NTN BUZZTIME, INC. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference herein, if any, contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, or the Forward-Looking Statements Safe Harbor, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts could be deemed forward-looking statements. We have tried, whenever possible, to identify these statements by using words such as "believes," "estimates," "anticipates," "expects," "intends," "plans," "seeks," or words of similar meaning, or future or conditional verbs, such as "may," "will," "should," "could," "aims," "intends" or "projects," and similar expressions, whether in the negative or the affirmative. Forward-looking statements reflect management's beliefs and assumptions, are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statement. For us, particular factors that might cause or contribute to such differences include: (1) our ability to raise substantial capital in the very near-term to allow us to maintain operations and sustain the negative impact of the COVID-19 pandemic on our business and financial condition, and if we are able to sustain such impact, our ability to recover from the impact; (2) our ability to successfully manage our liquidity and our working capital deficit by managing the timing of payments to our third parties; (3) our ability to comply with our financial covenants in our loan and security agreement with Avidbank and its right to declare a default if we do not, which could lead to all payment obligations becoming immediately due and payable and which could lead to a foreclosure on our assets; (4) when, and the extent to which, the negative impact of the pandemic will improve, including when a substantial majority of restaurants across theU.S. andCanada will be permitted to offer on-site dining and operate at or close to pre-pandemic levels or when a substantial majority of bars across theU.S. andCanada will be permitted to re-open and operate at or close to pre-pandemic levels, when our customers will re-open, or if they will subscribe to our service if and when they do; (5) the negative impact that measures we implemented and may implement to reduce our operating expenses and planned capital expenses (including investments in our business) may have on our ability to effectively manage and operate our business; (6) our ability to maintain or grow our revenue; (7) with respect to our strategic process, the risk that we may not enter into a definitive agreement for a potential transaction or, if we do, that the potential transaction will not be completed; (8) our ability to compete effectively within the highly competitive interactive games, entertainment and marketing services industries, including our ability to successfully commercially launch attractive product offerings, and the impact of new products and technological change, especially in the mobile and wireless markets, on our operations and competitiveness; (9) our ability to adequately protect our proprietary rights and intellectual property; and (10) the other risks and uncertainties described in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 (our "2019 10-K"), and described in other documents we file from time to time with theSecurities and Exchange Commission , orSEC , including our Current Reports on Form 8-K and our Quarterly Reports on Form 10-Q filed with theSEC thereafter. To the extent the impact of the COVID-19 pandemic adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A "Risk Factors" included in
our 2019 10-K. 20 Readers are urged not to place undue reliance on the forward-looking statements in this report or incorporated by reference herein, which speak only as of the date of this report. We are including this cautionary note to make applicable, and take advantage of, the safe harbor provisions of the Forward-Looking Statements Safe Harbor. We believe that the expectations reflected in forward-looking statements in this report or incorporated herein by reference are based upon reasonable assumptions at the time made. However, given the risks and uncertainties, you should not rely on any forward- looking statements as a prediction of actual results, developments or other outcomes. You should read these forward-looking statements with the understanding that we may be unable to achieve projected results, developments or other outcomes and that actual results, developments or other outcomes may be materially different from what we expect. You are cautioned not to place undue reliance on these forward-looking statements. We intend forward-looking statements to speak only as of the time they are made. Except as required by law, we do not undertake, and expressly disclaim any obligation, to disseminate, after the date hereof, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read with, the accompanying unaudited condensed consolidated financial statements and notes, included in Item 1 of this Quarterly Report on Form 10-Q, to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. All dollar amounts in this discussion are rounded to the nearest thousand. Our discussion is organized as follows:
? Overview and Highlights. This section describes our business and significant
events and transactions we believe are important in understanding our
financial condition and results of operations.
? Critical Accounting Policies. This section lists our significant accounting
policies, including any material changes in our critical accounting policies,
estimates and judgments during the three and six months ended
from those described in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of our 2019 10-K.
? Results of Operations. This section provides an analysis of our results of
operations presented in the accompanying unaudited condensed consolidated
statements of operations by comparing the results for the three and six months
ended
2019.
21
? Liquidity and Capital Resources. This section provides an analysis of our
historical cash flows, and our future capital requirements.
? Recent Accounting Pronouncements. This section provides information related to
new or updated accounting guidance that may impact our consolidated financial
statements.
? Off-Balance Sheet Arrangements. This section provides information related to
any off-balance sheet arrangement we may have that would affect our
consolidated finance statements.
