# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Sep 30, 2019

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2019-11-01
- Accepted by EDGAR: Nov 1, 2019, 16:11 ET
- Period: 2019-09-30
- Accession: 0001493152-19-016324
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000149315219016324/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000149315219016324/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $4.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $14.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2019-07-01 to 2019-09-30 | $3.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-01-01 to 2019-09-30 | $10.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-07-01 to 2019-09-30 | −$316.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-01-01 to 2019-09-30 | −$535.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $19.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $30.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | −$351.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | −$754.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | −$0.12 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | −$0.27 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 2,874,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 2,870,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $1.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $111.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-09-30 | $2.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-09-30 | $5.5m | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-30 | $14.9m | us-gaap:Assets |
| Current liabilities | at 2019-09-30 | $3.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-09-30 | $8.6m | us-gaap:Liabilities |
| Current portion of debt | at 2019-09-30 | $1.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2019-09-30 | $6.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,100 characters.

#### CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

*This report and the documents incorporated by reference, if any, contain “forward-looking statements” – that is statements related to future events, results, performance, prospects and opportunities, including statements related to our strategic plans and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry trends and our financial position. Forward-looking statements are based on information currently available to us, on our current expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions of management. Forward looking statements often contain words such as “expects,” “anticipates,” “could,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “would,” and similar expressions. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or contribute to such differences include our ability to grow our revenue and successfully implement our other business strategies to make up for the revenue we have historically received from Buffalo Wild Wings corporate-owned restaurants and its franchisees after our existing relationship with them terminates on November 15, 2019; our ability to raise additional funds in the future on favorable terms, if at all; we have borrowed substantially all amounts available to us under existing credit facilities and, subject to limited exceptions, our loan and security agreement with Avidbank prohibits us from borrowing additional amounts from other lenders; our ability to comply with our financial covenants to Avidbank and its right to declare a default if we do not, which could lead to all payment obligations becoming immediately due and payable; 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; the impact of new products and technological change, especially in the mobile and wireless markets, on our operations and competitiveness; risks relating to the exploration of strategic alternatives that we announced in December 2018; our ability to maintain an adequate supply of our tablets and related equipment; our ability to adequately protect our proprietary rights and intellectual property; our ability to successfully and efficiently manage the design, manufacturing and assembly process of the tablet and related equipment used in our tablet platform; and the other risks and uncertainties described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and described in other documents we file from time to time with the Securities and Exchange Commission, or SEC, including this report and our other Quarterly Reports on Form 10-Q. Readers are urged not to place undue reliance on the forward-looking statements in this report or incorporated by reference herein, which speak only as of the date of this report. Except as required by law, we undertake no obligation to revise or update any such forward-looking statement to reflect future events or circumstances.*

### INTRODUCTION

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

- *Overview and Highlights*. This section describes our business and significant events and transactions we believe are important in understanding our financial condition and results of operations.
- *Critical Accounting Policies*. This section lists our significant accounting policies, including any material changes in our critical accounting policies, estimates and judgments during the three and nine months ended September 30, 2019 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2018.

15

- *Results of Operations*. This section provides an analysis of our results of operations presented in the accompanying unaudited condensed consolidated statements of operations by comparing the results for the three and six months ended June 30, 2019 to the results for the three and six months ended June 30, 2018.
- *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, including performance analytics, to help our customers acquire, engage and retain its patrons. Our tablets and technology offer engaging solutions to establishments with guests who experience dwell time, such as bars, restaurants, casinos and senior living centers. Casual dining venues subscribe to our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games. Our platform, creates connections among the players and venues, and amplifies guests’ positive experiences, and our in-venue TV network creates one of the largest digital out of home advertising audiences in the United States and Canada. We continue to support our legacy network product line, which we call our Classic platform.

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

Over 6 million games are played on our network each month, and as of September 30, 2019, approximately 57% of our network subscriber venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Buffalo Wings & Rings, Old Chicago, Native Grill & Wings, Houlihans, Beef O’Brady’s, Boston Pizza, and Arooga’s.

