NTN Buzztime, Inc (NTN)

FORM 10-Q | Quarterly Report
Aug. 6, 2018 4:31 PM
|
About: NTN Buzztime, Inc (NTN)View as PDF
NTN BUZZTIME INC (Form: 10-Q, Received: 08/06/2018 16:33:53)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

Commission file number 001-11460

 

 

 

NTN Buzztime, Inc.

(Exact name of registrant as specified in its charter)

 

DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer Identification No.)

 

2231 RUTHERFORD ROAD, SUITE 200, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)

 

(760) 438-7400

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ]
         
  Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]
         
      Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]

 

As of August 2, 2018, the registrant had outstanding 2,866,326 shares of common stock, $0.005 par value per share.

 

 

 

     
 

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

Item   Page
PART I
     
1. Financial Statements  
     
  Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 1
     
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017 (unaudited) 2
     
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) 3
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 4
     
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 10
     
3. Quantitative and Qualitative Disclosures About Market Risk 19
     
4. Controls and Procedures 19
     
PART II
     
1. Legal Proceedings 20
     
1A. Risk Factors 20
     
2. Unregistered Sales of Equity Securities and Use of Proceeds 22
     
3. Defaults Upon Senior Securities 22
     
4. Mine Safety Disclosures 22
     
5. Other Information 22
     
6. Exhibits 23
     
  Signatures 24

 

     
 

 

PART I

 

Item 1. Financial Statements .

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amount)

 

    June 30, 2018   December 31, 2017
      (unaudited)          
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 3,785     $ 3,378  
Accounts receivable, net of allowances of $405 and $463, respectively     787       714  
Site equipment to be installed     3,798       4,866  
Prepaid expenses and other current assets     843       680  
Total current assets     9,213       9,638  
Fixed assets, net     3,922       3,678  
Software development costs, net of accumulated amortization of $2,827 and $2,651, respectively     1,696       1,459  
Deferred costs     541       775  
Goodwill     955       1,004  
Other assets     29       16  
Total assets   $ 16,356     $ 16,570  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY                
Current Liabilities:                
Accounts payable   $ 427     $ 390  
Accrued compensation     586       646  
Accrued expenses     581       418  
Sales taxes payable     110       107  
Income taxes payable     26       13  
Current portion of long-term debt     2,210       5,059  
Current portion of obligations under capital leases     167       176  
Current portion of deferred revenue     2,849       3,564  
Deferred rent     83       182  
Other current liabilities     98       192  
Total current liabilities     7,137       10,747  
Long-term debt     2,510       8  
Long-term obligations under capital leases     81       164  
Long-term deferred revenue     44       63  
Other liabilities     48       52  
Total liabilities     9,820       11,034  
                 
Shareholders' Equity:                
Series A 10% cumulative convertible preferred stock, $0.005 par value, $156 liquidation preference, 156 shares authorized; 156 shares issued and outstanding at June 30, 2018 and December 31, 2017     1       1  
Common stock, $0.005 par value, 15,000 shares authorized at June 30, 2018 and December 31, 2017; 2,866 and 2,521 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively     14       13  
Treasury stock, at cost, 10 shares at June 30, 2018 and December 31, 2017     (456 )     (456 )
Additional paid-in capital     136,383       134,752  
Accumulated deficit     (129,660 )     (129,119 )
Accumulated other comprehensive income     254       345  
Total shareholders' equity     6,536       5,536  
Total liabilities and shareholders' equity   $ 16,356     $ 16,570  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

1

 
 

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(unaudited)

 

    Three Months Ended
June 30,
  Six Months Ended
June 30,
    2018   2017   2018   2017
Revenues                                
Subscription revenue   $ 4,041     $ 4,232     $ 8,106     $ 8,458  
Hardware revenue     590       223       1,269       408  
Other revenue     1,020       1,094       2,037       1,914  
Total Revenue     5,651       5,549       11,412       10,780  
Operating expenses:                                
Direct operating costs (includes depreciation and amortization of $614 and $465 for the three months ended June 30, 2018 and 2017, respectively, and $1,167 and $956 for the six months ended June 30, 2018 and 2017, respectively)     1,937       1,631       3,904       3,474  
Selling, general and administrative     3,658       3,858       7,679       7,992  
Depreciation and amortization (excluding depreciation and amortization included in direct operating costs)     83       86       169       174  
Total operating expenses     5,678       5,575       11,752       11,640  
Operating loss     (27 )     (26 )     (340 )     (860 )
Other (expense) income, net     (73 )     (132 )     (167 )     618  
Loss before income taxes     (100 )     (158 )     (507 )     (242 )
Provision for income taxes     (24 )     (6 )     (26 )     (12 )
Net loss   $ (124 )   $ (164 )   $ (533 )   $ (254 )
                                 
Net loss per common share - basic and diluted   $ (0.05 )   $ (0.07 )   $ (0.21 )   $ (0.11 )
                                 
Weighted average shares outstanding - basic and diluted     2,514       2,494       2,512       2,375  
                                 
Comprehensive loss                                
Net loss   $ (124 )   $ (164 )   $ (533 )   $ (254 )
Foreign currency translation adjustment     (43 )     41       (91 )     56  
Total comprehensive loss   $ (167 )   $ (123 )   $ (624 )   $ (198 )

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2

 
 

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

   

Six months ended

June 30,

    2018   2017
Cash flows provided by operating activities:                
Net loss   $ (533 )   $ (254 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     1,336       1,130  
Provision for doubtful accounts     36       40  
Scrap expense     28       24  
Transfer of fixed assets to sales-type lease     10       -  
Stock-based compensation     251       234  
Amortization of debt issuance costs     17       26  
Issuance of common stock in lieu of cash for bonus compensation     -       164  
Impairment of capitalized software     12       4  
Loss from disposition of equipment     11       6  
Changes in assets and liabilities:                
Accounts receivable     (108 )     127  
Site equipment to be installed     (111 )     (218 )
Prepaid expenses and other assets     (176 )     (1,121 )
Accounts payable and accrued liabilities     145       148  
Income taxes payable     14       (12 )
Deferred costs     234       55  
Deferred revenue     (734 )     2,669  
Deferred rent     (99 )     (90 )
Other liabilities     (94 )     (126 )
Net cash provided by operating activities     239       2,806  
Cash flows used in investing activities:                
Capital expenditures     (280 )     (339 )
Capitalized development expenditures     (424 )     (362 )
Net cash used in investing activities     (704 )     (701 )
Cash flows provided by (used in) financing activities:                
Net proceeds from issuance of common stock related to registered direct offering     1,381       1,773  
Principal payments on capital lease     (88 )     (77 )
Payments on long-term debt     (364 )     (2,651 )
Debt issuance costs on long-term debt     -       (22 )
Payment of preferred stockholders dividends     (8 )     (8 )
Net cash provided by (used in) financing activities     921       (985 )
Net increase in cash and cash equivalents     456       1,120  
Effect of exchange rate on cash     (49 )     28  
Cash and cash equivalents at beginning of period     3,378       5,686  
Cash and cash equivalents at end of period   $ 3,785     $ 6,834  
                 
Supplemental disclosures of cash flow information:                
Cash paid during the period for:                
Interest   $ 173     $ 303  
                 
Income taxes   $ 17     $ 33  
                 
Supplemental disclosure of non-cash investing and financing activities:                
                 
Site equipment transferred to fixed assets   $ 1,151     $ 729  
                 
Equipment acquired under capital lease   $ 5     $ -  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3

 
 

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

(1) BASIS OF PRESENTATION

 

Description of Business

 

NTN Buzztime, Inc. (the “Company”) was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate name to NTN Communications, Inc. in 1985. The Company changed its name to NTN Buzztime, Inc. in 2005 to better reflect the growing role of the Buzztime consumer brand.

 

The Company delivers interactive entertainment and innovative technology, including performance analytics and secure payment with Europay, MasterCard® and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple, Android and Samsung Pay. Most frequently used in bars and restaurants in North America, the Company’s tablets and technology offer engaging solutions to establishments with guests who experience dwell time, such as casinos, senior living, and more. Casual dining venues subscribe to the Company’s customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games, customized menus and self-service dining features. The Company’s platform improves operating efficiencies, creates connections among the players and venues, and amplifies guests’ positive experiences. The Company’s tablet platform was commercially launched during 2013 and then scaled during 2014. The Company also continues to support its legacy network product line, which it calls its Classic platform.

 

The Company generates revenue by charging subscription fees for its service to network subscribers, by leasing equipment to certain network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, by licensing its content for use with third-party equipment, from providing professional services (such as developing certain functionality within the Company’s platform for customers), and from pay-to-play single player games.

 

At June 30, 2018, 2,703 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network, of which approximately 83% were using the tablet platform.