OVERVIEW AND HIGHLIGHTS
About Our Business and How We Talk About It
We deliver interactive entertainment and innovative technology to our partners in a wide range of verticals - from bars and restaurants to casinos and senior living centers. By enhancing the overall guest experience, we believe we help our hospitality partners acquire, engage, and retain patrons. Through social fun and friendly competition, our platform creates bonds between our hospitality partners and their patrons, and between patrons themselves. We believe this unique experience increases dwell time, revenue, and repeat business for venues - and has also created a large and engaged audience which we connect with through our in-venue TV network. Until the significant disruptions to the restaurant and bar industry resulting from the COVID-19 pandemic that began inMarch 2020 , over 1 million hours of trivia, card, sports and arcade games were played on our network each month. Since the pandemic, approximately 100,000 hours per month of such games have been played on our network each month. We generate revenue by charging subscription fees to our partners for access to our 24/7 trivia network, by selling and leasing tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling digital-out-of-home (DOOH) advertising direct to advertisers and on national ad exchanges, by licensing our entertainment and trivia content to other parties, and by providing professional services such as custom game design or development of new platforms on our existing tablet form factor. UntilFebruary 1, 2020 , we also generated revenue from hosting live trivia events. We sold all our assets used to host live trivia events inJanuary 2020 . We own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our property. Other trademarks are the property of their respective owners. Unless otherwise indicated, references in this report: (a) to "Buzztime," "NTN," "we," "us" and "our" refer toNTN Buzztime, Inc. and its consolidated subsidiaries; (b) to "network subscribers," "customers," or "partners" refer to venues that subscribe to our network service; (c) to "consumers," "patrons" or "players" refer to the individuals that engage in our games, events, and entertainment experiences available at venues and (d) to "venues" or "sites" refer to locations (such as a bar or restaurant) of our customers at which our games and entertainment experiences are available to consumers. Recent Developments COVID-19 Impact The negative impact of the COVID-19 pandemic on the restaurant and bar industry was abrupt and substantial, and our business, cash flows from operations and liquidity suffered, and continues to suffer, materially as a result. In many jurisdictions, including those in which we have many customers and prospective customers, restaurants and bars were ordered by the government to shut-down or close all on-site dining operations in the latter half ofMarch 2020 . Since then, governmental orders and restrictions impacting restaurants and bars in certain jurisdictions were eased or lifted as the number of COVID-19 cases decreased or plateaued, but as jurisdictions began experiencing a resurgence in COVID-19 cases, many jurisdictions reinstated such orders and restrictions, including mandating the shut-down of bars and the closing of all on-site dining operations of restaurants. We have experienced material decreases in subscription revenue, advertising revenue and cash flows from operations, which we expect to continue for at least as long as the restaurant and bar industry continues to be negatively impacted by the COVID-19 pandemic, and which may continue thereafter if restaurants and bars seek to reduce their operating costs or are unable to re-open even if restrictions within their jurisdictions are eased or lifted. For example, at its peak, approximately 70% of our customers had their subscriptions to our services temporarily suspended. As ofAugust 5, 2020 , approximately 35% of our customers remain on subscription suspensions. 22
In response to the impact of the pandemic on our business, we implemented measures to reduce our operating expenses and preserve capital, and we may implement additional measures in the future.
? We reduced our headcount (as of
whom are currently working remotely, compared to 74 at
? Our chief executive officer agreed to defer payment of 45% of his base salary
between
or such time as our board of directors determines in good faith that we are in
the financial position to pay his accumulated deferred salary. As of
2020, we have accrued approximately
officer's deferred compensation.
? We terminated the lease for our corporate headquarters, resulting in a
reduction in our future cash obligations under the lease by approximately
million (see Note 9 to the unaudited condensed consolidated financial
statements included herein).
? We substantially eliminated all capital projects and are aggressively managing
our payables to limit further cash outlays and manage our working capital.
Our current focus is on maintaining operations and exploring and evaluating strategic alternatives focused on maximizing shareholder value as discussed below under "-Strategic Process". We are allocating limited resources to product development, marketing and sales. See "-Liquidity and Capital Resources," below, and "Item 1A. Risk Factors" in Part II of this report for additional information regarding the impact of the pandemic on our business and outlook.