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

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

### Strategic Process

Our board of directors 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 successfully execute our current long-term operating and strategic plan (see “LIQUIDITY AND CAPITAL RESOURCES,” below) in the event the strategic process does not result in a transaction. Our board of directors has not set a timetable for the strategic process nor has it made any decisions relating to any strategic alternatives at this time, 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.

### Our Strategy

Below is a discussion of our strategy and highlights of accomplishments and milestones achieved during 2019:

*Hardware.* We have a core competency in designing, manufacturing, deploying and supporting tablet-enabled solutions for our partners. We believe our tablets are more durable than off-the-shelf tablets available to consumers, and we can customize our tables to meet the needs of our customers. As previously announced, in the third quarter of 2019, we signed a second order with our partner that services the correctional facility industry for approximately $3,000,000, and delivery of tablets under that order is expected to begin in the fourth quarter of 2019 and continue through the end of 2020. During the third quarter we also signed an agreement with Spendgo, a leading digital marketing and loyalty platform, to use our tablets in its customer locations. We expect initial orders from Spendgo during the fourth quarter of 2019 and the first quarter of 2020, and we anticipate a steady pace of re-orders. Lastly, after the end of the third quarter, we launched a pilot test of our tablets with a food service provider, who has over 200 locations.

*Buzztime Basic*. Our tablet product offering has repeatedly been proven to have a positive business impact for the venues who offer it to their customers. We call that impact the Buzztime Network Effect. However, we have had challenges acquiring new venues because delivering the robust, real time, multi-player experience available through our tablet product offering requires extensive amounts of equipment and expertise to deploy. That equipment and expertise results in a relatively high entry price point, which limits our market opportunity.

To address this problem, following months of development and research, during the second quarter of 2019 we began field testing a lower cost, entry-level product that we call Buzztime Basic. We believe that this capital-light, entry-level offering will enable customers to achieve the Buzztime Network Effect with less financial risk. To date, we have deployed Buzztime Basic on a market-by-market basis and are currently in approximately 120 locations. We anticipate reaching approximately 200 Buzztime Basic locations by year-end.

The brains behind Buzztime Basic is Site Hub, our redesigned personal computer, about the size of a deck of cards, that streams our content to television screens within the venue. Currently, a majority of our trivia content is available for streaming through Site Hub. Players will be able to play our trivia games on their mobile phones through our new mobile app, discussed in more detail below.

*Mobile App*. In May 2019, we released an open beta version of our mobile app, and we continue to release updates as we receive feedback from our customers and evaluate how to improve both the experience and social hooks to enable more viral growth in today’s environment. The app can be found in both the Apple App store and Google Play. Our app allows players to use their own mobile device to play along with most of our network trivia games within our customer’s venues. The app is a complement to our tablet platform experience and is the primary means of playing our trivia games in Buzztime Basic.

*Advertising*. During the first quarter of 2019, we rolled out our new, modernized ad platform to a subset of our customers. We completed the rollout to all existing customers in the second quarter. This new advertising system gives us access to ad buying platforms where digital advertising inventory is bought and sold on public exchanges and private marketplaces. We continue to work with advertising sales companies to help us improve our advertisement sales and with an advertisement technology company to improve our ad loading, management, and delivery and testing capabilities. We can use advertising to monetize Buzztime Basic, as well as our entire network. If we successfully expand our market reach, we expect that our network will become more attractive to third parties who desire to advertise in the venues in which our network is available, thereby increasing our advertising revenue.

*Buffalo Wild Wings*. Under the terms of our existing agreements, our relationship with Buffalo Wild Wings corporate-owned and franchisee-owned restaurants terminates on November 15, 2019. Although we continue to have discussions with Buffalo Wild Wings corporate and its franchisees to extend the relationship beyond that date, and although we have extended our relationship with certain franchisees, we do not expect the relationship with Buffalo Wild Wings corporate or with a majority of franchisees to be extended. We began reducing our operating expenses in anticipation of the termination of existing relationships and are working on a de-commission plan in anticipation of relationships ending on November 15, 2019.

### CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to deferred costs and revenues, depreciation 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, fixed assets, 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.

There have been no material changes in our critical accounting policies, estimates and judgments during the three and nine months ended September 30, 2019 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2018, except for *Leases (Topic 842)*. Upon adoption of Topic 842, we recognized on our consolidated balance sheet as of January 1, 2019 approximately $3,458,000 of operating lease liabilities, and approximately $2,336,000 of corresponding operating right-of use assets, net of tenant improvement allowances. We have also shown the initial recognition of the leases as a supplemental noncash financing activity on the accompanying statement of cash flows. The adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations. (See Note 7 to the accompanying unaudited condensed consolidated financial statements for more information on the adoption of Topic 842.)

### RESULTS OF OPERATIONS

We incurred a net loss of $351,000 and $754,000 for the three and nine months ended September 30, 2019, respectively, compared to recognizing net income of $222,000 for the three months ended September 30, 2018 and a net loss of $311,000 for the nine months ended September 30, 2018, respectively.

### Revenue

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

|  | Three months ended September 30, 2019 $% of Total Revenue |  | 2018 $% of Total Revenue |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 3,723,000 | 81% | 4,005,000 | 67% | (282,000) | (7%) |
| Hardware revenue | 11,000 | 0% | 1,158,000 | 19% | (1,147,000) | (99%) |
| Other revenue | 846,000 | 19% | 841,000 | 14% | 5,000 | 1% |
| Total | 4,580,000 | 100% | 6,004,000 | 100% | (1,424,000) | (24%) |

|  | Nine months ended September 30, 2019 $% of Total Revenue |  | 2018 $% of Total Revenue |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 11,356,000 | 78% | 12,111,000 | 70% | (755,000) | (6%) |
| Hardware revenue | 811,000 | 6% | 2,427,000 | 14% | (1,616,000) | (67%) |
| Other revenue | 2,471,000 | 17% | 2,878,000 | 17% | (407,000) | (14%) |
| Total | 14,638,000 | 100% | 17,416,000 | 100% | (2,778,000) | (16%) |

#### Subscription Revenue

Subscription revenue decreased for the three and nine months ended September 30, 2019 primarily due to lower average site count and lower average revenue per site when compared to the same periods in 2018. In October 2018, Buffalo Wild Wings informed us that it determined not to rollout our order, payment and guest insights functionality and that its relationship with us would continue in accordance with existing agreements we entered into in the ordinary course of business, and which terminate in accordance with their terms on November 15, 2019. We do not expect our relationship with Buffalo Wild Wings corporate-owned restaurants or with a majority of franchisees to continue after that date. If we do not add other network subscribers to sufficiently offset the subscription revenue we receive and have received in recent years from Buffalo Wild Wings corporate-owned restaurants and its franchisees, we expect our subscription revenue to materially decrease beginning in the first quarter of 2020, which is the first full quarter after our existing agreements with Buffalo Wild Wings corporate-owned restaurants and its franchisees terminate in accordance with their terms. See “PART II — OTHER INFORMATION, ITEM 1A., Risk Factors,” below.

#### Hardware Revenue

Hardware revenue consists of revenue from hardware sales and from sales-type lease arrangements. Hardware revenue for the three and nine months ended September 30, 2019 decreased when compared to the same periods in 2018 primarily due to a hardware sale during the three and nine months ended September 30, 2018 that did not occur again in the same periods in 2019, and to a lesser extent to fewer sales-type lease arrangements. During the third quarter of 2019, we entered into a $3,000,000 follow-on contract with the customer who purchased the hardware in 2018, and we expect to begin delivering hardware under that contract during the fourth quarter of 2019 and throughout 2020. We do not expect to enter into sales-type lease arrangements in the future, and we are uncertain the extent to which we will enter into hardware sales arrangements during the fourth quarter of 2019 or thereafter.