 

Basis of Accounting Presentation

 

The accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments that are necessary, which are of a normal and recurring nature, for a fair presentation for the periods presented of the financial position, results of operations and cash flows of the Company and its wholly-owned subsidiaries: IWN, Inc., IWN, L.P., Buzztime Entertainment, Inc., NTN Wireless Communications, Inc., NTN Software Solutions, Inc., NTN Canada, Inc., and NTN Buzztime, Ltd., all of which, other than NTN Canada, Inc., are dormant subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

 

These condensed consolidated financial statements should be read with the consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017. The accompanying condensed balance sheet as of December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2018, or any other period.

 

In connection with preparing its financial statements as of and for the period ended June 30, 2018, the Company evaluated whether there are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt about its ability to continue as a going concern within twelve months after the date that such financial statements are issued. The Company believes it has sufficient cash to meet its operating cash requirements and to fulfill its debt obligations for at least the next twelve months after the date that such financial statements are issued. During the three months ended June 30, 2018, the Company issued 345,772 shares of its common stock in a registered direct offering and received net proceeds of approximately $1,381,000. (See Note 4.) To increase the likelihood that the Company will be able to successfully execute its operating and strategic plan and to position the Company to better take advantage of market opportunities for growth, it is continuing to evaluate additional financing alternatives, including additional equity financings and alternative sources of debt. If the Company’s cash and cash equivalents are not sufficient to meet future cash requirements, it may have to reduce planned capital expenses, reduce operational cash uses or raise capital on terms that are not as favorable to the Company as they otherwise might be. Any actions the Company may undertake to reduce planned capital purchases or reduce expenses might not cover shortfalls in available funds. If the Company requires additional capital, it may not secure additional financing on terms acceptable to the Company, or at all.

 

 

4

 
 

 

(2) Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) . In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which deferred the effective date of ASU 2014-09 by one year to fiscal periods beginning after December 15, 2017. The Company adopted the new standard effective January 1, 2018 using the full retrospective approach.

 

This update outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized:

 

1. Identify the contract(s) with customers
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when the performance obligations have been satisfied

 

Topic 606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.

 

The Company completed the process of evaluating the effect of adopting this update and has determined that the timing and amount of revenue recognized based on Topic 606 is consistent with the Company’s revenue recognition policy under previous guidance, and accordingly, there was no transition adoption adjustment necessary upon the adoption of the Topic 606 guidance.

 

The Company generates revenue by charging subscription fees for its service to network subscribers, by leasing equipment to certain network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, by licensing its content for use with third-party equipment, from providing professional services (such as developing certain functionality within the Company’s platform for customers), and from pay-to-play single player games.

 

In general, when multiple performance obligations are present in a customer contract, the transaction price is allocated to the individual performance obligations based on the relative stand-alone selling prices, and the revenue is recognized when or as each performance obligation has been satisfied. Discounts are treated as a reduction to the overall transaction price and allocated to the performance obligations based on the stand-alone selling prices. All revenues are recognized net of sales tax collected from the customer. The following describes how the Company recognizes its revenue streams under Topic 606.

 

Subscription Revenue - The Company recognizes its recurring subscription fees over time as customers receive and consume the benefits of such services, which includes the Company’s content, the Company’s equipment to access the content and the installation of the equipment. In general, customers pay for the subscription services during the month in which they receive the services. Due to the timing of providing the services and receiving payment for the services, the Company does not record any unbilled contract asset. Occasionally, a customer will prepay for up to one year of subscription services, in which case, the Company will record deferred revenue on the balance sheet related to such prepayment and will recognize the revenue over the time the customer receives the subscription services. Revenue from installation services is also recorded as deferred revenue and recognized over the longer of the contract term and the expected term of the customer relationship using the straight line method. The Company has certain contingent performance obligations with respect to repairing or replacing equipment and would recognize any such revenue at the point in time the Company performs such services.

 

Costs associated with installing the equipment are considered direct costs. Costs associated with sales commissions are considered incremental costs for fulfilling the contract because such costs would not have been incurred without obtaining the contract. The Company expects to recover both costs through future fees it collects and both costs are recorded in deferred costs on the balance sheet and amortized on a straight-line basis. For costs that are of an amount that is less than or equal to the deferred revenue for the related contract, the amortization period approximates the longer of the contract term and the expected term of the customer relationship. For any excess costs that exceed the deferred revenue, the amortization period of the excess cost is the initial term of the contract, which is generally one year because the Company can still recover that excess cost in the initial term of the contract.

 

Sales-type Lease Revenue – For certain customers that lease equipment under sale-type lease arrangements, the Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) No. 840, Leases. Such revenue is recognized at the time of installation based on the net present value of the leased equipment. Interest income is recognized over the life of the lease for customers who have remaining lease payments to make. In the event a customer under a sales-type lease arrangement prepays for the lease in full prior to receiving the equipment under the lease, such amounts are recorded in deferred revenue and recognized as revenue once the equipment has been installed and activated at the customer’s location. The cost of the leased equipment is recognized at the same time as the revenue.

 

 

5

 
 

 

Equipment Sales – The Company recognizes revenue from equipment sales at a point in time, which is when control has been transferred to the customer, the customer holds legal title and the customer has significant risks and rewards of ownership. Generally, the Company has determined that any customer acceptance provisions of the equipment is a formality, as the Company has historically demonstrated the ability to produce and deliver similar equipment. If the Company sells equipment with unique specifications, then customer control of the equipment will occur upon customer acceptance as defined in the contract, and revenue will be recognized at that time. Costs associated with the equipment sold is recognized at the same point in time as the revenue.

 

Live Hosted Trivia Revenue – The Company recognizes its live-hosted trivia revenue at a point in time, which is when the event takes place. Some customers host their own trivia events and the Company provides the game materials. In these cases, the Company recognizes the revenue at the point in time the Company sends the game materials to the customer. The Company recognizes related costs at the same point in time the revenue is recognized. Generally, there is no unbilled revenue or deferred revenue associated with live hosted trivia events.

 

Advertising Revenue – The Company recognizes advertising revenue over the time the advertising campaign airs in its customers locations. The Company uses the time elapsed output method to measure its progress toward satisfying the performance obligation. When the Company contracts with an advertising agent, the Company shares in the advertising revenue generated with that agent. In these cases, the Company generally recognizes revenue on a net basis, as the agent typically has the responsibility for the relationship with the advertiser and the credit risk. When the Company contracts directly with the advertiser, it will recognize the revenue on a gross basis and will recognize any revenue share arrangement it has with a third party as a direct expense, as the Company has the responsibility for the relationship with the advertiser and the credit risk. Generally, there is no unbilled revenue or deferred revenue associated with the Company’s advertising activities.

 

Pay-to-Play Revenue – The Company recognizes revenue generated from its customers’ patrons who access the Company’s premium games on the tablets. This revenue is recognized at a point in time based on usage-based royalty revenue guidance. The Company generally shares in the revenue with the customer whose patrons generated the pay-to-play revenue. The Company has determined that it is the principal and the customer is the agent, and therefore, the Company recognizes this revenue on a gross basis, with the amount of revenue shared with the customer as a direct expense. Costs associated with procuring the game license or developing the games are recognized over the life of the license or expected life of the developed game. Generally, there is no unbilled revenue or deferred revenue associated with the Company’s pay-to-play games.

 

Content Licensing – The Company licenses content (trivia packages) to a certain customer, who in turn installs the content on its equipment that it sells to its customers. The content license is characterized as a “right to use intellectual property as it exists at the point in time at which the license is granted,” meaning the Company is not expected to undertake activities that affect the intellectual property or any such activities would not affect the intellectual property the customer is using. The content license is considered to be on consignment, and the Company retains title of the licensed content throughout the license period. The Company’s customer has no obligation to pay for the licensed content until the customer sells and installs the content to its customer. Accordingly, the Company recognizes revenue at the point in time when such installation occurs. The Company recognizes costs related to developing the content during the period incurred.

 

Professional Development Revenue – Depending on the type of development work the Company is performing, the Company will recognize revenue, and associated costs, at the point in time when the Company satisfies each performance obligation, which is generally when the customer can direct the use of, and obtain substantially all of the remaining benefits of the goods or service provided. For services provided over time, the corresponding revenue is generally recognized over the time the Company provides such services. Any payments received before satisfying the performance obligations are recorded as deferred revenue and recognized as revenue when or as such obligations are satisfied. The Company does not have unbilled revenue assets associated with professional development services.

 

(3) Basic and Diluted Earnings Per Common Share

 

The Company computes basic and diluted earnings per common share in accordance with the provisions of FASB ASC No. 260, Earnings per Share . Basic earnings per share excludes the dilutive effects of options, warrants and other convertible securities. Diluted earnings per share reflects the potential dilution of securities that could share in the Company’s earnings. The number of shares of the Company’s common stock subject to options, warrants, and convertible preferred stock excluded from computing diluted net loss per common share was approximately 433,000 and 394,000 as of June 30, 2018 and 2017, respectively, as their effect was anti-dilutive.