Paycheck Protection Program Loan
InApril 2020 , we received a loan of approximately$1,625,000 under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act administered by theU.S. Small Business Administration . The loan matures onApril 18, 2022 and bears interest at a rate of 1.0% per annum. We must make monthly interest only payments beginning onNovember 18, 2020 . One final payment of all unforgiven principal plus any accrued unpaid interest is due at maturity. See "-Liquidity and Capital Resources," below. Strategic Process
Our board of directors and its strategic committee continues to explore and evaluate strategic alternatives focused on maximizing shareholder value, while also exploring and evaluating financing alternatives to increase the likelihood that we will be able to avoid a restructuring, which may include a reorganization, bankruptcy, assignment for the benefit of creditors, or a dissolution, liquidation and/or winding up, in the event the strategic process does not result in a transaction. As previously reported, we entered into a non-binding letter of intent for a potential strategic transaction with a third party. The letter of intent is only a mutual indication of interest in the potential transaction by both parties and does not represent any legally binding commitment or obligation on the part of either party with respect to the potential transaction. The terms of the potential transaction, if any, are subject to a number of contingencies, including the performance of due diligence and the negotiation and execution of a definitive agreement. The parties are currently performing due diligence and negotiating a definitive agreement. No assurances are, or can be given, that the parties will enter into a definitive agreement for the potential transaction, or that even if such agreement is entered into, that the potential transaction
will be consummated. Our board of directors has not set a timetable for the strategic process, and no assurance can be given as to the outcome of the process. We do not intend to disclose additional details regarding the strategic process unless and until further disclosure is appropriate or necessary. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to deferred costs and revenues, depreciation and amortization of fixed assets, the provision for income taxes including the valuation allowance, stock-based compensation, bad debts, impairment of software development costs, goodwill, intangible assets and contingencies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management's most subjective judgments. 23 There have been no material changes in our critical accounting policies, estimates and judgments during the three months endedJune 30, 2020 from those described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our 2019 10-K. RESULTS OF OPERATIONS
We incurred a net loss of
Revenue We generate revenue by charging subscription fees to our partners for access to our 24/7 trivia network, by selling and leasing tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling DOOH advertising direct to advertisers and on national ad exchanges, by licensing our entertainment and trivia content to other parties, and by providing professional services such as custom game design or development of new platforms on our existing tablet form factor. UntilFebruary 1, 2020 , we also generated revenue from hosting live trivia events. We sold all our assets used to host live trivia events inJanuary 2020 . The table below summarizes the type of revenue we generated for the three and six months endedJune 30, 2020 and 2019 and the change in such revenue
between the two periods:
Three months ended June 30,
2020 2019
% of Total % of Total $ %
$ Revenue $ Revenue Change ChangeSubscription revenue 727,000 96.4 % 3,800,000 73 % (3,073,000 ) (80.9 )% Hardware revenue 26,000 3.4 % 595,000
11 % (569,000 ) (95.6 )%
Other revenue 1,000 0.1 % 831,000 16 % (830,000 ) (99.9 )%
Total 754,000 100.0 % 5,226,000 100 % (4,472,000 ) (85.6 )%
Six months ended June 30,
2020 2019
% of Total % of Total $ %
$ Revenue $ Revenue Change ChangeSubscription revenue 2,726,000 87 % 7,633,000
76 % (4,907,000 ) (64 )%
Hardware revenue 42,000 1 % 800,000 8 % (758,000 ) (95 )%
Other revenue 380,000 12 % 1,625,000 16 % (1,245,000 ) (77 )%
Total 3,148,000 100 % 10,058,000 100 % (6,910,000 ) (69 )%
Subscription Revenue
The decrease in subscription revenue for the three and six months ended June 30,
2020 was due to lower average site count, lower average revenue per site and the
impact of the COVD-19 pandemic on our business when compared to the same periods
in 2019. We previously reported that our subscription revenue would materially
decrease beginning in the first quarter of 2020 if we did not add network
subscribers or other revenue sources sufficient to replace the revenue
historically received from Buffalo Wild Wings corporate-owned restaurants and
its franchisees, after our existing relationships with BWW terminated in
November 2019 . To date, we have not offset the lost subscription revenue from
Buffalo Wild Wings corporate-owned restaurants and its franchisees, and, in
light of the substantial negative impact the pandemic has had, continues to have
and is expected to continue to have, on the restaurant and bar industry and on
our business, and taking into account the measures we implemented in response to
the impact of the pandemic on our business to reduce operating expenses and
preserve capital, including reducing our headcount and sales and marketing team,
we do not expect that will be able to do so in the foreseeable future.
Because shelter-in-place orders and governmental orders and restrictions on the
operations of restaurants and bars to shut-down or close all on-site dining were
generally issued toward the end of the first quarter of 2020, the negative
impacts of the COVID-19 pandemic on our subscription revenue were significantly
greater in the second quarter of 2020 compared to the first quarter of 2020. We
expect that our subscription revenue will continue to suffer during the third
quarter of 2020 and thereafter as a result of the pandemic, including because we
expect governmental orders and restrictions impacting restaurants and bars will
remain in effect or be reinstated in response to resurgences in COVID-19 cases.