#### Other Revenue

During the three months ended September 30, 2019, other revenue remained relatively flat with increases in advertising revenue of approximately $71,000 offset by decreases in all other miscellaneous revenue of approximately $67,000. For the nine months ended September 30, 2019, other revenue decreased primarily due to lower professional services and pay-to-play revenue of approximately $584,000, offset by increases in advertising and content licensing revenue of approximately $152,000 and $27,000, respectively, when compared to the same periods in 2018.

#### Geographic Breakdown of Site Count

Geographic breakdown of our site count for network subscribers was:

|  | Network Subscribers as of September 30, 2019 | 2018 |
| --- | ---: | ---: |
| United States | 2,431 | 2,521 |
| Canada | 134 | 145 |
| Total | 2,565 | 2,666 |

### Direct Operating Costs and Gross Margin

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

|  | Three months ended September 30, 2019 | 2018 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $4,580,000 | $6,004,000 | $(1,424,000) | (24%) |
| Direct Operating Costs | 1,344,000 | 2,115,000 | (771,000) | (36%) |
| Gross Margin | $3,236,000 | $3,889,000 | $(653,000) | (17%) |
| Gross Margin Percentage | 71% | 65% |  |  |

|  | Nine months ended September 30, 2019 | 2018 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $14,638,000 | $17,416,000 | $(2,778,000) | (16%) |
| Direct Operating Costs | 4,545,000 | 6,019,000 | (1,474,000) | (24%) |
| Gross Margin | $10,093,000 | $11,397,000 | $(1,304,000) | (11%) |
| Gross Margin Percentage | 69% | 65% |  |  |

For the three and nine months ended September 30, 2019, the decrease in direct operating costs was primarily due to decreases in equipment expense, service provider fees and freight expense of approximately $712,000 and $1,392,000, respectively, primarily due to fewer installation of hardware under sales-type lease arrangements and to decreased hardware sales, and to a lesser extent, decreases in miscellaneous expenses related to direct costs of approximately $59,000 and $82,000, respectively, when compared to the same periods in 2018.

The increase in gross margin for the three and nine months ended September 30, 2019 was primarily due to revenue mix when compared to the same periods in 2018. Our hardware revenue typically has lower margins due to the high cost of the equipment.

### Operating Expenses

|  | Three months ended September 30, 2019 | 2018 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $3,464,000 | $3,444,000 | $20,000 | 0.6% |
| Depreciation and amortization (non-direct) | $88,000 | $75,000 | $13,000 | 17.3% |

19

|  | Nine months ended September 30, 2019 | 2018 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $10,355,000 | $11,123,000 | $(768,000) | (7%) |
| Depreciation and amortization (non-direct) | $273,000 | $244,000 | $29,000 | 12% |

#### Selling, General and Administrative Expenses

The decrease in selling, general and administrative expenses for the three and nine months ended September 30, 2019 was primarily due to decreased payroll and related expense of $44,000 and $726,000, respectively, and decreased professional fees of $16,000 and $219,000, respectively, offset by an increase in marketing expense of $23,000 and $135,000, respectively, when compared to the same periods in 2018. In anticipation of not extending our relationship with Buffalo Wild Wings or with a majority number of its franchisees beyond November 15, 2019, (See “PART II — OTHER INFORMATION, ITEM 1A., Risk Factors,” below), we began to reduce certain operating expenses. We expect total selling, general, and administrative expenses for 2019 to be less than $13,500,000.

#### Depreciation and Amortization Expense

The increase in depreciation and amortization expense for the three and six months ended June 30, 2019 compared to the same periods in 2018 was primarily due to our leasehold improvement asset we recognized as a result of our move to our new headquarters in December 2018. The leasehold improvement asset is being depreciated over the term of the lease, which is 89 months.