 

 

6

 
 

 

(4) STOCKHOLDERS’ EQUITY

 

Registered Direct Offering

 

On June 27, 2018, 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 $4.50 per share. The offering closed on June 29, 2018. The Company sold 345,772 shares of its common stock and received net proceeds of approximately $1,381,000, after deducting approximately $175,000 in offering expenses.

 

The Company intends to use the net proceeds for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities.

 

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 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 June 30, 2018, approximately 59,000 share-based awards were available for grant 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 June 30, 2018, there were no share-based awards available for grant 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 and six months ended June 30, 2018 and 2017 under the ASC No. 718 requirements:

 

    Three months ended June 30,   Six months ended June 30,  
    2018   2017   2018   2017
Weighted average risk-free rate     2.88 %     1.61 %     2.88 %     1.62 %
Weighted average volatility     113.09 %     114.33 %     113.09 %     114.70 %
Dividend yield     0.00 %     0.00 %     0.00 %     0.00 %
Expected life     7.24 years       7.38 years       7.24 years       7.25 years  

 

The Company granted stock options to purchase approximately 2,000 shares of common stock during each of the three months ended June 30, 2018 and 2017, and stock options to purchase approximately 2,000 and 4,000 shares of common stock during the six months ended June 30, 2018 and 2017, respectively. No options were exercised during either of the three or six months ended June 30, 2018 or 2017.

 

Grants of restricted stock units are settled in an equal number of shares of common stock on the vesting date of the award. A stock unit award is settled only to the extent vested. Vesting generally requires the continued employment by the award recipient through the respective vesting date. Because restricted stock units are settled in an equal number of shares of common stock without any offsetting payment by the recipient, the measurement of cost is based on the quoted market price of the stock at the measurement date, which is the date of grant. During the six months ended June 30, 2018, the Company granted 53,000 restricted stock units with a grant date fair value of $6.04 per restricted stock unit. Of the 53,000 restricted stock units, 25,000 and 15,000 were granted to Messrs. Ram Krishnan and Allen Wolff, respectively, and are subject to accelerated vesting provisions in their respective employment agreements. The Company did not grant restricted stock units during the three months ended June 30, 2018, nor did it grant restricted stock units during the three or six months ended June 30, 2017.

 

 

7

 
 

 

The Company estimates forfeitures at the time of grant and revises if necessary in subsequent periods if actual forfeiture rates differ from those estimates. Forfeitures were estimated based on historical activity for the Company. Stock-based compensation expense for the three months ended June 30, 2018 and 2017 was $134,000 and $117,000, respectively, and $251,000 and $234,000 for the six months ended June 30, 2018 and 2017, respectively, and is expensed in selling, general and administrative expenses and credited to additional paid-in-capital.

 

(5) DEBT

 

Term Loan

 

In November 2017, the Company entered into an amended and restated loan and security agreement with East West Bank (“EWB”),under which the Company borrowed $4,500,000 in the form of a 36-month term loan, which matures on November 29, 2020. EWB has a first-priority security interest in all the Company’s existing and future personal property, including its intellectual property, subject to limited exceptions. The Company has no more borrowing availability under this credit facility.

 

As of June 30, 2018, $4,500,000 was outstanding under this credit facility, of which $1,950,000 was recorded in current portion of long-term debt and $2,550,000 was recorded in long-term debt on the accompanying consolidated balance sheet. The Company’s monthly payments were interest only until June 30, 2018, at which time such payment became principal and interest. EWB automatically withdraws the applicable payment from the Company’s bank account when due. The first principal payment was due June 30, 2018, a Saturday. Accordingly, EWB debited the Company’s account in July for such payment. As a result, the amount of long-term debt on the accompanying consolidated balance sheet as of June 30, 2018 includes the amount of principal payment due on such date.

 

The Company must satisfy financial covenants under this credit facility, including minimum liquidity, maximum senior leverage ratio and minimum Adjusted EBITDA (as defined below) set forth below for the period indicated:

 

Six Month Period Ending   Minimum Adjusted EBITDA
March 31, 2018   $ 600,000  
June 30, 2018   $ 1,200,000  
September 30, 2018   $ 1,600,000  
December 31, 2018   $ 1,500,000  

 

As of June 30, 2018, the Company was in compliance with all covenants. Beginning with the quarter ending March 31, 2019, the Company must satisfy a minimum fixed charge coverage ratio in lieu of the minimum Adjusted EBITDA covenant.

 

“Adjusted EBITDA” means (a) EBITDA (which is net income, plus interest expense, plus, to the extent deducted in the calculation of net income, depreciation expense and amortization expense, plus income tax expense) plus (b) other noncash expenses and charges, plus (c) to the extent approved by EWB, other onetime charges, plus (d) 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.

 

The Company recorded total debt issuance costs of $59,000, which includes a $45,000 facility fee. The Company is amortizing the debt issuance costs to interest expense using the effective interest rate method over the life of the loan. As of June 30, 2018, the unamortized portion of the debt issuance costs was $40,000 and is recorded as a reduction of long term debt.

 

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 June 30, 2018, the maximum amount was $9,690,000, all of which has been borrowed. In April 2015, the Company used approximately $3,381,000 of the proceeds borrowed under a prior credit facility with EWB to pay down a portion of the principal amount the Company had borrowed under this financing arrangement, accrued interest and a prepayment fee.

 

 

8

 
 

 

The Company was able to borrow up to the maximum amount available under this financing arrangement in tranches as needed. Each tranche borrowed through August 2015 incurred interest at 8.32% per annum; the interest for tranches borrowed thereafter was reduced to rates between 7.32% to 8.05% per annum. With respect to the first $1,000,000 in the aggregate borrowed, principal and interest payments are due in 36 equal monthly installments. With respect to amounts borrowed in excess of the first $1,000,000 in the aggregate, the first monthly payment will be equal to 24% of the principal amount outstanding, and the remaining principal and interest due is payable in 35 equal monthly installments. The Company granted the lender a first security interest in the equipment purchased with the funds borrowed. This equipment lender entered into a subordination agreement with EWB.

 

As of June 30, 2018, $260,000 was outstanding under this financing arrangement, all of which is recorded in current portion of long-term debt on the accompanying consolidated balance sheet. The Company does not expect the lender to lend any additional funds under this financing arrangement.

 

(6) ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The United States dollar is the Company’s functional currency, except for its operations in Canada where the functional currency is the Canadian dollar. The financial position and results of operations of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. In accordance with ASC No. 830, Foreign Currency Matters , revenues and expenses of the Company’s foreign subsidiaries have been translated into U.S. dollars using the weighted average exchange rates during the reporting period, and the assets and liabilities of such subsidiaries have been translated using the period end exchange rate. Accumulated other comprehensive income includes the accumulated gains or losses from these foreign currency translation adjustments. As of June 30, 2018 and December 31, 2017, $254,000 and $345,000 of foreign currency translation adjustments were recorded in accumulated other comprehensive income, respectively.

 

(7) RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2018, the FASB issued ASU No. 2018-07 (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The guidance is effective for fiscal years beginning after December 15, 2018 (which is January 1, 2019 for the Company), including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company does not expect that the adoption of this ASU will have a significant impact on its consolidated financial statements.

 

(8) CONCENTRATIONS OF RISK

 

Significant Customer

 

The table below sets forth the approximate amount of revenue the Company generated from Buffalo Wild Wings corporate-owned restaurants and its franchisees during the periods indicated and the percentage of total revenue that such amount represents for such periods:

 

    Three months ended June 30,   Six months ended June 30,
    2018   2017   2018   2017
Revenue   $ 2,475,000     $ 2,379,000     $ 5,273,000     $ 4,484,000  
% of total revenue     44 %     43 %     46 %     42 %

 

As of June 30, 2018 and December 31, 2017, approximately $159,000 and $191,000, respectively, was included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and its franchisees.

 

Sole Equipment Supplier

 

The Company purchases the tablets, cases and charging trays used for its tablet platform from one unaffiliated third-party manufacturer. The Company has no alternative manufacturer for its tablets and has no alternative manufacturer or device for the cases or charging trays.

 

 

9

 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations .

 

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

 

This report and the documents incorporated by reference, if any, contain “forward-looking statements” – that is statements related to future events, results, performance, prospects and opportunities, including statements related to our strategic plans and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry trends and our financial position. Forward-looking statements are based on information currently available to us, on our current expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions of management. Forward looking statements often contain words such as “expects,” “anticipates,” “could,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “would,” and similar expressions. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or contribute to such differences include (1) our ability to compete effectively within the highly competitive interactive games, entertainment and marketing services industries, (2) the impact of new products and technological change, especially in the mobile and wireless markets, on our operations and competitiveness, (3) our ability to maintain or improve our relationship with Buffalo Wild Wings, who together with its franchisees accounted for a significant portion of our revenues, (4) our ability to adequately protect our proprietary rights and intellectual property, (5) our ability to raise additional funds on favorable terms; we have borrowed substantially all amounts available to us under existing credit facilities and, subject to limited exceptions, our loan and security agreement with East West Bank prohibits us from borrowing additional amounts from other lenders, (6) our ability to satisfy our payment obligations and comply with financial and other covenants under our amended and restated loan agreement with East West Bank, which lender has a first-priority security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions; (7) our ability to meet financial and other growth expectations of our investors, analysts and other market participants and commentators, including expectations relating to our site count, cash flow and EBITDA; (8) our ability to maintain an adequate supply of the tablet and related equipment used in our tablet platform, (9) our ability to significantly grow our subscription revenue and implement our other business strategies, (8) our ability to successfully and efficiently manage the design, manufacturing and assembly process of the tablet and related equipment used in our tablet platform and (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, 2017, and described in other documents we file from time to time with the Securities and Exchange Commission, or SEC, including this report and our other Quarterly Reports on Form 10-Q. Readers are urged not to place undue reliance on the forward-looking statements in this report or incorporated by reference herein, which speak only as of the date of this report. Except as required by law, we undertake no obligation to revise or update any such forward-looking statement to reflect future events or circumstances.

 

INTRODUCTION

 

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read with, the accompanying unaudited condensed consolidated financial statements and notes, included in Item 1 of this Quarterly Report on Form 10-Q, to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. All dollar amounts in this discussion are rounded to the nearest thousand. Our discussion is organized as follows:

 

Overview and Highlights . This section generally describes our business and significant events and transactions we believe are important in understanding our financial condition and results of operations.
     
Critical Accounting Policies . This section lists our significant accounting policies, including any material changes in our critical accounting policies, estimates and judgments during the three months ended June 30, 2018 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2017.
     
Results of Operations . This section provides an analysis of our results of operations presented in the accompanying unaudited condensed consolidated statements of operations by comparing the results for the three and six months ended June 30, 2018 to the results for the three and six months ended June 30, 2017.
     
Liquidity and Capital Resources . This section provides an analysis of our historical cash flows, and our future capital requirements.

 

 

10

 
 

 

OVERVIEW AND HIGHLIGHTS

 

About Our Business and How We Talk About It

 

We deliver interactive entertainment and innovative technology, including performance analytics and secure payment with Europay, MasterCard® and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple, Android and Samsung Pay. Most frequently used in bars and restaurants in North America our tablets and technology offer engaging solutions to establishments with guests who experience dwell time, such as casinos, senior living, and more. Casual dining venues subscribe to our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games, customized menus and self-service dining features. Our platform improves operating efficiencies, creates connections among the players and venues, and amplifies guests’ positive experiences. Our tablet platform was commercially launched during 2013 and then scaled during 2014. We also continue to support our legacy network product line, which we call our Classic platform.

 

We generate revenue by charging subscription fees for our service to network subscribers, by leasing equipment to certain network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, by licensing our content for use with third-party equipment, from providing professional services (such as developing certain functionality within our platform for customers), and from pay-to-play single player games.

 

Since 2015, over 115 million games have been played on our network annually, and as of June 30, 2018, approximately 55% of our network subscriber venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Buffalo Wings & Rings, Old Chicago, Native Grill & Wings, Houlihans, Beef O’Brady’s, Boston Pizza, and Arooga’s.

 

We own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our property. Other trademarks are the property of their respective owners.

 

Unless otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us” and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers” or “customers” refer to venues that subscribe to our network service; (c) to “consumers” or “players” refer to the individuals that engage in our games, events, and entertainment experiences available at our customers’ venues and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant) of our customers at which our games, events, and entertainment experiences are available to consumers.

 

Our Strategy and Business Updates

 

Grow business beyond restaurant and bar industry . One of our major initiatives is to expand our business beyond the restaurant and bar industry through partnerships and product extensions. During the first quarter of 2018, we agreed to sell our tablets to a third-party who will use our tablets and operating system to deliver their services in local jails. In July 2018, we entered into a revenue share agreement with this partner, under which our partner will make our single player games available for a fee to inmates. Earlier in 2017, we began a relationship with a third-party who is licensing our trivia content for use in casino gaming machines and is leasing our tablets for use in retail settings to complete loyalty/reward program transactions.

 

Launch expanded product offerings . We continue to focus on bringing new experiences and promotions to our customers. We are developing new products that we believe will help differentiate our offerings from those of our competitors, and which are expected to provide an ability to scale our business beyond our traditional entertainment offering.

 

New Site Hub . A piece of the equipment we install in our customers’ venues is a personal computer that acts as a server from which our content is streamed to the tablets within the venue. We are working on a smaller form factor for the personal computer that, besides being physically smaller, would be available at a lower cost and would reduce labor-intensive installation costs. We believe that the site hub will lead to new opportunities, which could include the ability to display video, highlights, dynamic web content, and app content, in addition to delivering our historical offerings within venues. We are currently testing the first version of the site hub in-house and are working toward making it commercially available by the end of 2018 or early 2019.

 

Mobile Only Offerings.

 

Mobile live trivia. We have completed a market-ready, mobile version of our live trivia product that allows customers, trivia hosts, and individuals to start their own trivia events. We released this product for select use cases and plan to have more use cases in the coming months.
     
Tablet-free system . We are developing a version of our system that allows players to use their own mobile device to play our network games inside our customers’ venues.

 

11

 
 

 

When these mobile offerings become available commercially, they will be our easiest to adopt, lowest cost of entry solutions, and may serve as a test for a venue contemplating a more significant investment.

 

Single Player Games . During the second quarter, we released our first internally-built single player arcade game, Buzztime Soccer, for our tablet platform, and we expect to release several more internally-built single player games in the coming weeks. Previously, we purchased these games from third party aggregators, sometimes at significant cost.

 

Buffalo Wild Wings . In March 2017, Buffalo Wild Wings chose us to be its provider of digital menu, order, and payment functionality. In November 2017, we expected to begin rolling out our improved tablet platform system at certain Buffalo Wild Wings locations during the first quarter of 2018 and, after an initial set of locations was running smoothly, throughout the rest of the Buffalo Wild Wings corporate and franchise locations with which we had partnered. Due to the acquisition of Buffalo Wild Wings by Arby’s Restaurant Group, Inc. (which renamed itself Inspire Brands Inc.) in February 2018 and to the associated changes with Buffalo Wild Wings’ operations, the rollout of our expanded functionality tablet platform system was put on hold to allow its new ownership to assess all the programs at Buffalo Wild Wings. Since that time, we have been working with Inspire Brands as it integrates Buffalo Wild Wings into its portfolio and determines its brand priorities. Our updated tablet platform system is currently live at 31 Buffalo Wild Wings locations with our order, payment and guest insights functionality. We continue to believe that a long-term relationship with Inspire Brands presents numerous opportunities as it intends to add several more brands to its portfolio, and that our discussions with Inspire Brands have been going well. At this time we are not certain to what extent or which of our offerings, if any, will fit within its updated brand strategy, or when it will make this determination. Aside from existing contractual obligations under agreements we have entered into in the ordinary course of business, Inspire Brands has no obligation to continue or to expand our current relationship. We continue to believe our player engagement and loyalty as well as expanded product offerings will offer us a way to continue supporting the Buffalo Wild Wings brand under the Inspire Brands umbrella.

 

Advertising Partnerships . We believe that if we lower the price of our tablet platform, we can acquire more market share. One way to lower the price is by subsidizing our costs through advertising. We are currently working with advertising sales companies to help us improve our advertisement sales and with an advertisement technology company to improve our ad loading, management, and delivery and testing capabilities.

 

Recent Developments

 

Registered Direct Offerings

 

On June 27, 2018, we entered into a subscription agreement with certain investors relating to the issuance and sale of shares of our common stock at a purchase price of $4.50 per share. The offering closed on June 29, 2018. We sold 345,772 shares of our common stock and received net proceeds of approximately $1,381,000, after deducting approximately $175,000 in offering expenses.

 

We intend 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.

 

Non-compliance with NYSE American continued listing standard

 

As previously reported, in March 2018, we received a letter from the NYSE Regulation Inc. stating that we were not in compliance with NYSE American LLC listing standards, specifically, Section 1003(a)(iii) of the Company Guide, because we reported stockholders’ equity of less than $6 million as of December 31, 2017 and had net losses in five of our most recent fiscal years ended December 31, 2017. In April 2018, we submitted a plan to NYSE Regulation advising of actions we have taken or will take to regain compliance with Section 1003(a)(iii) by March 20, 2019. In April 2018, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that extends through March 20, 2019 to regain compliance with Section 1003(a)(iii).

