SECURITIES AND EXCHANGE COMMISSION
2021 Securities registered pursuant to Section 12(b) of the Act: Yes ☒ No ☐ ☐ ☐ Yes ☐ No ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 2020☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 numbernumber: 001-11460
NTN Buzztime,DELAWAREDelaware 31-1103425 (State of incorporation) (I.R.S. Employer Identification No.) 6965 EL CAMINO REAL, SUITE 105-BOX 517,CARLSBAD, CALIFORNIA140 58th Street, Suite 2100, Brooklyn, New York 9200811220(Address of principal executive offices) (Zip Code) (760) 438-7400(Former name, former address and former fiscal year, if changed since last report) Symbol(s)symbol Common Stockstock, $0.005 par value per share NTNBTX NYSE AmericanThe Nasdaq Stock Market LLCYES [X] NO [ ][X]☒ No [ ]Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in in Rule 12b-2 of the Exchange Act.Large accelerated filer [ ]☐Accelerated filer [ ]☐ Non-accelerated filer [X]☒Smaller reporting company [X]☒ Emerging growth company [ ]☐[ ]YES [ ] NO [X]10, 2020,8, 2021, the registrant had outstanding 2,962,86652,043,818 shares of common stock, $0.005 par value per share.
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements (unaudited) | |
| 1 | ||
NTN BUZZTIME, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
| 2 | ||
| 3 | ||
| 4 | ||
| 5 | ||
| Item 2. | 22 | |
| Item 3. | 34 | |
| Item 4. | 34 | |
| PART II – OTHER INFORMATION | ||
| Item 1. | 35 | |
| Item 1A. | 35 | |
| Item 2. | 36 | |
| Item 6. | 37 | |
| 38 | ||
BUZZTIME,Buzztime, Inc.) and “Brooklyn LLC” refers to Brooklyn ImmunoTherapeutics LLC, a wholly owned subsidiary of Brooklyn. All references to “our company,” “we,” “us” or “our” mean Brooklyn. and its subsidiaries, including Brooklyn LLC, unless stated otherwise or the context otherwise requires.
(In thousands, except par value amount)
| September 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,710 | $ | 3,209 | ||||
| Restricted cash | - | 50 | ||||||
| Accounts receivable, net of allowances of $845 and $354, respectively | 132 | 1,195 | ||||||
| Income tax receivable | 13 | - | ||||||
| Site equipment to be installed | 792 | 1,090 | ||||||
| Prepaid expenses and other current assets | 146 | 526 | ||||||
| Total current assets | 2,793 | 6,070 | ||||||
| Restricted cash, long-term | - | 150 | ||||||
| Operating lease right-of-use assets | 5 | 2,101 | ||||||
| Fixed assets, net | 689 | 2,822 | ||||||
| Software development costs, net of accumulated amortization of $3,016 and $3,341, respectively | 1,420 | 1,915 | ||||||
| Deferred costs | 85 | 274 | ||||||
| Goodwill | - | 696 | ||||||
| Other assets | 62 | 97 | ||||||
| Total assets | $ | 5,054 | $ | 14,125 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 275 | $ | 835 | ||||
| Accrued compensation | 125 | 588 | ||||||
| Accrued expenses | 490 | 490 | ||||||
| Sales taxes payable | 14 | 131 | ||||||
| Income taxes payable | - | 3 | ||||||
| Current portion of long-term debt, net | 1,724 | 2,739 | ||||||
| Current portion of obligations under operating leases | 5 | 409 | ||||||
| Current portion of obligations under finance leases | 23 | 21 | ||||||
| Current portion of deferred revenue | 120 | 460 | ||||||
| Other current liabilities | 154 | 419 | ||||||
| Total current liabilities | 2,930 | 6,095 | ||||||
| Long-term debt | 1,625 | - | ||||||
| Long-term obligations under operating leases | - | 2,891 | ||||||
| Long-term obligations under finance leases | 4 | 20 | ||||||
| Long-term deferred revenue | - | 2 | ||||||
| Other liabilities | - | 26 | ||||||
| Total liabilities | 4,559 | 9,034 | ||||||
| Shareholders’ Equity | ||||||||
| Series A 10% cumulative convertible preferred stock, $0.005 par value, $156 liquidation preference, 156 shares authorized, issued and outstanding at September 30, 2020 and December 31, 2019 | 1 | 1 | ||||||
| Common stock, $0.005 par value, 15,000 shares authorized at September 30, 2020 and December 31, 2019; 2,952 and 2,901 shares issued at September 30, 2020 and December 31, 2019, respectively | 15 | 14 | ||||||
| Treasury stock, at cost, 10 shares at September 30, 2020 and December 31, 2019 | (456 | ) | (456 | ) | ||||
| Additional paid-in capital | 136,881 | 136,721 | ||||||
| Accumulated deficit | (136,187 | ) | (131,457 | ) | ||||
| Accumulated other comprehensive income | 241 | 268 | ||||||
| Total shareholders’ equity | 495 | 5,091 | ||||||
| Total liabilities and shareholders’ equity | $ | 5,054 | $ | 14,125 | ||||
See
September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets: | ||||||||
| Cash | $ | 24,381,831 | $ | 1,630,455 | ||||
| Tax receivable | 23,303 | 0 | ||||||
| Prepaid expenses and other current assets | 1,353,183 | 102,322 | ||||||
| Total current assets | 25,758,317 | 1,732,777 | ||||||
| Property and equipment, net | 547,006 | 594,106 | ||||||
| Right-of-use assets - operating leases | 2,665,828 | 2,092,878 | ||||||
| Goodwill | 2,043,747 | 2,043,747 | ||||||
| In-process research and development | 6,860,000 | 6,860,000 | ||||||
| Investment in NoveCite | 1,000,000 | 0 | ||||||
| Security deposits and other assets | 519,467 | 453,252 | ||||||
| Total assets | $ | 39,394,365 | $ | 13,776,760 | ||||
| LIABILITIES AND STOCKHOLDERS’ AND MEMBERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 996,262 | $ | 1,275,223 | ||||
| Accrued expenses | 2,128,493 | 1,051,020 | ||||||
| Loans payable | 410,000 | 410,000 | ||||||
| PPP Loan, current | 0 | 115,972 | ||||||
| Operating lease liabilities, current | 408,125 | 273,217 | ||||||
| Other current liabilities | 617,661 | 0 | ||||||
| Total current liabilities | 4,560,541 | 3,125,432 | ||||||
| Contingent consideration | 19,360,000 | 20,110,000 | ||||||
| Operating lease liabilities, non-current | 2,410,667 | 1,905,395 | ||||||
| PPP Loan, non-current | 0 | 193,933 | ||||||
| Other liabilities | 22,863 | 22,863 | ||||||
| Total liabilities | 26,354,071 | 25,357,623 | ||||||
| Stockholders’ and members’ equity (deficit): | ||||||||
| Class A membership units | 0 | 23,202,005 | ||||||
| Class B membership units | 0 | 1,400,000 | ||||||
| Class C membership units | 0 | 1,000,000 | ||||||
| Common units | 0 | 197,873 | ||||||
| Series A convertible preferred stock | 781 | 0 | ||||||
Common stock, $0.005 par value, 100,000,000 shares authorized; 52,043,818 shares issued and outstanding at September 30, 2021; 0 shares issued and outstanding at December 31, 2020. | 260,219 | 0 | ||||||
| Additional paid-in capital | 164,010,804 | 0 | ||||||
| Accumulated deficit | (151,231,510 | ) | (37,380,741 | ) | ||||
| Total stockholders’ and members’ equity (deficit) | 13,040,294 | (11,580,863 | ) | |||||
| Total liabilities and stockholders’ and members’ equity (deficit) | $ | 39,394,365 | $ | 13,776,760 | ||||
(In thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue from contracts with customers | ||||||||||||||||
| Subscription revenue | $ | 1,053 | $ | 3,723 | $ | 3,779 | $ | 11,356 | ||||||||
| Hardware revenue | 379 | 11 | 421 | 811 | ||||||||||||
| Other revenue | 45 | 846 | 425 | 2,471 | ||||||||||||
| Total revenue from contracts with customers | 1,477 | 4,580 | 4,625 | 14,638 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct operating costs (includes depreciation and amortization of $346 and $649 for the three months ended September 30, 2020 and 2019, respectively, and $1,241 and $1,918 for the nine months ended September 30, 2020 and 2019, respectively) | 801 | 1,344 | 2,364 | 4,545 | ||||||||||||
| Selling, general and administrative | 2,068 | 3,413 | 6,743 | 10,303 | ||||||||||||
| Impairment of capitalized software | - | 51 | 238 | 52 | ||||||||||||
| Impairment of goodwill | - | - | 662 | - | ||||||||||||
| Depreciation and amortization (excluding depreciation and amortization included in direct operating costs) | 26 | 88 | 189 | 273 | ||||||||||||
| Total operating expenses | 2,895 | 4,896 | 10,196 | 15,173 | ||||||||||||
| Operating loss | (1,418 | ) | (316 | ) | (5,571 | ) | (535 | ) | ||||||||
| Other (expense) income, net | (82 | ) | (16 | ) | 826 | (189 | ) | |||||||||
| Loss before income taxes | (1,500 | ) | (332 | ) | (4,745 | ) | (724 | ) | ||||||||
| Benefit (provision) for income taxes | 19 | (19 | ) | 23 | (30 | ) | ||||||||||
| Net loss | (1,481 | ) | (351 | ) | (4,722 | ) | (754 | ) | ||||||||
