Item
1.
Financial
Statements
.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except par value amount)
(unaudited)
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,113
|
|
|
$
|
5,686
|
|
Accounts
receivable, net of allowances of $493 and $376, respectively
|
|
|
1,765
|
|
|
|
928
|
|
Site
equipment to be installed
|
|
|
2,568
|
|
|
|
2,998
|
|
Prepaid
expenses and other current assets
|
|
|
1,189
|
|
|
|
1,050
|
|
Total
current assets
|
|
|
11,635
|
|
|
|
10,662
|
|
Fixed
assets, net
|
|
|
2,910
|
|
|
|
3,101
|
|
Software
development costs, net of accumulated amortization of $2,697 and $2,641, respectively
|
|
|
1,065
|
|
|
|
970
|
|
Deferred
costs
|
|
|
851
|
|
|
|
904
|
|
Goodwill
|
|
|
946
|
|
|
|
937
|
|
Intangible
assets, net
|
|
|
17
|
|
|
|
29
|
|
Other
assets
|
|
|
110
|
|
|
|
92
|
|
Total
assets
|
|
$
|
17,534
|
|
|
$
|
16,695
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
513
|
|
|
$
|
247
|
|
Accrued
compensation
|
|
|
519
|
|
|
|
1,060
|
|
Accrued
expenses
|
|
|
561
|
|
|
|
697
|
|
Sales
taxes payable
|
|
|
101
|
|
|
|
142
|
|
Income
taxes payable
|
|
|
(17
|
)
|
|
|
4
|
|
Current
portion of long-term debt (Note 4)
|
|
|
7,306
|
|
|
|
2,988
|
|
Current
portion of obligations under capital leases
|
|
|
155
|
|
|
|
155
|
|
Current
portion of deferred revenue
|
|
|
1,037
|
|
|
|
1,059
|
|
Other
current liabilities
|
|
|
347
|
|
|
|
291
|
|
Total
current liabilities
|
|
|
10,522
|
|
|
|
6,643
|
|
Long-term
debt (Note 4)
|
|
|
446
|
|
|
|
5,123
|
|
Long-term
obligations under capital leases
|
|
|
220
|
|
|
|
259
|
|
Long-term
deferred revenue
|
|
|
179
|
|
|
|
219
|
|
Deferred
rent
|
|
|
326
|
|
|
|
371
|
|
Other
liabilities
|
|
|
13
|
|
|
|
12
|
|
Total
liabilities
|
|
|
11,706
|
|
|
|
12,627
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock, $.005 par value, $156 liquidation preference, 5,000 shares designated 156 shares issued and
outstanding at March 31, 2017 and December 31, 2016
|
|
|
1
|
|
|
|
1
|
|
Common
stock, $.005 par value, 168,000 shares authorized at March 31, 2017 and December 31, 2016; 2,484 and 2,261 shares issued and
outstanding at March 31, 2017 and December 31, 2016, respectively (Note 3)
|
|
|
12
|
|
|
|
11
|
|
Treasury
stock, at cost, 10 shares at March 31, 2017 and December 31, 2016
|
|
|
(456
|
)
|
|
|
(456
|
)
|
Additional
paid-in capital
|
|
|
134,149
|
|
|
|
132,315
|
|
Accumulated
deficit
|
|
|
(128,116
|
)
|
|
|
(128,026
|
)
|
Accumulated
other comprehensive income
|
|
|
238
|
|
|
|
223
|
|
Total
shareholders’ equity
|
|
|
5,828
|
|
|
|
4,068
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
17,534
|
|
|
$
|
16,695
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In
thousands, except per share amounts)
(unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
Subscription
revenue
|
|
$
|
4,226
|
|
|
$
|
4,374
|
|
Sales-type
lease revenue
|
|
|
185
|
|
|
|
396
|
|
Other
revenue
|
|
|
820
|
|
|
|
712
|
|
Total
Revenue
|
|
|
5,231
|
|
|
|
5,482
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Direct
operating costs (includes depreciation and amortization of $491 and $643, respectively)
|
|
|
1,843
|
|
|
|
2,036
|
|
Selling,
general and administrative
|
|
|
4,134
|
|
|
|
4,200
|
|
Depreciation
and amortization (excluding depreciation and amortization included in direct operating costs)
|
|
|
88
|
|
|
|
114
|
|
Total
operating expenses
|
|
|
6,065
|
|
|
|
6,350
|
|
Operating
loss
|
|
|
(834
|
)
|
|
|
(868
|
)
|
Other
income (expense), net
|
|
|
750
|
|
|
|
(154
|
)
|
Loss
before income taxes
|
|
|
(84
|
)
|
|
|
(1,022
|
)
|
Provision
for income taxes
|
|
|
(6
|
)
|
|
|
(19
|
)
|
Net
loss
|
|
$
|
(90
|
)
|
|
$
|
(1,041
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic and diluted
|
|
|
2,255
|
|
|
|
1,839
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(90
|
)
|
|
$
|
(1,041
|
)
|
Foreign
currency translation adjustment
|
|
|
15
|
|
|
|
113
|
|
Total
comprehensive loss
|
|
$
|
(75
|
)
|
|
$
|
(928
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements.