 

The listing of our common stock on the NYSE American is being continued during the plan period pursuant to an extension. The NYSE Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with Section 1003(a)(iii) by March 20, 2019 or if we do not make progress consistent with our plan during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate. See “PART II—ITEM 1A. RISK FACTORS—”Our common stock could be delisted or suspended from trading on the NYSE American if we do not regain compliance with continued listing criteria with which we are currently not compliant or if we fail to meet any other continued listing criteria,” below. Raising capital in the offering described above is consistent with the initiatives outlined in our plan to regain compliance, and after giving effect to that offering, we believe we are on the path to regaining compliance with Section 1003(a)(iii). NYSE Regulation will determine if and when we have regained compliance. In order for it to determine that we have regained compliance, we must have stockholders’ equity of $6 million or more for two consecutive quarters.

 

 

12

 
 

 

East West Bank Credit Facility

 

In March 2018, we entered into an amendment to the amended and restated loan and security agreement we entered into with East West Bank on November 29, 2017. In accordance with the terms of the amended and restated loan and security agreement, beginning with the payment due on June 30, 2018, our payments under this credit facility became principal and interest, whereas they have historically been interest only.

 

CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to deferred costs and revenues, depreciation of fixed assets, the provision for income taxes including the valuation allowance, stock-based compensation, bad debts, investments, impairment of software development costs, goodwill, fixed assets, intangible assets and contingencies, including the reserve for sales tax inquiries. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments.

 

There have been no material changes in our critical accounting policies, estimates and judgments during the three and six months ended June 30, 2018 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2017, except for Revenue from Contracts with Customers (Topic 606) . We have completed the process of evaluating the effect of adopting Topic 606 and have determined that the timing and amount of revenue recognized based on Topic 606 is consistent with our revenue recognition policy under previous guidance, and accordingly, there was no transition adoption adjustment necessary upon the adoption of the Topic 606 guidance . (See Note 2 to the accompanying unaudited condensed consolidated financial statements.)

 

RESULTS OF OPERATIONS

 

Three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017

 

We incurred a net loss of $124,000 and $533,000 for the three and six months ended June 30, 2018, respectively, compared to a net loss of $164,000 and $254,000 for the three and six months ended June 30, 2017.

 

Revenue

 

The table below summarizes our revenue by type for the period indicated:

 

    Three months ended June 30,        
    2018   2017        
    $  

% of Total

Revenue

  $  

% of Total

Revenue

 

$

Change

 

%

Change

Subscription revenue     4,041,000       72 %     4,232,000       76 %     (191,000 )     (5 )%
Hardware revenue     590,000       10 %     223,000       4 %     367,000       165 %
Other revenue     1,020,000       18 %     1,094,000       20 %     (74,000 )     (7 )%
Total     5,651,000       100 %     5,549,000       100 %     102,000       2 %

 

    Six months ended June 30,        
    2018   2017        
    $  

% of Total

Revenue

  $  

% of Total

Revenue

 

$

Change

 

%

Change

Subscription revenue     8,106,000       71 %     8,458,000       78 %     (352,000 )     (4 )%
Hardware revenue     1,269,000       11 %     408,000       4 %     861,000       211 %
Other revenue     2,037,000       18 %     1,914,000       18 %     123,000       6 %
Total     11,412,000       100 %     10,780,000       100 %     632,000       6 %

 

 

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Subscription revenue decreased for the three and six months ended June 30, 2018 primarily due to lower average site count and lower average revenue per site when compared to the same periods in 2017. During the three and six months ended June 30, 2018, hardware revenue increased primarily due to more installations of our tablet platform for certain customers under sales-type lease arrangements when compared to the same periods in 2017. Additionally, we began selling equipment during the three months ended June 30, 2018, which accounts for $39,000 of the increase in hardware revenue when compared to the same period in 2017. We expect the amount of hardware revenue to continue fluctuating in correlation with customer contracts under sales-type lease arrangements and with other equipment sale contracts. Other revenue increased for the three and six months ended June 30, 2018 due primarily to an increase in professional services when compared to the same periods in 2017.

 

Geographic breakdown of our site count for network subscribers was:

 

   

Network Subscribers

as of June 30,

 
    2018     2017  
United States     2,561       2,628  
Canada     142       140  
Total     2,703       2,768  

 

Direct Costs and Gross Margin

 

A comparison of direct costs and gross margin for the period indicated is shown in the table below:

 

   

Three months ended

June 30,

        %  
    2018     2017     Change    

Change

 
Revenues   $ 5,651,000     $ 5,549,000     $ 102,000       2 %
Direct Costs     1,937,000       1,631,000       306,000       19 %
Gross Margin   $ 3,714,000     $ 3,918,000     $ (204,000 )     (5 )%
                                 
Gross Margin Percentage     66 %     71 %                

 

   

Six months ended

June 30,

          %  
    2018     2017     Change    

Change

 
Revenues   $ 11,412,000     $ 10,780,000     $ 632,000       6 %
Direct Costs     3,904,000       3,474,000       430,000       12 %
Gross Margin   $ 7,508,000     $ 7,306,000     $ 202,000       3 %
                                 
Gross Margin Percentage     66 %     68 %                

 

For the three months ended June 30, 2018, the increase in direct costs was primarily due to increased equipment expense of $311,000 related to higher sale-type lease revenue and equipment sales, increased depreciation expense of $149,000 for capitalized site equipment and software development programs and increased service provider fees of $14,000, offset by decreases in freight expense of $47,000, direct wages of $62,000 and license fees of $53,000 when compared to the same period in 2017.

 

For the six months ended June 30, 2018, the increase in direct costs was primarily due to increased equipment expense of $376,000 related to higher sale-type lease revenue and equipment sales, increased depreciation expense of $211,000 for capitalized site equipment and software development programs and increased service provider fees of $35,000, offset by decreases in freight expense of $111,000, direct wages of $56,000 and license fees of $34,000 when compared to the same period in 2017.

 

 

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Operating Expenses

 

    Three months ended
June 30,
          %  
    2018     2017     Change     Change  
Selling, general and administrative   $ 3,658,000     $ 3,858,000     $ (200,000 )     (5 )%
                                 
Depreciation and amortization (non-direct)   $ 83,000     $ 86,000     $ (3,000 )     (3 )%

 

    Six months ended
June 30,
          %  
    2018     2017     Change     Change  
Selling, general and administrative   $ 7,679,000     $ 7,992,000     $ (313,000 )     (4 )%
                                 
Depreciation and amortization (non-direct)   $ 169,000     $ 174,000     $ (5,000 )     (3 )%

 

Selling, General and Administrative Expenses

 

The decrease in selling, general and administrative expenses for the three months ended June 30, 2018 was primarily due to decreased payroll and related expense of $213,000, decreased hardware and software expenses of $46,000 and decreased marketing expense of $33,000, offset by increased professional fees of $94,000, in each case, when compared to the same period in 2017.

 

The decrease in selling, general and administrative expenses for the six months ended June 30, 2018 was primarily due to decreased payroll and related expense of $379,000, decreased marketing expense of $100,000 and decreased operating supplies expenses of $37,000, offset by increased professional fees of $252,000, in each case, when compared to the same period in 2017.

 

Depreciation and Amortization Expense

 

The decrease in depreciation and amortization expense for the three and six months ended June 30, 2018 compared to the same periods in 2017 was primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.

 

Other (Expense) Income, Net

 

   

Three months ended

June 30,

    Decrease in other  
    2018     2017    

expense, net

 
Total other (expense) income, net   $ (73,000 )   $ (132,000 )   $ 59,000  

 

    Six months ended
June 30,
    Increase in other  
    2018     2017    

expense, net

 
Total other (expense) income, net   $ (167,000 )   $ 618,000     $ (785,000 )

 

For the three months ended June 30, 2018, the decrease in other expense, net was primarily related to decreased interest expense resulting from lower debt balances and increased foreign currency exchange gains related to the operations of our Canadian subsidiary.

 

For the six months ended June 30, 2018, the increase in other expense, net was primarily related to the receipt of a one-time payment from a supplier during the 2017 period related to a supply chain matter that was resolved in exchange for such payment and the absence of a similar event during the 2018 period.

 

 

15

 
 

 

Income Taxes

 

   

Three months ended

June 30,

 
    2018     2017  
Provision for income taxes   $ (24,000 )   $ (6,000 )

 

    Six months ended
June 30,
 
    2018     2017  
Provision for income taxes   $ (26,000 )   $ (12,000 )

 

During 2018, we expect to incur state income tax liability related to our U.S. operations and income tax liability in Canada related to our operations in Canada. We have established a full valuation allowance for substantially all deferred tax assets, including our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets. The effective tax rate differs from the statutory tax rate due primarily to our full valuation allowance.

 

EBITDA—Consolidated Operations

 

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with GAAP. Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation and amortization charges compared to their net income or loss calculation in accordance with GAAP.

 

The table below shows a reconciliation of our consolidated net loss calculated in accordance with GAAP to EBITDA for the period indicated. EBITDA should not be considered a substitute for, or superior to, net loss calculated in accordance with GAAP.

