ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report. The forward-looking statements included in this Quarterly Report are made only as of the date hereof.
Overview
This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understand our financial results for the three and nine months ended September 30, 2018 and 2017. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, and our audited consolidated financial statements and accompanying notes included in Form S-1/A filed on August 22, 2018.
Tapinator develops and publishes mobile games and applications on the iOS, Google Play, and Amazon platforms. Tapinator's portfolio includes over 300 titles that, collectively, have achieved over 450 million mobile downloads, including products such as
ROCKY
™,
Video Poker
Classic
,
Solitaire Dash, Dot to Dot – Relaxing Puzzles
and
Dice Mage
. Tapinator generates revenues through the sale of branded advertising and via consumer transactions, including in-app purchases and subscriptions.
The Company currently develops two types of mobile applications. The Company’s Full-Featured Games are unique products with high production values and significant revenue potential, developed and published selectively based on both original and licensed IP. These titles require extensive development, marketing, and live ops investment and have, in the opinion of management, the potential to become well-known and long-lasting mobile franchises. These games are currently published exclusively under the Tapinator brand. Tapinator’s Rapid-Launch Games are legacy products that historically have been developed and published in significant quantity. These are titles that have been built economically and rapidly based on a series of internally developed, re-useable game engines. These games were previously published under the Tapinator brand but are currently published under the Tap2Play and TopTap Games brands.
Full-Featured Games:
We define a Full-Featured Game as a product that is designed and engineered on a completely custom basis (i.e. not based on an existing game engine), and one that contains unique components of gameplay, systems, themes, IP or some combination thereof. Full-Featured Games require significant development, marketing and live ops investment and have, in the opinion of management, the potential to become long-lasting, category leading mobile game franchises. To date, the Company has developed and/or published approximately 17 Full-Featured Games including notable titles such as:
ROCKY
™,
Video Poker Classic
,
Solitaire Dash
and
Dice Mage
. Thirteen of these games have been editorially featured as “Best New Games” or “New Games We Love” by Apple on the iOS platform, and a subset of these games have also been editorially featured by the Google Play and Amazon App Stores. These games are marketed primarily through app store feature placement and through paid marketing channels in cases where the Company calculates that a game’s average player Lifetime Value (“LTV”) exceeds that of the game’s average player acquisition cost. Full-Featured Games are monetized primarily via consumer app store transactions.
Rapid-Launch Games:
We define a Rapid-Launch Game as a product that is built on top of one of our internally developed Rapid-Launch Game engines. To date, we have developed engines (and launched more than 300 Rapid-Launch titles) within the following game genres: parking, driving, stunts, shooters, fighting, animal sims, career sims and racing. For example, we have created a proprietary parking simulation engine and have used this to launch car, truck, limousine, ambulance, and other types of vehicle parking simulation games. These games are monetized primarily through branded advertisements which are typically sold via third-party advertising networks and trafficked via third-party ad mediation software installed within the games. These games are marketed primarily through cross-promotion within our existing Rapid-Launch Game network and via various app store optimization (“ASO”) strategies.
Strategy
In early 2017, we announced a strategic shift to primarily focus the Company’s management and investment resources into our Full-Featured Games business. We believe the potential size, quality and sustainability of revenues and earnings from the Full-Featured business is significantly greater than that of our legacy Rapid-Launch Games business. The Company’s goal for its Full-Featured business is to create franchise-type products that are evergreen in nature (also known as “Category Leaders”). In order to accomplish this goal, the Company is focused on developing products that achieve customer lifetime values (LTVs) that exceed the customer acquisition cost, at scale. The Company has been able to achieve this, at certain download volumes, for two products:
Video Poker Classic
and
Solitaire Dash
. The Company believes that, in 2018 and 2019, it will be able to further improve core metrics via product development and scale both of these games via marketing, as well as launch new products that can join
Video Poker Classic
and
Solitaire Dash
as Category Leaders.
In late 2018, the Company developed plans to expand its Full-Featured strategy to include subscription-based, freemium mobile applications within the Games, Entertainment and Lifestyle categories. In August 2018, Tapinator launched
Dot to Dot – Relaxing Puzzles,
its first subscription-based application under this expanded strategy, and expects to launch a second product pursuant to this strategy during the fourth quarter of this year.
