NTN BUZZTIME, INC. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference herein, if any, contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, or the Forward-Looking Statements Safe Harbor, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts could be deemed forward-looking statements. We have tried, whenever possible, to identify these statements by using words such as "believes," "estimates," "anticipates," "expects," "intends," "plans," "seeks," or words of similar meaning, or future or conditional verbs, such as "may," "will," "should," "could," "aims," "intends" or "projects," and similar expressions, whether in the negative or the affirmative. Forward-looking statements reflect management's beliefs and assumptions, are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. 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 statement. For us, particular factors that might cause or contribute to such differences include: (1) the risk that the conditions to the closing of the Asset Sale or the Merger are not satisfied, including the failure to timely or at all obtain stockholder approval for the Asset Sale or the Merger; (2) uncertainties as to the timing of the consummation of the Asset Sale or the Merger and the ability of the parties to consummate the Asset Sale or the Merger; (3) risks related to our ability to correctly estimate our operating expenses and our expenses associated with the Asset Sale or the Merger; (4) unexpected costs, charges or expenses resulting from the Asset Sale or the Merger; (5) if the Merger or the Asset Sale is not consummated, our ability to raise substantial capital in the very near-term to allow us to maintain operations and sustain the negative impact of the COVID-19 pandemic on our business and financial condition, and if we are able to sustain such impact, our ability to recover from the impact; (6) our ability to successfully manage our liquidity and our working capital deficit by managing the timing of payments to our third parties; (7) our ability to comply with our financial covenants in our loan and security agreement with Avidbank and its right to declare a default if we do not, which could lead to all payment obligations becoming immediately due and payable and which could lead to a foreclosure on our assets; (8) when, and the extent to which, the negative impact of the pandemic will improve, including when a substantial majority of restaurants across theU.S. andCanada will be permitted to offer on-site dining and operate at or close to pre-pandemic levels or when a substantial majority of bars across theU.S. andCanada will be permitted to re-open and operate at or close to pre-pandemic levels, when our customers will re-open, or if they will subscribe to our service if and when they do; (9) the negative impact that measures we implemented and may implement to reduce our operating expenses and planned capital expenses (including investments in our business) may have on our ability to effectively manage and operate our business; (10) our ability to maintain or grow our revenue; and (11) the other risks and uncertainties described in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 (our "2019 10-K"), and described in other documents we file from time to time with theSecurities and Exchange Commission , orSEC , including our Current Reports on Form 8-K and our Quarterly Reports on Form 10-Q filed with theSEC thereafter. To the extent the impact of the COVID-19 pandemic adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A "Risk Factors" included in our 2019 10-K. 21 Readers are urged not to place undue reliance on the forward-looking statements in this report or incorporated by reference herein, which speak only as of the date of this report. We are including this cautionary note to make applicable, and take advantage of, the safe harbor provisions of the Forward-Looking Statements Safe Harbor. We believe that the expectations reflected in forward-looking statements in this report or incorporated herein by reference are based upon reasonable assumptions at the time made. However, given the risks and uncertainties, you should not rely on any forward- looking statements as a prediction of actual results, developments or other outcomes. You should read these forward-looking statements with the understanding that we may be unable to achieve projected results, developments or other outcomes and that actual results, developments or other outcomes may be materially different from what we expect. You are cautioned not to place undue reliance on these forward-looking statements. We intend forward-looking statements to speak only as of the time they are made. Except as required by law, we do not undertake, and expressly disclaim any obligation, to disseminate, after the date hereof, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read with, the accompanying unaudited condensed consolidated financial statements and notes, included in Item 1 of this Quarterly Report on Form 10-Q, to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. All dollar amounts in this discussion are rounded to the nearest thousand. Our discussion is organized as follows:
? Overview and Highlights. This section describes our business and significant
events and transactions we believe are important in understanding our
financial condition and results of operations.
? Critical Accounting Policies. This section lists our significant accounting
policies, including any material changes in our critical accounting policies,
estimates and judgments during the three and nine months ended
2020 from those described in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of our 2019 10-K.
? Results of Operations. This section provides an analysis of our results of
operations presented in the accompanying unaudited condensed consolidated
statements of operations by comparing the results for the three and nine
months ended
ended
? Liquidity and Capital Resources. This section provides an analysis of our
historical cash flows, and our future capital requirements.
? Recent Accounting Pronouncements. This section provides information related to
new or updated accounting guidance that may impact our consolidated financial
statements.
? Off-Balance Sheet Arrangements. This section provides information related to
any off-balance sheet arrangement we may have that would affect our
consolidated finance statements.