NTN
BUZZTIME, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(90
|
)
|
|
$
|
(1,041
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
579
|
|
|
|
757
|
|
Provision
for doubtful accounts
|
|
|
26
|
|
|
|
24
|
|
Excess
and obsolete site equipment to be installed expense
|
|
|
-
|
|
|
|
25
|
|
Stock-based
compensation
|
|
|
117
|
|
|
|
113
|
|
Amortization
of debt issuance costs
|
|
|
12
|
|
|
|
10
|
|
Issuance
of common stock in lieu of cash for bonus compensation
|
|
|
164
|
|
|
|
-
|
|
Loss
from disposition of equipment
|
|
|
-
|
|
|
|
5
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(863
|
)
|
|
|
126
|
|
Site
equipment to be installed
|
|
|
208
|
|
|
|
(115
|
)
|
Prepaid
expenses and other assets
|
|
|
(148
|
)
|
|
|
(76
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(450
|
)
|
|
|
(209
|
)
|
Income
taxes payable
|
|
|
(22
|
)
|
|
|
(1
|
)
|
Deferred
costs
|
|
|
53
|
|
|
|
29
|
|
Deferred
revenue
|
|
|
(62
|
)
|
|
|
(7
|
)
|
Deferred
rent
|
|
|
(45
|
)
|
|
|
(40
|
)
|
Other
liabilities
|
|
|
55
|
|
|
|
(104
|
)
|
Net
cash used in operating activities
|
|
|
(466
|
)
|
|
|
(504
|
)
|
Cash
flows used in investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(97
|
)
|
|
|
(177
|
)
|
Software
development expenditures
|
|
|
(152
|
)
|
|
|
(99
|
)
|
Net
cash used in investing activities
|
|
|
(249
|
)
|
|
|
(276
|
)
|
Cash
flows used in financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock related to registered direct offering (Note 3)
|
|
|
1,554
|
|
|
|
-
|
|
Principal
payments on capital lease
|
|
|
(38
|
)
|
|
|
(21
|
)
|
Proceeds
from long-term debt
|
|
|
-
|
|
|
|
2,114
|
|
Payments
on long-term debt
|
|
|
(359
|
)
|
|
|
(1,035
|
)
|
Debt
issuance costs on long-term debt
|
|
|
(22
|
)
|
|
|
(5
|
)
|
Net
cash provided by financing activities
|
|
|
1,135
|
|
|
|
1,053
|
|
Net
increase in cash and cash equivalents
|
|
|
420
|
|
|
|
273
|
|
Effect
of exchange rate on cash
|
|
|
7
|
|
|
|
53
|
|
Cash
and cash equivalents at beginning of year
|
|
|
5,686
|
|
|
|
3,223
|
|
Cash
and cash equivalents at end of year
|
|
$
|
6,113
|
|
|
$
|
3,549
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
171
|
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
28
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Site
equipment transferred to fixed assets
|
|
$
|
222
|
|
|
$
|
317
|
|
|
|
|
|
|
|
|
|
|
Equipment
acquired under capital lease
|
|
$
|
-
|
|
|
$
|
22
|
|
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”) delivers interactive entertainment and innovative dining technology to bars and restaurants
in North America. Customers license the Company’s customizable solution to differentiate themselves via competitive fun
by offering guests trivia, card, sports and single player games, nationwide competitions, and by offering self-service dining
features including dynamic menus, touchscreen ordering and secure payment. The Company’s platform can improve operating
efficiencies, create connections among the players and venues and amplify guests’ positive experiences. Built on an extended
network platform, the Company’s interactive entertainment system has historically allowed multiple players to interact at
the venue, and now also enables competition between venues, referred to as massively multiplayer gaming. The Company’s current
platform, which it refers to as Buzztime Entertainment On Demand, or BEOND, was first introduced as a pilot program in December
2012, was expanded commercially during 2013, and the expansion was scaled during 2014. The Company continues to enhance its network
architecture and the BEOND tablet platform and player engagement paradigms. The Company also continues to support its legacy network
product line, which it refers to as Classic.
The
Company currently generates revenue by charging subscription fees for its service to its network subscribers, by leasing equipment
(including tablets used in its BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers,
by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games and by pay-to-play
single player games.
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.
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 in conjunction 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, 2016. The accompanying
condensed balance sheet as of December 31, 2016 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for
the three months ended March 31, 2017 are not necessarily indicative of the results to be anticipated for the entire year ending
December 31, 2017, or any other period.
(2) Basic
and Diluted Earnings Per Common Share
The
Company computes basic and diluted earnings per common share in accordance with the provisions of Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“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 total number of shares of the Company’s
common stock subject to options, warrants, and convertible preferred stock that were excluded from computing diluted net loss
per common share was approximately 454,000 and 439,000 shares as of March 31, 2017 and 2016, respectively, as their effect was
anti-dilutive.
(3) STOCKHOLDERS’
EQUITY
Registered
Direct Offering
On
March 27, 2017, the Company entered into a subscription agreement with certain investors relating to the issuance and sale of
shares of the Company’s common stock at a purchase price of $7.85 per share, which was the closing price of its common stock
on March 24, 2017. The offering closed on March 31, 2017. The Company sold 200,000 shares of its common stock and received net
proceeds of approximately $1.6 million, after deducting offering expenses.
The
Company intends to use the net proceeds of the offering for general corporate purposes, which may include working capital, general
and administrative expenses, capital expenditures and implementation of its strategic priorities.
The
shares were offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration
Statement No. 333-215271) filed with the Securities and Exchange Commission on December 22, 2016 and declared effective by the
SEC on February 2, 2017, and the base prospectus included therein, as supplemented by a prospectus supplement filed with the SEC
in connection with the takedown relating to the offering.
Stock-based
Compensation
The
Company’s stock-based compensation plans include the NTN Buzztime, Inc. 2004 Performance Incentive Plan (the “2004
Plan”), the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan (the “Amended 2010 Plan”) and the NTN
Buzztime, Inc. 2014 Inducement Plan (the “2014 Plan”). The 2004 Plan expired in September 2009. From and after the
date it expired, no awards could be granted under that plan and all awards that had been granted under that plan before it expired
are governed by that plan until they are exercised or expire in accordance with that plan’s terms. The Amended 2010 Plan
provides for the grant of up to 240,000 share-based awards and expires in February 2020. As of March 31, 2017, approximately 106,000
share-based awards were available to be issued under the Amended 2010 Plan. The 2014 Plan, which provides for the grant of up
to 85,000 share-based awards to a new employee as an inducement material to the new employee entering into employment with the
Company, was approved by the nominating and corporate governance/compensation committee of the Company’s board of directors
(the “Committee”) in September 2014 in connection with the appointment of Ram Krishnan as the Company’s Chief
Executive Officer. As of March 31, 2017, there were no share-based awards available to be granted under the 2014 Plan. The Company’s
stock-based compensation plans are administered by the Committee, which selects persons to receive awards and determines the number
of shares subject to each award and the terms, conditions, performance measures, if any, and other provisions of the award.