Current Outlook
The Company continues to have significant conviction regarding its Full-Featured Mobile Games and Applications business. As demonstrated by our strategic shift, we are confident in our ability to continue to drive strong year-over-year growth in key operating and financial metrics within our Full-Featured Mobile Games and Applications business for 2018 and beyond. This growth is expected to be derived from a combination of existing franchises such as
Video Poker Classic
and
Solitaire Dash
, and from new titles that we have launched or plan to this year such as
D
ot to Dot – Relaxing Puzzles, D
ice Mage
Online
and the upcoming subscription-based product that is slated to be announced and launched in Q4. Because a majority of our existing game updates and new games for this year are scheduled to release in Q3 and Q4, we expect to deliver a majority of our revenue and bookings growth within our Full-Featured Mobile Games and Applications business during the second half of 2018.
We previously recognized and communicated that our legacy-based Rapid-Launch Games business has peaked and that we chose to pivot the strategic focus of Tapinator to our Full-Featured Mobile Games and Applications business, where we believe the opportunity to be significantly greater and more sustainable. While our Rapid-Launch Games library continues to be impressive in scale and provide a meaningful long tail of revenue to the Company, recent changes in the Google Play store have reduced the discovery of our existing Rapid Launch Games and have likely made the introduction of new Rapid Launch Games to be more challenging. As a result of these changes, we are forecasting year-over-year declines in this business in 2018.
In January 2018, we announced the creation of a new subsidiary to develop and publish distributed apps and games that leverage blockchain technology. Since then, we have launched two fully functioning products,
Dark Winds
and
BitPainting
. When we initiated this effort, we were enthused by the potential long-term opportunity but recognized that the blockchain gaming market was in its infancy. To that end, we previously communicated to our shareholders that we did not expect these efforts to contribute materially to our 2018 revenues. We are extremely proud of the high quality of both of these products and how they were brought to market both cost-effectively and on schedule. Despite the quality of these applications, we have been extremely disappointed by the lack of consumer adoption of both products. Based on our experience with these initial launches, we now recognize that the current addressable market for blockchain games is likely too small and too early to generate significant near-term value for our shareholders. While we may continue to selectively develop our existing products, we are taking a cautious go-forward approach with respect to blockchain games and believe it prudent to curtail our investment in this area.
In late 2018, the Company developed plans to expand its Full-Featured strategy to include subscription-based, freemium mobile applications within the Games, Entertainment and Lifestyle categories. In August 2018, Tapinator launched
Dot to Dot – Relaxing Puzzles,
its first subscription-based application under this expanded strategy. We are encouraged by the initial results from this first product launched under this expanded strategy. We plan to continue to develop this product, we expect to launch a second product pursuant to this strategy during the fourth quarter of this year, and we are pursuing opportunities to expand this strategy even further in 2019.
Key Metrics
We regularly review a number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.
Key Operating Metrics
We manage our business by tracking various non-financial operating metrics that give us insight into user behavior in our games. The three metrics that we use most frequently are Daily Active Users (“DAUs”), Monthly Active Users (“MAUs”) and Average Bookings Per User (“ABPU”).
Daily Active Users – DAUs. We define DAUs as the number of individuals who played a particular smartphone game on a particular day. An individual who plays two different games on the same day is counted as two active users for that day when we aggregate DAU across games. In addition, an individual who plays the same game on two different devices during the same day (e.g., an iPhone and an iPad) is also counted as two active users for each such day when we average or aggregate DAU over time. Average DAU for a particular period is the average of the DAUs for each day during that period. We use DAU as a measure of player engagement with the titles that our players have downloaded.
Monthly Active Users – MAUs. We define MAUs as the number of individuals who played a particular smartphone game in the month for which we are calculating the metric. An individual who plays two different games in the same month is counted as two active users for that month when we aggregate MAU across games. In addition, an individual who plays the same game on two different devices during the same month (e.g., an iPhone and an iPad) is also counted as two active users for each such month when we average or aggregate MAU over time. Average MAU for a particular period is the average of the MAUs for each month during that period. We use the ratio between DAU and MAU as a measure of player retention.
Average Bookings Per User –ABPUs. We define ABPU as our total bookings in a given period, divided by the number of days in that period, divided by, the average DAUs during the period. We believe that ABPU provides useful information to investors and others in understanding and evaluating our results in the same manner as our management and board of directors. We use ABPU as a measure of overall monetization across all of our players through the sale of virtual goods and advertising.
Key Financial Metrics
Bookings.
Bookings is a non-GAAP financial measure that is equal to revenue recognized during the period plus or minus the change in deferred revenue during the period and amounts billed, but uncollected, pursuant to contractual license agreements. We record the sale of virtual goods as deferred revenue and then recognize that revenue over the estimated average life of the purchased virtual goods or as the virtual goods are consumed. Bookings is a fundamental top-line metric we use to manage our business, as we believe it is a useful indicator of the sales activity in a given period. Over the long term, the factors impacting our bookings and revenue are the same. However, in the short term, there are factors that may cause revenue to exceed or be less than bookings in any period.