OVERVIEW AND HIGHLIGHTS
About Our Business and How We Talk About It
We deliver interactive entertainment and innovative technology to our partners in a wide range of verticals - from bars and restaurants to casinos and senior living centers. By enhancing the overall guest experience, we believe we help our hospitality partners acquire, engage, and retain patrons. Through social fun and friendly competition, our platform creates bonds between our hospitality partners and their patrons, and between patrons themselves. We believe this unique experience increases dwell time, revenue, and repeat business for venues - and has also created a large and engaged audience which we connect with through our in-venue TV network. Until the significant disruptions to the restaurant and bar industry resulting from the COVID-19 pandemic that began inMarch 2020 , over 1 million hours of trivia, card, sports and arcade games were played on our network each month. Since the pandemic, approximately 100,000 hours per month of such games have been played on our network each
month. 22 We generate revenue by charging subscription fees to our partners for access to our 24/7 trivia network, by selling and leasing tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling digital-out-of-home (DOOH) advertising direct to advertisers and on national ad exchanges, by licensing our entertainment and trivia content to other parties, and by providing professional services such as custom game design or development of new platforms on our existing tablet form factor. UntilFebruary 1, 2020 , we also generated revenue from hosting live trivia events. We sold all our assets used to host live trivia events inJanuary 2020 . We own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our property. Other trademarks are the property of their respective owners. Unless otherwise indicated, references in this report: (a) to "Buzztime," "NTN," "we," "us" and "our" refer toNTN Buzztime, Inc. and its consolidated subsidiaries; (b) to "network subscribers," "customers," or "partners" refer to venues that subscribe to our network service; (c) to "consumers," "patrons" or "players" refer to the individuals that engage in our games, events, and entertainment experiences available at venues and (d) to "venues" or "sites" refer to locations (such as a bar or restaurant) of our customers at which our games and entertainment experiences are available to consumers. Recent Developments
Proposed Reverse Merger and Asset Sale Transactions
Since 2018, we have been exploring and evaluating strategic alternatives focused on maximizing shareholder value, while also exploring and evaluating financing alternatives to increase the likelihood that we would be able to avoid a restructuring (such as a reorganization, bankruptcy or assignment for the benefit of creditors) or a dissolution, liquidation and/or winding up of our company, in the event the strategic process does not result in a transaction. OnAugust 12, 2020 , we entered into an agreement and plan of merger and reorganization (the "Merger Agreement") withBrooklyn Immunotherapeutics LLC ("Brooklyn"), pursuant to which, subject to the terms and conditions thereof, a wholly-owned subsidiary ours will be merged with and intoBrooklyn (the "Merger"). OnSeptember 18, 2020 , we entered an asset purchase agreement (the "Asset Purchase Agreement") with eGames.comHoldings LLC ("eGames.com"), pursuant to which, subject to the terms and conditions thereof, we will sell and assign (the "Asset Sale") all of our right, title and interest in and to the assets relating to our current business (the "Purchased Assets") to eGames.com. If the Merger and the Asset Sale are completed, we will sell to eGames.com all of our right, title and interest in and to the assets relating to our business of licensing our interactive entertainment network and services and the tablets and related equipment used therein, and our business will become the business ofBrooklyn .Brooklyn is a clinical-stage biopharmaceutical company focused on exploring the role that cytokine-based therapy can have on the immune system in treating patients with cancer. Pursuant to, and on the terms and subject to the conditions of, the Merger Agreement, at the closing of the Merger,Brooklyn will become our wholly owned subsidiary. At the effective time of the Merger,Brooklyn's members will exchange their equity interests inBrooklyn for shares of our common stock representing between approximately 94.08% and 96.74% of our outstanding common stock immediately following the effective time of the Merger on a fully diluted basis (less a portion of such shares which will be allocated toMaxim Group LLC in respect of the success fee owed to it byBrooklyn ), and our stockholders as of immediately prior to the effective time, will own between approximately 5.92% and 3.26% of our outstanding common stock immediately after the effective time of the Merger on a fully diluted basis. The exact number of shares to be issued in the Merger will be determined pursuant to a formula in the Merger Agreement. Upon completion of the Merger, the board of directors of the combined company is expected to consist entirely of individuals designated byBrooklyn and the officers of the combined company are expected to be members ofBrooklyn's current management team. The employment ofAllen Wolff , our chief executive officer, with us will terminate upon the closing of the Asset Sale, and he will become employed by eGames.com.Sandra Gurrola , our senior vice president of finance, has had discussions regarding her possible employment with eGames.com following the closing of the Merger, and as of the date of this report, the parties continue to be in discussions andMs. Gurrola has not accepted an offer. Consummation of the Merger is subject to certain closing conditions, including, among other things, approval by our stockholders and by the beneficial holders of the Class A membership units ofBrooklyn . The Merger Agreement contains certain termination rights for each of us andBrooklyn , including that either party may terminate the Merger Agreement if the Merger has not been consummated byDecember 31, 2020 , subject to extension under specified circumstances. The Merger Agreement also provides that, upon the termination of the Merger Agreement under specified circumstances, we orBrooklyn will be required to pay the other party a$750,000 termination fee or reimburse the other party for up to$250,000 of its third party expenses. 23 We devoted significant resources and effort to identify, evaluate and negotiate the Merger Agreement withBrooklyn and the Asset Purchase Agreement with eGames.com, and continue to devote significant resources and effort to consummate the transactions contemplated by the Merger Agreement and the Asset Purchase Agreement. However, no assurances are, or can be given, that the Merger or the Asset Sale will be consummated. If the Merger is not completed, we cannot predict whether and to what extent we would be successful in consummating an alternative transaction, the timing of such a transaction or our future cash needs required to complete such a transaction, and we may choose or be forced to effectuate a restructuring or to dissolve and liquidate our assets. Even if the Merger is completed, it ultimately may not deliver the anticipated benefits or enhance stockholder value. If neither the Merger nor the Asset Sale are completed, we will reconsider our strategic alternatives and could attempt to complete another strategic transaction like the Merger or the Asset Sale, continue to operate our business, or dissolve and liquidate our assets. However, because of our limited cash and resources, we would likely be required to dissolve and liquidate our assets. If the Merger does not close and the Asset Sale closes, we may attempt to find another reverse merger partner or dissolve and liquidate our assets. Because theNYSE Regulation, Inc. may begin delisting proceedings if we had no assets or operations and due to our limited cash availability, we may be unable to identify and complete another reverse merger and we would likely be required to dissolve and liquidate our assets. In such case, we would be required to pay all our debts and contractual obligations and to set aside certain reserves for potential future claims. If the Merger closes and our stockholders do not approve the Asset Sale Proposal, the combined company will focus its resources on executingBrooklyn's business plan, and the board of directors of the combined company may elect to, among other things, attempt to sell or otherwise dispose of the assets related to our historical business, including to eGames.com under the Asset Purchase Agreement. Because as of immediately following the closing of the Merger, the assets related to our historical business are not expected to constitute all or substantially all of the combined company's assets, the combined company may be able sell or otherwise dispose of the assets related to our historical business without stockholder approval, including to eGames.com under the Asset Purchase Agreement.