### Other Expense, Net

|  | Three months ended September 30, 2019 | 2018 | Decrease in other expense, net |
| --- | ---: | ---: | ---: |
| Total other expense, net | $(16,000) | $(138,000) | $122,000 |

|  | Nine months ended September 30, 2019 | 2018 | Decrease in other expense, net |
| --- | ---: | ---: | ---: |
| Total other expense, net | $(189,000) | $(305,000) | $116,000 |

For the three months ended September 30, 2019, the decrease in other expense, net was primarily related to decreased interest expense resulting from lower debt balances, increased foreign currency exchange gains related to the operations of our Canadian subsidiary and gains from the sale of equipment when compared to the same period in 2018.

For the nine months ended September 30, 2019, the decrease in other expense, net was primarily related to decreased interest expense resulting from lower debt balances and gains from the sale of equipment, offset by increased foreign currency losses related to the operations of our Canadian subsidiary when compared to the same period in 2018.

### Income Taxes

|  | Three months ended September 30, 2019 | 2018 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Provision for income taxes | $(19,000) | $(10,000) | $(9,000) | (90.0%) |

|  | Nine months ended September 30, 2019 | 2018 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Provision for income taxes | $(30,000) | $(36,000) | $6,000 | 16.7% |

During 2019, we expect to incur state income tax liability related to our U.S. operations and income tax liability in Canada related to our operations in Canada. We have established a full valuation allowance for substantially all deferred tax assets, including our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets. The effective tax rate differs from the statutory tax rate due primarily to our full valuation allowance.

### EBITDA—Consolidated Operations

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

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

|  | Three months ended September 30, 2019 | 2018 | Nine months ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net (loss) income per GAAP | $(351,000) | $222,000 | $(754,000) | $(311,000) |
| Interest expense, net | 60,000 | 118,000 | 196,000 | 305,000 |
| Income tax provision | 19,000 | 10,000 | 30,000 | 36,000 |
| Depreciation and amortization | 737,000 | 732,000 | 2,191,000 | 2,068,000 |
| EBITDA | $465,000 | $1,082,000 | $1,663,000 | $2,098,000 |

### LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2019, we had cash, cash equivalents and restricted cash of $2,784,000 compared to cash, cash equivalents and restricted cash of $2,786,000 as of December 31, 2018.

In September 2018, we entered into a loan and security agreement with Avidbank, under which we borrowed $4,000,000 in the form of a one-time 48-month term loan, all of which we used to pay-off the $4,050,000 of principal borrowed from East West Bank (“EWB”). We used our cash on hand to pay the remaining $50,000 we borrowed from EWB plus accrued and unpaid interest. The amended and restated loan and security agreement we entered into with EWB on November 29, 2017, as amended on March 12, 2018, terminated in connection with such payments.

As of September 30, 2019, $3,000,000 was outstanding under the Avidbank term loan, with $1,000,000 recorded in current portion of long-term debt and the remaining $2,000,000 recorded as long-term debt on our balance sheet. We recorded debt issuance costs of $23,000, which includes a $20,000 facility fee. 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 of September 30, 2019 was $13,000 and is recorded as a reduction of long-term debt.

We must comply with these financial covenants under the loan and security agreement:

- Our EBITDA (as defined in the loan and security agreement, which definition contains certain adjustments to the definition noted under “EBITDA-Consolidated Operations” above) must be at least $1,000,000 for the trailing six-month period as of the last day of each fiscal quarter. The loan and security agreement defines “EBITDA” as (a) net profit (or loss), after provision for taxes, plus (b) interest expense, plus (c) to the extent deducted in the calculation of net profit (or loss), depreciation expense and amortization expense, plus (d) income tax expense, plus (e) to the extent approved by Avidbank, other noncash expenses and charges, other onetime charges, and any losses arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business.
- The aggregate amount of unrestricted cash we have in deposit accounts or securities accounts maintained with Avidbank must be not less than $2,000,000 at all times.

As of September 30, 2019, we were in compliance with both covenants.

Subject to customary exceptions, under the loan and security agreement, 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. The loan and security agreement 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 loan and security agreement also includes customary events of default 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 loan and security agreement.