We use bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with U.S. GAAP. In addition, other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces its usefulness as a comparative measure.
Trends in Key Operating Metrics
|
|
Three Months Ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
All Games
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average DAUs
|
|
|
261
|
|
|
|
685
|
|
|
|
476
|
|
|
|
656
|
|
Average MAUs
|
|
|
4,822
|
|
|
|
11,679
|
|
|
|
8,335
|
|
|
|
12,827
|
|
ABPU
|
|
|
0.03
|
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
0.01
|
|
The decrease in average DAU and MAU for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 was primarily related to a general weakening in new player installs of our Rapid-Launch Games that began in Q4 2016 and that has continued through Q3 2018.
The decrease in average DAU and MAU for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily related to a general weakening in new player installs of our Rapid-Launch Games that began in Q4 2016 and that has continued through Q3 2018.
The ABPU increased for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 because a larger percentage of our player base was derived from our higher monetizing Full-Featured Games.
We expect further decreases in both DAU and MAU over the next several quarters as our Rapid-Launch Games continue to decline and the Company continues to focus on its more highly monetizing, but lower volume, Full-Featured Games and Applications.
|
|
Three Months Ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Full-Featured Games
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average DAUs
|
|
|
27
|
|
|
|
44
|
|
|
|
29
|
|
|
|
30
|
|
Average MAUs
|
|
|
202
|
|
|
|
541
|
|
|
|
271
|
|
|
|
335
|
|
ABPU
|
|
|
0.12
|
|
|
|
0.10
|
|
|
|
0.11
|
|
|
|
0.12
|
|
The decrease in average DAU and MAU within our Full-Featured Games for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 was primarily related to the successful launches (and related audience spikes) of Dice Mage 2 and Big Sport Fishing 2 in Q3 2017, but partially offset by audience gains in Video Poker Classic and the launch of Fusion Heroes on iOS in 2018.
The increase in our Full-Featured Games’ ABPU for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 was primarily related to relative and absolute increases in DAU from Video Poker Classic during the comparative periods. The decrease in our Full-Featured Games’ ABPU for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 was primarily related to a decrease in monetization from Video Poker Classic’s “whale players” during the comparative periods, and the inclusion of lower monetizing properties of Dice Mage 2, Big Sport Fishing 2 and Fusion Heroes in the more recent periods.
|
|
Three Months Ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Rapid-Launch Games
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average DAUs
|
|
|
234
|
|
|
|
647
|
|
|
|
447
|
|
|
|
703
|
|
Average MAUs
|
|
|
4,620
|
|
|
|
10,993
|
|
|
|
8,063
|
|
|
|
12,492
|
|
ABPU
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.01
|
|
The decrease in average DAU and MAU within our Rapid-Launch Games for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017 was primarily related to a general weakening in new player installs stemming from what we believe to be saturation for these types of games that began in Q4 2016 and that has continued through Q3 2018. In addition, changes to the Google Play discovery algorithm that occurred late in Q2 2018 also contributed to the decline in our Rapid-Launch audience metrics.
The ABPU within our Rapid-Launch Games remained unchanged for the three and nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017, driven by an increase in advertising prices (“CPM’s” or “Cost Per Thousand Impressions”), but offset by a reduction in player engagement (specifically impressions per DAU) during the relative periods.
Results of Operations
The following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison periods identified.
Comparison of the Three Months Ended
September 30
, 2018 and 2017
Revenue
|
|
Three months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Revenue by Type
|
|
|
|
|
|
|
|
|
Consumer App Store Transactions
|
|
$
|
344
|
|
|
$
|
414
|
|
Advertising / Other
|
|
|
337
|
|
|
|
436
|
|
Total
|
|
$
|
681
|
|
|
$
|
850
|
|
Our revenue decreased $169 thousand, or 20%, to $681 thousand for the three months ended September 30, 2018 from $850 thousand for the three months ended September 30, 2017. The decrease in revenue is attributable primarily to a decrease in Consumer App Store Transactions and Advertising related bookings from both our Rapid-Launch and Full-Featured Games, which was partially offset by an increase from Other Revenue associated with the Solitaire Dash License Agreement that we entered into during Q3 2018.
