NTN BUZZTIME, INC. Introduction
Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read in conjunction with the accompanying audited
consolidated financial statements and notes, included in Item 8 of this report,
to help provide an understanding of our financial condition, the changes in our
financial condition and our results of operations. You should also see the
section entitled "Forward-Looking Statements" at the beginning of this report.
Our MD&A is organized as follows:
? Overview. This section provides a general description of our business.
? Results of Operations. This section provides an analysis of our results of
operations presented in the accompanying consolidated statements of operations
by comparing the results for our two most recent completed fiscal years.
? Liquidity and Capital Resources. This section provides an analysis of our
historical cash flows, as well as our future capital requirements.? 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.
? Critical Accounting Policies and Estimates. This section provides a listing of
our significant accounting policies, including any material changes in our
critical accounting policies, estimates and judgments during the year ended
Report on Form 10-K for the year ended
? Recent Accounting Pronouncements. This section provides information related to
new or updated accounting guidance that may impact our consolidated financial
statements.
Overview
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, or the
pandemic, that began in March 2020 , over 1 million hours of trivia, card, sports
and arcade games were played on our network each month. Since March 2020 ,
approximately 100,000 hours per month of such games have been played on ournetwork each month. 23
As mentioned below, we will be holding our special meeting of stockholders to consider the Merger (as defined below), the Asset Sale (as defined below) and related proposals onMarch 15, 2021 at9:00 a.m., Pacific Time , unless postponed or adjourned to a later date or time. We are focused on managing our operating expenses and maintaining our operations through consummation of the Merger and Asset Sale. There can be no assurance that we will be successful in completing the Merger or the Asset Sale or managing our operating expenses or maintaining our operations through consummation of the Merger and Asset Sale. 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 throughmid-March 2021 , assuming 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 that the earliest the Asset Sale and the Merger could be completed is during the week ofMarch 15, 2021 . If the completion of the Asset Sale and the Merger is delayed beyond that week, we will need to raise additional capital to maintain operations through the completion of the Asset Sale and the Merger, and we currently have no arrangements for such capital. If we do not complete the Merger for any reason, we would likely be required to dissolve and liquidate our assets, and we would be required to pay all our debts and contractual obligations and set aside certain reserves for potential future claims. In such event, our investors may lose their entire investment. While we could attempt to complete another strategic transaction like the Merger or to raise additional capital through equity financings and/or alternative sources of debt to allow us to continue as a going concern, based on the strategic process conducted to date, we do not believe that we would be able to identify and complete another reverse merger or consummate a financing to obtain sufficient additional financial resources when needed, on acceptable terms, or at all.
Proposed Merger with
OnAugust 12, 2020 , we entered into an agreement and plan of merger and reorganization (the "Merger Agreement") withBrooklyn Immunotherapeutics LLC ("Brooklyn"), a privately-held, biopharmaceutical company focused on exploring the role that cytokine-based therapy can have in treating patients with cancer. Pursuant to the Merger Agreement, subject to the satisfaction or waiver of the conditions set forth in the agreement,BIT Merger Sub, Inc. , our wholly-owned subsidiary formed solely for purposes of carrying out the merger, will merge with and intoBrooklyn , withBrooklyn surviving the merger as a wholly-owned subsidiary of our company andBrooklyn's members receiving newly issued shares of our common stock in exchange for their ownership interests inBrooklyn (the "Merger"). The Merger, if completed, will result in a change in control of NTN as described below. If the Merger is completed, NTN expects to change its name toBrooklyn ImmunoTherapeutics, Inc. and the combined company will focus onBrooklyn's business of exploring the role that cytokine-based therapy can have on the immune system in treating patients with cancer. Upon completion of the Merger, the board of directors of the combined company is expected to consist entirely of individuals designated byBrooklyn and the officers of the combined company are expected to be members ofBrooklyn's current management team. If the Merger is completed, at the effective time of the Merger,Brooklyn's members will exchange their equity interests inBrooklyn for shares of NTN common stock representing between approximately 94.08% and 96.74% of the outstanding common stock of NTN immediately following the effective time of the Merger on a fully diluted basis (less a portion of such shares which will be allocated toBrooklyn's banker, Maxim, in respect of the success fee owed to it byBrooklyn ), and NTN's stockholders as of immediately prior to the effective time, will own between approximately 5.92% and 3.26% of the outstanding common stock of NTN immediately after the effective time of the Merger on a fully diluted basis. The exact number of shares to be issued in the Merger will be determined pursuant to a formula in the Merger Agreement that takes into account the amount ofBrooklyn's cash and cash equivalents as of the closing of the Merger and the amount by which NTN's net cash is less than zero at the closing.