In connection with preparing our financial statements as of and for the period ended September 30, 2019, we evaluated whether there are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt about our ability to continue as a going concern within twelve months after the date that such financial statements are issued. We believe we have sufficient cash to meet our operating cash requirements and to fulfill our debt obligations for at least the next twelve months after the date that such financial statements are issued.

Under the terms of our existing agreements, our relationship with Buffalo Wild Wings corporate-owned and franchisee-owned restaurants terminates on November 15, 2019. Although we continue to have discussions with Buffalo Wild Wings corporate and its franchisees to extend the relationship beyond that date, and although we have extended our relationship with certain franchisees, we do not expect the relationship with Buffalo Wild Wings corporate or with a majority of franchisees to be extended. We began reducing our operating expenses in anticipation of the termination of existing relationships and are working on a de-commission plan in anticipation of relationships ending on November 15, 2019. See “PART II — OTHER INFORMATION, ITEM 1A., Risk Factors,” below.

We are continuing to explore and evaluate financing alternatives, including additional equity financings and alternative sources of debt. These efforts are being undertaken to increase the likelihood that we will be able to successfully execute our current long-term operating and strategic plan and to position us to take advantage of market opportunities for growth and to respond to competitive pressures. If our cash and cash equivalents are not sufficient to meet future capital requirements, and if we cannot raise an adequate amount of capital, we will not be able to successfully execute our current long-term operating and strategic plan or take advantage of market opportunities for growth and will have to reduce planned capital expenses and further reduce operational cash uses. Any capital we may raise may be on terms that are not as favorable to us as they otherwise might be. Any actions we are undertaking or may undertake to reduce planned capital expenses or reduce operational cash uses may not cover shortfalls in available funds. See “PART II — OTHER INFORMATION, ITEM 1A., Risk Factors,” below.

#### Working Capital

As of September 30, 2019, we had working capital (current assets in excess of current liabilities) of $2,015,000 compared to working capital of $2,761,000 as of December 31, 2018. The following table shows our changes in working capital from December 31, 2018 to September 30, 2019:

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2018 | $2,761,000 |
| Changes in current assets: |  |
| Cash and cash equivalents | (3,000) |
| Restricted cash | 1,000 |
| Accounts receivable, net of allowance | (366,000) |
| Site equipment to be installed | (938,000) |
| Prepaid expenses and other current assets | 68,000 |
| Net decrease in current assets | (1,238,000) |
| Changes in current liabilities: |  |
| Accounts payable | 64,000 |
| Accrued compensation | (122,000) |
| Accrued expenses | (122,000) |
| Sales taxes payable | (16,000) |
| Income taxes payable | 5,000 |
| Current portion of obligations under operating leases | 412,000 |
| Current portion of obligations under financing leases | (23,000) |
| Deferred revenue | (524,000) |
| Other current liabilities | (166,000) |
| Net increase in current liabilities | (492,000) |
| Net decrease in working capital | (746,000) |
| Working capital as of September 30, 2019 | $2,015,000 |

22

#### Cash Flows

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

| Cash provided by (used in): | Nine months ended September 2019 | 2018 |
| --- | ---: | ---: |
| Operating activities | $1,761,000 | $528,000 |
| Investing activities | (964,000) | (981,000) |
| Financing activities | (826,000) | 181,000 |
| Effect of exchange rates | 27,000 | (28,000) |
| Net decrease in cash, cash equivalents and restricted cash | $(2,000) | $(300,000) |

*Net cash provided by operating activities.* The increase in cash provided by operating activities was due to a decrease in net loss of $297,000, after giving effect to adjustments made for non-cash transactions and decreases in cash used in operating assets and liabilities of $1,530,000 during the nine months ended June 30, 2019 when compared to the same period in 2018.

Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $530,000 to $7,386,000 for the nine months ended September 30, 2019 from $7,916,000 for the same period in 2018, primarily due to a reduction in headcount.