|
|
Three months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Revenue by Game Type
|
|
|
|
|
|
|
|
|
Full-Featured
|
|
$
|
380
|
|
|
$
|
355
|
|
Rapid-Launch
|
|
|
301
|
|
|
|
495
|
|
Total
|
|
$
|
681
|
|
|
$
|
850
|
|
Our Full-Featured Games’ revenue increased $25 thousand, or 7%, to $380 thousand for the three months ended September 30, 2018 from $355 thousand for the three months ended September 30, 2018. The increase in Full-Featured Games revenue is attributable primarily to an increase from Other Revenue associated with the Solitaire Dash License Agreement that we entered into during Q3 2018, but partially offset by decreases in both Consumer App Store Transactions and Advertising related bookings during the comparative periods.
Our Rapid-Launch Games’ revenue decreased $194 thousand, or 39%, to $301 thousand for the three months ended September 30, 2018 from $495 thousand for the three months ended September 30, 2017. The decrease in revenue is attributable primarily to a decrease in advertising related bookings, stemming from a decrease in DAUs across our Rapid-Launch Games portfolio.
Cost of Revenue
|
|
Three months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Platform Fees
|
|
$
|
156
|
|
|
$
|
255
|
|
Licensing + Royalties
|
|
|
8
|
|
|
|
49
|
|
Hosting
|
|
|
3
|
|
|
|
2
|
|
Total Cost of Revenue
|
|
$
|
167
|
|
|
$
|
306
|
|
Revenue
|
|
|
681
|
|
|
|
850
|
|
Gross Margin
|
|
|
76
|
%
|
|
|
64
|
%
|
Our cost of revenue decreased $139 thousand, or 45%, to $167 thousand in the three months ended September 30, 2018 from $306 thousand in the three months ended September 30, 2017. This decrease was primarily due to a corresponding decrease in revenue during the same periods. Our Gross Margin increased by twelve hundred basis points to 76% during the three months ended September 30, 2018 from 64% during the three months ended September 30, 2017. This increase was primarily due to the absence of platform fees associated with revenue corresponding to the Solitaire Dash License Agreement.
Research and Development Expenses
|
|
Three months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
43
|
|
|
$
|
32
|
|
Percentage of revenue
|
|
|
6
|
%
|
|
|
4
|
%
|
Our research and development expenses increased $11 thousand, or 34%, to $43 thousand in the three months ended September 30, 2018 from $32 thousand in the three months ended September 30, 2017. The increase in research and development costs was primarily due to an increase in revenue share associated with our Rapid-Launch Games released beginning in March 2017, resulting from a contractual change we made in early 2017 with the developer of our Rapid-Launch Games. The strategic effect of this change was to reduce our initial capital risk associated with our Rapid-Launch Games, in exchange for a commensurate increase in the long-term revenue share that we pay for these games.
Marketing Expenses
|
|
Three months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Marketing and public relations
|
|
$
|
129
|
|
|
$
|
71
|
|
Percentage of revenue
|
|
|
19
|
%
|
|
|
8
|
%
|
Our marketing expenses increased $58 thousand, or 82%, to $129 thousand in the three months ended September 30, 2018 from $71 thousand in the three months ended September 30, 2017. The increase in 2018 was primarily due to higher game marketing expenditures for our Full-Featured games which was partially offset by a reduction in corporate marketing and PR during the comparative periods.
General and Administrative Expenses
|
|
Three months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
General and administrative
|
|
$
|
783
|
|
|
$
|
372
|
|
Percentage of revenue
|
|
|
115
|
%
|
|
|
44
|
%
|
Our general and administrative expenses increased $411 thousand, or 110%, to $783 thousand in the three months ended September 30, 2018 from $372 thousand in the three months ended September 30, 2017. The increase in general and administrative expenses was substantially due to non-cash, stock-based compensation expenses related to certain RSU incentive grants made in the first quarter of 2018.
|
|
Three months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Amortization of capitalized software development
|
|
$
|
166
|
|
|
$
|
167
|
|
Percentage of revenue
|
|
|
24
|
%
|
|
|
20
|
%
|
Our amortization of capitalized software development remained approximately unchanged at $166 thousand in the three months ended September 30, 2018 as compared to $167 thousand in the three months ended September 30, 2017.
Other (income) expenses
|
|
Three months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Other (income) expenses
|
|
$
|
(1
|
)
|
|
$
|
402
|
|
Percentage of revenue
|
|
|
0
|
%
|
|
|
47
|
%
|
Our other expenses decreased $403 thousand, or 100% to $(1) thousand in the three months ended September 30, 2018 from $402 thousand in the three months ended September 30, 2017. The decrease in other expenses was attributable to a decrease in debt discount of $282 thousand and a decrease in interest expense of $120 thousand, which were both attributable to the repayment of the Senior Convertible Debenture in February 2018.