The descriptions above of Merger Agreement and the Asset Purchase Agreement do not purport to be complete and are qualified in their entirety by reference to the Merger Agreement and the Asset Purchase Agreement that have been filed with theSecurities and Exchange Commission (the "SEC"), and are incorporated by reference in this report. The assertions embodied in the representations and warranties contained in the Merger Agreement and the Asset Purchase Agreement are qualified by information in confidential disclosure schedules delivered by the parties in connection with the signing of those agreements. Moreover, certain representations and warranties contained in those agreements were made as of a specified date; may have been made for the purposes of allocating contractual risk between the parties to such agreements; and may be subject to contractual standards of materiality different from what might be viewed as material to our stockholders. Accordingly, the representations and warranties in those agreements should not be relied on by any persons as characterizations of the actual state of facts and circumstances of our company or any other parties thereto at the time they were made and should consider the information in these agreements in conjunction with the entirety of the factual disclosure about our company in this report. Information concerning the subject matter of the representations and warranties may have changed after the date of those agreements, which subsequent information may or may not be fully reflected in our public disclosures. Those agreements should not be read alone, but should instead be read in conjunction with each other and other information included in this report and in the registration statement on Form S-4 we filed with theSEC onOctober 2, 2020 , to register the offer and sale of the shares of our common stock to be issued pursuant to the Merger Agreement (the "Registration Statement"). The Registration Statement also serves as our proxy statement for the special meeting of stockholders that we intend to convene as promptly as practicable following the effectiveness of the Registration Statement at which our stockholders will be asked to vote to approve (i) the issuance of shares of our common stock to the members ofBrooklyn pursuant to the terms of the Merger Agreement and the change of control resulting therefrom, (ii) a reverse stock split of the outstanding shares of our common stock within a range of one new share for every 3 to 10 (or any number in between) shares outstanding (if the reverse stock split is implemented in connection with the Merger, the ratio will be mutually agreed upon by our board of directors andBrooklyn's managers, and if not implemented in connection with the Merger, will be determined by our board of directors), (iii) amendments to our certificate of incorporation to increase the authorized number of shares of our common stock, change our corporate name to "Brooklyn Immunotherapeutics, Inc. ", and provide the holders of our Series A Convertible Preferred Stock with voting rights (in order to help ensure the tax-deferred nature of the transactions contemplated by the Merger Agreement), (iv) a new stock incentive plan, which will become effective upon the Merger and will authorize the issuance of no more than 7.5% of the fully-diluted outstanding shares of our common stock immediately following the effective date of the merger, (v) the Asset Sale and (vi) on a non-binding, advisory basis, the compensation that will be paid or may become payable to our named executive officers in connection with the Merger and the Asset Sale.
24Bridge Loan In connection with entering into the Asset Purchase Agreement with eGames.com onSeptember 18, 2020 , we issued toFertilemind Management, LLC , an affiliate of eGames.com, an unsecured promissory note in the principal amount of$1,000,000 , evidencing a$1,000,000 loan received fromFertilemind Management, LLC on behalf of eGames.com. We may use the loan proceeds for, among other things, the payment of obligations related to the transactions contemplated by the Asset Purchase Agreement and the Merger Agreement and other general working capital purposes. Upon the closing of the Asset Sale, the loan be applied against the purchase price under the Asset Purchase Agreement, and the promissory note evidencing the loan will be extinguished. See "-Liquidity and Capital Resources," below. We are in discussions withFertilemind Management, LLC regarding the possibility of borrowing an additional$500,000 on approximatelyDecember 1, 2020 , which, if received, would also be applied toward the purchase price at the closing of the Asset Sale. No assurances can be given that we will obtain such$500,000 loan fromFertilemind Management, LLC or from any other party. COVID-19 Impact The negative impact of the COVID-19 pandemic on the restaurant and bar industry was abrupt and substantial, and our business, cash flows from operations and liquidity suffered, and continues to suffer, materially as a result. In many jurisdictions, including those in which we have many customers and prospective customers, restaurants and bars were ordered by the government to shut-down or close all on-site dining operations in the latter half ofMarch 2020 . Since then, governmental orders and restrictions impacting restaurants and bars in certain jurisdictions were eased or lifted as the number of COVID-19 cases decreased or plateaued, but as jurisdictions began experiencing a resurgence in COVID-19 cases, many jurisdictions reinstated such orders and restrictions, including mandating the shut-down of bars and the closing of all on-site dining operations of restaurants. We have experienced material decreases in subscription revenue, advertising revenue and cash flows from operations, which we expect to continue for at least as long as the restaurant and bar industry continues to be negatively impacted by the COVID-19 pandemic, and which may continue thereafter if restaurants and bars seek to reduce their operating costs or are unable to re-open even if restrictions within their jurisdictions are eased or lifted. For example, at its peak, approximately 70% of our customers had their subscriptions to our services temporarily suspended. As ofNovember 10, 2020 , approximately 11% of our customers remain on subscription suspensions.
In response to the impact of the pandemic on our business, we implemented measures to reduce our operating expenses and preserve capital, and we may implement additional measures in the future.