Our primary source of cash is cash we generate from customers. Cash received from customers decreased $1,570,000 to $15,055,000 for the nine months ended September 30, 2019 from $16,625,000 for the same period in 2018 due primarily to decreased hardware and other revenue. See “RESULTS OF OPERATIONS—Revenue,” above, for more information regarding the decrease in our revenue and our expectations regarding our revenue in the future.

*Net cash used in investing activities.* Although cash used in investing activities for the nine months ended September 30, 2019 remained consistent with the same period in 2018, we increased the amount of capitalized software development expenditures related to new product development and decreased our purchases of other capital expenses during the nine months ended September 30, 2019 when compared to the same period in 2018.

*Net cash (used in) provided by financing activities.* During the nine months ended September 30, 2018, we received $4,000,000 in proceeds from a term loan from Avidbank and we received $1,375,000 in net proceeds from a registered offering of our common stock. There were no similar financing activities during the same period in 2019. During the nine months ended September 30, 2019, we made $4,269,000 less in principal payments on our long-term debt when compared to the same period in 2018.

### RECENT ACCOUNTING PRONOUNCEMENTS

In November 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2018-18, *Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606.* This ASU requires certain transactions between participants in a collaborative arrangement to be accounted for as revenue under the new revenue standard when the participant is a customer. The standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for us). We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, *Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract*. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for us) and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted at any time. We are evaluating the impact that the adoption of this ASU will have on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, *Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement*. This ASU modifies certain disclosure requirements on fair value measurements. The standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for us). We are evaluating the impact that the adoption of this standard will have our consolidated financial statements.

In June 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 after December 15, 2022 (which will be January 1, 2023 for us). We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements.

### OFF-BALANCE SHEET ARRANGEMENTS

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

## Market risk

As filed, 183 characters.

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

## Controls and procedures

As filed, 1,416 characters.

#### Evaluation of Disclosure Controls and Procedures

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

#### Changes in Internal Control Over Financial Reporting

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

## Risk factors

As filed, 9,054 characters.

An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 (our “2018 10-K”) together with all other information contained or incorporated by reference in this report before you invest in our common stock. If any of the risks described in this report or in our 2018 10-K occur, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected. Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment. As of the date of this report, we do not believe there have been any material changes to the risk factors disclosed in our 2018 10-K except as described below.

***We receive a significant portion of our revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees and our existing relationship will terminate on November 15, 2019. If we do not make up for that revenue, we expect our subscription revenue to materially decrease beginning in the first quarter of 2020.***

For the nine months ended September 30, 2019, Buffalo Wild Wings corporate-owned restaurants and its franchisees accounted for approximately 40%, or $5,891,000, of our total revenue. As of that date, approximately $202,000 was included in accounts receivable. For the year ended December 31, 2018, Buffalo Wild Wings corporate-owned restaurants and its franchisees accounted for approximately 44%, or $10,180,000, of our total revenue. As of that date, approximately $552,000 was included in accounts receivable.

In October 2018, Buffalo Wild Wings informed us that it determined not to rollout our order, payment and guest insights functionality and that its relationship with us would continue in accordance with existing agreements we entered into in the ordinary course of business, and which terminate in accordance with their terms on November 15, 2019. Although we continue to have discussions with Buffalo Wild Wings corporate and its franchisees to extend the relationship beyond that date, and although we have extended our relationship with certain franchisees, we do not expect the relationship with Buffalo Wild Wings corporate or with a majority of franchisees to be extended. We began reducing our operating expenses in anticipation of the termination of existing relationships and are working on a de-commission plan in anticipation of relationships ending on November 15, 2019. If we do not add other network subscribers to sufficiently offset the subscription revenue we receive and have received in recent years from Buffalo Wild Wings corporate-owned restaurants and its franchisees, we expect our subscription revenue to materially decrease beginning in the first quarter of 2020, which could materially and adversely affect our operating results and cash flows. In addition, the inability to demonstrate Buffalo Wild Wings as a strategic user of our tablet platform system could negatively impact achievement of our chain customer site growth goals. Likewise, if any other customer who may in the future represent a significant portion of our revenue were to breach or terminate their subscriptions or otherwise decrease the amount of business they transact with us, we could lose a significant portion of our revenues and cash flow.