Comparison of the
Nine
M
onths
E
nded
September 30
, 2018 and 2017
Revenue
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Revenue by Type
|
|
|
|
|
|
|
|
|
Consumer App Store Transactions
|
|
$
|
1,345
|
|
|
$
|
921
|
|
Advertising / Other
|
|
|
959
|
|
|
|
1,362
|
|
Total
|
|
$
|
2,304
|
|
|
$
|
2,283
|
|
Our revenue increased $21 thousand, or 1%, to $2,304 thousand for the nine months ended September 30, 2018 from $2,283 thousand for the nine months ended September 30, 2017. The increase in revenue is attributable primarily to an increase in Consumer App Store Transactions, driven from within both our Full-Featured Games and our Rapid-Launch Games and an increase in Other Revenue from our Full-Featured Games associated with the Solitaire Dash License Agreement that we entered into during Q3 2018, both of which were partially offset by a decrease in Advertising related bookings, driven by DAU declines from within both our Full-Featured and Rapid-Launch Game portfolios.
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Revenue by Game Type
|
|
|
|
|
|
|
|
|
Full-Featured
|
|
$
|
951
|
|
|
$
|
650
|
|
Rapid-Launch
|
|
|
1,353
|
|
|
|
1,633
|
|
Total
|
|
$
|
2,304
|
|
|
$
|
2,283
|
|
Our Full-Featured Games’ revenue increased $301 thousand, or 46%, to $951 thousand for the nine months ended September 30, 2018 from $650 thousand for the nine months ended September 30, 2017. The increase in Full-Featured Games revenue is attributable primarily to an increase in Consumer App Store Transactions and an increase in Other Revenue associated with the Solitaire Dash License Agreement that we entered into during Q3 2018.
Our Rapid-Launch Games’ revenue decreased $280 thousand, or 17%, to $1,353 thousand for the nine months ended September 30, 2018 from $1,633 thousand for the nine months ended September 30, 2017. The decrease in revenue is attributable primarily to a decrease in advertising related bookings, stemming from a decrease in DAUs across our Rapid-Launch Games portfolio, partially offset by an increase in Consumer App Store Transactions during the comparative periods.
Cost of Revenue
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Platform Fees
|
|
$
|
642
|
|
|
$
|
675
|
|
Licensing + Royalties
|
|
|
59
|
|
|
|
67
|
|
Hosting
|
|
|
9
|
|
|
|
7
|
|
Total Cost of Revenue
|
|
$
|
710
|
|
|
$
|
749
|
|
Revenue
|
|
|
2,304
|
|
|
|
2,283
|
|
Gross Margin
|
|
|
69
|
%
|
|
|
67
|
%
|
Our cost of revenue decreased $39 thousand, or 5%, to $710 thousand in the nine months ended September 30, 2018 from $749 thousand in the nine months ended September 30, 2017. Our Gross Margin increased by two hundred basis points to 69% during the nine months ended September 30, 2018 from 67% during the nine months ended September 30, 2017. The decrease in our cost of revenue and increase in our gross margin was primarily due to the absence of platform fees associated with revenue corresponding to the Solitaire Dash License Agreement.
Research and Development Expenses
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
198
|
|
|
$
|
67
|
|
Percentage of revenue
|
|
|
9
|
%
|
|
|
3
|
%
|
Our research and development expenses increased $131 thousand, or 196%, to $198 thousand in the nine months ended September 30, 2018 from $67 thousand in the nine months ended September 30, 2017. The increase in research and development costs was primarily due to an increase in revenue share associated with our Rapid-Launch Games released beginning in March 2017, resulting from a contractual change we made in early 2017 with the developer of our Rapid-Launch Games. The strategic effect of this change was to reduce our initial capital risk associated with our Rapid-Launch Games, in exchange for a commensurate increase in the long-term revenue share that we pay for these games.
Marketing Expenses
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Marketing and public relations
|
|
$
|
302
|
|
|
$
|
406
|
|
Percentage of revenue
|
|
|
13
|
%
|
|
|
18
|
%
|
Our marketing expenses decreased $104 thousand, or 26%, to $302 thousand in the nine months ended September 30, 2018 from $406 thousand in the nine months ended September 30, 2017. The decrease in 2018 was primarily due to lower game marketing expenditures for our Full-Featured games and a decrease in corporate marketing during the comparative periods.