 

   

Three months ended

June 30,

   

Six months ended

June 30,

 
    2018     2017     2018     2017  
Net loss per GAAP   $ (124,000 )   $ (164,000 )   $ (533,000 )   $ (254,000 )
Interest expense, net     94,000       123,000       187,000       282,000  
Income tax provision     24,000       6,000       26,000       12,000  
Depreciation and amortization     697,000       551,000       1,336,000       1,130,000  
EBITDA   $ 691,000     $ 516,000     $ 1,016,000     $ 1,170,000  

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2018, we had cash and cash equivalents of $3,785,000 compared to cash and cash equivalents of $3,378,000 as of December 31, 2017.

 

In November 2017, we entered into an amended and restated loan and security agreement with East West Bank (“EWB”), under which we borrowed $4,500,000 in the form of a 36-month term loan, which matures on November 29, 2020. EWB has a first-priority security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions. We have no more borrowing availability under this credit facility.

 

As of June 30, 2018, $4,500,000 was outstanding under this credit facility, of which $1,950,000 was recorded in current portion of long-term debt and $2,550,000 was recorded in long-term debt on the accompanying consolidated balance sheet. Our monthly payments were interest only until June 30, 2018, at which time such payments became principal and interest. EWB automatically withdraws the applicable payment from our bank account when due. The first principal payment was due June 30, 2018, a Saturday. EWB debited our bank account in July for such payment. As a result, the amount of long-term debt on the accompanying consolidated balance sheet as of June 30, 2018 includes the amount of the principal due on such date.

 

 

16

 
 

 

We must satisfy financial covenants under this credit facility, including minimum liquidity, maximum senior leverage ratio and minimum Adjusted EBITDA (as defined below) set forth below for the period indicated:

 

Six Month Period Ending   Minimum Adjusted EBITDA  
March 31, 2018   $ 600,000  
June 30, 2018   $ 1,200,000  
September 30, 2018   $ 1,600,000  
December 31, 2018   $ 1,500,000  

 

As of June 30, 2018, we were in compliance with all covenants. Beginning with the quarter ending March 31, 2019, we must satisfy a minimum fixed charge coverage ratio in lieu of the minimum Adjusted EBITDA covenant.

 

“Adjusted EBITDA” means (a) EBITDA (which is net income, plus interest expense, plus, to the extent deducted in the calculation of net income, depreciation expense and amortization expense, plus income tax expense) plus (b) other noncash expenses and charges, plus (c) to the extent approved by EWB, other onetime charges, plus (d) 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.

 

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 case-by-case, considering such factors as it considers relevant, including the amount outstanding under this financing arrangement. Through June 30, 2018, we borrowed $9,690,000. As of June 30, 2018, $260,000 was outstanding, all of which is recorded in current portion of long-term debt on the accompanying consolidated balance sheet. We do not expect the lender to lend any additional funds under this financing arrangement.

 

In connection with preparing the financial statement as of and for the period ended June 30, 2018, we evaluated whether there are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt about our ability to continue as a going concern within twelve months after the date that such financial statements are issued. We believe we will have sufficient cash to meet our operating cash requirements and to fulfill our debt obligations for at least the next twelve months from the date that such financial statements are issued. During the three months ended June 30, 2018, we issued 345,772 shares of our common stock in a registered direct offering and received net proceeds of approximately $1,381,000. To increase the likelihood that we will be able to successfully execute our operating and strategic plan and to better position the company take advantage of market opportunities for growth, we are continuing to evaluate additional financing alternatives, including additional equity financings and alternative sources of debt. If our cash and cash equivalents do not meet our future cash requirements, we may have to reduce planned capital expenses, reduce operational cash uses or raise capital on terms that are not as favorable to us as they otherwise might be. Any actions we may undertake to reduce planned capital purchases or reduce expenses might not cover shortfalls in available funds. If we require additional capital, we may not secure additional financing on terms acceptable to us, or at all.

 

 

17

 
 

 

Working Capital

 

As of June 30, 2018, we had working capital (current assets in excess of current liabilities) of $2,076,000 compared to negative working capital (current liabilities in excess of current assets) of $1,109,000 as of December 31, 2017. The following table shows our change in working capital from December 31, 2017 to June 30, 2018:

 

   

Increase

(Decrease)

 
Working capital as of December 31, 2017   $ (1,109,000 )
Changes in current assets:        
Cash and cash equivalents     407,000  
Accounts receivable, net of allowance     73,000  
Site equipment to be installed     (1,068,000 )
Prepaid expenses and other current assets     163,000  
Change in total current assets     (425,000 )
Changes in current liabilities:        
Accounts payable     37,000  
Accrued compensation     (60,000 )
Accrued expenses     163,000  
Sales taxes payable     3,000  
Income taxes payable     13,000  
Current portion of long-term debt     (2,849,000 )
Current portion of obligations under capital leases     (9,000 )
Deferred revenue     (715,000 )
Deferred rent     (99,000 )
Other current liabilities     (94,000 )
Change in total current liabilities     (3,610,000 )
Net change in working capital     3,185,000  
Working capital as of June 30, 2018   $ 2,076,000  

 

Cash Flows

 

Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows, are summarized as follows:

 

    Six months ended
June 30,
 
    2018     2017  
Cash provided by (used in):                
Operating activities   $ 239,000     $ 2,806,000  
Investing activities     (704,000 )     (701,000 )
Financing activities     921,000       (985,000 )
Effect of exchange rates     (49,000 )     28,000  
Net increase in cash and cash equivalents   $ 407,000     $ 427,000  

 

Net cash provided by operations. The decrease in cash provided by operating activities was primarily due to receiving a prepayment during the 2017 period from Buffalo Wild Wings for equipment and services to be delivered in the future. We did not receive a similar prepayment during the same period in 2018.

 

Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $398,000 to $5,301,000 for the six month months ended June 30, 2018 from $5,699,000 for the same period in 2017, primarily due to a reduction in incentive compensation and headcount.

 

Our primary source of cash is cash we generate from customers. Cash received from customers decreased $4,088,000 to $11,185,000 for the six months ended June 30, 2018 from $15,274,000 for the same period in 2017. This decrease was primarily related to the prepayment from Buffalo Wild Wings described above.

 

Net cash used in investing activities. Our net cash used in investing activities for the six months ended June 30, 2018, which is related to capitalized software development expenditures and capital expenditures, was flat compared to the same period in 2017.

 

Net cash provided by (used in) financing activities. The $1,906,000 increase in cash provided by financing activities was primarily attributable to a decrease of $2,287,000 in principal payments on our long-term debt for the six months ended June 30, 2018 compared to the same period in 2017, offset by a $392,000 reduction in net proceeds received from common stock offerings. We received $1,381,000 in net proceeds from our common stock offering that closed in June 2018, and we received an aggregate of $1,773,000 in net proceeds from our common stock offerings that closed in March and April 2017.

 

 

18

 
 

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2018, the FASB issued ASU No. 2018-07 (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The guidance is effective for fiscal years beginning after December 15, 2018 (which is January 1, 2019 for us), including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk .

 

Under Securities and Exchange Commission, or SEC, rules and regulations, as a smaller reporting company we are not required to provide the information otherwise required by this item.

 

Item 4. Controls and Procedures .

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, our management evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, or the Exchange Act) as to whether such disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on our evaluation, our principal executive officer and principal financial officer concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings .

 

From time to time, we are subject to legal proceedings in the ordinary course of business. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or outcomes could occur that have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results. We are not currently subject to any pending material legal proceedings.

 

Item 1A. Risk Factors .

 

An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2017 together with all other information contained or incorporated by reference in this report before you invest in our common stock. If any of the risks described in this report or in our annual report occur, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected. Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment. As of the date of this report, we do not believe there have been any material changes to the risk factors disclosed in our annual report other than as stated below.

 

If we fail to satisfy our financial covenants to our primary lender, the lender may declare a default, which could lead to all payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business.

 

Our amended and restated loan and security agreement with East West Bank contains certain financial covenants with which we must comply, including minimum adjusted EBITDA, minimum liquidity and a maximum senior leverage ratio, and beginning with the quarter ending March 31, 2019, a minimum fixed charge coverage ratio, which will replace the minimum adjusted EBITDA covenant. If we fail to satisfy these covenants, East West Bank may declare a default, which could lead to all payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business. East West Bank has a first-priority security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions. Accordingly, in an event of a default, East West Bank could dispose of such assets to satisfy our payment obligations.

 

As of June 30, 2018, we were in compliance with all covenants. However, there can be no assurance we will be in compliance with all covenants in the future, including due to including due to events or conditions outside of our control. For example, fluctuations in our operating results, such as may result from delays in or failure on the part of Inspire Brands Inc. to maintain or expand our relationship with Buffalo Wild Wings as was anticipated before its acquisition, could result in violation of the adjusted EBITDA covenant. Even though it has done so previously, East West Bank may not be willing to waive future incidences of covenant default.