See the section titled "Business" in Item 1 of Part I this report for additional information about the Merger Agreement and Merger.
Proposed Asset Sale to eGames.com
When NTN announced the signing of the Merger Agreement, NTN also announced that it was continuing to explore the sale of substantially all of the assets relating to its current business to provide additional capital and allow the combined company following the closing of the Merger, if it closes, to be in a position to focus exclusively onBrooklyn's business. OnSeptember 18, 2020 , NTN and eGames.comHoldings LLC ("eGames.com") entered into an asset purchase agreement (as amended from time to time, the "APA") pursuant to which, subject to the terms and conditions thereof, NTN will sell and assign (the "Asset Sale") all of its right, title and interest in and to the assets relating to its current business (the "Purchased Assets") to eGames.com. The Purchased Assets comprise substantially all of NTN's assets. At the closing of the Asset Sale, in addition to assuming specified liabilities of NTN, eGames.com will pay NTN$2.0 million in cash. In connection with entering into the APA, the sole owner of eGames.com absolutely, unconditionally and irrevocably guaranteed to NTN the full and prompt payment when due of any and all amounts, from time to time, payable by eGames.com under the APA. In connection with entering into the APA,Fertilemind Management, LLC , an affiliate of eGames.com ("Fertilemind"), on behalf of eGames.com, made a$1.0 million bridge loan to NTN. OnNovember 19, 2020 , NTN, eGames.com and Fertilemind entered into an omnibus amendment and agreement pursuant to which, among other things, eGames.com agreed to provide, or cause Fertilemind, on behalf of eGames.com, to provide, an additional$0.5 million bridge loan to NTN onDecember 1, 2020 , and the parties agreed to increase the interest rate on the$1.0 million bridge loan Fertilemind made to NTN inSeptember 2020 from 8% to 10% effectiveDecember 1, 2020 . Fertilemind provided the$0.5 million bridge loan to NTN onDecember 1, 2020 . OnJanuary 12, 2021 , NTN, eGames.com and Fertilemind entered into a second omnibus amendment and agreement pursuant to which, among other things, eGames.com agreed to provide, or cause Fertilemind, on behalf of eGames.com, to provide an additional$0.2 million bridge loan to NTN onJanuary 12, 2021 . Fertilemind provided the$0.2 million bridge loan to NTN onJanuary 12, 2021 . The principal and accrued interest of each of the loans provided by Fertilemind to NTN will be applied toward the$2.0 million purchase price at the closing of the Asset Sale. 24
See the section titled "Business" in Item 1 of Part I this report for additional information about the APA and Asset Sale.
Recent Developments 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 ofMarch 9, 2021 , approximately 11% of our customers remain on subscription suspensions.
In response to the impact of the pandemic on our business, we implemented measures to reduce our operating expenses and preserve capital, and we may implement additional measures in the future.
? We reduced our headcount (as of
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. All such
deferred base salary payments were made by November 6, 2020 .
? 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 16 to our audited consolidated financial statements included
herein).
? We substantially eliminated all capital projects and are aggressively managing
our expenditures to limit further cash outlays and manage our working capital.
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 began making monthly interest only payments inNovember 2020 . One final payment of all unforgiven principal plus any accrued unpaid interest is due at maturity. InNovember 2020 , we were informed by our lender that theU.S Small Business Administration approved the forgiveness of approximately$1,093,000 of the$1,625,000 loan, leaving a principal balance of approximately$532,000 . For additional information, see the section entitled "Liquidity and Capital Resources-Paycheck Protection Program Loan," below. All amounts outstanding under our term loan we entered into with Avidbank inSeptember 2018 were paid in full onDecember 31, 2020 and we have no further obligations to Avidbank.