? We reduced our headcount (as of
whom are currently working remotely, compared to 74 at
? Our chief executive officer agreed to defer payment of 45% of his base salary
between
or such time as our board of directors determines in good faith that we are in
the financial position to pay his accumulated deferred salary. As of September
30 2020, we have accrued approximately
officer's deferred compensation.
? We terminated the lease for our corporate headquarters, resulting in a
reduction in our future cash obligations under the lease by approximately
million (see Note 10 to the unaudited condensed consolidated financial
statements included herein).
? We substantially eliminated all capital projects and are aggressively managing
our payables to limit further cash outlays and manage our working capital.
Paycheck Protection Program Loan
InApril 2020 , we received a loan of approximately$1,625,000 under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act administered by theU.S. Small Business Administration . The loan matures onApril 18, 2022 and bears interest at a rate of 1.0% per annum. We must make monthly interest only payments beginning onNovember 18, 2020 . One final payment of all unforgiven principal plus any accrued unpaid interest is due at maturity. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. InOctober 2020 , we submitted our loan forgiveness application for the PPP Loan and inNovember 2020 , theU.S Small Business Administration approved the forgiveness of approximately$1,093,000 of the$1,625,000 loan, leaving a note balance of approximately$532,000 . See "-Liquidity and Capital Resources," below. 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 inthe 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 and amortization of fixed assets, the provision for income taxes including the valuation allowance, stock-based compensation, bad debts, impairment of software development costs, goodwill, intangible assets and contingencies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management's most subjective judgments. 25
There have been no material changes in our critical accounting policies,
estimates and judgments during the three months ended
RESULTS OF OPERATIONS
We incurred a net loss of
Revenue We generate revenue by charging subscription fees to our partners for access to our 24/7 trivia network, by selling and leasing tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling DOOH advertising direct to advertisers and on national ad exchanges, by licensing our entertainment and trivia content to other parties, and by providing professional services such as custom game design or development of new platforms on our existing tablet form factor. UntilFebruary 1, 2020 , we also generated revenue from hosting live trivia events. We sold all our assets used to host live trivia events inJanuary 2020 . The table below summarizes the type of revenue we generated for the three and nine months endedSeptember 30, 2020 and 2019 and the change in such revenue between the two periods: Three months ended September 30, 2020 2019 % of Total % of Total $ % $ Revenue $ Revenue Change Change Subscription revenue 1,053,000 71.3 % 3,723,000 81 % (2,670,000 ) (71.7 )% Hardware revenue 379,000 25.7 % 11,000 0 % 368,000 3,345.5 )% Other revenue 45,000 3.0 % 846,000 19 % (801,000 ) (94.7 )% Total 1,477,000 100.0 % 4,580,000 100 % (3,103,000 ) (67.8 )% Nine months ended September 30, 2020 2019 % of Total % of Total $ % $ Revenue $ Revenue Change Change Subscription revenue 3,779,000 82 % 11,356,000 78 % (7,577,000 ) (67 )% Hardware revenue 421,000 9 % 811,000 6 % (390,000 ) (48 )% Other revenue 425,000 9 % 2,471,000 17 % (2,046,000 ) (83 )% Total 4,625,000 100 % 14,638,000 100 % (10,013,000 ) (68 )% Subscription Revenue The decrease in subscription revenue for the three and nine months endedSeptember 30, 2020 was due to lower average site count, lower average revenue per site and the impact of the COVD-19 pandemic on our business when compared to the same periods in 2019. We previously reported that our subscription revenue would materially decrease beginning in the first quarter of 2020 if we did not add network subscribers or other revenue sources sufficient to replace the revenue historically received fromBuffalo Wild Wings corporate-owned restaurants and its franchisees, after our existing relationships with BWW terminated inNovember 2019 . To date, we have not offset the lost subscription revenue fromBuffalo Wild Wings corporate-owned restaurants and its franchisees, and, in light of the substantial negative impact the pandemic has had, continues to have and is expected to continue to have, on the restaurant and bar industry and on our business, and taking into account the measures we implemented in response to the impact of the pandemic on our business to reduce operating expenses and preserve capital, including reducing our headcount and sales and marketing team, we do not expect that will be able to do so in the foreseeable future.
Because shelter-in-place orders and governmental orders and restrictions on the operations of restaurants and bars to shut-down or close all on-site dining were generally issued toward the end of the first quarter of 2020, the negative impacts of the COVID-19 pandemic on our subscription revenue were significantly greater in the second quarter of 2020 compared to the first quarter of 2020. Although restrictions have been lifted or reduced for many of our customers, our subscription revenue suffered during the third quarter of 2020 and we expect that it will continue to suffer as a result of the pandemic, including because we expect governmental orders and restrictions impacting restaurants and bars will remain in effect or be reinstated in response to resurgences in COVID-19 cases. See "Item 1A. Risk Factors" in Part II of this report for additional information regarding the impact of the pandemic on our business and outlook. 26
ASC No. 606 specifies certain criteria that an arrangement with a customer must
have in order for a contract to exist for purposes of revenue recognition, one
of which is that it must be probable that we will collect the consideration to
which we will be entitled under the contract. As a result of the impact that the
COVID-19 pandemic has had, and continues to have, on our customers, we
determined that due to the uncertainty of collectability of the subscription
fees for certain customers, our arrangement with those customers no longer meets
all the criteria needed for a contract to exist for revenue recognition
purposes. Therefore, we did not recognize revenue for these customers and fully
reserved for accounts receivable in the allowance for doubtful accounts. We only
recognize revenue for the arrangements that continued to meet the contract
criteria, including the criteria that collectability was probable.