| Series A preferred stock dividend | - | - | (8 | ) | (8 | ) | ||||||||||
| Net loss attributable to common shareholders | $ | (1,481 | ) | $ | (351 | ) | $ | (4,730 | ) | $ | (762 | ) | ||||
| Net loss per common share - basic and diluted | $ | (0.50 | ) | $ | (0.12 | ) | $ | (1.62 | ) | $ | (0.27 | ) | ||||
| Weighted average shares outstanding - basic and diluted | 2,936 | 2,874 | 2,920 | 2,870 | ||||||||||||
| Comprehensive loss | ||||||||||||||||
| Net loss | $ | (1,481 | ) | $ | (351 | ) | $ | (4,722 | ) | $ | (754 | ) | ||||
| Foreign currency translation adjustment | 1 | (18 | ) | (27 | ) | 47 | ||||||||||
| Total comprehensive loss | $ | (1,480 | ) | $ | (369 | ) | $ | (4,749 | ) | $ | (707 | ) | ||||
See
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 1,466,652 | 923,529 | 8,379,062 | 2,299,669 | ||||||||||||
| Acquired in-process research and development | 80,537,551 | 0 | 80,537,551 | 0 | ||||||||||||
| General and administrative | 4,258,178 | 1,084,057 | 10,515,088 | 2,741,652 | ||||||||||||
| Transaction costs | 0 | 0 | 5,765,407 | 0 | ||||||||||||
| Change in fair value of contingent consideration | 70,000 | 0 | (750,000 | ) | 0 | |||||||||||
| Total operating expenses | 86,332,381 | 2,007,586 | 104,447,108 | 5,041,321 | ||||||||||||
| Loss from operations | (86,332,381 | ) | (2,007,586 | ) | (104,447,108 | ) | (5,041,321 | ) | ||||||||
| Other income (expenses): | ||||||||||||||||
| Loss on sale of NTN assets | 0 | 0 | (9,648,173 | ) | 0 | |||||||||||
| Other income (expense), net | 277,069 | (12,559 | ) | 252,318 | (31,482 | ) | ||||||||||
| Total other income (expenses), net | 277,069 | (12,559 | ) | (9,395,855 | ) | (31,482 | ) | |||||||||
| Net loss | (86,055,312 | ) | (2,020,145 | ) | (113,842,963 | ) | (5,072,803 | ) | ||||||||
| Series A convertible preferred stock dividend | 0 | 0 | (7,806 | ) | 0 | |||||||||||
| Net loss attributable to common stockholders | $ | (86,055,312 | ) | $ | (2,020,145 | ) | $ | (113,850,769 | ) | $ | (5,072,803 | ) | ||||
| Net loss per common share - basic and diluted | $ | (1.70 | ) | $ | (0.11 | ) | $ | (2.82 | ) | $ | (0.29 | ) | ||||
| Weighted average shares outstanding - basic and diluted | 50,543,982 | 17,626,806 | 40,362,440 | 17,570,973 | ||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ STOCKHOLDERS’ AND MEMBERS’ EQUITY
(DEFICIT)
(in thousands)
| Series A Cumulative Convertible Preferred Stock | Common Stock | Treasury | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Stock | Capital | Deficit | Income | Total | ||||||||||||||||||||||||||||
| Balances at July 1, 2020 | 156 | $ | 1 | 2,938 | $ | 15 | $ | (456 | ) | $ | 136,837 | $ | (134,706 | ) | $ | 240 | $ | 1,931 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | 1 | 1 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (1,481 | ) | - | (1,481 | ) | |||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes | - | - | 14 | - | - | (9 | ) | - | - | (9 | ) | |||||||||||||||||||||||||
| Non-cash stock based compensation | - | - | - | - | - | 53 | - | - | 53 | |||||||||||||||||||||||||||
| Balances at September 30, 2020 | 156 | $ | 1 | 2,952 | $ | 15 | $ | (456 | ) | $ | 136,881 | $ | (136,187 | ) | $ | 241 | $ | 495 | ||||||||||||||||||
| Balances at January 1, 2020 | 156 | $ | 1 | 2,901 | $ | 14 | $ | (456 | ) | $ | 136,721 | $ | (131,457 | ) | $ | 268 | $ | 5,091 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | (27 | ) | (27 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (4,722 | ) | - | (4,722 | ) | |||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units, net of shares withheld for payroll taxes | - | - | 28 | - | - | (18 | ) | - | - | (18 | ) | |||||||||||||||||||||||||
| Issuance of common stock in lieu of cash compensation, net of shares withheld for payroll taxes | - | - | 23 | 1 | - | 43 | - | - | 44 | |||||||||||||||||||||||||||
| Non-cash stock based compensation | - | - | - | - | - | 135 | - | - | 135 | |||||||||||||||||||||||||||
| Cash paid to Series A preferred stockholders for semi-annual dividend | - | - | - | - | - | - | (8 | ) | - | (8 | ) | |||||||||||||||||||||||||
| Balances at September 30, 2020 | 156 | $ | 1 | 2,952 | $ | 15 | $ | (456 | ) | $ | 136,881 | $ | (136,187 | ) | $ | 241 | $ | 495 | ||||||||||||||||||
| Series A Cumulative Convertible Preferred Stock | Common Stock | Treasury | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Stock | Capital | Deficit | Income | Total | ||||||||||||||||||||||||||||
| Beginning balances at July 1, 2019 | 156 | $ | 1 | 2,882 | $ | 14 | $ | (456 | ) | $ | 136,648 | $ | (129,805 | ) | $ | 265 | $ | 6,667 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | (18 | ) | (18 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (351 | ) | - | (351 | ) | |||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | - | - | 13 | - | - | (16 | ) | - | - | (16 | ) | |||||||||||||||||||||||||
| Non-cash stock based compensation | - | - | - | - | - | 63 | - | - | 63 | |||||||||||||||||||||||||||
| Balances at September 30, 2019 | 156 | $ | 1 | 2,895 | $ | 14 | $ | (456 | ) | $ | 136,695 | $ | (130,156 | ) | $ | 247 | $ | 6,345 | ||||||||||||||||||
| Beginning balances at January 1, 2019 | 156 | $ | 1 | 2,875 | $ | 14 | $ | (456 | ) | $ | 136,552 | $ | (129,394 | ) | $ | 200 | $ | 6,917 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | 47 | 47 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (754 | ) | - | (754 | ) | |||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | - | - | 20 | - | - | (29 | ) | - | - | (29 | ) | |||||||||||||||||||||||||
| Cash paid to Series A preferred stockholders for semi-annual dividend | - | - | - | - | - | - | (8 | ) | - | (8 | ) | |||||||||||||||||||||||||
| Non-cash stock based compensation | - | - | - | - | - | 172 | - | - | 172 | |||||||||||||||||||||||||||
| Balances at September 30, 2019 | 156 | $ | 1 | 2,895 | $ | 14 | $ | (456 | ) | $ | 136,695 | $ | (130,156 | ) | $ | 247 | $ | 6,345 | ||||||||||||||||||
See
| Membership Equity | Common Stock | Series A Convertible Preferred Stock | Additional Paid-in | Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Class C | Common | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balances at July 1, 2021 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | 44,707,382 | $ | 223,537 | 156,112 | $ | 781 | $ | 100,134,743 | $ | (65,176,198 | ) | $ | 35,182,863 | |||||||||||||||||||||||
| Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net | 0 | 0 | 0 | 0 | 340,048 | 1,700 | 0 | 0 | 3,498,796 | 0 | 3,500,496 | |||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with the acquisition of Novellus, Inc. | 0 | 0 | 0 | 0 | 7,022,230 | 35,111 | 0 | 0 | 58,648,832 | 0 | 58,683,943 | |||||||||||||||||||||||||||||||||
| Forfeiture of unvested restricted stock | 0 | 0 | 0 | 0 | (25,842 | ) | (129 | ) | 0 | 0 | 129 | 0 | 0 | |||||||||||||||||||||||||||||||
| Stock based compensation | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 1,728,304 | 0 | 1,728,304 | |||||||||||||||||||||||||||||||||
| Net loss | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | (86,055,312 | ) | (86,055,312 | ) | |||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | 52,043,818 | $ | 260,219 | 156,112 | $ | 781 | $ | 164,010,804 | $ | (151,231,510 | ) | $ | 13,040,294 | |||||||||||||||||||||||
| Balances at January 1, 2021 | $ | 23,202,005 | $ | 1,400,000 | $ | 1,000,000 | $ | 197,873 | 0 | $ | 0 | 0 | $ | 0 | $ | 0 | $ | (37,380,741 | ) | $ | (11,580,863 | ) | ||||||||||||||||||||||
| Brooklyn rights offerings membership units | 10,500,000 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | 10,500,000 | |||||||||||||||||||||||||||||||||
| Elimination of Brooklyn’s historical members’ equity | (33,702,005 | ) | (1,400,000 | ) | (1,000,000 | ) | (197,873 | ) | - | 0 | - | 0 | 36,299,878 | 0 | 0 | |||||||||||||||||||||||||||||
| Common stock to be retained by NTN stockholders | 0 | 0 | 0 | 0 | 1,514,373 | 7,572 | 0 | 0 | 8,169,885 | 0 | 8,177,457 | |||||||||||||||||||||||||||||||||
| Issuance of Series A convertible preferred stock retained by NTN stockholders | 0 | 0 | 0 | 0 | 0 | 0 | 156,112 | 781 | (781 | ) | 0 | 0 | ||||||||||||||||||||||||||||||||
| Issuance of common stock to Brooklyn members | 0 | 0 | 0 | 0 | 38,923,957 | 194,620 | 0 | 0 | (194,620 | ) | 0 | �� | 0 | |||||||||||||||||||||||||||||||