 

Our cash flow may not cover our capital needs and we may need to raise additional funds in the future. Such funds may not be available when needed, on acceptable terms or at all and, if available, may dilute current stockholders.

 

As of June 30, 2018, we had cash and cash equivalents of $3,785,000. 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. As of June 30, 2018, $4,500,000 was outstanding under that loan agreement, of which $1,950,000 was recorded in current portion of long-term debt and $2,550,000 was recorded in long-term debt on our consolidated balance sheet. The loan matures on November 29, 2020. Beginning with the payment due on June 30, 2018, our payments under this credit facility became principal and interest, whereas they have historically been interest only. In addition, as of June 30, 2018, $260,000 was outstanding under a financing arrangement with an equipment lender and recorded in current portion of long-term debt on our consolidated balance sheet.

 

Our ability to meet our debt service obligations and to fund working capital, capital expenditures and investments in our business, will depend upon our future performance, which will depend on many factors, including:

 

  our ability to generate cash from operating activities;
  acceptance of, and demand for, our interactive games and entertainment;
  the costs of continuing to develop and implement our tablet platform and product line;

 

 

20

 
 

 

  the costs of developing new entertainment content, products, or technology or expanding our offering to new media platforms such as the internet and mobile phones;
  the extent to which we invest in the creation of new entertainment content and new technology; and
  the number and timing of acquisitions and other strategic transactions, if any.

 

In addition, in order to fully execute on our long-term strategic initiatives, we believe we will likely require additional funding in the future.

 

We cannot ensure that we will generate cash flow from operations in an amount sufficient to enable us to meet our debt service obligations or to fund our working capital needs, capital expenditures and investments in our business. East West Bank has a first-priority security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions, and our equipment lender has a first-priority security interest in the equipment we purchased with the funds borrowed, subject to a subordination agreement with East West Bank. If we default on our monthly payment obligations to our lenders, and our debt obligations become immediately due and payable in full, our lenders may dispose of our personal property to satisfy our payment obligations. If we need to raise additional funds in the future, such funds may not be available when needed, on acceptable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, or at all, we may not be able to continue to develop and implement our platform and product line, develop or enhance our other products and services, successfully execute our business plan or any or all of our strategic initiatives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.

 

We receive a significant portion of our revenues from Buffalo Wild Wings, and any decrease in the amount of their business could materially and adversely affect our cash flow and revenue.

 

For the year ended December 31, 2017, Buffalo Wild Wings corporate-owned restaurants and its franchisees accounted for approximately 41%, or $8,678,000, of our total revenue. For the six months ended June 31, 2018, Buffalo Wild Wings corporate-owned restaurants and its franchisees accounted for approximately 46%, or $5,273,000, of our total revenue. As of June 30, 2018 and December 31, 2017, approximately $159,000 and $191,000, respectively, was included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and its franchisees.

 

In March 2017, Buffalo Wild Wings chose us to be its provider of digital menu, order, and payment functionality. In November 2017, we expected to begin rolling out our improved tablet platform system at certain Buffalo Wild Wings locations during the first quarter of 2018 and, after an initial set of locations was running smoothly, throughout the rest of the Buffalo Wild Wings corporate and franchise locations with which we had partnered. Due to the acquisition of Buffalo Wild Wings by Arby’s Restaurant Group, Inc. (which renamed itself Inspire Brands Inc.) in February 2018 and to the associated changes with Buffalo Wild Wings’ operations, the rollout of our expanded functionality tablet platform system was put on hold to allow its new ownership to assess all the programs at Buffalo Wild Wings. Since that time, we have been working with Inspire Brands as it integrates Buffalo Wild Wings into its portfolio and determines its brand priorities. Our updated tablet platform system is currently live at 31 Buffalo Wild Wings locations with our order, payment and guest insights functionality. We continue to believe that a long-term relationship with Inspire Brands presents numerous opportunities as it intends to add several more brands to its portfolio, and that our discussions with Inspire Brands have been going well. At this time we are not certain to what extent or which of our offerings, if any, will fit within its updated brand strategy, or when it will make this determination. Aside from existing contractual obligations under agreements we have entered into in the ordinary course of business, Inspire Brands has no obligation to continue or to expand our current relationship. We continue to believe our player engagement and loyalty as well as expanded product offerings will offer us a way to continue supporting the Buffalo Wild Wings brand under the Inspire Brands umbrella.

 

If we are unable to maintain or expand our current relationship with Buffalo Wild Wings (now under the Inspire Brands umbrella) or its franchisees, we could lose a significant portion of our revenues, which could materially and adversely affect our operating results and cash flows. In addition, inability to demonstrate Buffalo Wild Wings as a strategic user of our expanded functionality tablet platform system could negatively impact achievement of our chain customer site growth goals. Likewise, if any other customer who may in the future represent a significant portion of our revenue were to breach or terminate their subscriptions or otherwise decrease the amount of business they transact with us, we could lose a significant portion of our revenues and cash flow.

 

 

21

 
 

 

Our common stock could be delisted or suspended from trading on the NYSE American if we do not regain compliance with continued listing criteria with which we are currently not compliant or if we fail to meet any other continued listing criteria.

 

As reported, in March 2018, we received a letter from the NYSE Regulation Inc. stating that we are not in compliance with NYSE American LLC continued listing standards. Specifically, we are not in compliance with Section 1003(a)(iii) of the Company Guide because we reported stockholders’ equity of less than $6 million as of December 31, 2017 and had net losses in five of our most recent fiscal years ended December 31, 2017. Our stockholders’ equity was $5.5 million as of December 31, 2017. As a result, we are now subject to the procedures and requirements of Section 1009 of the Company Guide.

 

On April 26, 2018, the NYSE Regulation Inc. notified us that it has accepted our plan to regain compliance with Section 1003(a)(iii) of the Company Guide and granted us a plan period that extends through March 20, 2019 to regain compliance. The listing of our common stock on the NYSE American is being continued during the plan period pursuant to an extension. The NYSE Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with Section 1003(a)(iii) by March 20, 2019 or if we do not make progress consistent with our plan during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate. After giving effect to the offering that closed on June 29, 2018, we believe we are on the path to regaining compliance with Section 1003(a)(iii) of the Company Guide. NYSE Regulation will determine if and when we have regained compliance. In order for it to determine that we have regained compliance, we must have stockholders’ equity of $6 million or more for two consecutive quarters.

 

We can give no assurances that we will be able to address our non-compliance with the NYSE American continued listing standards or, even if we do, that we will be able to maintain the listing of our common stock on the NYSE American. Our common stock could be delisted because we do not make progress consistent with our plan during the plan period, because we do not regain compliance by March 20, 2019, or because we fall below compliance with other NYSE American listing standards. In addition, we may determine to pursue business opportunities or grow our business at levels or on timelines that reduces our stockholders’ equity below the level required to maintain compliance with NYSE American continued listing standards. The delisting of our common stock for whatever reason could, among other things, substantially impair our ability to raise additional capital; result in a loss of institutional investor interest and fewer financing opportunities for us; and/or result in potential breaches of representations or covenants in agreements pursuant to which we made representations or covenants relating to our compliance with applicable listing requirements. Claims related to any such breaches, with or without merit, could result in costly litigation, significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on our financial condition, business and results of operations. In addition, the delisting of our common stock for whatever reason may materially impair our stockholders’ ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

 

Not Applicable

 

Item 5. Other Information .

 

None

 

 

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Item 6. Exhibits.

 

Exhibit   Description   Incorporated By Reference
3.1(a)   Restated Certificate of Incorporation   Exhibit to Form 10-Q filed on August 14, 2013
         
3.1(b)   Certificate of Amendment to the Restated Certificate of Incorporation (reverse/forward split)   Exhibit to Form 8-K filed on June 17, 2016
         
3.1(c)   Certificate of Decrease of the Series A Convertible Preferred Stock   Exhibit to Form 8-K filed on April 12, 2017
         
3.1(d)   Certificate of Amendment to the Restated Certificate of Incorporation (decrease in authorized capital stock)   Exhibit to Form 8-K filed on June 9, 2017
         
3.2   Bylaws, as amended   Exhibit to Form 10-K filed on March 26, 2008
         
10.1   Form of Subscription Agreement, dated June 27, 2018, by and among the investor parties thereto and the registrant.   Exhibit to Form 8-K filed on June 27, 2018
         
10.2*   NTN Buzztime, Inc. Non-Employee Director Compensation Policy   Filed herewith
         
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
32.1#   Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Furnished herewith
         
32.2#   Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Furnished herewith
         
101.INS   XBRL Instance Document   Filed herewith
         
101.SCH   XBRL Taxonomy Extension Schema Document   Filed herewith
         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   Filed herewith
         
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document   Filed herewith
         
101.LAB   XBRL Taxonomy Extension Label Linkbase Document   Filed herewith

 

 

* Management contract or compensatory plan.
   