In
Results of Operations
We generated 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 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 . (See Note 4 to the consolidated financial statements included in this report.) The table below summarizes the type of revenue we generated for the years endedDecember 31, 2020 and 2019: Years ended December 31, 2020 2019 % of Total % of Total % $ Revenue $ Revenue Change $ Change Subscription revenue 4,882,000 84.2 % 14,278,000 72.1 % (9,396,000 ) (65.8 %) Hardware revenue 426,000 7.3 % 2,350,000 11.9 % (1,924,000 ) (81.9 %) Other revenue 492,000 8.5 % 3,178,000 16.0 % (2,686,000 ) (84.5 %) Total 5,800,000 100.0 % 19,806,000 100.0 % (14,006,000 ) (70.7 %) 25 Subscription Revenue The decrease in subscription revenue for the year endedDecember 31, 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 2019. We previously reported that our subscription revenue would materially decrease beginning in the first quarter of 2020 if we did not add network subscribers or other revenue sources sufficient to replace the revenue historically received fromBuffalo Wild Wings corporate-owned restaurants and its franchisees, after our existing relationships with BWW terminated inNovember 2019 . To date, we have not offset the lost subscription revenue fromBuffalo Wild Wings corporate-owned restaurants and its franchisees, and, in light of the substantial negative impact the pandemic has had, continues to have and is expected to continue to have, on the restaurant and bar industry and on our business, and taking into account the measures we implemented in response to the impact of the pandemic on our business to reduce operating expenses and preserve capital, including reducing our headcount and sales and marketing team, we do not expect that will be able to do so in the foreseeable future. Although shelter-in-place orders and governmental orders and restrictions on the operations of restaurants and bars to shut have been lifted or reduced for many of our customers, our subscription revenue suffered during 2020 and we expect that it will continue to suffer as a result of the pandemic, including because we expect governmental orders and restrictions impacting restaurants and bars will remain in effect or be reinstated in response to resurgences in COVID-19 cases. See "Item 1A. Risk Factors" of this report for additional information regarding the impact of the pandemic on our business and outlook. 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 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 December 31, 2020 2019 United States 941 1,318 Canada 95 122 Total 1,036 1,440 Hardware Revenue The decrease in hardware revenue for the year endedDecember 31, 2020 was due to decreased sales-type lease arrangements as well as a reduction in hardware sales to our jail services partner when compared to 2019. As previously reported, inSeptember 2020 , we entered into an agreement with our jail service partner to terminate our existing contract and cancel the remaining tablets to be delivered under our contract. We do not expect to recognize material hardware revenue
in the future. Other Revenue The decrease in other revenue for the year endedDecember 31, 2020 was primarily due to a decrease in revenue from our live-hosted trivia events when compared to 2019 as a result of the sale inJanuary 2020 of all our assets used to conduct such events. We do not expect to recognize revenue from live-hosted trivia events in the future. We also recognized less license revenue and advertising revenue during the year endedDecember 31, 2020 when compared to 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. 26
Direct Costs and Gross Margin
The following table compares the direct costs and gross margin for the years
ended
For the years ended
December 31,
2020 2019 Change
Revenues $ 5,800,000 $ 19,806,000 $ (14,006,000 )
Direct Costs 2,907,000 7,483,000 (4,576,000 )
Gross Margin $ 2,893,000 $ 12,323,000 $ (9,430,000 )
Gross Margin Percentage 49.9 % 62.2 %
For the year ended December 31, 2020 , the decrease in direct costs was primarily
due to decreased (1) direct wages of approximately $1,133,000 as a result of no
longer providing live-hosted trivia events after January 2020 ; (2) equipment
expense of approximately $1,545,000 due primarily to a reduction in hardware
revenue as well as a reduction in equipment write-offs of certain older site
equipment; (3) depreciation expense of $979,000 ; (4) service provider and
freight expense of approximately $581,000 ; and (5) other miscellaneous expenses
of $338,000 , in each case, when compared to 2019.
The decrease in gross margin for the year ended December 31, 2020 was primarily
due to the reduction in revenue when compared to the same periods in 2019.
Additionally, certain fixed costs, such as direct depreciation and amortization
expense, negatively impacted gross margins for the year ended December 31 ,
2020
when compared to 2019.