| Issuance of common stock to Financial Advisor upon consummation of merger | 0 | 0 | 0 | 0 | 1,067,668 | 5,338 | 0 | 0 | 5,760,069 | 0 | 5,765,407 | |||||||||||||||||||||||||||||||||
| Issuance of common stock from the exercise of stock options | 0 | 0 | 0 | 0 | 1,300 | 6 | 0 | 0 | 10,196 | 0 | 10,202 | |||||||||||||||||||||||||||||||||
| Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net | 0 | 0 | 0 | 0 | 3,551,990 | 17,760 | 0 | 0 | 52,007,654 | 0 | 52,025,414 | |||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with the acquisition of Novellus, Inc. | 0 | 0 | 0 | 0 | 7,022,230 | 35,111 | 0 | 0 | 58,648,832 | 0 | 58,683,943 | |||||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash dividend to Series A convertible preferred stockholders | 0 | 0 | 0 | 0 | 202 | 1 | 0 | 0 | 7,805 | (7,806 | ) | 0 | ||||||||||||||||||||||||||||||||
| Forfeiture of unvested restricted stock | 0 | 0 | 0 | 0 | (37,902 | ) | (189 | ) | 0 | 0 | 189 | 0 | 0 | |||||||||||||||||||||||||||||||
| Stock based compensation | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 3,301,697 | 0 | 3,301,697 | |||||||||||||||||||||||||||||||||
| Net loss | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | (113,842,963 | ) | (113,842,963 | ) | |||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | 52,043,818 | $ | 260,219 | 156,112 | $ | 781 | $ | 164,010,804 | $ | (151,231,510 | ) | $ | 13,040,294 | |||||||||||||||||||||||
| Membership Equity | Accumulated | |||||||||||||||||||||||
| Class A | Class B | Class C | Common | Deficit | Total | |||||||||||||||||||
Balances at July 1, 2020 | $ | 23,202,005 | $ | 1,400,000 | $ | 1,000,000 | $ | 152,405 | $ | (13,994,184 | ) | $ | 11,760,226 | |||||||||||
| Stock based compensation: | 0 | 0 | 0 | 22,734 | 0 | 22,734 | ||||||||||||||||||
| Net loss | 0 | 0 | 0 | 0 | (2,020,145 | ) | (2,020,145 | ) | ||||||||||||||||
Balances at September 30, 2020 | $ | 23,202,005 | $ | 1,400,000 | $ | 1,000,000 | $ | 175,139 | $ | (16,014,329 | ) | $ | 9,762,815 | |||||||||||
| Balances at January 1, 2020 | $ | 18,177,692 | $ | 1,400,000 | $ | 1,000,000 | $ | 106,937 | $ | (10,941,526 | ) | $ | 9,743,103 | |||||||||||
| Stock based compensation | 0 | 0 | 0 | 68,202 | 0 | 68,202 | ||||||||||||||||||
| Sale of members’ equity | 5,024,313 | 0 | 0 | 0 | 0 | 5,024,313 | ||||||||||||||||||
| Net loss | 0 | 0 | 0 | 0 | (5,072,803 | ) | (5,072,803 | ) | ||||||||||||||||
| Balances at September 30, 2020 | $ | 23,202,005 | $ | 1,400,000 | $ | 1,000,000 | $ | 175,139 | $ | (16,014,329 | ) | $ | 9,762,815 | |||||||||||
CONDENSED
| For the nine months ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows (used in) provided by operating activities: | ||||||||
| Net loss | $ | (4,722 | ) | $ | (754 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 1,430 | 2,191 | ||||||
| Provision for doubtful accounts | 124 | 144 | ||||||
| Amortization of operating lease right-of-use-assets | 161 | 217 | ||||||
| Common stock issued for compensation in lieu of cash payment | 61 | - | ||||||
| Transfer of fixed assets to sales-type lease | - | 7 | ||||||
| Stock-based compensation | 135 | 172 | ||||||
| Gain from the asset sale of Stump! Trivia and OpinioNation | (1,225 | ) | - | |||||
| Loss from the termination of operating lease | 9 | - | ||||||
| Loss (gain) from the sale or disposition of assets, net | 511 | (5 | ) | |||||
| Impairment of capitalized software | 238 | 52 | ||||||
| Impairment of goodwill | 662 | - | ||||||
| Amortization of debt issuance costs | 12 | 7 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 939 | 222 | ||||||
| Site equipment to be installed | 51 | 475 | ||||||
| Operating lease liabilities | (154 | ) | (111 | ) | ||||
| Prepaid expenses and other assets | 353 | (66 | ) | |||||
| Accounts payable and accrued liabilities | (1,405 | ) | (196 | ) | ||||
| Income taxes | (16 | ) | 4 | |||||
| Deferred costs | 189 | 84 | ||||||
| Deferred revenue | (342 | ) | (541 | ) | ||||
| Other liabilities | (291 | ) | (141 | ) | ||||
| Net cash (used in) provided by operating activities | (3,280 | ) | 1,761 | |||||
| Cash flows used in investing activities: | ||||||||
| Capital expenditures | (21 | ) | (111 | ) | ||||
| Capitalized software development expenditures | (173 | ) | (882 | ) | ||||
| Proceeds from the sales of equipment | - | 29 | ||||||
| Net cash used in investing activities | (194 | ) | (964 | ) | ||||
| Cash flows provided by (used in) financing activities: | ||||||||
| Net proceeds from the sale of Stump! Trivia | 1,226 | - | ||||||
| Proceeds from long-term debt | 2,625 | - | ||||||
| Payments on long-term debt | (2,025 | ) | (750 | ) | ||||
| Debt issuance costs on long-term debt | (3 | ) | - | |||||
| Principal payments on finance leases | (14 | ) | (39 | ) | ||||
| Payment of preferred stockholders dividends | (8 | ) | (8 | ) | ||||
| Payroll tax remitted on net share settlement of equity awards | (36 | ) | (29 | ) | ||||
| Net cash provided by (used in) financing activities | 1,765 | (826 | ) | |||||
| Effect of exchange rate on cash and cash equivalents | 10 | 27 | ||||||
| Net decrease in cash, cash equivalents and restricted cash | (1,699 | ) | (2 | ) | ||||
| Cash, cash equivalents and restricted cash at beginning of period | 3,409 | 2,786 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 1,710 | $ | 2,784 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 86 | $ | 195 | ||||
| Income taxes | $ | 23 | $ | 26 | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Site equipment transferred to fixed assets | $ | 69 | $ | 458 | ||||
| Assets acquired under operating leases | $ | 28 | $ | 57 | ||||
| Initial measurement of operating lease right-of-use assets and liabilities | $ | - | $ | 3,458 | ||||
| Reconciliation of cash, cash equivalents and restricted cash at end of period: | ||||||||
| Cash and cash equivalents | $ | 1,710 | $ | 2,533 | ||||
| Restricted cash | - | 51 | ||||||
| Restricted cash, long-term | - | 200 | ||||||
| Total cash, cash equivalents and restricted cash at end of period | $ | 1,710 | $ | 2,784 | ||||
See
For the nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows used in operating activities: | ||||||||
| Net loss | $ | (113,842,963 | ) | $ | (5,072,803 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 92,754 | 72,909 | ||||||
| Stock-based compensation | 3,301,697 | 68,202 | ||||||
| Amortization of right-to-use asset | 242,849 | 0 | ||||||
| Transaction costs - shares to Financial Advisor | 5,765,407 | 0 | ||||||
| Loss on sale of NTN assets | 9,648,173 | 0 | ||||||
| Loss on disposal of fixed assets | 12,626 | 0 | ||||||
| Gain on forgiveness of PPP Loan | (309,905 | ) | 0 | |||||
| Acquired in-process research and development | 80,537,551 | 0 | ||||||
| Change in fair value of contingent consideration | (750,000 | ) | 0 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Account receivable | 4,680 | 0 | ||||||
| Prepaid expenses and other current assets | (1,109,270 | ) | (69,240 | ) | ||||
| Security deposits and other non-current assets | (31,496 | ) | (84,914 | ) | ||||
| Accounts payable and accrued expenses | 5,881 | (1,392,925 | ) | |||||
| Operating lease liability | (225,618 | ) | (2,356 | ) | ||||
| Other liabilities | 0 | 17,842 | ||||||
| Net cash used in operating activities | (16,657,634 | ) | (6,463,285 | ) | ||||
| Cash flows used in investing activities: | ||||||||
| Purchase of property and equipment | (6,860 | ) | (26,177 | ) | ||||
| Purchase of NTN, net of cash acquired | 147,262 | 0 | ||||||
| Purchase of Novellus, net cash acquired | (22,853,608 | ) | 0 | |||||
| Proceeds from the sale of NTN assets, net of cash disposed | 118,594 | 0 | ||||||
| Net cash used in investing activities | (22,594,612 | ) | (26,177 | ) | ||||
| Cash flows provided by financing activities: | ||||||||
Net proceeds of common stock issued to Lincoln Park | 52,025,414 | 0 | ||||||
Proceeds from the exercise of stock options | 10,202 | 0 | ||||||
Proceeds from loans payable | 0 | 309,905 | ||||||
| Proceeds from the collection of subscription receivable | 0 | 275,000 | ||||||
| Repayment of NTN’s PPP loan | (531,994 | ) | 0 | |||||
| Proceeds from sale of members’ equity | 10,500,000 | 3,858,750 | ||||||
| Net cash provided by financing activities | 62,003,622 | 4,443,655 | ||||||