See "Item 1A. Risk Factors" in Part II of this report for additional information
regarding the impact of the pandemic on our business and outlook.
24
ASC No. 606 specifies certain criteria that an arrangement with a customer must
have in order for a contract to exist for purposes of revenue recognition, one
of which is that it must be probable that we will collect the consideration to
which we will be entitled under the contract. As a result of the impact that the
COVID-19 pandemic has had, and continues to have, on our customers, we
determined that due to the uncertainty of collectability of the subscription
fees for certain customers, our arrangement with those customers no longer meets
all the criteria needed for a contract to exist for revenue recognition
purposes. Therefore, we did not recognize revenue for these customers and fully
reserved for accounts receivable in the allowance for doubtful accounts. We only
recognize revenue for the arrangements that continued to meet the contract
criteria, including the criteria that collectability was probable.
The table below provides a geographic breakdown of our site count as of the date
indicated:
Network Subscribers
as of June 30,
2020 2019
United States 1,110 2,476
Canada 109 133
Total 1,219 2,609
Hardware Revenue
The decrease in hardware revenue for the three and six months ended June 30,
2020 was primarily due to decreased sales-type lease arrangements when compared
to the same periods in 2019. As previously reported, we did not, and do not,
expect to continue recognizing hardware revenue under sales-type lease
arrangements during 2020 or thereafter. We expect to recognize hardware revenue
through the third quarter of 2020 under our existing contract with our jail
services partner, however, we are in discussions with the jail service partner
to terminate our existing contract and cancel the remaining tablets to be
delivered under our contract after the third quarter of 2020.
Other Revenue
The decrease in other revenue for the three and six months ended June 30, 2020
was primarily due to a decrease in revenue from our live-hosted trivia events
when compared to the same periods in 2019 as a result of the sale in January
2020 of all our assets used to conduct such events. We do not expect to
recognize revenue from live-hosted trivia events in the future.
We also recognized less license revenue and advertising revenue during the three
and six months ended June 30, 2020 when compared to the same periods in 2019. We
expect our advertising revenue will continue to be materially adversely impacted
because of a decrease in advertising sales arising from a slowdown in consumer
traffic in the restaurant and bars that subscribe to our service as a result of
the COVID-19 pandemic.
Direct Operating Costs and Gross Margin
A comparison of direct operating costs and gross margin for the periods indicated is shown in the table below:
Three months ended
June 30,
%
2020 2019 Change Change
Revenues $ 754,000 $ 5,226,000 $ (4,472,000 ) (86 )%
Direct Operating Costs 613,000 1,717,000 (1,104,000 ) (64 )%
Gross Margin $ 141,000 $ 3,509,000 $ (3,368,000 ) (96 )%
Gross Margin Percentage 19 % 67 %
Six months ended
June 30,
%
2020 2019 Change Change
Revenues $ 3,148,000 $ 10,058,000 $ (6,910,000 ) (69 )%
Direct Operating Costs 1,563,000 3,201,000 (1,638,000 ) (51 )%
Gross Margin $ 1,585,000 $ 6,857,000 $ (5,272,000 ) (77 )%
Gross Margin Percentage 50 % 68 %
25
For the three months ended June 30, 2020 , the decrease in direct operating costs
was primarily due to decreased (1) equipment expense of approximately $368,000
due to reduction in hardware revenue; (2) direct wages of approximately $368,000
as a result of no longer providing live-hosted trivia events after January 2020
following the sale of all our assets used to conduct those events; (3)
depreciation expense of $185,000 ; (4) service provider and freight expense of
approximately $159,000 ; and (5) other miscellaneous expenses of $77,000 , in each
case, when compared to the same period in 2019.
For the six months ended June 30, 2020 , the decrease in direct costs was
primarily due to decreased (1) direct wages of approximately $515,000 as a
result of no longer providing live-hosted trivia events after January 2020 ; (2)
equipment expense of approximately $375,000 due primarily to reduction in
hardware revenue; (3) depreciation expense of $375,000 ; (4) service provider and
freight expense of approximately $246,000 ; and (5) other miscellaneous expenses
of $128,000 , in each case, when compared to the same period in 2019.
The decrease in gross margin for the three and six months ended June 30, 2020
was primarily due to the reduction in revenue when compared to the same periods
in 2019. Additionally, certain fixed costs, such as direct depreciation and
amortization expense, negatively impacted gross margins for the three and six
months ended June 30, 2020 when compared to the same periods in 2019.