Operating Expenses
For the years ended
December 31,
2020 2019 Change
Selling, general and administrative
Impairment of capitalized software$ 248,000 $ 550,000
$ (302,000 ) Impairment of goodwill$ 662,000 $ -$ 662,000
Depreciation and amortization (non-direct)
$ (159,000 )
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses for the year endedDecember 31, 2020 when compared to 2019 was primarily due to decreased (1) payroll and related expense of$4,450,000 as a result of reduced headcount; (2) marketing fees of$732,000 due to managing discretionary spending; (3) lease expense of approximately$245,000 due to terminating our lease and vacating our corporate headquarters inJune 2020 , and (4) miscellaneous expense of$396,000 , in each case, when compared to 2019. These decreases were partially offset by increased transaction-related expenses of$739,000 for the year endedDecember 31, 2020 , consisting primarily of professional financial advisor, legal and accounting fees associated with evaluating strategic opportunities, negotiating the Merger Agreement and the APA and other services related to the proposed Merger and Asset Sale.
Impairment of
During each of the years endedDecember 31, 2020 and 2019, we abandoned certain capitalized software development projects that we concluded were no longer a current strategic fit or for which we determined that the marketability of the content had decreased due to obtaining additional information regarding the specific purpose for which the content was intended. 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.
27 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$662,000 for the year endedDecember 31, 2020 , all of which was recorded during the three months endedMarch 31, 2020 . There was no goodwill impairment recorded for the year endedDecember 31, 2019 . Depreciation and Amortization The decrease in depreciation and amortization expense for the year endedDecember 31, 2020 was primarily due to various equipment becoming fully depreciated and not replacing with new assets, and as a result of writing off our leasehold improvement assets when we terminated our lease and vacated our corporate headquarters inJune 2020 . Other (Expense) Income, Net For the years ended December 31, Increase in other 2020 2019 income, net Interest expense, net$ (138,000 ) $ (249,000 ) Other income (expense), net 2,026,000 (9,000 ) Total other income (expense), net$ 1,888,000 $ (258,000 ) $ 2,146,000
The increase in other income, net for the year endedDecember 31, 2020 when compared to 2019 was primarily related to (1) a gain of approximately$1,225,000 for the sale of all our assets used to conduct live-hosted trivia events; (2) decreased interest expense of approximately$111,000 due to lower debt balances; and (3) a gain of approximately$1,093,000 related to the forgiveness of the 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"). InOctober 2020 , we submitted our loan forgiveness application for our PPP loan, and inNovember 2020 , the lender informed us that theU.S Small Business Administration approved the forgiveness of approximately$1,093,000 of the$1,625,000 loan, leaving a principal balance of approximately$532,000 . These increases in other income, net were partially offset by increased losses during the year endedDecember 31, 2020 of approximately$284,000 related to disposals of assets when we terminated the lease for our corporate headquarters inJune 2020 when compared to 2019. Income Taxes For the years ended December 31, 2020 2019 Benefit (provision) for income taxes$ 6,000 $ (27,000 )
We expect to incur state income tax liability in 2020 related to our
Liquidity and Capital Resources
As ofDecember 31, 2020 , we had cash, cash equivalents and restricted cash of$777,000 compared to cash, cash equivalents and restricted cash of$3,409,000 as ofDecember 31, 2019 . During the year endedDecember 31, 2020 , we incurred a net loss of$4,415,000 compared to a net loss of$2,047,000 for the year endedDecember 31, 2019 . In connection with preparing our financial statements as of and for the year endedDecember 31, 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. As discussed in more detail under "Bridge Loans," below, we have received an aggregate of$1.7 million in principal amount of bridge loans from Fertilemind, an affiliate of eGames.com. The principal amount of these loans and accrued interest thereon will be applied toward the$2.0 million purchase price under the APA. If the Asset Sale does not close, the principal amount of these loans and accrued interest thereon is due and payable upon the earlier of (i) the termination of the APA, (ii) the closing of a Business Combination (as defined in the promissory note evidencing the loan), and (iii)April 30, 2021 . 28
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. 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 throughmid-March 2021 , assuming 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 that the earliest the Asset Sale and the Merger could be completed is during the week ofMarch 15, 2021 . If the completion of the Asset Sale and the Merger is delayed beyond that week, we will need to raise additional capital to maintain operations through the completion of the Asset Sale and the Merger, and we currently have no arrangements for such capital. If we do not complete the Merger for any reason, we would likely be required to dissolve and liquidate our assets, and we would be required to pay all our debts and contractual obligations and set aside certain reserves for potential future claims. In such event, our investors may lose their entire investment. While we could attempt to complete another strategic transaction like the Merger or to raise additional capital through equity financings and/or alternative sources of debt to allow us to continue as a going concern, based on the strategic process conducted to date, we do not believe that we would be able to identify and complete another reverse merger or consummate a financing to obtain sufficient additional financial resources when needed, on acceptable terms, or at all. See "ITEM 1A, Risk Factors-Risk Factors That May Affect Our Business-"Our cash flows from operations and liquidity have been materially adversely affected by the effects of the COVID-19 pandemic. We need to raise capital in the near term and/or complete a strategic transaction, and our inability to do so could result in us pursuing 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," above. 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 following the date that our financial statements as of and for the year endedDecember 31, 2020 are issued. 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. All amounts owing under the term loan were paid onDecember 31, 2020 , when the term loan matured, and Avidbank released its security interest in all of our existing personal property. We incurred approximately$26,000 of debt issuance costs related to the Original LSA and the amendment to the LSA. The debt issuance costs were amortized to interest expense using the effective interest rate method over the life of the loan. The debt issuance costs were fully amortized as ofDecember 31, 2020 .