The
Company records stock-based compensation in accordance with ASC No. 718
, Compensation – Stock Compensation
and ASC
No. 505-50,
Equity – Equity-Based Payments to Non-Employees.
The Company estimates the fair value of stock options
using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite
service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line
single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair
value on the grant date and is periodically re-measured as the underlying awards vest.
The
Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term
of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise
patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate,
the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend
yield assumption is based on the Company’s history and expectation of dividend payouts.
The
following weighted-average assumptions were used for grants issued during the three months ended March 31, 2017 and 2016 under
the ASC No. 718 requirements.
|
|
Three
months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted
average risk-free rate
|
|
|
1.63
|
%
|
|
|
1.26
|
%
|
Weighted average
volatility
|
|
|
115.0
|
%
|
|
|
110.7
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected
life
|
|
|
7.14
years
|
|
|
|
6.02
years
|
|
ASC
No. 718 requires forfeitures to be estimated at the time of grant and revised 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 March 31, 2017 and 2016 was $117,000 and $113,000, respectively, and is expensed in selling,
general and administrative expenses and credited to additional paid-in-capital. The Company granted stock options to purchase
2,000 and 15,500 shares of common stock during the three months ended March 31, 2017 and 2016, respectively. No options were exercised
during either of the three months ended March 31, 2017 or 2016.
(4) DEBT
Revolving
Line of Credit
In
April 2015, the Company entered into a loan and security agreement with East West Bank, or EWB, which was amended in March 2016,
December 2016 and February 2017. The Company refers to the loan and security agreement as amended in March 2016, December 2016
and February 2017 as the EWB credit facility. Under the EWB credit facility, the Company may request advances in an aggregate
outstanding amount at any time up to the lesser of (a) $7,500,000, which the Company refers to as the revolving line, or (b) the
sum of $2,000,000 (which the Company refers to as the “sublimit”) plus the amount equal to its borrowing base, in
each case, less the aggregate outstanding principal amount of prior advances. On June 15, 2017, the sublimit becomes zero. If
the aggregate amount of advances as of June 15, 2017 exceeds the lesser of the revolving line or the amount equal to the Company’s
borrowing base, then the Company must pay EWB the amount of such excess. Advances bear interest, at the Company’s option,
at the rate of either (A) a variable rate per annum equal to the prime rate as set forth in The Wall Street Journal plus 3.25%
(which decreases to 1.75% at the earlier of June 15, 2017 or such time the Company pays off in full in cash the $2.0 million sublimit),
or (B) at a fixed rate per annum equal to the LIBOR Rate for the interest period for the advance plus 6.00% (which decreases to
4.50% at the earlier of June 15, 2017 or full repayment of the sublimit on all amounts then outstanding and on any subsequent
borrowings). So long as there is no event of default, the Company may make a one-time request to increase the revolving line by
up to $2,500,000, which EWB may accept or decline. All advances are due on January 15, 2018. The Company uses the proceeds available
under this credit facility to fund strategic growth initiatives and for general working capital purposes.
The
Company’s borrowing base under the EWB credit facility is, as of the date of determination, an amount equal to the product
of: (a) the average monthly recurring revenue for the immediately preceding three months; times (b) one plus our average churn
rate for the immediately preceding three months (not to exceed zero); times (c) 300%. For this purpose, the Company’s monthly
recurring revenue is limited to all recurring subscription revenue attributable to software that the Company sold or licensed
and all recurring revenue relating to services it delivered and 50% of all revenue attributable to the Company’s “Stump”
product line. Because the amount of the Company’s monthly recurring revenue and how much each source contributes to it will
change from month to month, the Company’s borrowing base will fluctuate accordingly.
Under
the EWB credit facility, the Company is required to meet a minimum adjusted earnings before interest, taxes, depreciation and
amortization, or adjusted EBITDA, target and churn rate targets, in each case, as specified in the EWB credit facility. Adjusted
EBITDA is the sum (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)
non-cash stock compensation expenses, plus (f) other non-cash expenses and charges, plus (g) to the extent approved by EWB, other
one-time charges, plus (h) to the extent approved by EWB, any losses arising from the sale, exchange, transfer or other disposition
of assets not in the ordinary course of business. Compliance with the adjusted EBITDA target is measured as of the last day of
each fiscal quarter with respect to the immediately prior three-month period. Through January 31, 2017, compliance with the churn
rate target was measured on a monthly and trailing three-month basis. In February 2017, compliance began to be measured only on
a trailing three-month basis.
The
EWB credit facility also requires the Company to maintain, at June 15, 2017, or if earlier, at such time that the $2.0 million
sublimit has been paid off, a balance on deposit with EWB equal to 100% of the aggregate outstanding principal amount of the advances
at the applicable measurement time.
As
of March 31, 2017, the Company borrowed $6,500,000 in the aggregate under the EWB credit facility, of which $6,450,000 remained
outstanding due to paying down $50,000 on the revolving line and is recorded in current portion of long-term debt on the accompanying
consolidated balance sheet. As of March 31, 2017, and based on the Company’s borrowing base calculated as of that date,
approximately $20,000 was available to borrow. In April 2017, the Company paid in full the $2,000,000 outstanding under the sublimit,
leaving $4,450,000 outstanding. As a result of paying the sublimit in full, the Company was required to have a balance on deposit
with EWB equal to 100% of the aggregate outstanding principal amount of the advances at that time, and the Company complied with
this covenant. The Company was also in compliance with all other covenants as of March 31, 2017.
