
|
|
Net decrease
in cash and cash equivalents
|
|
$
|
(300,000
|
)
|
|
$
|
(1,222,000
|
)
|
Net
cash provided by operating activities.
The decrease in cash provided by operating activities was primarily due to receiving
a prepayment during the 2017 period from Buffalo Wild Wings for equipment and services to be delivered in the future. We did not
receive a similar prepayment during the same period in 2018. This prepayment was offset by a decrease in equipment purchases during
2018 when compared to 2017.
Our
largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $759,000 to $7,916,000 for
the nine month months ended September 30, 2018 from $8,675,000 for the same period in 2017, primarily due to a reduction in incentive
compensation and headcount.
Our
primary source of cash is cash we generate from customers. Cash received from customers decreased $4,099,000 to $16,625,000 for
the nine months ended September 30, 2018 from $20,724,000 for the same period in 2017. This decrease was primarily related to
the prepayment received in 2017 from Buffalo Wild Wings described above as well an increase in accounts receivable.
Net
cash used in investing activities.
Our increase in net cash used in investing activities for the nine months ended September
30, 2018 was primarily related to increased capitalized software development expenditures offset by a decrease in capital expenditures
when compared to the same period in 2017.
Net
cash provided by (used in) financing activities.
The $1,411,000 increase in cash provided by financing activities was primarily
attributable to a $4,000,000 increase in long-term debt proceeds from the term loan we borrowed from Avidbank, offset by a $2,162,000
increase in long-term debt payments and by a $398,000 decrease in net proceeds received from common stock offerings for the nine
months ended September 30, 2018 compared to the same period in 2017.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and in July 2018, the FASB issued ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements. These updates require 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
assets, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. These updates are effective for fiscal periods beginning after December 15, 2018 (which is January 1, 2019 for us), including
interim periods within those fiscal years. 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. Although
we have not completed our assessment of the full impact on our consolidated financial statements of the adoption of Topic 842,
we currently believe that the most significant changes will be related to the recognition of a right-to-use asset and corresponding
lease liability on our consolidated balance sheet for the new facility lease described in Note 6.
In
March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118
. This ASU incorporates SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which
addresses the accounting implications of the major tax reform legislation, Public Law No. 115-97, commonly referred to as the
Tax Cuts and Jobs Act (the “2017 Tax Act”), enacted on December 22, 2017. SAB 118 allows a company to record provisional
amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. We continue
to analyze the effect that the 2017 Tax Act will have on our consolidated financial statements.
In
the first quarter of 2018, we adopted ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The standard clarifies
the presentation of restricted cash and cash equivalents and requires companies to include restricted cash and cash equivalents
in the beginning and ending balances of cash and cash equivalents on the statement of cash flows. The standard also requires additional
disclosures to describe the amount and detail of the restriction by balance sheet line item. Accordingly, we will include the
$250,000 restricted cash described in Note 6 as a component of cash, cash equivalents and restricted cash on our balance sheet
once such deposit is made into a restricted cash account, which is expected to occur during the fourth quarter of 2018.
In
June 2018, the FASB issued ASU No. 2018-07 (Topic 718),
Improvements to Nonemployee Share-Based Payment Accounting.
This
ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees
and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with
the accounting for employee share-based compensation. The guidance is effective for fiscal years beginning after December 15,
2018 (which is January 1, 2019 for us), including interim reporting periods within that fiscal year. Early adoption is permitted,
but no earlier than an entity’s adoption date of Topic 606. We do not expect that the adoption of this ASU will have a significant
impact on our consolidated financial statements.
OFF-BALANCE
SHEET ARRANGEMENTS
We
have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial
condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.