# This certification is being furnished solely to accompany this report pursuant to U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated herein by reference into any filing of the Company whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

   NTN BUZZTIME, INC.
     
Date: August 6, 2018 By: /s/ Allen Wolff
    Allen Wolff
    Chief Financial Officer and Executive Vice President
    (on behalf of the Registrant, and as its Principal Financial Officer)

 

 

24

 
 

 

Exhibit 10.2

 

Click to enlarge

 

NTN BUZZTIME, INC.

NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

 

Adopted and approved April 9, 2017, and effective as of April 1, 2017 (the “ Effective Date ”)

 

NTN Buzztime, Inc. (the “ Company ”) believes that granting compensation to members of the Board of Directors (the “ Board ,” and members of the Board, the “ Directors ”) represents an effective tool to attract, retain and reward Directors who are not employees of the Company (the “ Non-employee Directors ”). This Non-Employee Director Compensation Policy (this “ Policy ”) is intended to formalize the Company’s policy regarding annual retainer and equity compensation to Non-employee Directors. Unless otherwise defined herein, capitalized terms used in this Policy have the meaning given to such terms in the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan (the “ 2010 Plan ”). Each Non-employee Director will be solely responsible for any tax obligations he or she incurs as a result of compensation received from the Company, including under this Policy. The 2010 Plan provides that the Board shall administer the 2010 Plan with respect to all Awards granted to Non-employee Directors. This Policy is effective as of the Effective Date.

 

Compensation Generally

 

The Company compensates its Non-employee Directors for their service in such capacity with annual retainers and equity compensation as described in this Policy. Directors who are also employees of the Company are not entitled to receive any compensation for their service as Directors. No Director will be entitled to or paid any fees for meeting attendance. From time to time, a Non-employee Director may provide the Company with consulting services, and the Company may compensate such Non-employee Director for such services.

 

Annual Retainers

 

Amount

 

Each Non-employee Director will be eligible for a $25,000 annual retainer for his or her service as a Director. If the Chairperson of the Board is a Non-employee Director, he or she will be eligible for an additional $20,000 annual retainer for services in such capacity. Each Non-employee Director who serves on one of the committees of the Board listed in the table below will also be eligible for an additional annual retainer for their service on such committee as set forth in the table below.

 

Board Committee   Chairperson     Member  
Audit Committee   $ 10,000     $ 5,000  
Nominating and Corporate Governance/Compensation Committee   $ 10,000     $ 5,000  

 

Payment

 

Each annual retainer under this Policy will be paid quarterly in arrears on a prorated basis to each Non-employee Director who has served in the relevant capacity at any point during the immediately preceding Company fiscal quarter, and such payment shall be made no later than 30 days following the end of the applicable Company fiscal quarter (such payment date, a “ Payment Date ”).

 

    1
 

 

Election for Cash Retainers to be Paid in Stock

 

Each Non-employee Director may elect that payment of the annual retainer he or she is eligible to receive under this Policy, or a portion of such retainer, be settled in the form of a Restricted Stock Grant granted under the 2010 Plan. Such Restricted Stock Grant shall be fully-vested on the date of grant. An election under this paragraph (each, an “ Election ”) must be made by the applicable Non-employee Director during an open trading window under the Company’s insider trading policy by written notification to the Company’s Corporate Secretary and to the Company’s Chief Financial Officer no later than the 15 th day of the last month of the Company fiscal quarter for which the retainer is to be paid (the “ Election Deadline ”) for such Election to be effective with respect to such retainer. An Election applies only to the particular calendar quarter for which it is made. Absent an Election being timely made in accordance with this paragraph as to a particular calendar quarter, the portion of the annual retainer to be paid on the Payment Date for that particular calendar quarter will be in the form of cash. Once an Election is made with respect to a particular calendar quarter, it may not be withdrawn or substituted unless the Board determines, in its sole discretion, that the withdrawal or substitution is occasioned by an extraordinary or unanticipated event. Each payment in the form of a Restricted Stock Grant shall (i) be made on the same Payment Date as a cash retainer payment and (ii) cover a number of shares of the Company’s common stock equal to the U.S. dollar amount of the applicable cash retainer payment, divided by the closing market price of the Company’s common stock on the last day of the applicable Company fiscal quarter, rounded down to the nearest whole share. For clarity, absent an Election, cash retainers shall be paid in cash. If the Restricted Stock Grant would be deemed a purchase and on the date the Restricted Stock Grant would be purchased pursuant to an Election there is in place any restriction under applicable law (including a blackout period under the Sarbanes-Oxley Act of 2002) or the rules of the principal national securities exchange on which the Shares are traded (a “ Purchase Restriction ”) which would prohibit the Non-employee Director from making such a purchase, then the Restricted Stock Grant shall be purchased on the first trading day following the lapse or removal of the Purchase Restriction based on the Fair Market Value of the shares on such trading day.

 

Equity Compensation

 

Initial Awards . Each Non-employee Director who is initially elected or appointed to the Board on or after the Effective Date automatically will be granted a Nonstatutory Stock Option to purchase 600 Shares (an “ Initial Option Award ”). Of the 600 Shares subject to an Initial Option Award, 300 Shares will be fully vested and exercisable on the date of grant and the remaining 300 Shares will vest and become exercisable, subject to the Director’s continued service, in 12 equal monthly installments beginning in the month immediately following the date of grant.

 

Annual Awards . Each Non-employee Director who is re-elected for an additional term of service on the Board automatically will be granted a Nonstatutory Stock Option to purchase 400 Shares (an “ Annual Award ”) on the date of the Company’s annual stockholder meeting at which such Director is so re-elected. The Shares subject to an Annual Award will vest and become exercisable, subject to the Director’s continued service, in 12 equal monthly installments beginning in the month immediately following the date of grant.

 

Each Initial Option Award and Annual Award will (a) have an exercise price per share equal to the Fair Market Value of a Share on the date of grant; and (b) expire on the earlier of 10 years from the date of grant or 90 days from the date the Director ceases to serve on the Board.

 

Additional Provisions

 

All provisions of the 2010 Plan will apply to Equity Awards granted to Non-employee Directors under this Policy, unless a provision in this Policy is inconsistent with the 2010 Plan, in which case such provision of the 2010 Plan would not apply to the Equity Awards. All applicable terms of the 2010 Plan apply to this Policy as if fully set forth herein, and all grants of Equity Awards are hereby subject in all respect to the terms of the 2010 Plan. Equity Awards granted under this Policy shall be made solely by and subject to the terms set forth in a Restricted Stock Grant Agreement and Stock Option Agreement, as applicable, in a form approved by the Board.

 

This Policy may be amended, modified or terminated by the Board in the future at its sole discretion. No Director shall have any rights hereunder; provided, however, that the foregoing does not limit any rights a Director may have under and with respect to any Equity Awards granted to such Director under this Policy.

 

This Policy is subject to review and renewal at least annually by the Board.

 

Adjustments

 

In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company or other change in the corporate structure of the Company affecting the Shares occurs, the Board, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under this Policy, will adjust the number of Shares issuable pursuant to Awards granted under this Policy.

 

Revisions

 

The Board may change and otherwise revise the terms of Equity Awards granted under this Policy, including, without limitation, the number of Shares subject thereto, for Equity Awards of the same or different type granted on or after the date the Board determines to make any such change or revision.

 

    2
 

 

 

 

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Ram Krishnan, certify that:

 

1. I have reviewed this report on Form 10-Q of NTN Buzztime, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: August 6, 2018

/s/ Ram Krishnan

  Ram Krishnan
  Chief Executive Officer
  NTN Buzztime, Inc.

 

     
 

 

Exhibit 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Allen Wolff, certify that:

 

1. I have reviewed this report on Form 10-Q of NTN Buzztime, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: August 6, 2018

/s/ Allen Wolff

  Allen Wolff
  Chief Financial Officer and Executive Vice President
  NTN Buzztime, Inc.

 

     
 

 

Exhibit 32.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of NTN Buzztime, Inc. (the “Registrant”) on Form 10-Q for the period ended June 30, 2018 (the “Report”), I, Ram Krishnan, Chief Executive Officer of the Registrant, do hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

(1) the Report, as filed with the Securities and Exchange Commission, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Dated: August 6, 2018

/s/ Ram Krishnan

  Ram Krishnan
  Chief Executive Officer
  NTN Buzztime, Inc.

 

     
 

 

Exhibit 32.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of NTN Buzztime, Inc. (the “Registrant”) on Form 10-Q for the period ended June 30, 2018 (the “Report”), I, Allen Wolff, Chief Financial Officer of the Registrant, do hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

(1) the Report, as filed with the Securities and Exchange Commission, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Dated: August 6, 2018 /s/ Allen Wolff
  Allen Wolff
  Chief Financial Officer and Executive Vice President
  NTN Buzztime, Inc.