The
Company used approximately $3,381,000 of the total $6,500,000 borrowed under the EWB credit facility to pay down indebtedness
that was then owed to an equipment lender and to pay related prepayment fees. Under the EWB credit facility, the amount the Company
may owe under its current credit facility with that equipment lender is not limited to any specified amount. With EWB’s
consent, the Company may incur additional indebtedness of up to $2,000,000 in the aggregate with other equipment lenders for equipment
financing. Subject to the foregoing, the EWB credit facility prohibits the Company from borrowing additional amounts from other
lenders.
The
Company paid $37,500 to EWB as a facility fee at the time of closing in April 2014, and has incurred approximately $31,000 for
fees associated with the amendments. An additional facility fee (equal to the product of (x) 0.50% of the increase in the revolving
line times (y) the quotient of the number of days remaining between the effective date of such increase and January 15, 2018,
divided by 1,095) will be due if the revolving line is increased pursuant to the Company’s request. The Company also pays
an unused line fee equal to 0.50% per year of the difference between the amount of the revolving line as in effect from time to
time and the average monthly balance in each month, which is payable monthly in arrears. The average monthly balance is calculated
by adding the ending outstanding balance under the revolving line for each day in the month divided by the number of days in the
month.
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 March 31, 2017, 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 received from the EWB credit facility to pay down a portion
of the principal amount the Company had borrowed under this financing arrangement, accrued interest and a prepayment fee. As of
March 31, 2017, approximately $1,302,000 of principal remained outstanding under this financing arrangement, of which $856,000
is recorded in current portion of long-term debt on the accompanying consolidated balance sheet.
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.
(5) 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 at weighted
average exchange rates prevailing during the period, and the assets and liabilities of such subsidiaries have been translated
at the period end exchange rate. Accumulated other comprehensive income includes the accumulated gains or losses from these foreign
currency translation adjustments. As of March 31, 2017 and December 31, 2016, $238,000 and $223,000 of foreign currency translation
adjustments were recorded in accumulated other comprehensive income, respectively.
(6) RECENT
ACCOUNTING PRONOUNCEMENTS
Management
has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial
statements, and believes that these recent pronouncements will not have a material effect on the Company’s consolidated
financial statements.
(7) CONCENTRATIONS
OF RISK
Significant
Customer
For
the three months ended March 31, 2017 and 2016, the Company generated approximately $2,105,000 and $2,292,000, respectively, of
total revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees, which represented approximately 40% and
42% of total revenue for those periods, respectively. As of March 31, 2017 and December 31, 2016, approximately $250,000 and $261,000,
respectively, was included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and its franchisees.
Equipment
Suppliers
The
Company currently purchases the tablets, cases and charging trays used in its BEOND platform from one unaffiliated third-party
manufacturer. The Company currently does not have an alternative manufacturer for its tablets or an alternative manufacturer or
device for the tablet cases or tablet charging trays. The Company no longer purchases playmakers for its Classic platform.
As
of March 31, 2017, approximately $1,000 was included in accounts payable or accrued expenses for the tablet equipment purchased
from its sole supplier. There were no amounts outstanding in accounts payable or accrued expenses as of December 31, 2016 related
to the sole supplier.
(8) SUBSEQUENT
EVENT
Registered
Direct Offering
On
April 25, 2017, the Company entered into a subscription agreement with certain investors relating to the issuance and sale of
shares of the Company’s common stock at a purchase price of $7.78 per share, which was the closing price of its common stock
on April 24, 2017. The offering closed on April 28, 2017. The Company sold 29,566 shares of its common stock and received net
proceeds of approximately $219,000, after deducting estimated offering expenses.
The
Company intends to use the net proceeds of the offering for general corporate purposes, which may include working capital, general
and administrative expenses, capital expenditures and implementation of its strategic priorities.
The
shares were offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration
Statement No. 333-215271) filed with the Securities and Exchange Commission (“SEC”) on December 22, 2016 and declared
effective by the SEC on February 2, 2017, and the base prospectus included therein, as supplemented by a prospectus supplement
filed with the SEC in connection with the takedown relating to the offering.
As
previously reported, in November 2015, the Company received a letter from the NYSE Regulation Inc. stating that it is not in compliance
with Section 1003(a)(iii) of the NYSE MKT Company Guide because the Company reported stockholders’ equity of less than $6
million as of September 30, 2015 and had net losses in five of its most recent fiscal years ended December 31, 2014. In December
2015, the Company submitted a plan to NYSE Regulation advising of actions it has taken or will take to regain compliance with
Section 1003(a)(iii) by May 13, 2017. In January 2016, NYSE Regulation notified the Company that NYSE Regulation has accepted
the Company’s plan and granted the Company a plan period that extends through May 13, 2017 to regain compliance with Section
1003(a)(iii).
In
April 2016, as previously reported, the Company received a second letter from NYSE Regulation stating that it is not in compliance
with Section 1003(a)(ii) of the Company Guide because the Company reported stockholders’ equity of less than $4 million
as of December 31, 2015 and had net losses in three of its four most recent fiscal years ended December 31, 2015. As a result,
the Company continues to be subject to the procedures and requirements of Section 1009 of the Company Guide. Because this instance
of noncompliance is in addition to the Company’s noncompliance with Section 1003(a)(iii) of the Company Guide discussed
above, the Company was not required to submit a new compliance plan.
Under
Section 1003(a)(i) of the Company Guide, the NYSE MKT will normally consider suspending dealings in, or removing from the list,
securities of an issuer which has stockholders’ equity of less than $2 million if such issuer has sustained losses from
continuing operations and/or net losses in two of its three most recent fiscal years. The Company had net losses in two of its
three most recent fiscal years ended December 31, 2015. The Company’s stockholders’ equity at September 30, 2016 was
$1.8 million, and accordingly, the Company was below compliance with Section 1003(a)(i), as well. However, in the Company’s
November 2016 offering it raised approximately $2.7 million, and the Company’s stockholders’ equity at December 31,
2016 was approximately $4.1 million. The Company also raised approximately $1.6 million in March 2017.