Operating Expenses
Three months ended
June 30,
2020 2019 Change
Selling, general and administrative
Impairment of capitalized software$ 100,000 $ -
Depreciation and amortization (non-direct)
$ (11,000 ) Six months ended June 30, 2020 2019 Change
Selling, general and administrative
Impairment of capitalized software$ 238,000 $ 1,000
$ 237,000 Impairment of goodwill$ 662,000 $ -$ 662,000
Depreciation and amortization (non-direct)
$ (22,000 )
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses for the three
months ended
The decrease in selling, general and administrative expenses for the six months endedJune 30, 2020 when compared to the same period in 2019 was primarily due to decreased (1) payroll and related expense of$1,732,000 , (2) marketing fees of$440,000 and (3) miscellaneous expense of$149,000 . These decreases were partially offset by increased bad debt expense of$106,000 . In light of the recent measures we implemented to reduce operating expenses and to preserve capital, we expect our selling, general and administrative expenses to decrease in 2020. However, such actions, and any similar actions we may implement in the future, could adversely affect our business and we may not realize the operation or financial benefits of such actions.
Impairment of
Impairment of capitalized software increased for the three and six months endedJune 30, 2020 as a result of abandoning certain capitalized software development projects that we concluded were no longer a current strategic fit or for which we determined that the marketability of the content had decreased due to obtaining additional information regarding the specific purpose for which the content was intended. 26 Impairment ofGoodwill
ThroughMarch 31, 2020 , we had goodwill resulting from the excess of costs over the fair value of assets we acquired in 2003 related to our Canadian business (the "Reporting Unit").Goodwill and intangible assets acquired in a purchase combination that are determined to have an indefinite useful life are not amortized, but instead are assessed annually, or at interim periods, for impairment based on qualitative factors, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events, to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Reporting Unit is less than its carrying amount. If there are indications of impairment, then we perform a quantitative impairment test. During out evaluation of impairment indicators as ofMarch 31, 2020 , we determined that the uncertainty relating to the impact of the COVID-19 pandemic on the Reporting Unit's future operating results represented an indicator of impairment. Accordingly, we compared the estimated fair value of the Reporting Unit to its carrying value atMarch 31, 2020 , determined that a full impairment loss was warranted and recognized an impairment charge of$662,000 for the six months endedJune 30, 2020 , all of which was recorded during the three months endedMarch 31, 2020 . There was no goodwill impairment recorded for the three or six months endedJune 30, 2019 . Depreciation and Amortization
The decrease in depreciation and amortization expense for the three and six
months ended
Other Income (Expense), Net
Three months ended
June 30,
Increase in other
2020 2019 expense, net
Total other expense, net $ (376,000 ) $ (88,000 ) $ (288,000 )
Six months ended
June 30,
Increase in other
2020 2019 income, netTotal other income (expense), net$ 908,000 $ (173,000 ) $ 1,081,000 For the three months endedJune 30, 2020 , the increase in other expense, net, was primarily due to a$269,000 loss related to terminating the lease for our corporate headquarters and disposing of related fixed assets, as well as increased foreign currency losses related to our Canadian subsidiary, offset by a decreased interest expense due to lower long-term debt balances when compared to the same period in 2019. For the six months endedJune 30, 2020 , the increase in other income, net was primarily due to a$1,265,000 gain related to the sale of all our assets used to conduct live-hosted trivia events, increased foreign currency gains related to our Canadian subsidiary, and decreased interest expense due to lower long-term debt balances, offset by a$269,000 loss related to the terminating the lease for our corporate headquarters and disposing of related fixed assets, in each case, when compared to the same period in 2019. Income Taxes Three months ended June 30, 2020 2019 Change Provision for income taxes$ (15,000 ) $ -$ (15,000 ) Six months ended June 30, 2020 2019 Change
Benefit (provision) for income taxes
27 We expect to incur state income tax liability in 2020 related to ourU.S. operations. For the six months endedJune 30, 2020 , an impairment to goodwill resulted in a net tax benefit inCanada . We have established a full valuation allowance for substantially all of our deferred tax assets, including the NOL carryforwards, since we do not believe that we are more likely than not to generate future taxable income to realize these assets.
EBITDA-Consolidated Operations
Earnings before interest, taxes, depreciation and amortization, or EBITDA, is
not intended to represent a measure of performance in accordance with GAAP. Nor
should EBITDA be considered as an alternative to statements of cash flows as a
measure of liquidity. EBITDA is included herein because we believe it is a
measure of operating performance that financial analysts, lenders, investors and
other interested parties find to be a useful tool for analyzing companies like
us that carry significant levels of non-cash depreciation and amortization
charges compared to their net income or loss calculation in accordance with
GAAP.