General and Administrative Expenses
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
General and administrative
|
|
$
|
2,403
|
|
|
$
|
1,051
|
|
Percentage of revenue
|
|
|
104
|
%
|
|
|
46
|
%
|
Our general and administrative expenses increased $1,352 thousand, or 129%, to $2,403 thousand in the nine months ended September 30, 2018 from $1,051 thousand in the nine months ended September 30, 2017. The increase in general and administrative expenses was primarily due to non-cash, stock-based compensation expenses related to certain RSU incentive grants made in the first quarter of 2018 and a non-recurring, non-cash, stock-based professional fee related to certain investment banking services provided to the Company during the more recent period.
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Amortization of capitalized software development
|
|
$
|
437
|
|
|
$
|
543
|
|
Percentage of revenue
|
|
|
19
|
%
|
|
|
24
|
%
|
Our amortization of capitalized software development decreased $106 thousand or 20% to $437 thousand in the nine months ended September 30, 2018 from $543 thousand in the nine months ended September 30, 2017. The decrease in amortization of capitalized software development was primarily attributable to the impairment of capitalized software relating to the termination of one of our Full-Featured Games in Q4 2017.
Other (income) expenses
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Other (income) expenses
|
|
$
|
321
|
|
|
$
|
2,366
|
|
Percentage of revenue
|
|
|
14
|
%
|
|
|
104
|
%
|
Our other expenses decreased $2,045 thousand or 86% to $321 thousand in the nine months ended September 30, 2018 from $2,366 thousand in the nine months ended September 30, 2017. The decrease in other expenses was attributable to a decrease in debt discount of $935 thousand, or 83% to $188 thousand from $1,122 thousand, a decrease in interest expense, net, of $280 thousand or 67% to $133 thousand that was attributable to the repayment of the Senior Convertible Debenture in February 2018, and a prior year loss from debt extinguishment of $830 thousand resulting from the Senior Convertible Debenture 2017 Amendment Agreement.
Liquidity and Capital Resources
General
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has reported cash and cash equivalents of $1.0 million, a working capital excess of $840 thousand as of September 30, 2018 and a net loss of $2,081 thousand for the nine months ended September 30, 2018. The Company does not currently anticipate that additional financing will be required within the next twelve months.
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
314
|
|
|
$
|
86
|
|
Investing activities
|
|
|
(643
|
)
|
|
|
(646
|
)
|
Financing activities
|
|
|
1,092
|
|
|
|
104
|
|
Increase (Decrease) in cash and cash equivalents
|
|
$
|
763
|
|
|
$
|
(456
|
)
|
Operating Activities
Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments.
In the nine months ended September 30, 2018, net cash provided by operating activities was $314 thousand, which was primarily due to a $2,081 thousand net loss, $16 thousand increase in prepaid expenses, and a $60 thousand decrease in due to related parties. These amounts were offset by $104 thousand decrease in accounts receivable, a $47 thousand increase in accounts payable and accrued expenses, $184 thousand increase in deferred revenue, and adjustments for non-cash items, including stock-based compensation expense of $1,453 thousand, amortization of software development costs of $437 thousand, amortization of original issue discount of $51 thousand, depreciation and amortization of other assets of $7 thousand and amortization of debt discount of $188 thousand.
In the nine months ended September 30, 2017, net cash provided by operating activities was $86 thousand, which was primarily due to a $2.92 million net loss, an $18 thousand increase in accounts receivable, a $126 thousand increase in prepaid expenses, and a $45 thousand decrease in accounts payable and accrued expenses, and a $32 thousand decrease in due to related parties. These amounts were offset by a $335 thousand increase in deferred revenue and adjustments for non-cash items, including stock based compensation expense of $117 thousand, amortization of software development costs of $543 thousand, depreciation and amortization of other assets of $17 thousand, amortization of debt discount of $1.12 million, amortization of original issue discount of $265 thousand and a loss on extinguishment of $830 thousand.
Investing Activities
Cash used in investing activities in the nine months ended September 30, 2018 was $643 thousand, which was due to $642 thousand of capitalized software development costs related to the development of our mobile games and $1 thousand of purchase of property and equipment during the period.
Cash used in investing activities in the nine months ended September 30, 2017 was $645 thousand, which was primarily due to $641 thousand of capitalized software development costs related to the development of our mobile games and $4 thousand of purchase of property and equipment during the period.