The table below provides a geographic breakdown of our site count as of the date
indicated:
Network Subscribers
as of September 30,
2020 2019
United States 981 2,431
Canada 99 134
Total 1,080 2,565
Hardware Revenue
The increase in hardware revenue for the three months ended September 30, 2020
was due to the final delivery of tablets to our jail services partner. In
September 2020 , we entered into an agreement with our jail service partner to
terminate our existing contract and cancel the remaining tablets to be delivered
under our contract. We expect our hardware revenue to materially decrease in the
future.
The decrease in hardware revenue for the nine months ended September 30, 2020
was primarily due to decreased sales-type lease arrangements when compared to
the same periods in 2019. As previously reported, we did not, and do not, expect
to continue recognizing hardware revenue under sales-type lease arrangements
during 2020 or thereafter.
Other Revenue
The decrease in other revenue for the three and nine months endedSeptember 30, 2020 was primarily due to a decrease in revenue from our live-hosted trivia events when compared to the same periods in 2019 as a result of the sale inJanuary 2020 of all our assets used to conduct such events. We do not expect to recognize revenue from live-hosted trivia events in the future. We also recognized less license revenue and advertising revenue during the three and nine months endedSeptember 30, 2020 when compared to the same periods in 2019. We expect our advertising revenue will continue to be materially adversely impacted because of a decrease in advertising sales arising from a slowdown in consumer traffic in the restaurant and bars that subscribe to our service as a result of the COVID-19 pandemic. 27
Direct Operating Costs and Gross Margin
A comparison of direct operating costs and gross margin for the periods indicated is shown in the table below:
Three months ended
September 30,
2020 2019 Change % Change
Revenues $ 1,477,000 $ 4,580,000 $ (3,103,000 ) (68 )%
Direct Operating Costs 801,000 1,344,000 (543,000 ) (40 )%
Gross Margin $ 676,000 $ 3,236,000 $ (2,560,000 ) (79 )%
Gross Margin Percentage 46 % 71 %
Nine months ended
September 30,
2020 2019 Change % Change
Revenues $ 4,625,000 $ 14,638,000 $ (10,013,000 ) (68 )%
Direct Operating Costs 2,364,000 4,545,000 (2,181,000 ) (48 )%
Gross Margin $ 2,261,000 $ 10,093,000 $ (7,832,000 ) (78 )%
Gross Margin Percentage 49 % 69 %
For the three months ended September 30, 2020 , the decrease in direct operating
costs was primarily due to decreased (1) direct wages of approximately $313,000
as a result of no longer providing live-hosted trivia events after January 2020
following the sale of all our assets used to conduct those events; (2)
depreciation expense of $302,000 ; (3) service provider and freight expense of
approximately $152,000 ; and (4) other miscellaneous expenses of $78,000 , in each
case, when compared to the same period in 2019. These decreased expenses were
offset by increased equipment expense of approximately $303,000 as a result of
the delivery of tablets to our jail services provider during the three months
ended September 30, 2020 compared to the same period in 2019.
For the nine months ended September 30, 2020 , the decrease in direct costs was
primarily due to decreased (1) direct wages of approximately $828,000 as a
result of no longer providing live-hosted trivia events after January 2020 ; (2)
equipment expense of approximately $71,000 due primarily to reduction in
hardware revenue; (3) depreciation expense of $677,000 ; (4) service provider and
freight expense of approximately $398,000 ; and (5) other miscellaneous expenses
of $206,000 , in each case, when compared to the same period in 2019.
The decrease in gross margin for the three and nine months ended September 30,
2020 was primarily due to the reduction in revenue when compared to the same
periods in 2019. Additionally, certain fixed costs, such as direct depreciation
and amortization expense, negatively impacted gross margins for the three and
nine months ended September 30, 2020 when compared to the same periods in 2019.
Operating Expenses
Three months ended
September 30,
2020 2019 Change
Selling, general and administrative
Impairment of capitalized software $ -$ 51,000
Depreciation and amortization (non-direct)
$ (62,000 ) Nine months ended September 30, 2020 2019 Change
Selling, general and administrative
Impairment of capitalized software$ 238,000 $ 52,000
$ 186,000 Impairment of goodwill$ 662,000 $ -$ 662,000
Depreciation and amortization (non-direct)
$ (84,000 ) 28
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses for the three and nine months endedSeptember 30, 2020 when compared to the same period in 2019 was primarily due to decreased (1) payroll and related expense of$1,498,000 and$3,320,000 , respectively, as a result of reduced headcount; (2) marketing fees of$168,000 and$609,000 , respectively, due to managing discretionary spending; (3) lease expense of approximately$118,000 and$127,000 , respectively, due to terminating our lease and vacating our corporate headquarters inJune 2020 , and (4) miscellaneous expense of$192,000 and$208,000 , respectively, in each case, when compared to the same periods in 2019. These decreases were partially offset by increased professional fees of$630,000 and$613,000 for the three and nine months endedSeptember 30, 2020 , respectively, primarily due to costs associated with the Merger and Asset Sale transactions. In light of the recent measures we implemented to reduce operating expenses and to preserve capital, we expect our selling, general and administrative expenses to continue to decrease in the fourth quarter of 2020 when compared to the prior year period. However, such actions, and any similar actions we may implement in the future, could adversely affect our business and we may not realize the operation or financial benefits of such actions.