The tables below shows a reconciliation of our consolidated net loss calculated
in accordance with GAAP to EBITDA for the periods indicated. EBITDA should not
be considered a substitute for, or superior to, net loss calculated in
accordance with GAAP.
Three months ended Six months ended
June 30, June 30,
2020 2019 2020 2019
Net loss per GAAP $ (2,023,000 ) $ (90,000 ) $ (3,241,000 ) $ (403,000 )
Interest expense, net 32,000 69,000 77,000 136,000
Income tax provision 15,000 - (4,000 ) 11,000
Depreciation and amortization 512,000 707,000 1,058,000 1,454,000
EBITDA $ (1,464,000 ) $ 686,000 $ (2,110,000 ) $ 1,198,000 LIQUIDITY AND CAPITAL RESOURCES
As ofJune 30, 2020 , we had cash, cash equivalents and restricted cash of approximately$2.4 million compared to approximately$3.4 million as ofDecember 31, 2019 . During the three and six months endedJune 30, 2020 , we incurred a net loss of$2,023,000 and$3,241,000 , respectively. In connection with preparing our financial statements as of and for the three and six months endedJune 30, 2020 , our management evaluated whether there are conditions or events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt about our ability to continue as a going concern through twelve months after the date that such financial statements are issued. Our primary source of capital is cash from operations. We have experienced material decreases in subscription revenue, advertising revenue and cash flows from operations as a result of the impact of the COVID-19 pandemic on the restaurant and bar industry. We expect the negative impact on our business to continue for as long as restaurants and bars continue to be negatively impacted by the pandemic, and which may continue thereafter if restaurants and bars seek to reduce their operating costs or choose not to re-open even if governmental orders and restrictions are eased or lifted. See "Recent Developments-COVID-19 Impact," above. As a result of the impact of the pandemic on our business and taking into account our current financial condition and our existing sources of projected revenue and our projected subscription revenue, advertising revenue and cash flows from operations, we believe we will have sufficient cash resources to pay forecasted cash outlays only throughOctober 2020 , assuming Avidbank does not take actions to foreclose on our assets in the event we are not in compliance with our financial covenants under our loan and security agreement with Avidbank, and we are able to continue to successfully manage our working capital deficit by managing the timing of payments to our vendors and other third parties. We expect to meet our near term debt service obligations on our term loan with Avidbank and we satisfied our financial covenants under our related loan and security agreement as ofJune 30, 2020 . However, unless in the very near term our subscription revenue, advertising revenue and cash flows from operations return to pre-pandemic levels and/or we raise substantial capital, we do not expect that we will be able to satisfy our asset coverage ratio covenant under the loan and security agreement at the end ofJuly 2020 , which may result in Avidbank declaring a default and foreclosing on our assets. See Item 1A. Risk Factors in Part II of this report, below. 28 We continue to explore and evaluate opportunities to raise capital, including through equity financings, alternative sources of debt, and strategic transactions, which may include a business combination transaction and/or selling a portion or all of our assets. We currently have no binding arrangements for capital or for a strategic transaction, and no assurances can be given that we will be able to raise sufficient capital when needed, on acceptable terms, or at all, or that we will be able to complete a strategic transaction. If we are unable to raise sufficient additional capital in the very near term, we may default on our payment obligations to Avidbank or not satisfy our financial covenants to Avidbank, and if we do, Avidbank may declare a default, which could lead to all payment obligations becoming immediately due and payable and Avidbank has a first-priority security interest in all our existing and future personal property. In addition, we will be required to curtail or terminate some or all of our business operations and we may determine to pursue a restructuring, which may include a reorganization or bankruptcy under Federal bankruptcy laws, assignment for the benefit of creditors, or a dissolution, liquidation and/or winding up. Our investors may lose their entire investment in the event Avidbank forecloses on our personal property to satisfy our payment obligations and/or in the event of a reorganization, bankruptcy, assignment for the benefit of creditors, liquidation, dissolution or winding up. See Item 1A. Risk Factors in Part II of this report, below. Based on the factors described above, management concluded that there is substantial doubt regarding our ability to continue as a going concern through the twelve month period subsequent to the issuance date of these financial statements. Management's plans for addressing the liquidity shortfall include continuing efforts to raise additional capital through equity financings and alternative sources of debt. However, there can be no assurances that we will be able to raise sufficient capital when needed, on acceptable terms, or at all. In light of the substantial doubt regarding our ability to continue as a going concern through the twelve month period subsequent to the issuance date of these financial statements, our board of directors and its strategic committee continues to explore and evaluate strategic alternatives focused on maximizing shareholder value.