***Our cash flow from operations may not cover our capital needs to successfully execute our current long-term operating and strategic plans or position us to take advantage of market opportunities for growth or to respond to competitive pressures or unanticipated customer requirements, and we may need to raise additional capital in the future. Such capital may not be available when needed, on acceptable terms or at all and, if available, may dilute current stockholders.***

As of September 30, 2019, we had cash, cash equivalents and restricted cash of $2,784,000. As of December 31, 2018, we had cash, cash equivalents and restricted cash of $2,786,000. We have borrowed all amounts available to us under existing credit facilities and, subject to limited exceptions, our loan and security agreement with Avidbank prohibits us from borrowing additional amounts from other lenders. As of September 30, 2019, $3,000,000 was outstanding under that loan agreement, of which $1,000,000 was recorded in current portion of long-term debt and $2,000,000 was recorded in long-term debt on our balance sheet, which is gross of any unamortized debt issuance costs that are recorded as a reduction of long-term debt. The loan matures on September 30, 2022. Avidbank automatically deducts from our bank account monthly principal payments of approximately $83,000 plus accrued and unpaid interest.

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

- our ability to generate cash from operating activities;
- acceptance of, and demand for, our interactive games and entertainment;
- the costs of continuing to develop and implement our tablet platform and product line;
- the costs of developing new entertainment content, products, or technology or expanding our offering to new media platforms such as the internet and mobile phones;
- the extent to which we invest in creating new entertainment content and new technology; and
- the number and timing of acquisitions and other strategic transactions, if any.

To increase the likelihood that we will be able to successfully execute our current long-term operating and strategic plan, and to position us to take advantage of market opportunities for growth and to respond to competitive pressures, unless we increase our revenue to meet our capital needs, we will need additional capital. We have begun to reduce certain operating expenses in anticipation of the termination of existing agreements. We are continuing to explore and evaluate financing alternatives, including additional equity financings and alternative sources of debt. If our cash and cash equivalents are not sufficient to meet future capital requirements, and if we cannot raise an adequate amount of capital, we will not be able to successfully execute our current long-term operating and strategic plan or take advantage of market opportunities for growth and will have to reduce planned capital expenses and further reduce operational cash uses. Any capital we may raise may be on terms that are not as favorable to us as they otherwise might be. Any actions we are undertaking or may undertake to reduce planned capital expenses or reduce operational cash uses may not cover shortfalls in available funds. If we issue equity or debt securities to raise additional funds, our existing stockholders will likely experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our common stock.

***If we fail to comply with our financial covenants to Avidbank, it may declare a default, which could lead to all payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business.***

We must comply with financial covenants our loan and security agreement with Avidbank: our EBITDA must be at least $1,000,000 for the trailing six-month period as of the last day of each fiscal quarter, and the aggregate amount of unrestricted cash we have in deposit accounts or securities accounts maintained with Avidbank must be not less than $2,000,000 at all times.

As of September 30, 2019, we were in compliance with these covenants. However, there can be no assurance we will be in compliance with these covenants in the future, including due to events or conditions outside of our control. For example, fluctuations in our operating results, such as a material decrease in our subscription revenue as a result of the termination of our existing agreements with Buffalo Wild Wings corporate-owned restaurants and its franchisees on November 15, 2019, could result in violation of the adjusted EBITDA covenant. See “*We receive a significant portion of our revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees and our existing relationship will terminate on November 15, 2019. If we do not make up for that revenue, we expect our subscription revenue to materially decrease beginning in the first quarter of 2020”* above.

If we fail to comply with our covenants, Avidbank may declare a default, which could lead to all payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business. Avidbank has a first-priority security interest in all our existing and future personal property. Accordingly, in an event of a default, Avidbank could dispose of such property to satisfy our payment obligations.

Filed Nov 1, 2019.
Source: SEC EDGAR, the filing index for accession 0001493152-19-016324. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.