Impairment of
For the nine months endedSeptember 30, 2020 , we abandoned certain capitalized software development projects that we concluded were no longer a current strategic fit or for which we determined that the marketability of the content had decreased due to obtaining additional information regarding the specific purpose for which the content was intended. We did not incur any impairment charges during the three months endedSeptember 30, 2020 . For the three and nine months endedSeptember 30, 2019 , we also abandoned certain capitalized software projects, which resulted in impairments charges during each of those periods. Impairment ofGoodwill
ThroughMarch 31, 2020 , we had goodwill resulting from the excess of costs over the fair value of assets we acquired in 2003 related to our Canadian business (the "Reporting Unit").Goodwill and intangible assets acquired in a purchase combination that are determined to have an indefinite useful life are not amortized, but instead are assessed annually, or at interim periods, for impairment based on qualitative factors, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events, to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Reporting Unit is less than its carrying amount. If there are indications of impairment, then we perform a quantitative impairment test. During out evaluation of impairment indicators as ofMarch 31, 2020 , we determined that the uncertainty relating to the impact of the COVID-19 pandemic on the Reporting Unit's future operating results represented an indicator of impairment. Accordingly, we compared the estimated fair value of the Reporting Unit to its carrying value atMarch 31, 2020 , determined that a full impairment loss was warranted and recognized an impairment charge of$662,000 for the nine months endedSeptember 30, 2020 , all of which was recorded during the three months endedMarch 31, 2020 . There was no goodwill impairment recorded for the three or nine months endedSeptember 30, 2019 . Depreciation and Amortization The decrease in depreciation and amortization expense for the three and nine months endedSeptember 30, 2020 was primarily due to various equipment becoming fully depreciated and not replacing with new assets, and as a result of writing off our leasehold improvement assets when we terminated our lease and vacated our corporate headquarters inJune 2020 .
Other Income (Expense), Net
Three months ended
September 30, Increase in other
2020 2019 expense, net
Total other expense, net $ (82,000 ) $ (16,000 ) $ (66,000 )
Nine months ended
September 30, Increase in other
2020 2019 income, netTotal other income (expense), net$ 826,000 $ (189,000 ) $ 1,015,000 29
For the three months endedSeptember 30, 2020 , the increase in other expense, net, was primarily due to increased foreign currency losses related to our Canadian subsidiary and losses related to the disposal or sale of assets, offset by a decreased interest expense due to lower long-term debt balances when compared to the same period in 2019. For the nine months endedSeptember 30, 2020 , the increase in other income, net was primarily due to a$1,225,000 gain related to the sale of all our assets used to conduct live-hosted trivia events, increased foreign currency gains related to our Canadian subsidiary, and decreased interest expense due to lower long-term debt balances, offset by a$286,000 loss related to the terminating our leases and disposing of related fixed assets, in each case, when compared to the same period in 2019. Income Taxes Three months ended September 30, 2020 2019 Change Benefit (provision) for income taxes$ 19,000 $ (19,000 ) $ 38,000 Nine months ended September 30, 2020 2019 Change
Benefit (provision) for income taxes
We expect to incur state income tax liability in 2020 related to ourU.S. operations. For the nine months endedSeptember 30, 2020 , an impairment to goodwill resulted in a net tax benefit inCanada . We have established a full valuation allowance for substantially all of our deferred tax assets, including the net operating loss carryforwards, since we do not believe that we are more likely than not to generate future taxable income to realize these assets.
LIQUIDITY AND CAPITAL RESOURCES
As ofSeptember 30, 2020 , we had cash, cash equivalents and restricted cash of approximately$1.7 million , including the$1.0 million bridge loan we received in connection with entering into the Asset Purchase Agreement, which is discussed further below, compared to approximately$3.4 million as ofDecember 31, 2019 . During the three and nine months endedSeptember 30, 2020 , we incurred a net loss of$1,481,000 and$4,722,000 , respectively. In connection with preparing our financial statements as of and for the three and nine months endedSeptember 30, 2020 , our management evaluated whether there are conditions or 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 through twelve months after the date that such financial statements are issued. Our primary source of capital is cash from operations. We have experienced material decreases in subscription revenue, advertising revenue and cash flows from operations as a result of the impact of the COVID-19 pandemic on the restaurant and bar industry. We expect the negative impact on our business to continue for as long as restaurants and bars continue to be negatively impacted by the pandemic, and which may continue thereafter if restaurants and bars seek to reduce their operating costs or choose not to re-open even if governmental orders and restrictions are eased or lifted. See "Recent Developments-COVID-19 Impact," above. As a result of the impact of the pandemic on our business and taking into account our current financial condition and our existing sources of projected revenue and our projected subscription revenue, advertising revenue and cash flows from operations, if we are able to borrow an additional$500,000 fromFertilemind Management, LLC as discussed below, we believe we will have sufficient cash resources to pay forecasted cash outlays only throughmid-January 2021 , but if we do not borrow such amount fromFertilemind Management, LLC or any other party, we believe we will have sufficient cash resources to pay forecasted cash outlays only throughmid-December 2020 , in each case, assuming Avidbank does not take actions to foreclose on our assets in the event we are not in compliance with our financial covenants under our loan and security agreement with Avidbank, and we are able to continue to successfully manage our working capital deficit by managing the timing of payments to our vendors and other third parties. We expect to meet our near term debt service obligations on our term loan with Avidbank and we satisfied our financial covenants under our related loan and security agreement as ofSeptember 30, 2020 . However, unless in the very near term our subscription revenue, advertising revenue and cash flows from operations return to pre-pandemic levels and/or we raise substantial capital, we may not satisfy the liquidity covenant under the loan and security agreement, which is measured on a daily basis, at all times duringDecember 2020 , which may result in Avidbank declaring a default and foreclosing on our assets. See Item 1A. Risk Factors in Part II of this report, below. 30 Based on the factors described above, management concluded that there is substantial doubt regarding our ability to continue as a going concern through the twelve-month period subsequent to the issuance date of these financial statements. As discussed in greater detail in the section entitled "-Overview and Highlights-Recent Developments-Proposed Reverse Merger and Asset Sale Transactions," if we do not complete the Merger, we would likely be required to dissolve and liquidate our assets, and we would be required to pay all our debts and contractual obligations and set aside certain reserves for potential future claims. We may attempt to complete another strategic transaction like the Merger or the Asset Sale or to raise additional capital through equity financings and/or alternative sources of debt to allow us to continue as a going concern. However, based on the strategic process conducted to date, we do not believe that we would be able to identify and complete another reverse merger or consummate a financing to obtain sufficient additional financial resources when needed, on acceptable terms, or at all. The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern. Avidbank Term Loan Under a loan and security agreement we entered into with Avidbank inSeptember 2018 , or the Original LSA, we borrowed$4,000,000 in the form of a 48-month term loan, all of which we used to pay-off the$4,050,000 of principal borrowed from our then-existing lender. InFebruary 2020 , we made a pre-payment on the term loan of approximately$150,000 following the sale inJanuary 2020 of all our assets used to conduct live-hosted trivia events. InMarch 2020 , we entered into an amendment to the Original LSA. We refer to the Original LSA, as amended, as the Avidbank LSA. In connection with entering into the amendment, we made a$433,000 payment on our term loan, which included the$83,333 monthly principal payment forMarch 2020 plus accrued interest and a$350,000 principal prepayment. As ofSeptember 30, 2020 , the outstanding principal balance on the term loan was$725,000 . See Note 9 to the unaudited condensed consolidated financial statements included herein for additional information regarding the Avidbank LSA.