| Net increase (decrease) in cash and cash equivalents | 22,751,376 | (2,045,807 | ) | |||||
| Cash and cash equivalents at beginning of period | 1,630,455 | 5,100,819 | ||||||
| Cash and cash equivalents at end of period | $ | 24,381,831 | $ | 3,055,012 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 12,796 | $ | 0 | ||||
| Income taxes | $ | 0 | $ | 0 | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Issuance of common stock for Series A convertible preferred stock dividend | $ | 7,806 | $ | 0 | ||||
| Issuance of common stock for business combination | $ | 8,177,457 | $ | 0 | ||||
| Issuance of common stock for Novellus acquisition | $ | 58,683,943 | $ | 0 | ||||
| Forfeiture of unvested restricted stock | $ | (189 | ) | $ | 0 | |||
| Preferred shares issued in connection with reverse merger | $ | 781 | $ | 0 | ||||
Initial measurement of ROU assets, net of tenant improvement allowance | $ | 815,799 | $ | 0 | ||||
Initial measurement of operating lease liabilities | $ | 865,799 | $ | 0 | ||||
| DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
3.) cost was incurred.NTN“Company”“Merger Sub”), entered into an agreement and plan of merger and reorganization (the “Merger Agreement”) pursuant to which, among other matters, Merger Sub merged with and into Brooklyn LLC, with Brooklyn LLC continuing as a wholly owned subsidiary of Brooklyn and as the surviving company of the merger (the “Merger”). The Merger was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate name to NTN Communications, Inc. in 1985. The Companyclosed on March 25, 2021. After the Merger, Brooklyn changed its name to NTNfrom “NTN Buzztime, Inc.” to “Brooklyn ImmunoTherapeutics, Inc.” The Merger was accounted for as a reverse acquisition, with Brooklyn LLC being deemed the acquiring company for accounting purposes.2005and to better reflect the growing roleassets relating to the business it operated prior to the Merger, which was operated under the name “NTN Buzztime, Inc.,” to eGames.com Holdings LLC (“eGames.com”) in accordance with the terms of an asset purchase agreement dated September 18, 2020, as amended, between Brooklyn and eGames.com (the “Asset Purchase Agreement”). (See Note 3.)Buzztime consumer brand.The Company delivers interactive entertainment and innovative technology, including performance analytics, to help its customers acquire, engage and retain its patrons. The Company’s tablets and technology offer engaging solutions to establishments with guests who experience dwell time, such as in bars, restaurants, casinos and senior living centers. Casual dining venues subscribe to the Company’s customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games. The Company’s platform creates connections among the players and venues, and amplifies guests’ positive experiences, and its in-venue TV network creates oneAcquisition, Brooklyn also acquired 25.0% of the largest digital outtotal outstanding equity interests of home advertising audiences in the United States and Canada. The Company also continues to support its legacy networkNoveCite, Inc. (“NoveCite”), a corporation focused on developing an allogeneic mesenchymal stem cell product line, which it calls its Classic platform.The Company generates revenue by charging subscription fees to partners for access to its 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 its entertainment and trivia content to other entities, and by providing professional services such as custom game design or development of new platforms on its existing tablet form factor. Until February 1, 2020, the Company also generated revenuepatients with acute respiratory distress syndrome, including from hosting live trivia events. The Company sold all of its assets used to host live trivia events in January 2020.At September 30, 2020, 1,080 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network. SeeCOVID-19. (See Note 3 for more information regarding the impact of the COVID-19 pandemic on these venues and the Company’s subscription revenues.Accounting Presentation Inopinion of management,Merger closed on March 25, 2021. The Merger was accounted for as a reverse acquisition, with Brooklyn LLC being deemed the accompanying condensed consolidatedacquiring company for accounting purposes. Brooklyn LLC’s historical financial statements include all adjustmentshave replaced Brooklyn’s historical financial statements with respect to periods prior to the completion of the Merger (when Brooklyn operated under the name “NTN Buzztime, Inc.”. The Company retrospectively adjusted the weighted average shares used in determining loss per common share to reflect the conversion of the outstanding Class A units, Class B units, Class C units, and common units of Brooklyn LLC that are necessary, which areconverted into shares of Brooklyn’s common stock upon the Merger and to reflect the effect of a normal2-to-1 reverse stock split of Brooklyn’s common stock that occurred immediately prior to the Merger.recurring nature, for a fair presentationsubstantially all of the value was attributed to in-process research and development (“IPR&D”), with the exception of the cash paid for the periods presented ofinvestment in NoveCite, which is being accounted for as an investment in equity securities. The IPR&D had no alternative future uses and no separate economic values from its original intended purpose and was therefore expensed in the financial position, results of operations and cash flows ofperiod the Company and its wholly-owned subsidiaries: IWN, Inc., IWN, L.P., Buzztime Entertainment, Inc., NTN Wireless Communications, Inc., NTN Software Solutions, Inc., NTN Canada, Inc., NTN Buzztime, Ltd. and BIT Merger Sub, Inc., all of which, other than NTN Canada, Inc. and BIT Merger Sub, Inc., are dormant subsidiaries. All significant intercompany transactions have been eliminated in consolidation.contained in the Company’s annual report on Form 10-K for the fiscal year ended, and as of, December 31, 2019.2020, contained in Brooklyn’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2021, as amended by an amendment thereto filed with the SEC on April 30, 2021. The accompanying condensed consolidated balance sheet as of December 31, 20192020 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and nine months ended September 30, 20202021 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2020,2021, or any other period.ReclassificationsCertain reclassifications
| 2) | LIQUIDITY AND CAPITAL RESOURCES |
| Number of shares of common stock owned by Brooklyn stockholders immediately before the Merger | 1,514,373 | |||
| Multiplied by the fair value per share of common stock (i) | $ | 5.40 | ||
| Total purchase price | $ | 8,177,614 |
| (i) | Based on the closing price per share (post reverse stock split) of the common stock of Brooklyn as reported on the NYSE American stock exchange on March 25, 2021, immediately before the Merger. |
Historical Balance Sheet of Brooklyn at March 25, 2020 | Fair Value Adjustment to Brooklyn Pre-Merger Assets | Purchase Price Allocation Pro Forma Adjustment | ||||||||||
| Cash and cash equivalents | $ | 147,728 | $ | 0 | $ | 147,728 | ||||||
Accounts receivable | 102,517 | 0 | 102,517 | |||||||||
| Prepaid expense and other current assets | 329,596 | 0 | 329,596 | |||||||||
| Property and equipment, net | 1,015,370 | 0 | 1,015,370 | |||||||||
Software development costs | 1,296,460 | (368,460 | ) | 928,000 | ||||||||
| Customers | 0 | 548,000 | 548,000 | |||||||||
| Trade name | 0 | 299,000 | 299,000 | |||||||||
| Accounts payable, accrued liabilities and other current liabilities | (3,781,173 | ) | 0 | (3,781,173 | ) | |||||||
Net assets acquired, excluding goodwill | $ | (889,502 | ) | $ | 478,540 | $ | (410,962 | ) | ||||
Total consideration | $ | 8,177,614 | ||||||||||
Net assets acquired, excluding goodwill | (410,962 | ) | ||||||||||
Goodwill | $ | 8,588,576 | ||||||||||
Upon completion of the Merger, the combined company will focus its resources on executing Brooklyn’s business plan, and the board of directors of the combined company is expected to consist entirely of individuals designated by Brooklyn and the officers of the combined company are expected to be members of Brooklyn’s current management team.