The
listing of the Company’s common stock on the NYSE MKT is being continued during the plan period. The NYSE Regulation staff
reviews the Company periodically for compliance with initiatives outlined in the Company’s plan. If the Company is not in
compliance with the listing requirements with which it is currently not in compliance by May 13, 2017 or if the Company does not
make progress consistent with its plan during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate.
The Company has continued to make progress consistent with its plan during the plan period. Raising capital in the offering described
above is consistent with the initiatives outlined in the Company’s plan to regain compliance, and after giving effect to
the offering described above, the Company believes it will have regained compliance with Sections 1003 (a)(i), (ii) and (iii)
of the Company Guide, however determination of whether the Company has regained such compliance will be made by NYSE Regulation
and will be publicly disclosed by the Company.
The
following table shows the Company’s stockholders’ equity balance as of March 31, 2017 as reported and on a pro forma
basis as if the Company completed the offering described above as of March 31, 2017.
|
|
As
of March 31, 2017
|
|
|
|
As
reported
|
|
|
Net
proceeds from April 2017 offering
|
|
|
Pro
forma
|
|
Total
stockholders’ equity
|
|
$
|
5,828,000
|
|
|
$
|
219,000
|
|
|
$
|
6,047,000
|
|
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 herein 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 maintain
an adequate supply of the tablet and related equipment used in our BEOND product line, (5) our ability to adequately protect our
proprietary rights and intellectual property, (6) our ability to raise additional funds in the future on favorable terms; we have
borrowed substantially all amounts available to us under existing credit facilities and, subject to limited exceptions, our loan
and security agreement with East West Bank prohibits us from borrowing additional amounts from other lenders, (7) our ability
to significantly grow our subscription revenue and implement our other business strategies, (8) our ability to successfully and
efficiently manage the design, manufacturing and assembly process of our BEOND tablet platform and (9) the other risks and uncertainties
described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31,
2016, 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 contained in this report or incorporated by reference herein, which speak only as of the date of this report. Except
as required by law, we do not undertake any obligation to revise or update any such forward-looking statement to reflect future
events or circumstances.
You
should read the following discussion of our financial condition and results of operations in conjunction with the consolidated
financial statements and the notes to those statements included elsewhere in this report.
INTRODUCTION
Management’s
discussion and analysis of financial condition and results of operations is provided as a supplement to 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. Our discussion
is organized as follows:
|
●
|
Overview
and Highlights
. This section provides a general description of our business and significant events and transactions that
we believe are important in understanding our financial condition and results of operations.
|
|
|
|
|
●
|
Critical
Accounting Policies
. This section provides a listing of our significant accounting policies, including any material changes
in our critical accounting policies, estimates and judgments during the three months ended March 31, 2017 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, 2016.
|
|
|
|
|
●
|
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 months ended March 31, 2017 to the
results for the three months ended March 31, 2016.
|
|
|
|
|
●
|
Liquidity
and Capital Resources
. This section provides an analysis of our historical cash flows, as well as our future capital requirements.
|
OVERVIEW
AND HIGHLIGHTS
About
Our Business and How We Talk About It
We
deliver interactive entertainment and innovative dining technology to bars and restaurants in North America. Customers license
our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and single player
games, nationwide competitions, and by offering self-service dining features including dynamic menus, touchscreen ordering and
secure payment. Our platform can improve operating efficiencies, create connections among the players and venues and amplify guests’
positive experiences. Built on an extended network platform, our interactive entertainment system has historically allowed multiple
players to interact at the venue, and now also enables competition between venues, referred to as massively multiplayer gaming.
Our current platform, which we refer to as Buzztime Entertainment On Demand, or BEOND, was first introduced as a pilot program
in December 2012, was expanded commercially during 2013, and the expansion was scaled during 2014. We continue to enhance our
network architecture and the BEOND tablet platform and player engagement paradigms. We also continue to support our legacy network
product line, which we refer to as Classic.
We
currently generate revenue by charging subscription fees for our service to our network subscribers, by leasing equipment (including
tablets used in our BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers, by
hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games and by pay-to-play
single player games.
Over
136 million games were played on our network during 2016, and as of March 31, 2017, approximately 54% 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, BEOND Powered by Buzztime and Play Along
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 hospitality locations 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
hospitality locations, and (d) to “hospitality locations,” “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.
Recent
Developments
Registered
Direct Offerings
As
previously reported, in a registered direct offering that closed on April 28, 2017, we sold 29,566 shares of our common stock
and received net proceeds of approximately $219,000, after deducting offering expenses.
Also
as previously reported, in a registered direct offering that closed on March 31, 2017, we sold 200,000 shares of our common stock
and received net proceeds of approximately $1.6 million, after deducting offering expenses.
We
are using and will continue to use the net proceeds of the offerings for general corporate purposes, which may include working
capital, general and administrative expenses, capital expenditures and implementation of our strategic priorities.
Notice
of non-compliance with NYSE MKT continued listing standard
As
previously reported, in November 2015, we received a letter from the NYSE Regulation Inc. stating that we are not in compliance
with Section 1003(a)(iii) of the NYSE MKT Company Guide because we reported stockholders’ equity of less than $6 million
as of September 30, 2015 and had net losses in five of our most recent fiscal years ended December 31, 2014. In December 2015,
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 May 13, 2017. In January 2016, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that
extends through May 13, 2017 to regain compliance with Section 1003(a)(iii).
In
April 2016, as previously reported, we received a second letter from NYSE Regulation stating that we are not in compliance with
Section 1003(a)(ii) of the Company Guide because we reported stockholders’ equity of less than $4 million as of December
31, 2015 and had net losses in three of our four most recent fiscal years ended December 31, 2015. As a result, we continue to
be subject to the procedures and requirements of Section 1009 of the Company Guide. Because this instance of noncompliance is
in addition to our noncompliance with Section 1003(a)(iii) of the Company Guide discussed above, we were not required to submit
a new compliance plan.