Paycheck Protection Program Loan
InApril 2020 , we issued a note in the principal amount of approximately$1,625,000 evidencing the loan we received under the PPP that bears interest at a rate of 1.0% per annum. Under the terms of the PPP, certain amounts of the PPP loan may be forgiven if they used for qualifying expenses as described in the CARES Act. InOctober 2020 , we submitted our loan forgiveness application for the PPP loan, and inNovember 2020 , our lender informed us that theU.S Small Business Administration approved the forgiveness of approximately$1,093,000 of the$1,625,000 loan, leaving a principal balance of approximately$532,000 . The unforgiven principal balance, plus accrued and unpaid interest, is due at the closing of the Asset Sale, if the Asset Sale occurs, or at the closing of the Merger, if the Merger occurs. If neither the Asset Sale nor the Merger occurs, the unforgiven principal balance, plus accrued and unpaid interest, is due at maturity,April 18, 2022 . We began making monthly interest only payments onNovember 18, 2020 . We may prepay the PPP loan at any time with no prepayment penalties. As ofDecember 31, 2020 , the outstanding principal balance of the PPP loan was approximately$532,000 . 29 Bridge Loans In connection with entering into the APA, we issued to Fertilemind an unsecured promissory note (the "First Note") in the principal amount of$1,000,000 , evidencing a$1,000,000 loan received from Fertilemind on behalf of eGames.com. As described below, untilDecember 1, 2020 , the principal amount of the First Note accrued interest at the rate of 8% per annum (increasing to 15% per annum upon the occurrence of an event of default), compounded annually. OnNovember 19, 2020 , eGames.com agreed to loan, or cause Fertilemind, on behalf of eGames.com, to loan an additional$500,000 to us onDecember 1, 2020 . Upon receipt of such$500,000 loan, onDecember 1, 2020 , we issued a second unsecured promissory note (the "Second Note") evidencing such loan. In connection with borrowing the additional$500,000 loan, the interest rate of the First Note increased from 8% to 10% beginning onDecember 1, 2020 . OnJanuary 12, 2021 , eGames.com agreed to loan, or cause Fertilemind, on behalf of eGames.com, to loan an additional$200,000 to us onJanuary 12, 2021 . Upon receipt of such$200,000 loan, onJanuary 12, 2021 , we issued a third unsecured promissory note (the "Third Note," and together with the First Note and the Second Note, the "Bridge Notes") evidencing such loan. The principal amount of the Second Note and the Third Note accrues interest at the rate of 10% per annum (increasing to 15% per annum upon the occurrence of an event of default), compounded annually. The principal amount of the Bridge Notes and accrued interest thereon is due and payable upon the earlier of (i) the termination of the APA, (ii) the closing of a Business Combination (as defined in the Bridge Notes), and (iii)April 30, 2021 . Upon the closing of the Asset Sale, the outstanding principal amount of the Bridge Notes and all accrued and unpaid interest thereon will be applied against the purchase price under the APA, and the Bridge Notes will be extinguished. We may use the proceeds under the Bridge Notes for, among other things, the payment of obligations related to the transactions contemplated by the APA and the Merger and other general working capital purposes. The Bridge Notes include customary events of default, including if any portion of either of the Bridge Notes is not paid when due; if we default in the performance of any other material