On September 18, 2020, the Company and eGames.com Holdings LLC (“eGames.com”) entered into an asset purchase agreement (the “Asset Purchase Agreement”), pursuant to which, subjectrights offering. Funding to the termsrights offering was received between February 17, 2021 and conditions thereof, the Company will sell and assign (the “Asset Sale”) allApril 5, 2021.
| Proceeds from sale: | ||||
| Cash | $ | 132,055 | ||
| Escrow | 50,000 | |||
| Assume advance/loans | 1,700,000 | |||
| Interest on advance/loans | 67,945 | |||
| Carrying value of assets sold: | ||||
| Cash and cash equivalents | (13,461 | ) | ||
| Accounts receivable | (75,153 | ) | ||
| Prepaids and other current assets | (123,769 | ) | ||
| Property and equipment, net | (1,013,950 | ) | ||
| Software development costs | (927,368 | ) | ||
| Customers | (548,000 | ) | ||
| Trade name | (299,000 | ) | ||
| Goodwill | (8,588,576 | ) | ||
| Other assets | (103,173 | ) | ||
| Liabilities transferred upon sale: | ||||
| Accounts payable and accrued expenses | 113,156 | |||
| Obligations under finance leases | 16,676 | |||
| Lease liability | 25,655 | |||
| Deferred revenue | 54,803 | |||
| Other current liabilities | 148,987 | |||
| Transaction costs | (265,000 | ) | ||
| Total loss on sale of assets | $ | (9,648,173 | ) | |
In connection with entering into the Asset Purchase Agreement, an affiliate of eGames.com loaned $1,000,000 to the Company, which,2020 as if the closing of the Asset Sale occurs, will be applied toward the purchase price at the closing of the Asset Sale. See Note 10 for more information regarding this loan. The Company is in discussions with the affiliate of eGames.com regarding the possibility of borrowing an additional $500,000 on approximately December 1, 2020, which, if received, would also be applied toward the purchase price at the closing of the Asset Sale. No assurances can be given that the Company will obtain such $500,000 loan from such affiliate or from any other party.
Consummation of the Merger and the Asset Sale isDisposition had been completed as of January 1, 2020.
| Nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net loss attributable to common stockholders | $ | (113,850,769 | ) | $ | (5,080,609 | ) | ||
| Basic and diluted net loss per share attributable to common stockholders | $ | (2.82 | ) | $ | (0.29 | ) | ||
No assurances are, or can be given,asset acquired is as follows:
Shares Issued | Fair Value Per Share | Fair Value of Consideration | ||||||||||
| Cash paid | $ | 22,882,181 | ||||||||||
| Cash acquired | (28,573 | ) | ||||||||||
| Unrestricted shares | 3,644,540 | $ | 10.05 | 36,627,627 | ||||||||
| Restricted shares | 3,377,690 | 6.53 | 22,056,316 | |||||||||
| Total fair value of consideration paid | 81,537,551 | |||||||||||
| Less amount of cash paid for NoveCite investment | (1,000,000 | ) | ||||||||||
| Fair value of IPR&D acquired | $ | 80,537,551 | ||||||||||
The negative impactcost is incurred. Accordingly, the Company expensed the fair value of the COVID-19 pandemic onIPR&D during the restaurant and bar industry was abrupt and substantial, andthird quarter of 2021 in the amount of $80,537,551.
| 4) | FAIR VALUE OF FINANCIAL INSTRUMENTS |
| As of September 30, 2021 | ||||||||||||
| Description | Level 1 | Level 2 | Level 3 | |||||||||
| Liabilities: | ||||||||||||
| Contingent consideration | 0 | 0 | $ | 19,360,000 | ||||||||
| Total | $ | 0 | $ | 0 | $ | 19,360,000 | ||||||
| As of December 31, 2020 | ||||||||||||
| Description | Level 1 | Level 2 | Level 3 | |||||||||
| Liabilities: | ||||||||||||
| Contingent consideration | 0 | 0 | $ | 20,110,000 | ||||||||
| Total | $ | 0 | $ | 0 | $ | 20,110,000 | ||||||
While the Company expects the effects of the pandemic to negatively impact its future results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of the pandemic means the related future financial impact cannot be reasonably estimated at this time. The Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Such estimates and assumptions affect, among other things, the allowance for doubtful accounts, site equipment to be installed, fixed assets, capitalized software development, goodwill and right-of-use assets. Events and changes in circumstances arising after the issuance of the financial statements as of andconsideration for the three and nine months ended September 30, 2020, including those resulting from the impacts of the pandemic, will be reflected future periods.
In connection with preparing its financial statements as of and for the three and nine months ended September 30, 2020, the Company’s management evaluated whether there are conditions or events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt about the Company’s ability to continue as a going concern through twelve months after the date that such financial statements are issued.2021. During the three and nine months ended September 30, 2020,2021, the Company incurredadjusted the carrying amount of its contingent consideration liabilities as follows:
Three months ended September 30, 2021 | Nine months ended September 30, 2021 | |||||||
| Balance as of beginning of period | $ | 19,290,000 | $ | 20,110,000 | ||||
| Fair value adjustments included in operating expenses | 70,000 | (750,000 | ) | |||||
| Balance as of end of period | $ | 19,360,000 | $ | 19,360,000 | ||||
| 5) | LEASES |
As a result of the impact of the COVID-19 pandemic on the Company’s business and taking into account its current financial condition and its existing sources of projected revenue and cash flows from operations, if the Company is ablemodified transition method without retrospective application to borrow an additional $500,000 from the affiliate of eGames.com discussed above, the Company believes it will have sufficient cash resources to pay forecasted cash outlays only through mid-January 2021, but if the Company does not borrow such amount from the affiliate of eGames.com or any other party, the Company believes it will have sufficient cash resources to pay forecasted cash outlays only through mid-December 2020, in each case, assuming Avidbank does not take actions to foreclose on the Company’s assets in the event the Company becomes out of compliance with its financial covenants, and the Company is able to continue to successfully manage its working capital deficit by managing the timing of payments to its vendors and other third parties.
Based on the factors described above, management concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern through the twelve-month period subsequent to the issuance date of these financial statements.comparative periods. The Company needs to completeelected the Merger or the Asset Sale or raise capital to meet its debt service obligations to Avidbank and fund its working capital needs. The Company currently has no arrangements for such capital and no assurances can be given that it will be able to raise such capital when needed, on acceptable terms, or at all.
The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realizationpackage 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 the Company’s ability to continue as a going concern.