Under
Section 1003(a)(i) of the Company Guide, the NYSE MKT will normally consider suspending dealings in, or removing from the list,
securities of an issuer which has stockholders’ equity of less than $2 million if such issuer has sustained losses from
continuing operations and/or net losses in two of its three most recent fiscal years. We had net losses in two of our three most
recent fiscal years ended December 31, 2015. Our stockholders’ equity at September 30, 2016 was $1.8 million, and accordingly,
we were below compliance with Section 1003(a)(i), as well. However, we raised approximately $2.7 million in the offering we closed
in November 2016, and our stockholders’ equity at December 31, 2016 was approximately $4.1 million.
The
listing of our common stock on the NYSE MKT is being continued during the plan period. The NYSE Regulation staff reviews us periodically
for compliance with initiatives outlined in our plan. If we are not in compliance with the listing requirements with which we
are currently not in compliance by May 13, 2017 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—Risks
Relating to the Market for Our Common Stock—Our common stock could be delisted or suspended from trading on the NYSE MKT
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. We have continued to make progress consistent with our plan during the plan
period. Raising capital in the offerings described above is consistent with the initiatives outlined in our plan to regain compliance,
and after giving effect to the offering that closed on April 28, 2017, we believe we will have regained compliance with Sections
1003 (a)(i), (ii) and (iii) of the Company Guide, however determination of whether we have regained such compliance will be made
by NYSE Regulation and will be publicly disclosed by us.
Amendment
to East West Bank Credit Facility
In
February 2017, we entered into a third amendment to the loan and security agreement with EWB to extend the maturity date of the
$2,000,000 sublimit from March 31, 2017 to June 15, 2017, to establish the minimum adjusted EBITDA targets for each of our 2017
fiscal quarters, to remove the monthly compliance check of churn rate targets and to amend when compliance with minimum deposit
amounts is measured. For additional information regarding this credit facility, see “—Liquidity and Capital Resources,”
below.
Our
Strategy and Current Highlights
Below
is a discussion of our strategy and highlights of accomplishments and milestones achieved during 2017:
Scale
digital menu and payment functionality.
We are heavily focused on delivering digital menu and payment functionality on the
tablet platform, which we believe will improve the operational and marketing value of our product offering. This expanded functionality
will help us deliver an enhanced guest experience. Rolling out this functionality will be a key focus for us in 2017. In
March 2017, we announced that we have expanded our relations with Buffalo Wild Wings, who chose us to be its provider of
digital menu, order, and payment functionality. We expect our expenses to increase due to initiatives we implement as we prepare
to expand and support this relationship.
Improve
value and price for our “independent” customers.
During 2017, we are continuing to focus on, entertainment, which
is a key source of value to our independent customers. During the first quarter of 2017, we launched Spaceteam, an award-winning
multi-player game that creates social engagement between guests at the table and between guests and venues, which is a key value
driver for independent bars and restaurants.
We
also continued to make progress on our hardware design and quality in order to reduce expense, while expanding capabilities,
retaining consistency in the design and giving us the ability to offer flexibility in our pricing for quality independent
customers.
Refine
our commercial execution.
We are focused on increasing our site count of both independent customers and chain customers. Receiving
a reference from a national chain account, such as Buffalo Wild Wings, is critical to our chain efforts, and our ability to demonstrate
Buffalo Wild Wings as a strategic user of the menu, order and pay functionality is critical to receiving that reference. For our
independent customers, we continue to model and test our go-to-market efforts by improving our sales processes, technology and
people.
Expand
revenue opportunities.
We intend to grow the consumer audience by engaging them more with improved entertainment experiences
and providing premium content that we can monetize through direct payment. In addition we have been researching and testing our
services within adjacent markets, such as senior centers, car dealerships and casinos. We also continue to monetize the network
through local and national advertising revenue streams.
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 that 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 months ended March
31, 2017 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, 2016.
RESULTS
OF OPERATIONS
Three
months ended March 31, 2017 compared to the three months ended March 31, 2016
We
generated a net loss of $90,000 for the three months ended March 31, 2017 compared to a net loss of $1,041,000 for the three months
ended March 31, 2016.
Revenue
The
table below summarizes the type of revenue we generated for the three months ended March 31, 2017 and 2016:
|
|
Three
months ended March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
|
|
|
%
of Total
Revenue
|
|
|
$
Change
|
|
|
%
Change
|
|
Subscription
revenue
|
|
|
4,226,000
|
|
|
|
80.8
|
%
|
|
|
4,374,000
|
|
|
|
79.8
|
%
|
|
|
(148,000
|
)
|
|
|
(3.4
|
)%
|
Sales-type
lease revenue
|
|
|
185,000
|
|
|
|
3.5
|
%
|
|
|
396,000
|
|
|
|
7.2
|
%
|
|
|
(211,000
|
)
|
|
|
(53.3
|
)%
|
Other
revenue
|
|
|
820,000
|
|
|
|
15.7
|
%
|
|
|
712,000
|
|
|
|
13.0
|
%
|
|
|
108,000
|
|
|
|
15.2
|
%
|
Total
|
|
|
5,231,000
|
|
|
|
100.0
|
%
|
|
|
5,482,000
|
|
|
|
100.0
|
%
|
|
|
(251,000
|
)
|
|
|
(4.6
|
)%
|
Subscription
revenue decreased for the three months ended March 31, 2017 primarily due to lower average site count when compared to the same
period in 2016. During the three months ended March 31, 2017, equipment lease revenue recognized under sales-type lease arrangements
decreased due to fewer installations of our BEOND platform for certain customers under sales-type lease arrangements when compared
to the same period in 2016. Equipment lease revenue (which has lower margins due to the cost we incur to purchase the equipment
that we lease) is recognized when we lease the equipment. The equipment lease revenue is a one-time payment that covers the lease
of the equipment for three-years, after which the lessee may purchase the equipment for a nominal fee or lease new equipment.