term, agreement, covenant or condition of either of the Bridge Notes, subject to a cure period; if any final judgment for the payment of money is rendered against us and we do not discharge the same or cause it to be discharged or vacated within 90 days; if we make an assignment for the benefit of creditors, if we generally does not pay its debts as they become due; if a receiver, liquidator or trustee is appointed for us, or if we are adjudicated bankrupt or insolvent. In the event of an event of default, the Bridge Notes will accelerate and become immediately due and payable at the
option of the holder. Working Capital As ofDecember 31, 2020 , we had negative working capital (current liabilities in excess of current assets) of$636,000 compared to negative working capital of$25,000 as ofDecember 31, 2019 . The following table shows our change in working capital fromDecember 31, 2019 toDecember 31, 2020 . Increase (Decrease) Working capital deficit as of December 31, 2019$ (25,000 ) Changes in current assets: Cash and cash equivalents (2,432,000 ) Accounts receivable, net of allowance (1,079,000 ) Site equipment to be installed (435,000 ) Prepaid expenses and other current assets (350,000 ) Net decrease in current assets (4,346,000 ) Changes in current liabilities: Accounts payable (565,000 ) Accrued compensation (524,000 ) Accrued expenses (252,000 ) Sales taxes payable (125,000 ) Income taxes payable 6,000 Current portion of obligations under capital leases (373,000 ) Deferred revenue 1,000 Deferred rent (384,000 ) Other current liabilities (280,000 ) Net decrease in current liabilities (3,735,000 ) Net decrease in working capital (611,000 ) Working capital deficit as of December 31, 2020$ (636,000 ) 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 years ended December 31, 2020 2019 Change Cash (used in) provided by: Operating activities$ (3,894,000 ) $ 2,744,000 $ (6,638,000 ) Investing activities 960,000 (1,065,000 ) 2,025,000 Financing activities 291,000 (1,098,000 ) 1,389,000 Effect of exchange rates 11,000 42,000 (31,000 )
Net (decrease) increase in cash, cash equivalents and restricted cash
Net cash (used in) provided by operations. The increase in cash used in operating activities was primarily due to an increase in net loss of$5,643,000 after giving effect to adjustments made for non-cash transactions as well as increased cash used for operating assets and liabilities of$995,000 during
2020 compared to 2019.
Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased$4,862,000 from$9,296,000 for 2019 to$4,434,000 for 2020, primarily due to reduced headcount. Our primary source of cash is cash we generate from customers. Cash received from customers decreased$13,041,000 from$19,790,000 for 2019 to$6,749,000 for 2020, primarily related to decreased subscription revenue, hardware revenue
and live hosted trivia revenue. Net cash provided by (used in) investing activities. The$2,025,000 increase in cash provided by investing activities was primarily due to receiving$1,226,000 in net proceeds from the sale of all our assets used to conduct live-hosted trivia events inJanuary 2020 as well as decreased capital expenditures. Net cash provided by (used in) financing activities. During the year endedDecember 31, 2020 , we received$1,625,000 in proceeds from the PPP loan and$1,500,000 in proceeds from bridge loans received from Fertilemind. There were no similar transactions during 2019. During 2020, we made$1,750,000 more in principal payments on long-term debt and$26,000 less in principal payments on our finance leases when compared to 2019.