At the commencement date of the Company’s lease for its corporate headquarters on December 1, 2018, the Company’s primary lender, Avidbank, issued a $250,000 letter of credit to the lessor as security, which amount was reduced by $50,000 on December 1, 2019 and was to be reduced by the same amount December 1 of each year thereafter, provided there has been no default under the lease. Avidbank required the Company to deposit $250,000 in a restricted cash account maintained with the bank, which amount was and would be reduced as the amount required under the letter of credit is reduced. The Company recorded the $250,000 deposit as restricted cash on its balance sheet, with $50,000 plus any earned interest being recorded in short-term restricted cash and the balance being recorded in long-term restricted cash.
In June 2020, the Company terminated its lease for its corporate headquarters, and as part of the consideration to the lessor for the early least termination, the lessor received the $200,000 of restricted cash providedthree practical expedients allowed for under the letter of credit in July 2020. (See Note 10 for more information on the lease termination.)
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) No. 606, Revenue from Contracts with Customers. ASC No. 606 provides a five-step analysis in determining when and how revenue is recognized:
ASC No. 606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.
The Company generates revenue by charging subscription fees to partners for access to its 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 its entertainment and trivia content to other entities, and by providing professional services such as custom game design or development of new platforms on its existing tablet form factor. Until February 1, 2020, the Company also generated revenue from hosting live trivia events. The Company sold all of its assets used to host live trivia events in January 2020.
In general, when multiple performance obligations are present in a customer contract, the transaction price is allocated to the individual performance obligation based on the relative stand-alone selling prices, and the revenue is recognized when or as each performance obligation has been satisfied. Discounts are treated as a reduction to the overall transaction price and allocated to the performance obligations based on the relative stand-alone selling prices. All revenues are recognized net of sales tax collected from the customer.
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 the Company will collect the consideration to which it will be entitled under the contract. As a result of the impact that the COVID-19 pandemic has had, and continues to have, on the Company’s customers, the Company determined that due to the uncertainty of collectability of the subscription fees for certain customers, the Company’s arrangement with those customers no longer meets all the criteria needed for a contract to exist for revenue recognition purposes. Therefore,transition guidance. Accordingly, the Company did not reassess: (1) whether any expired or existing contracts are/or contain leases; (2) the lease classification for any expired or existing leases; or (3) initial direct costs for any existing leases. The Company has also elected not to recognize revenueright-of-use assets (“ROU assets”) and lease liabilities for these customersshort-term leases that have a term of 12 months or less.
Revenue Streams
The Company disaggregates revenue by material revenue stream as follows:
| Three months ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| $ | % of Total Revenue | $ | % of Total Revenue | $ Change | % Change | |||||||||||||||||||
| Subscription revenue | 1,053,000 | 71.3 | % | 3,723,000 | 81 | % | (2,670,000 | ) | (71.7 | )% | ||||||||||||||
| Hardware revenue | 379,000 | 25.7 | % | 11,000 | 0 | % | 368,000 | 3,345.5 | % | |||||||||||||||
| Other revenue | 45,000 | 3.0 | % | 846,000 | 19 | % | (801,000 | ) | (94.7 | )% | ||||||||||||||
| Total | 1,477,000 | 100.0 | % | 4,580,000 | 100 | % | (3,103,000 | ) | (67.8 | )% | ||||||||||||||
| Nine months ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| $ | % of Total Revenue | $ | % of Total Revenue | $ Change | % Change | |||||||||||||||||||
| Subscription revenue | 3,779,000 | 82 | % | 11,356,000 | 78 | % | (7,577,000 | ) | (67 | )% | ||||||||||||||
| Hardware revenue | 421,000 | 9 | % | 811,000 | 6 | % | (390,000 | ) | (48 | )% | ||||||||||||||
| Other revenue | 425,000 | 9 | % | 2,471,000 | 17 | % | (2,046,000 | ) | (83 | )% | ||||||||||||||
| Total | 4,625,000 | 100 | % | 14,638,000 | 100 | % | (10,013,000 | ) | (68 | )% | ||||||||||||||
The following describes how the Company recognizes revenue under ASC No. 606.
Subscription Revenue - Priorlease components to the COVID-19 pandemic, the Company recognized the recurring subscription fees it received for its services over time as customers received and consumed the benefits of such services, the Company’s equipment to access the Company’s content and the installation of the equipment. In general, customers pay for the subscription services during the month in which they receiverelate and instead account for each as a single lease component for all underlying asset classes. Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance, tax payments and other miscellaneous costs. The variable portion of lease payments is not included in the services. Due toROU assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the timingobligation for those payments is incurred and are included in lease expenses. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses.
As discussed above, as a result of the impact that the COVID-19 pandemic has had, and continues to have, on the Company’s customers, the Company determined that due to the uncertainty of collectability of the subscription fees for certain customers, the Company’s arrangement with those customers no longer meets all the criteria needed for a contract to exist for revenue recognition purposes. Therefore, the Company did not recognize revenue for these customers and fully reserved for accounts receivable in the allowance for doubtful accounts.
Costs associated with installing the equipment are considered direct costs. Costs associated with sales commissions are considered incremental costs for obtaining the contract because such costs would not have been incurred without obtaining the contract. The Company expects to recover both costs through future fees it collects and both costs are recorded in deferred costs on the balance sheet and amortized on a straight-line basis. For installation costs that are of an amount that is less than or equal tobasis over the deferred installation revenue for the related contract, the amortization period approximates the longer of the contractlease term and the expected term of the customer relationship. For any excessis included in general and administrative costs that exceed the deferred revenue, the amortization period of the excess cost is the initial term of the contract, which is generally one to two years because the Company can still recover that excess cost in the initial termstatements of the contract. The Company amortizes commissions over the longer of the contract term and the expected term of the customer relationship.
Sales-type Lease Revenue – For certain customers that lease equipment under sale-type lease arrangements, the Company recognizes revenue in accordance with ASC No. 842, Leases. Such revenue is recognized at the time of installation based on the net present value of the leased equipment. Interest income is recognized over the life of the lease for customers who have remaining lease payments to make. In the event a customer under a sales-type lease arrangement prepays for the lease in full prior to receiving the equipment under the lease, such amounts are recorded in deferred revenue and recognized as revenue once the equipment has been installed and activated at the customer’s location. The cost of the leased equipment is recognized at the same time as the revenue. The Company does not expect to recognize revenue under sales-type lease arrangements after the year ended December 31, 2019.
Equipment Sales – operations.
Advertising Revenue – The Company recognizes advertising revenue eitheroperations over the time the advertising campaign airs in its customers’ locations or at a point in time by impression. For advertising campaigns that are airing over a specific period of time (regardless of number of impressions), the Company uses the time elapsed output method to measure its progress toward satisfying the performance obligation. When the Company contracts with an advertising agent, the Company shares in the advertising revenue generated with that agent. In these cases, the Company generally recognizes revenue on a net basis, as the agent typically has the responsibility for the relationship with the advertiser and the credit risk. When the Company contracts directly with the advertiser, it will recognize the revenue on a gross basis and will recognize any revenue share arrangement it has with a third party as a direct expense, as the Company has the responsibility for the relationship with the advertiser and the credit risk. Generally, there is no unbilled revenue associated with the Company’s advertising activities.
Content Licensing – The Company licenses content (trivia packages) to a certain customer, who in turn installs the content on its equipment that it sells to its customers. The content license is characterized as a “right to use intellectual property as it exists at the point in time at which the license is granted,” meaning the Company is not expected to undertake activities that affect the intellectual property or any such activities would not affect the intellectual property the customer is using. The content license is considered to be on consignment, and the Company retains title of the licensed content throughout the license period. The Company’s customer has no obligation to pay for the licensed content until the customer sells and installs the content to its customer. Accordingly, the Company recognizes revenue at the point in time when such installation occurs. The Company recognizes costs related to developing the content during the period incurred.
Live-hosted Trivia Revenue – As of February 1, 2020, the Company no longer has revenue related to hosting live- trivia events as a result of the sale of all of the Company’s assets used to host live trivia events in January 2020. The Company recognized revenue from hosting live-trivia events at a point in time, which is when the event took place. Some customers hosted their own trivia events and the Company provided the game materials. In those cases, the Company recognized the revenue at the point in time the Company sent the game materials to the customer. The Company recognized related costs at the same point in time the revenue was recognized. Generally, there was no unbilled revenue or deferred revenue associated with live-hosted trivia events.
Professional Development Revenue – Depending on the type of development work the Company is performing, the Company will recognize revenue, and associated costs, at the point in time when the Company satisfies each performance obligation, which is generally when the customer can direct the use of, and obtain substantially all of the remaining benefits of the goods or service provided. For services provided over time, the corresponding revenue is generally recognized over the time the Company provides such services. Any payments received before satisfying the performance obligations are recorded as deferred revenue and recognized as revenue when or as such obligations are satisfied. The Company does not have unbilled revenue assets associated with professional development services.