The monthly principal payment amounts under the Avidbank LSA was
We must satisfy two financial covenants under the Avidbank LSA: a monthly minimum asset coverage ratio covenant, which we refer to as the ACR covenant, and a minimum liquidity covenant. Under the ACR covenant, the ratio of (i) our unrestricted cash at Avidbank as of the last day of a calendar month plus 75% of our outstanding accounts receivable accounts that are within 90 days of invoice date to (ii) the outstanding principal balance of our term loan on such day must be no less than 1.25 to 1.00. Under the minimum liquidity covenant, the aggregate amount of unrestricted cash we have in deposit accounts or securities accounts maintained with Avidbank must be at all times not less than the principal balance outstanding under our term loan. As ofSeptember 30, 2020 , we were in compliance with both of those covenants. However, unless in the very near term our subscription revenue, advertising revenue and cash flows from operations return to pre-pandemic levels and/or we raise substantial capital, we may not satisfy the liquidity covenant under the loan and security agreement, which is measured on a daily basis, at all times duringDecember 2020 , which may result in Avidbank declaring a default and foreclosing on our assets. Under the Avidbank LSA, subject to customary exceptions, we are prohibited from borrowing additional indebtedness. We granted and pledged to Avidbank a first-priority security interest in all our existing and future personal property. OnJune 1, 2020 , we and Avidbank entered into a second amendment to the loan and security agreement to formally memorialize Avidbank's consent to our borrowing of the PPP Loan (as defined below). We received Avidbank's initial consent to borrow the PPP Loan inApril 2020 . We incurred approximately$26,000 of debt issuance costs related to the Original LSA and the amendment to the LSA. The debt issuance costs are being amortized to interest expense using the effective interest rate method over the life of the loan. The unamortized balance of the debt issuance costs as ofSeptember 30, 2020 was approximately$1,000 and is recorded as a reduction of long-term debt. The Avidbank LSA includes customary representations, warranties and covenants (affirmative and negative), including restrictive covenants that, subject to specified exceptions, limit our ability to: dispose of our business or property; merge or consolidate with or into any other business organization; incur or prepay additional indebtedness; create or incur any liens on its property; declare or pay any dividend or make a distribution on any class of our stock; or enter specified material transactions with our affiliates. The Avidbank LSA also includes customary events of default, including: payment defaults; breaches of covenants following any applicable cure period; material breaches of representations or warranties; the occurrence of a material adverse effect; events relating to bankruptcy or insolvency; and the occurrence of an unsatisfied material judgment against us. Upon the occurrence of an event of default, Avidbank may declare all outstanding obligations immediately due and payable, do such acts as it considers necessary or reasonable to protect its security interest in the collateral, and take such other actions as are set
forth in the Avidbank LSA. 31
Paycheck Protection Program Loan
OnApril 18, 2020 , we issued a note in the principal amount of approximately$1,625,000 evidencing a loan (the "PPP Loan") we received under the Paycheck Protection Program (the "PPP") of the Coronavirus Aid, Relief, and Economic Security Act administered by theU.S. Small Business Administration (the "CARES Act"). The PPP Loan matures onApril 18, 2022 and bears interest at a rate of 1.0% per annum. We must make monthly interest only payments beginning onNovember 18, 2020 . One final payment of all unforgiven principal plus any accrued unpaid interest is due at maturity. Under the terms of the PPP, we may prepay the PPP Loan at any time with no prepayment penalties. As ofSeptember 30, 2020 , the outstanding principal balance of the PPP Loan was$1,625,000 . Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. InOctober 2020 , we submitted our loan forgiveness application for the PPP Loan, and inNovember 2020 , theU.S Small Business Administration approved the forgiveness of approximately$1,093,000 of the$1,625,000 loan, leaving a principal balance of approximately$532,000 .Bridge Loan In connection with entering into the Asset Purchase Agreement with eGames.com, we issued toFertilemind Management, LLC , an affiliate of eGames.com, an unsecured promissory note (the "Note") in the principal amount of$1,000,000 , evidencing a$1,000,000 loan received fromFertilemind Management, LLC on behalf of eGames.com (the "Bridge Loan"). We may use the loan proceeds for, among other things, the payment of obligations related to the transactions contemplated by the Asset Purchase Agreement and the Merger Agreement and other general working capital purposes. The principal amount accrues interest at rate of 8% per annum (increasing to 15% per annum upon the occurrence of an event of default), compounded annually. The principal amount of the Bridge Loan and accrued interest thereon is due and payable upon the earlier of (i) the termination of the Asset Purchase Agreement, (ii) the closing of a Business Combination (as defined in the Note), and (iii)December 31, 2020 . Upon the closing of the Asset Sale, the Bridge Loan will be applied against the purchase price under the Asset Purchase Agreement, and the Note will be extinguished.