Financing Activities
Cash provided by financing activities in the nine months ended September 30, 2018 was $1,092 thousand, which was primarily due to $2,582 thousand in net proceeds received from the issuance of common stock and $120 thousand proceeds from exercised warrants, which were offset by a $1,143 thousand principal repayment of our Senior Secured Convertible Debenture, $367 repurchase of the Series B Preferred stock, and $100 thousand in cash used to buy back the non-controlling interest in our Revolution Blockchain subsidiary.
Cash provided by financing activities in the nine months ended September 30, 2017 was $104 thousand, which was due to $350 thousand in proceeds received from the sales of common stock, which was offset by a $234 thousand principal repayment of our Senior Convertible Debenture and $13 thousand of financing costs incurred during the period.
Contractual Obligations and Other Commercial Commitments
Smaller reporting companies are not required to provide the information required by this item.
Off-Balance Sheet Arrangements
For the nine months ended September 30, 2018 and 2017 we did not have any “off-balance sheet arrangements,” as defined in relevant Securities and Exchange Commission regulations that are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Trends in Key Non-GAAP Financial Metrics
We have provided in this report the non-GAAP financial measures of Bookings and adjusted EBITDA, as a supplement to the consolidated financial statements, which are prepared in accordance with United States generally accepted accounting principles ("GAAP"). Management uses Bookings and adjusted EBITDA internally in analyzing our financial results to assess operational performance and liquidity. The presentation of Bookings and adjusted EBITDA is not intended to be considered in isolation or as a substitute for the financial information prepared in accordance with GAAP. We believe that both management and investors benefit from referring to Bookings and adjusted EBITDA in assessing our performance and when planning, forecasting and analyzing future periods. We believe Bookings and adjusted EBITDA is useful to investors because it allows for greater transparency with respect to key financial metrics we use in making operating decisions and because our investors and analysts use them to help assess the health of our business. We have provided reconciliations between our historical Bookings and adjusted EBITDA to the most directly comparable GAAP financial measures below.
Bookings Results
Bookings increased $189 thousand, or 21%, to $1,088 thousand for the three months ended September 30, 2018 from $899 thousand for the three months ended September 30, 2017. The growth was due to increased bookings associated with our Full-Featured Games and primarily a result of the Solitaire Dash License Agreement that we entered into during Q3 2018, which was partially offset by a decrease in bookings achieved by our Rapid Launch Games during the period.
Bookings increased $70 thousand, or 3%, to $2,688 thousand for the nine months ended September 30, 2018 from $2,618 thousand for the nine months ended September 30, 2017. The growth was due to increased bookings associated with our Full-Featured Games and primarily a result of the Solitaire Dash License Agreement that we entered into during Q3 2018, which was partially offset by a decrease in bookings achieved by our Rapid Launch Games during the period.
|
|
Three Months Ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Bookings by Game Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full-Featured
|
|
$
|
787
|
|
|
$
|
405
|
|
|
$
|
1,337
|
|
|
$
|
988
|
|
Rapid-Launch
|
|
|
301
|
|
|
|
494
|
|
|
|
1,351
|
|
|
|
1,630
|
|
Total
|
|
$
|
1,088
|
|
|
$
|
899
|
|
|
$
|
2,688
|
|
|
$
|
2,618
|
|
Our Full-Featured Games’ bookings increased $382 thousand, or 94%, to $787 thousand for the three months ended September 30, 2018, from $405 thousand for the three months ended September 30, 2017. The increase was primarily due to the bookings associated with the Solitaire Dash License Agreement that we entered into during Q3 2018, and bookings growth related to audience gains achieved for Video Poker Classic during the more recent comparative period, both of which were partially offset by a decrease in bookings related to audience declines recorded for Dice Mage 2 and Big Sport Fishing 2 during the more recent comparative periods.
Our Rapid-Launch Games’ bookings decreased $193 thousand, or 39%, to $301 thousand for the three months ended September 30, 2018 from $494 thousand for the three months ended September 30, 2017. The decrease in bookings is attributable primarily to a decrease in advertising related bookings, stemming from a decrease in DAUs across our Rapid-Launch Games portfolio.
Our Full-Featured Games’ bookings increased $349 thousand, or 35%, to $1,337 thousand for the nine months ended September 30, 2018, from $988 thousand for the nine months ended September 30, 2017. The increase was primarily due to the bookings associated with the Solitaire Dash License Agreement that we entered into during Q3 2018 and the initial launch of Fusion heroes in Q2 2018. These increases were partially offset by a decrease in bookings related to ABPU decreases in Video Poker Classic and audience declines recorded Dice Mage 2 and Big Sport Fishing 2 during the more recent comparative periods.