We expect the amount of equipment lease revenue to continue fluctuating in correlation with customer contracts under sales-type
lease arrangements. Other revenue increased for the three months ended March 31, 2017 due primarily to an increase in our live
hosted events and professional services when compared to the same period in 2016.
Geographic
breakdown of our network subscribers is as follows:
|
|
Network
Subscribers
as of March 31,
|
|
|
|
2017
|
|
|
2016
|
|
United
States
|
|
|
2,643
|
|
|
|
2,742
|
|
Canada
|
|
|
145
|
|
|
|
161
|
|
Total
|
|
|
2,788
|
|
|
|
2,903
|
|
Direct
Costs and Gross Margin
A
comparison of direct costs and gross margin for the three months ended March 31, 2017 and 2016 is shown in the table below:
|
|
For
the three months ended
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
Revenues
|
|
$
|
5,231,000
|
|
|
$
|
5,482,000
|
|
|
$
|
(251,000
|
)
|
|
|
(4.6
|
)%
|
Direct
Costs
|
|
|
1,843,000
|
|
|
|
2,036,000
|
|
|
|
(193,000
|
)
|
|
|
(9.5
|
)%
|
Gross
Margin
|
|
$
|
3,388,000
|
|
|
$
|
3,446,000
|
|
|
$
|
(58,000
|
)
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin Percentage
|
|
|
64.8
|
%
|
|
|
62.9
|
%
|
|
|
|
|
|
|
|
|
The
decrease in direct costs for the three months ended March 31, 2017 compared to the same period in 2016 was primarily due to decreased
equipment expense of approximately $261,000 related to lower sale-type lease revenue, decreased depreciation expense for capitalized
site equipment and software development programs of $151,000 and decreased service provider fees of $70,000. These decreases were
offset by an increase of approximately $288,000 in repair expense related to our second generation tablet cases.
We
expect such repair expense to decrease in future quarters because we anticipate that our second generation tablet cases will be
phased out of locations by mid-2017.
We
may continue to experience challenges with our tablet platform equipment, and as a result, we may be required to recognize additional
repair expense in the future.
Operating
Expenses
|
|
For
the three months ended
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
% Change
|
|
Selling,
general and administrative
|
|
$
|
4,134,000
|
|
|
$
|
4,200,000
|
|
|
$
|
(66,000
|
)
|
|
|
(1.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization (non-direct)
|
|
$
|
88,000
|
|
|
$
|
114,000
|
|
|
$
|
(26,000
|
)
|
|
|
(22.8
|
)%
|
Selling,
General and Administrative Expenses
The
decrease in selling, general and administrative expenses for the three months ended March 31, 2016 was primarily due to less marketing
expense of approximately $56,000 and decreased payroll and related expense of $34,000, offset by increased professional fees of
$31,000 when compared to the same period in 2016.
We
expect selling, general and administrative expenses in the second and third quarters of 2017 to increase from first quarter 2017
as we continue to make decisions for efficiency as well as investments that can impact our growth, including as we implement initiatives
to prepare to expand our relationship with Buffalo Wild Wings and to support that expansion. For the full year 2017, we anticipate
selling, general and administrative expenses to be approximately $17.0 million.
Depreciation
and Amortization Expense
The
decrease in depreciation and amortization expense for the three months ended March 31, 2017 compared to the same period in 2016
is primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.
Other
Income (Expense), Net
|
|
For
the three months ended
March 31,
|
|
|
Increase
in other
|
|
|
|
2017
|
|
|
2016
|
|
|
income,
net
|
|
Total
other income (expense), net
|
|
$
|
750,000
|
|
|
$
|
(154,000
|
)
|
|
$
|
904,000
|
|
The
increase in total other income, net is primarily due to a one-time payment from a supplier, offset by increased interest expense
from higher long-term debt balances for the three months ended March 31, 2017 compared to the same period in 2016. The one-time
payment related to a supply chain matter that was resolved in exchange for such payment and which we do not expect to receive
again.
Income
Taxes
|
|
For
the three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Provision
for income taxes
|
|
$
|
(6,000
|
)
|
|
$
|
(19,000
|
)
|
We
expect to incur state income tax liability in 2017 related to our U.S. operations. We also expect to pay income taxes in Canada
due to profitability of our Canadian subsidiary. 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.
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 in comparison to their net income or loss calculation in accordance with GAAP.
The
reconciliation of our consolidated net loss calculated in accordance with GAAP to EBITDA for the three months ended March 31,
2017 and 2016 is shown in the table below. EBITDA should not be considered as substitutes for, or superior to, net loss calculated
in accordance with GAAP.
|
|
For
the three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net
loss per GAAP
|
|
$
|
(90,000
|
)
|
|
$
|
(1,041,000
|
)
|
Interest
expense, net
|
|
|
159,000
|
|
|
|
127,000
|
|
Income
tax provision
|
|
|
6,000
|
|
|
|
19,000
|
|
Depreciation
and amortization
|
|
|
579,000
|
|
|
|
757,000
|
|
EBITDA
|
|
$
|
654,000
|
|
|
$
|
(138,000
|
)
|
LIQUIDITY
AND CAPITAL RESOURCES
As
of March 31, 2017, we had cash and cash equivalents of $6,113,000 compared to $5,686,000 as of December 31, 2016.
In
a registered direct offering that closed on April 28, 2017, we sold 29,566 shares of our common stock and received net proceeds
of approximately $219,000, after deducting offering expenses. Also, in a registered direct offering that closed on March 31, 2017,
we sold 200,000 shares of our common stock and received net proceeds of approximately $1.6 million, after deducting offering expenses.
We are using and will continue to use the net proceeds of the offerings for general corporate purposes, which may include working
capital, general and administrative expenses, capital expenditures and implementation of our strategic priorities.
As
of March 31, 2017, we borrowed $6,500,000 in the aggregate under the EWB credit facility, of which $6,450,000 remained outstanding.