All of our obligations under the Note are subordinate to the indebtedness and all other obligations owed by us to Avidbank including under the Avidbank LSA.
The Note includes customary events of default, including if any portion of the Note is not paid when due; if we default in the performance of any other material term, agreement, covenant or condition of the Note, subject to a cure period; if any final judgment for the payment of money is rendered against us and we do not discharge the same or cause it to be discharged or vacated within 90 days; if we make an assignment for the benefit of creditors, if it generally does not pay its debts as they become due; if a receiver, liquidator or trustee of ours is appointed, or if we are adjudicated bankrupt or insolvent. In the event of an event of default, the Note will accelerate and become immediately due and payable at the option of the holder. We are in discussions withFertilemind Management, LLC regarding the possibility of borrowing an additional$500,000 on approximatelyDecember 1, 2020 , which, if received, would also be applied toward the purchase price at the closing of the Asset Sale. No assurances can be given that we will obtain such$500,000 loan fromFertilemind Management, LLC or from any other party. Working Capital As ofSeptember 30, 2020 , we had negative working capital (current liabilities in excess of current assets) of$137,000 compared to negative working capital of$25,000 as ofDecember 31, 2019 . The following table shows our change in working capital fromDecember 31, 2019 toSeptember 30, 2020 . 32 Increase (Decrease) Working capital as of December 31, 2019$ (25,000 ) Changes in current assets: Cash and cash equivalents (1,499,000 ) Restricted cash (50,000 ) Accounts receivable, net (1,063,000 ) Income tax receivable 13,000 Site equipment to be installed (298,000 ) Prepaid expenses and other current assets (380,000 ) Net decrease in current assets (3,277,000 ) Changes in current liabilities: Accounts payable (560,000 ) Accrued compensation (463,000 ) Accrued expenses - Sales taxes payable (117,000 ) Income taxes payable (3,000 ) Current portion of long-term debt, net (1,015,000 ) Current portion of obligations under operating leases (404,000 ) Current portion of obligations under finance leases 2,000 Current portion of deferred revenue (340,000 ) Other current liabilities (265,000 ) Net decrease in current liabilities (3,165,000 ) Net decrease in working capital (112,000 ) Working capital as of September 30, 2020$ (137,000 ) Cash Flows Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows, are summarized as follows: Nine months ended September 30, 2020 2019 Change Cash (used in) provided by: Operating activities$ (3,280,000 ) $ 1,761,000 $ (5,041,000 ) Investing activities (194,000 ) (964,000 ) 770,000 Financing activities 1,765,000 (826,000 ) 2,591,000 Effect of exchange rates 10,000 27,000 (17,000 ) Net decrease in cash, cash equivalents and restricted cash$ (1,699,000 ) $ (2,000 ) $ (1,697,000 ) Net cash (used in) provided by operations. The increase in cash used in operating activities was due to an increase in net loss of$4,635,000 , after giving effect to adjustments made for non-cash transactions of negative$667,000 , and an increase in cash used for operating assets and liabilities of$406,000 , during the nine months endedSeptember 30, 2020 when compared to
the same period in 2019.
Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased$3,661,000 to$3,725,000 for the nine months endedSeptember 30, 2020 from$7,386,000 for the same period in 2019, primarily due to reduced headcount. See "-Results of Operations-Operating Expenses," above. Our primary source of cash is cash we generate from customers. Cash received from customers decreased$9,477,000 to$5,578,000 for the nine months endedSeptember 30, 2020 from$15,055,000 for the same period in 2019. This decrease was primarily related to decreased subscription revenue, hardware revenue and revenue from live-hosted trivia events. The negative impact of the COVID-19 pandemic on the restaurant and bar industry was abrupt, and our business suffered materially as a result. See "Recent Developments-COVID-19 Impact," above, and "-Results of Operations-Revenue," above. Net cash used in investing activities. The$770,000 decrease in cash used in investing activities was primarily due to decreased capital expenditures and capitalized software development expenses. 33
Net cash provided by (used in) financing activities. During the nine months endedSeptember 30, 2020 , we received$1,226,000 in net proceeds from the sale of all our assets used to conduct live-hosted trivia events,$1,625,000 in proceeds from the PPP Loan and$1,000,000 in proceeds from the Bridge Loan. There were no similar transactions during the same period in 2019. During the nine months endedSeptember 30, 2020 , we made$1,275,000 more in principal payments on long-term debt when compared to the same period in 2019.
RECENT ACCOUNTING PRONOUNCEMENTS
InDecember 2019 , theFinancial Accounting Standards Board (the "FASB") issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. This ASU enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies with fiscal years beginning afterDecember 15, 2020 , (which will beJanuary 1, 2021 for us); early adoption is permitted. We are currently assessing the impact of this pronouncement to our consolidated financial statements.
InJune 2016 , the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The ASU requires an entity to establish an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. This ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. For smaller reporting companies, the effective date for this standard has been delayed and will be effective for fiscal years beginning afterDecember 15, 2022 (which will beJanuary 1, 2023 for us). We are evaluating the impact that the adoption of this standard will have 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.
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