Our Rapid-Launch Games’ bookings decreased $279 thousand, or 17%, to $1,351 thousand for the nine months ended September 30, 2018, from $1,630 thousand for the nine months ended September 30, 2017. The decrease in bookings is attributable primarily to a decrease in advertising related bookings, stemming from a decrease in DAUs across our Rapid-Launch Games portfolio, which was partially offset by an increase in Consumer App Store Transactions during the comparative periods.
The following table presents a reconciliation of bookings to revenue for each of the periods presented (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Bookings
|
|
$
|
1,088
|
|
|
$
|
899
|
|
|
$
|
2,688
|
|
|
$
|
2,618
|
|
Change in deferred revenue
|
|
|
(407
|
)
|
|
|
(49
|
)
|
|
|
(384
|
)
|
|
|
(335
|
)
|
Revenue
|
|
$
|
681
|
|
|
$
|
850
|
|
|
$
|
2,304
|
|
|
$
|
2,283
|
|
Limitations of Bookings
|
●
|
Bookings do not reflect that we defer and recognize certain mobile game revenue over the estimated life of durable virtual goods; and
|
|
●
|
other companies, including companies in our industry, may calculate bookings differently or not at all, which reduces their usefulness as a comparative measure.
|
Because of these limitations, you should consider bookings along with other financial performance measures, including revenue, net income (loss) and our other financial results presented in accordance with U.S. GAAP.
Adjusted EBITDA Results
Our Adjusted EBITDA decreased $150 thousand to ($26) thousand for the three months ended September 30, 2018 from $124 thousand for the three months ended September 30, 2017. The decrease in adjusted EBITDA is primarily due to an increase in net loss, combined with decreases in interest expense, depreciation and amortization of other assets and amortization of debt discount, which together were partially offset by increases in stock-based expense during the comparative periods.
Our Adjusted EBITDA increased $17 thousand to $143 thousand for the nine months ended September 30, 2018 from $126 thousand for the nine months ended September 30, 2017. The increase in adjusted EBITDA is primarily due to a decrease in net loss, combined with decreases in interest expense, amortization of capitalized software development, depreciation and amortization of other assets, amortization of debt discount and loss on extinguishment, which together were partially offset by increases in stock-based expense during the comparative periods.
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Reconciliation of Net Income (Loss) to Adjusted EBITDA: (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(608
|
)
|
|
$
|
(507
|
)
|
|
$
|
(2,081
|
)
|
|
$
|
(2,923
|
)
|
Interest expense, net
|
|
|
(1
|
)
|
|
|
120
|
|
|
|
134
|
|
|
|
413
|
|
Income taxes
|
|
|
1
|
|
|
|
1
|
|
|
|
5
|
|
|
|
6
|
|
Amortization of capitalized software development
|
|
|
166
|
|
|
|
167
|
|
|
|
437
|
|
|
|
543
|
|
Depreciation and amortization of other assets
|
|
|
2
|
|
|
|
5
|
|
|
|
7
|
|
|
|
17
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
282
|
|
|
|
188
|
|
|
|
1,122
|
|
Loss on Extinguishment
|
|
|
-
|
|
|
|
0
|
|
|
|
-
|
|
|
|
830
|
|
Stock-based expense
|
|
|
414
|
|
|
|
56
|
|
|
|
1,453
|
|
|
|
118
|
|
Adjusted EBITDA
|
|
$
|
(26
|
)
|
|
$
|
124
|
|
|
$
|
143
|
|
|
$
|
126
|
|
Limitations of Adjusted EBITDA
|
●
|
Adjusted EBITDA does not include the impact of stock-based expense, impairment of intangible assets previously acquired, acquisition-related transaction expenses, contingent consideration fair value adjustments and restructuring expense;
|
|
|
|
|
●
|
Adjusted EBITDA does not reflect income tax expense;
|
|
●
|
Adjusted EBITDA does not include other income or expense, which includes foreign exchange gains and losses and interest income or expense;
|
|
●
|
Adjusted EBITDA excludes depreciation and amortization of intangible assets. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and
|
|
●
|
Other companies, including companies in our industry, may calculate adjusted EBITDA differently or not at all, which will reduce their usefulness as a comparative measure.
|
Because of these limitations, you should consider adjusted EBITDA along with other financial performance measures, including revenue, net income (loss), diluted net income (loss) per share, cash flow from operations, GAAP operating expense, GAAP operating margin and our other financial results presented in accordance with GAAP.