Revenue Concentrations
The Company’s customers predominantly range from small independently operated bars and restaurants to bars and restaurants operated by national chains. This results in diverse venue sizes and locations. As of September 30, 2019, 2,565 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network, of which approximately 47% were Buffalo Wild Wings corporate-owned restaurants and its franchisees. As of September 30, 2020, the number declined to 1,080 venues, primarily due to the termination of its agreements with Buffalo Wild Wings corporate-owned restaurants and most of its franchisees in November 2019 in accordance with their terms and also in part to customers terminating their subscriptions or going out of business relating to the effects of the COVID-19 pandemic on their business.
The table below sets forth the approximate amount of revenue the Company generated from Buffalo Wild Wings corporate-owned restaurants and its franchisees duringlease terms. During the three and nine months ended September 30, 20202021, the net operating lease expenses were as follows:
Three months ended September 30, 2021 | Nine months ended September 30, 2021 | |||||||
| Operating lease expense | $ | 187,498 | $ | 501,097 | ||||
| Sublease income | (21,045 | ) | (62,116 | ) | ||||
| Variable lease expense | 5,625 | 15,977 | ||||||
| Total lease expense | $ | 172,078 | $ | 454,958 | ||||
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Buffalo Wild Wings revenue | $ | 25,000 | $ | 1,676,000 | $ | 176,000 | $ | 5,891,000 | ||||||||
| Percent of total revenue | 2 | % | 37 | % | 4 | % | 40 | % | ||||||||
September 30, 2021, including the changes during the period.
Operating Lease ROU Assets | ||||
| Operating lease ROU assets at January 1, 2021 | $ | 2,092,878 | ||
| Amortization of operating lease ROU assets | (242,849 | ) | ||
| Addition of operating lease ROU assets | 815,799 | |||
| Operating lease ROU assets at September 30, 2021 | $ | 2,665,828 | ||
Operating Lease Liabilities | ||||
| Operating lease liabilities at January 1, 2021 | $ | 2,178,612 | ||
| Principal payments on operating lease liabilities | (225,618 | ) | ||
| Addition of operating lease liabilities | 865,798 | |||
| Operating lease liabilities at September 30, 2021 | 2,818,792 | |||
| Less non-current portion | 2,410,667 | |||
| Current portion at September 30, 2021 | $ | 408,125 | ||
2021, the Company’s operating leases had a weighted-average remaining life of 5.1 years with a weighted-average discount rate of 12.76%. The geographic breakdownmaturities of the Company’s revenueoperating lease liabilities are as follows:
As of September 30, 2021 | ||||
| 2021 | $ | 183,877 | ||
| 2022 | 750,335 | |||
| 2023 | 767,154 | |||
| 2024 | 784,504 | |||
| 2025 | 802,358 | |||
| Thereafter | 512,534 | |||
| Total payments | 3,800,762 | |||
| Less imputed interest | (981,970 | ) | ||
| Total operating lease liabilities | $ | 2,818,792 | ||
As of September 30, 2021 | ||||
| 2021 | $ | 20,458 | ||
| 2022 | 82,419 | |||
| 2023 | 84,194 | |||
| 2024 | 86,010 | |||
| 2025 | 87,867 | |||
| Thereafter | 74,590 | |||
| $ | 435,538 | |||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| United States | $ | 1,420,000 | $ | 4,420,000 | $ | 4,390,000 | $ | 14,144,000 | ||||||||
| Canada | 57,000 | 160,000 | 235,000 | 494,000 | ||||||||||||
| Total revenue | $ | 1,477,000 | $ | 4,580,000 | $ | 4,625,000 | $ | 14,638,000 | ||||||||
Contract Assets and Liabilities
a separate lease, as the Company was not relieved of the primary obligation under the original lease. The Company enters into contractscontinues to account for the Manhattan lease as a lessee and may recognize contract assets and liabilities that arise from these contracts.in the same manner as prior to the commencement date of the sublease. The Company recognizes revenueaccounts for the sublease as a lessor of the lease. The sublease is classified as an operating lease, as it does not meet the criteria of a sale-type or direct financing lease.
| 6) | GOODWILL AND IN-PROCESS RESEARCH & DEVELOPMENT |
| 7) | ACCRUED EXPENSES |
September 30, 2021 | December 31, 2020 | |||||||
| Accrued compensation | $ | 589,652 | $ | 293,534 | ||||
| Accrued research and development expenses | 718,764 | 207,468 | ||||||
| Accrued general and administrative expenses | 625,487 | 399,893 | ||||||
| Accrued interest | 194,590 | 150,125 | ||||||
| Total accrued expenses | $ | 2,128,493 | $ | 1,051,020 | ||||
| 8) | DEBT |
Deferred Revenue | ||||
| Balance at January 1, 2020 | $ | 462,000 | ||
| New performance obligations | 198,000 | |||
| Revenue recognized | (540,000 | ) | ||
| Balance at September 30, 2020 | 120,000 | |||
| Less non-current portion | - | |||
| Current portion at September 30, 2020 | $ | 120,000 | ||
Merger Agreement, paid by Brooklyn upon the closing of the Merger.
| 9) | COMMITMENTS AND CONTINGENCIES |
Installation Costs | Sales Commissions | Total Deferred Costs | ||||||||||
| Balance at January 1, 2020 | $ | 187,000 | $ | 87,000 | $ | 274,000 | ||||||
| Incremental costs deferred | 83,000 | 60,000 | 143,000 | |||||||||
| Deferred costs recognized | (212,000 | ) | (120,000 | ) | (332,000 | ) | ||||||
| Balance at September 30, 2020 | 58,000 | 27,000 | 85,000 | |||||||||
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of potential common shares. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding plus potential common shares. Stock options, restricted stock units, and other convertible securities are considered potential common shares and are included in the calculation of diluted net loss per share using the treasury method when their effect is dilutive. Options, restricted stock units and convertible preferred stock representing approximately 239,000 and 249,000sell shares of common stock timely due to a delay caused by Brooklyn’s issuance of stock certificates in lieu of electronic book entry.
STOCK-BASED COMPENSATION |
The Company’s
The 2019
As a result of stockholderBrooklyn adopted the 2019 Performance Incentive Plan (the “2019 Plan”), Upon the approval of the 20192020 Plan, in June 2019, no future grants willcould be made under the 20102019 Plan. All awards that areAs of September 30, 2021, all outstanding options under the 20102019 Plan will continue to be governed by the 2010 Plan until they areeither had been exercised or expirehad expired in accordance with the terms of the applicable award or the 20102019 Plan. As
The 20142021 Inducement Plan, which provides for the grant of up to 85,0001,500,000 share-based awards as material inducement awards to a new employee as an inducement material to the new employee entering into employmentemployees in accordance with the employment inducement grant rules set forth in Section 711(a) of the NYSE American LLC Company andGuide. The 2021 Inducement Plan expires in September 2024.May 2031. As of September 30, 2020,2021, there were no equity grants372,880 nonqualified stock options and 221,640 restricted stock units (“RSUs”) outstanding under the 20142021 Inducement Plan.
The Company did not grant any stock options and no options were exercised during the three or nine months ended September 30, 2020. During the three and nine months ended September 30, 2019, the Company grantedassumes no dividends.
The following weighted-average assumptions were used for stock option awards granted during the three and nine months ended September 30, 2019:
| Three months ended | Nine months ended | |||||||
| September 30, 2019 | September 30, 2019 | |||||||
| Weighted average risk-free rate | 1.39 | % | 1.70 | % | ||||
| Weighted average volatility | 95.11 | % | 108.83 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
| Expected term | 5.61 years | 5.73 years | ||||||
The Company estimates forfeitures, based on historical activity, at the time of grant and revised if necessary in subsequent periods if actual forfeiture rates differ from those estimates. Stock-based compensation expense for2020. Brooklyn granted 232,300 nonqualified stock options during the three months ended September 30, 2020 and 2019 was $53,000 and $63,000, respectively, and $135,000 and $172,000 for2021. During the nine months ended September 30, 20202021, Brooklyn granted 3,598,048 nonqualified stock options, including 2 stock option grants made to Howard J. Federoff, M.D., Ph.D. upon his appointment as Brooklyn’s chief executive officer and 2019, respectively,president.
certain vesting acceleration provisions upon a qualifying termination, as described in his employment agreement with Brooklyn. Unless earlier terminated in accordance with their terms, each of the Time-Based Option and the Milestone Option will otherwise expire on the tenth anniversary of their respective grant date and be subject to the terms and conditions of the respective option agreement approved by Brooklyn. Each of the Time-Based Option and the Milestone Option was intended to constitute an “employment inducement grant” in accordance with the employment inducement grant rules set forth in Section 711(a) of the NYSE American LLC Company Guide and was offered as an inducement material to Dr. Federoff in connection with his hiring.