The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to our ability to continue as a going concern. Avidbank Term Loan Under a loan and security agreement we entered into with Avidbank inSeptember 2018 , or the Original LSA, we borrowed$4,000,000 in the form of a 48-month term loan, all of which we used to pay-off the$4,050,000 of principal borrowed from our then-existing lender. InFebruary 2020 , we made a pre-payment on the term loan of approximately$150,000 following the sale inJanuary 2020 of all our assets used to conduct live-hosted trivia events. InMarch 2020 , we entered into an amendment to the Original LSA. We refer to the Original LSA, as amended, as the Avidbank LSA. In connection with entering into the amendment, we made a$433,000 payment on our term loan, which included the$83,333 monthly principal payment forMarch 2020 plus accrued interest and a$350,000 principal prepayment. As ofJune 30, 2020 , the outstanding principal balance on the term loan was$1,625,000 . See Note 8 to the unaudited condensed consolidated financial statements included herein for additional information regarding the Avidbank LSA. The monthly principal payment amounts under the Avidbank LSA will be$300,000 for each of July, August, September, October andNovember 2020 , and$125,000 forDecember 2020 . We must satisfy two financial covenants under the Avidbank LSA: a monthly minimum asset coverage ratio covenant, which we refer to as the ACR covenant, and a minimum liquidity covenant. Under the ACR covenant, the ratio of (i) our unrestricted cash at Avidbank as of the last day of a calendar month plus 75% of our outstanding accounts receivable accounts that are within 90 days of invoice date to (ii) the outstanding principal balance of our term loan on such day must be no less than 1.25 to 1.00. Under the minimum liquidity covenant, the aggregate amount of unrestricted cash we have in deposit accounts or securities accounts maintained with Avidbank must be at all times not less than the principal balance outstanding under our term loan. As ofJune 30, 2020 , we were in compliance with both of those covenants. However, unless in the very near term our subscription revenue, advertising revenue and cash flows from operations return to pre-pandemic levels and/or we raise substantial capital, we do not expect that we will be able to satisfy our asset coverage ratio covenant under the loan and security agreement at the end ofJuly 2020 . Under the Avidbank LSA, subject to customary exceptions, we are prohibited from borrowing additional indebtedness. We granted and pledged to Avidbank a first-priority security interest in all our existing and future personal property. OnJune 1, 2020 , we and Avidbank entered into a second amendment to the loan and security agreement to formally memorialize Avidbank's consent to our borrowing of the PPP Loan (as defined below). We received Avidbank's initial consent to borrow the PPP Loan inApril 2020 . We incurred approximately$26,000 of debt issuance costs related to the Original LSA and the amendment to the LSA. The debt issuance costs are being amortized to interest expense using the effective interest rate method over the life of the loan. The unamortized balance of the debt issuance costs as ofJune 30, 2020 was$5,000 and is recorded as a reduction of long-term debt. 29 The Avidbank LSA includes customary representations, warranties and covenants (affirmative and negative), including restrictive covenants that, subject to specified exceptions, limit our ability to: dispose of our business or property; merge or consolidate with or into any other business organization; incur or prepay additional indebtedness; create or incur any liens on its property; declare or pay any dividend or make a distribution on any class of our stock; or enter specified material transactions with our affiliates. The Avidbank LSA also includes customary events of default, including: payment defaults; breaches of covenants following any applicable cure period; material breaches of representations or warranties; the occurrence of a material adverse effect; events relating to bankruptcy or insolvency; and the occurrence of an unsatisfied material judgment against us. Upon the occurrence of an event of default, Avidbank may declare all outstanding obligations immediately due and payable, do such acts as it considers necessary or reasonable to protect its security interest in the collateral, and take such other actions as are set forth in the Avidbank LSA.