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.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with 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, allowance for doubtful accounts, site equipment to be installed, investments, intangible assets, and contingencies. We base our estimates on a combination of historical experience and various other assumptions that are believed 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 materially from these estimates. 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.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts-We maintain allowances for doubtful accounts for estimated losses resulting from nonpayment by our customers. We reserve for all accounts that have been suspended or terminated from our Buzztime network services and for customers with balances that are greater than a predetermined number of days past due. We analyze historical collection trends, customer concentrations and creditworthiness, economic trends and anticipated changes in customer payment patterns when evaluating the adequacy of our allowance for doubtful accounts for specific and general risks. Additional reserves may also be established if specific customers' balances are identified as potentially uncollectible. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. 31
Site Equipment to be Installed- Site equipment to be installed consists of fixed assets related to our tablet platform that have not yet been placed in service and are stated at cost. Such equipment includes the Classic Playmaker, tablets, other associated electronics and the computers located at customer's sites. These assets remain in site equipment to be installed until installed at our customer sites, at which point, the cost of the deployed site equipment is reclassified to fixed assets and depreciated over the estimated useful life. We evaluate the recoverability of site equipment to be installed for impairment whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset or asset group to estimated undiscounted future net cash flows expected to be generated. If the carrying amount of the asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. During the year endedDecember 31, 2020 and 2019, we recognized a loss of approximately$307,000 and$591,000 , respectively, for the disposition of site equipment to be installed for which we did not expect to generate future cash flows. Fixed Assets- Fixed assets are recorded at cost. Equipment under finance leases is recorded at the present value of future minimum lease payments. We evaluate the recoverability of our fixed assets for impairment whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable. If the carrying amount of the asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. During the year endedDecember 31, 2020 , we recognized a loss of approximately$54,000 of fixed assets related to deployed site equipment in the ordinary course of business. As discussed further in Note 16 to the accompanying financial statements, we our lease for our corporate headquarters and vacated the facility as ofJune 30, 2020 . As a result, during the year endedDecember 31, 2020 , we wrote-off approximately$890,000 of unamortized tenant improvement allowance that is recorded as part of the gain on termination of lease, as well as approximately$87,000 in leasehold improvement assets and$197,000 in furniture and fixtures and our vehicle. During the year endedDecember 31, 2019 , total loss for the disposition of fixed assets was approximately$127,000 . Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements and fixed assets under finance leases is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the lease period. We incur a relatively significant level of depreciation expense in relation to our operating income. The amount of depreciation expense in any fiscal year is largely related to the equipment located at our customers' sites. Such equipment is depreciated over one to three years based on the shorter of the contractual finance lease period or the estimated useful life, which considers anticipated technology changes. Machinery and equipment are depreciated over three to five years. If our fixed assets turn out to have longer lives, on average, than estimated, then our depreciation expense would be significantly reduced in those future periods. Conversely, if the fixed assets turn out to have shorter lives, on average, than estimated, then our depreciation expense would be significantly increased in those future periods. As ofDecember 31, 2020 , we determined there were no changes to the estimated useful lives for any of our assets. Goodwill-Goodwill represents the excess of costs over fair value of assets of businesses acquired.Goodwill acquired in a purchase combination 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 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. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. If after assessing the totality of events or circumstances we determine it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then we must perform the step one quantitative impairment test outlined in Accounting Standards Codification ("ASC") No. 350, Intangibles -Goodwill and Other. Our goodwill balance of$696,000 as ofDecember 31, 2019 relates to the excess of costs over the fair value of assets we acquired in 2003 related to our Canadian business (the "Reporting Unit"). In our 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 three months endedMarch 31, 2020 . No further evaluations were necessary afterMarch 31, 2020 . There was no goodwill impairment recorded for the year endedDecember 31, 2019 . Revenue Recognition-In accordance with ASC No. 606, Revenue from Contracts with Customers, we recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We generate revenue by charging subscription fees to 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 entities, 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 of our assets used to host live trivia events inJanuary 2020 .
In general, when multiple performance obligations are present in a customer contract, we allocated the transaction price to the individual performance obligation based on the relative stand-alone selling prices, and recognize the revenue when or as each performance obligation has been satisfied. We treat discounts as a reduction to the overall transaction price and allocate the discount to the performance obligations based on the relative stand-alone selling prices. We recognize revenue net of sales tax we collect from the customer.
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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 recognized revenue for the arrangements that continued to meet the contract criteria, including the criteria that collectability was probable. Software Development Costs-We capitalize costs related to the development of certain software products in accordance with ASC No. 350. We recognize amortization of costs related to interactive programs on a straight-line basis over the programs' estimated useful lives, generally two to three years. Amortization expense relating to capitalized software development costs totaled$551,000 and$519,000 for the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 and 2019, approximately$123,000 and$177,000 , respectively, of capitalized software costs were not subject to amortization as the development of various software projects was not complete. We performed our annual review of software development projects for the years endedDecember 31, 2020 and 2019, and determined to abandon various 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 industry for which the content was intended. As a result, for the year endedDecember 31, 2020 and 2019, we recognized an impairment charge of$248,000 and$550,000 , respectively. Impairment of capitalized software is shown separately on our consolidated statement of operations. Income Taxes-Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. ASC No. 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. A tax position that meets the "more-likely-than-not" criterion is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. We have reviewed our tax positions and determined that an adjustment to the tax provision is not considered necessary nor is a reserve for income taxes required.
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 wasJanuary 1, 2021 for us); early adoption is permitted. We do not expect that the adoption of this accounting standard update to have a material impact on 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.
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