As of that date and based on our borrowing base calculated as of that date, approximately $20,000 was available to borrow. In
April 2017, we paid in full the $2,000,000 outstanding under the sublimit, leaving $4,450,000 outstanding. If the aggregate amount
of advances as of June 15, 2017 exceeds the lesser of the revolving line ($7,500,000) or the amount equal to our borrowing base
(which was $20,000 as of March 31, 2017), then we must pay EWB the amount of such excess. All advances are due on January 15,
2018. Under the EWB credit facility, we are required to meet a minimum adjusted EBITDA target and churn rate targets. We were
in compliance with these covenants as of March 31, 2017. As a result of paying the sublimit in full in April 2017, we were required
to have a balance on deposit with EWB equal to 100% of the aggregate outstanding principal amount of the advances at that time.
We complied with this covenant. For other information regarding the EWB credit facility, including how our borrowing base is determined,
see “Note 4—Debt” to the Notes to Condensed Consolidated Financial Statements included in this report.
We
have another financing arrangement with an equipment lender under which we may request funds to finance the purchase of certain
capital equipment. The lender determines whether to extend such funds on a case-by-case basis, taking into account such factors
as the lender considers relevant, including the amount outstanding under this financing arrangement. Through March 31, 2017, we
borrowed $9,690,000 under this financing arrangement, and as of March 31, 2017, $1,302,000 remained outstanding. We currently
do not expect the lender to lend any additional funds under this financing arrangement, and other than the EWB credit facility,
we currently do not have any other source of debt financing. In addition, other than up to $2,000,000 in the aggregate that we
may borrow for equipment financing with EWB’s consent, the EWB credit facility prohibits us from borrowing additional amounts
from other lenders.
In
connection with preparing the financial statement as of and for the three months ended March 31, 2017, 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 one year after the date that such financial statements are issued. As
a result of such evaluation, 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 issuance date of such financial statements. To increase the likelihood
that we will be able to successfully execute our operating and strategic plan and to position us to better 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 are not sufficient to meet future cash requirements, we may
be required 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 may be insufficient
to cover shortfalls in available funds. If we require additional capital, we may be unable to secure additional financing on terms
that are acceptable to us, or at all.
Working
Capital
As
of March 31, 2017, we had working capital (current assets in excess of current liabilities) of $1,113,000 compared to working
capital of $4,019,000 as of December 31, 2016. The following table shows our change in working capital from December 31, 2016
to March 31, 2017.
|
|
Increase
(Decrease)
|
|
Working
capital as of December 31, 2016
|
|
$
|
4,019,000
|
|
Changes
in current assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
|
427,000
|
|
Accounts
receivable, net of allowance
|
|
|
837,000
|
|
Site
equipment to be installed
|
|
|
(430,000
|
)
|
Prepaid
expenses and other current assets
|
|
|
139,000
|
|
Change
in total current assets
|
|
|
973,000
|
|
Changes
in current liabilities:
|
|
|
|
|
Accounts
payable
|
|
|
266,000
|
|
Accrued
compensation
|
|
|
(541,000
|
)
|
Accrued
expenses
|
|
|
(136,000
|
)
|
Sales
taxes payable
|
|
|
(41,000
|
)
|
Income
taxes payable
|
|
|
(21,000
|
)
|
Current
portion of long-term debt
|
|
|
4,318,000
|
|
Current
portion of obligations under capital leases
|
|
|
-
|
|
Deferred
revenue
|
|
|
(22,000
|
)
|
Other
current liabilities
|
|
|
56,000
|
|
Change
in total current liabilities
|
|
|
3,879,000
|
|
Net
change in working capital
|
|
|
(2,906,000
|
)
|
Working capital
as of March 31, 2017
|
|
$
|
1,113,000
|
|
Cash
Flows
Cash
flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows,
are summarized as follows:
|
|
For
the three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(466,000
|
)
|
|
$
|
(504,000
|
)
|
Investing
activities
|
|
|
(249,000
|
)
|
|
|
(276,000
|
)
|
Financing
activities
|
|
|
1,135,000
|
|
|
|
1,053,000
|
|
Effect
of exchange rates
|
|
|
7,000
|
|
|
|
53,000
|
|
Net
increase in cash and cash equivalents
|
|
$
|
427,000
|
|
|
$
|
326,000
|
|
Net
cash used in operating activities.
The $38,000 decrease in cash used in operating activities was due to a net decrease in
net loss of $915,000, after giving effect to adjustments made for non-cash transactions, offset by an increase in operating assets
and liabilities of $877,000 primarily due to an increase in accounts receivable during the three months ended March 31, 2017 compared
to the same period in 2016. The increase in accounts receivable is primarily due to a one-time payment related to a supply chain
matter that was resolved in exchange for such payment and which we do not expect to receive again
We
expect site equipment to be installed to increase in the second and third quarters of 2017 from the first quarter 2017 as we invest
in inventory to prepare to expand our relationship with Buffalo Wild Wings and to support that expansion.
Our
largest use of cash is payroll and related costs. Cash used for payroll and related costs increased $227,000 to $2,964,000 for
the three months ended March 31, 2017 from $2,737,000 during the same period in 2016.
Our
primary source of cash is cash we generate from customers. Cash received from customers decreased $280,000 to $5,669,000 for the
three months ended March 31, 2017 from $5,949,000 during the same period in 2016. This decrease was primarily a result of decreased
revenue during the three months ended March 31, 2017 when compared to the same period in 2016.
Net
cash used in investing activities.
The $27,000 decrease in cash used in investing activities was primarily due to a decrease
in capital expenditures offset by increased software development expenditures.
Net
cash provided by financing activities.
The $82,000 increase in cash provided by financing activities is primarily attributable
to the following:
|
●
|
During
the three months ended March 31, 2017, we received net proceeds of $1,554,000 from our common stock offering in March 2017;
there was no similar event during the same period in 2016; and
|
|
|
|
|
●
|
During
the three months ended March 31, 2017, our payments on long-term debt decreased by $676,000 compared to the same period in
2016.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
We
have considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements, and
believe that these recent pronouncements will not have a material effect 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.