Paycheck Protection Program Loan
OnApril 18, 2020 , we issued a note in the principal amount of approximately$1,625,000 evidencing a loan (the "PPP Loan") we received under the Paycheck Protection Program (the "PPP") of the Coronavirus Aid, Relief, and Economic Security Act administered by theU.S. Small Business Administration (the "CARES Act"). The PPP Loan matures onApril 18, 2022 and bears interest at a rate of 1.0% per annum. We must make monthly interest only payments beginning onNovember 18, 2020 . One final payment of all unforgiven principal plus any accrued unpaid interest is due at maturity. Under the terms of the PPP, we may prepay the PPP Loan at any time with no prepayment penalties. We may use funds from the PPP Loan for payroll costs, costs used to continue group health care benefits, mortgage interest payments, rent payments, utility payments, and interest payments on other debt obligations incurred beforeFebruary 15, 2020 . We intend to use the entire PPP Loan for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. No assurance is provided that we will obtain forgiveness of the loan in whole or in part. Avidbank consented to us borrowing the PPP Loan. As ofJune 30, 2020 , the outstanding principal balance of the PPP Loan was$1,625,000 . Working Capital As ofJune 30, 2020 , we had working capital (current asset in excess of current liabilities) of$894,000 compared to negative working capital (current liabilities in excess of current assets) of$25,000 as ofDecember 31, 2019 . The following table shows our change in working capital fromDecember 31, 2019 toJune 30, 2020 . Increase (Decrease) Working capital defecit as of December 31, 2019$ (25,000 ) Changes in current assets: Cash and cash equivalents (975,000 ) Accounts receivable, net of allowance (1,009,000 ) Site equipment to be installed 42,000 Prepaid expenses and other current assets (190,000 ) Net decrease in current assets (1,981,000 ) Changes in current liabilities: Accounts payable (438,000 ) Accrued compensation (472,000 ) Accrued expenses (105,000 ) Sales taxes payable (131,000 ) Income taxes payable 12,000 Current portion of long-term debt (1,119,000 ) Current portion of obligations under capital leases (381,000 ) Deferred rent (83,000 ) Other current liabilities (186,000 ) Net decrease in current liabilities (2,900,000 ) Net increase in working capital 919,000 Working capital as of June 30, 2020$ 894,000 30 Cash Flows Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows, are summarized as follows: For the six months ended June 30, 2020 2019 Change Cash (used in) provided by: Operating activities$ (2,450,000 ) $ 1,339,000 $ (3,789,000 ) Investing activities (150,000 ) (718,000 ) 568,000 Financing activities 1,620,000 (468,000 ) 2,088,000 Effect of exchange rates 6,000 39,000 (33,000 ) Net (decrease) increase in cash, cash equivalents and restricted cash $ (974,000 ) $
192,000$ (1,166,000 )
Net cash (used in) provided by operations. The decrease in cash provided by operating activities was due to an increase in net loss of$2,985,000 , after giving effect to adjustments made for non-cash transactions and an increase in cash used for operating assets and liabilities of$804,000 , during the six months endedJune 30, 2020 when compared to the same period in 2019. Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased$1,684,000 to$3,106,000 for the six months endedJune 30, 2020 from$4,790,000 for the same period in 2019, primarily due to reduced headcount. In light of the recent measures we implemented to reduce operating expenses and to preserve capital, we expect our selling, general and administrative expenses to decrease in 2020 when compared to the prior year period. See "-Results of Operations-Operating Expenses," above. Our primary source of cash is cash we generate from customers. Cash received from customers decreased$5,939,000 to$4,214,000 for the six months endedJune 30, 2020 from$10,153,000 for the same period in 2019. This decrease was primarily related to decreased subscription revenue, hardware revenue and revenue from live-hosted trivia events. The negative impact of the COVID-19 pandemic on the restaurant and bar industry was abrupt, and our business suffered materially as a result. See "Recent Developments-COVID-19 Impact," above, and "-Results of Operations-Revenue," above. Net cash used in investing activities. The$904,000 decrease in cash used in investing activities was primarily due to decreased capital expenditures and capitalized software development expenses. Net cash provided by (used in) financing activities. During the six months endedJune 30, 2020 , we received$1,166,000 in net proceeds from the sale of all our assets used to conduct live-hosted trivia events and$1,625,000 in proceeds from the PPP Loan. There were no similar transactions during the same period in 2019. During the six months endedJune 30, 2020 , we made$708,000 more in principal payments on long-term debt when compared to the same period in 2019.
RECENT ACCOUNTING PRONOUNCEMENTS
InDecember 2019 , theFinancial Accounting Standards Board (the "FASB") issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. This ASU enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year and interim-period accounting for enacted changes in tax law. The amendment will be effective for public companies with fiscal years beginning afterDecember 15, 2020 , (which will beJanuary 1, 2021 for us); early adoption is permitted. We are currently assessing the impact of this pronouncement to our consolidated financial statements.
InJune 2016 , the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The ASU requires an entity to establish an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting date. This ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. For smaller reporting companies, the effective date for this standard has been delayed and will be effective for fiscal years beginning afterDecember 15, 2022 (which will beJanuary 1, 2023 for us). We are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.
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