Three months ended September 30, 2021 | Nine months ended September 30, 2021 | |||||||
| Weighted average risk-free rate | 0.97 | % | 1.06 | % | ||||
| Weighted average volatility | 143.29 | % | 134.88 | % | ||||
| Dividend yield | 0 | % | 0 | % | ||||
| Expected term | 6.08 years | 6.08 years | ||||||
During the three months ended September 30, 2019, 30,000 NaN RSUs were awarded as a performance-based award granted to the Company’s former chief executive officer in connection with his resignation. The award would have vested in full upon the effective date of a change in control transaction in which an individual, entity or group acquired all of the Company’s then-outstanding equity interests on or before March 17, 2020, or in which an individual, entity or group acquired 51% of our then-outstanding equity interests on or before March 17, 2020, and then that same individual, entity or group acquired the remaining equity so that it held all of the Company’s then-outstanding equity interests on or before June 17, 2020. Continuing service was not required for vesting to occur. Because a change in control is not considered probable until a change in control occurs, and because the change in control did not occur as discussed above, the Company did not recognize stock compensation expense on this award and this award expired unvested.
In connection with the resignation of the Company’s former chief executive officer, the vesting of 10,000 of his RSUs were accelerated, 5,000 in September 2019 and 5,000 in October 2019. The modification of this award resulted in the Company recognizing stock compensation expense for the accelerated vesting of RSUs in the period in which the accelerated vesting occurred.
With the exception of the performance-based award and the acceleration of vesting of RSUs discussed above, RSUs typically vest over a period of two to three years, generally in monthly or quarterly increments. Some awards may have an initial cliff period of six months before the monthly vesting begins. All outstanding RSUs as of September 30, 2020 are subject to accelerated vesting in the event of a change in control.
The following table shows the number of RSUs that vested and were settled during the three and nine months ended September 30, 2020 and 2019, as well as the number of shares of common stock issued upon settlement. In lieu of paying cash to satisfy withholding taxes due upon the settlement of2020. NaN RSUs vested RSUs, an employee may elect to have shares of common stock withheld that would otherwise be issued at settlement, the value of which is equal to the amount of withholding taxes payable.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Restricted stock units vested and settled | 19,000 | 18,000 | 39,000 | 29,000 | ||||||||||||
| Common stock issued, net of shares withheld | 14,000 | 13,000 | 28,000 | 20,000 | ||||||||||||
Term Loan
In September 2018, the Company entered into a loan and security agreement with Avidbank for a 48-month term loan in the amount of $4,000,000. In February 2020, the Company made a pre-payment on the term loan of approximately $150,000 following the sale of all of the Company’s assets used to conduct the live-hosted knowledge-based trivia events in January 2020. In March 2020, the Company and Avidbank entered into an amendment to the loan and security agreement (“Amendment #1”). In connection with entering into Amendment #1, the Company made a $433,000 payment on the term loan, which included the $83,333 monthly principal payment plus accrued interest for March 2020 and a $350,000 principal prepayment, thereby reducing the outstanding principal balance of the term loan to $2,000,000 as of March 31, 2020.
The Company incurred approximately $26,000 of debt issuance costs related to the loan and security agreement and its amendment, of which approximately $3,000 was related to Amendment #1. 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, 2020 and December 31, 2019 was $1,000 and $11,000, respectively, and is recorded as a reduction of long-term debt.
Under the terms of Amendment #1, the Company’s financial covenants were changed as described below, the maturity date was changed from September 28, 2022 to December 31, 2020, and the amount of the Company’s monthly payment obligations increased as described below.
Before entering into Amendment #1, the Company’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) was required to 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 it had in deposit accounts or securities accounts maintained with Avidbank must be not less than $2,000,000 at all times. Under the terms of Amendment #1, the minimum EBITDA covenant was replaced with a monthly minimum asset coverage ratio covenant, which the Company refers to as the ACR covenant, and the minimum liquidity covenant was amended to provide that the aggregate amount of unrestricted cash the Company has in deposit accounts or securities accounts maintained with Avidbank must be at all times not less than the principal balance outstanding under the term loan. Under the ACR covenant, the ratio of (i) the Company’s unrestricted cash at Avidbank as of the last day of a calendar month plus 75% of its outstanding accounts receivable accounts that are within 90 days of invoice date to (ii) the outstanding principal balance of the term loan on such day must be no less than 1.25 to 1.00. As of September 30, 2020, the Company was in compliance with both of those covenants.
Before entering into Amendment #1, the Company was required to make monthly principal payments of approximately $83,000 plus accrued and unpaid interest. Under the terms of the amendment, the monthly principal payment increased to $125,000 for each of April, May and June 2020, to $300,000 for each of July, August, September, October and November 2020, and to $125,000 for December 2020. As of September 30, 2020, the outstanding principal balance of the term loan was $725,000.
On June 1, 2020, the Company and Avidbank entered into an amendment to the loan and security agreement to formally memorialize Avidbank’s consent to the Company receiving the PPP Loan (as defined below). Avidbank initially consented to the Company receiving the PPP loan in April 2020.
Paycheck Protection Program Loan
On April 18, 2020, the Company issued a note in the principal amount of approximately $1,625,000 to Level One Bank evidencing the loan (the “PPP Loan”) the Company received under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act administered by the U.S. Small Business Administration (the “CARES Act”). As of September 30, 2020, the outstanding principal balance of the PPP Loan was approximately $1,625,000.
The PPP Loan matures on April 18, 2022 and bears interest at a rate of 1.0% per annum. The Company must make monthly interest only payments beginning on November 18, 2020. One final payment of all unforgiven principal plus any accrued unpaid interest is due at maturity. Under the terms of the PPP, the Company may prepay the PPP Loan at any time with no prepayment penalties. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. In October 2020, the Company submitted its loan forgiveness application for the PPP Loan, and in November 2020, the U.S Small Business Administration approved the forgiveness of approximately $1,093,000 of the $1,625,000 loan, leaving a principal balance of approximately $532,000.
Bridge Loan
In connection with the Asset Purchase Agreement entered into with eGames.com on September 18, 2020, the Company issued to Fertilemind Management, LLC, an affiliate of eGames.com, an unsecured promissory note (the “Note”) in the principal amount of $1,000,000, evidencing a $1,000,000 loan received from Fertilemind Management, LLC on behalf of eGames.com (the “Bridge Loan”). The Company may use the loan proceeds for, among other things, the payment of obligations related to the transactions contemplated by the Asset Purchase Agreement and the Merger Agreement and other general working capital purposes. The principal amount accrues interest at rate of 8% per annum (increasing to 15% per annum upon the occurrence of an event of default), compounded annually. The principal amount of the Bridge Loan and accrued interest thereon is due and payable upon the earlier of (i) the termination of the Asset Purchase Agreement, (ii) the closing of a Business Combination (as defined in the Note), and (iii) December 31, 2020. Upon the closing of the Asset Sale, the Bridge Loan will be applied against the purchase price under the Asset Purchase Agreement, and the Note will be extinguished.
All of the Company’s obligations under the Note are subordinate to the indebtedness and all other obligations owed by the Company to Avidbank including under the loan and security agreement, dated as of September 28, 2018 and as amended from time to time, between the Company and Avidbank.
The Note includes customary events of default, including if any portion of the Note is not paid when due; if the Company defaults in the performance of any other material term, agreement, covenant or condition of the Note, subject to a cure period; if any final judgment for the payment of money is rendered against the Company and the Company does not discharge the same or cause it to be discharged or vacated within 90 days; if the Company makes an assignment for the benefit of creditors, if the Company generally does not pay its debts as they become due; if a receiver, liquidator or trustee of the Company is appointed, or if the Company is adjudicated bankrupt or insolvent. In the event of an event of default, the Note will accelerate and become immediately due and payable at the option of the holder.
The Company is in discussions with Fertilemind Management, LLC regarding the possibility of borrowing an additional $500,000 on approximately December 1, 2020, which, if received, would also be applied toward the purchase price at the closing of the Asset Sale. No assurances can be given that the Company will obtain such $500,000 loan from Fertilemind Management, LLC or from any other party.
As Lessee
The Company has operating leases for its warehouse facility and for equipment under agreements that expire at various dates through 2023. Certain of these leases contain renewal provisions and the warehouse lease requires the Company to pay utilities, insurance, taxes and other operating expenses. The Company terminated its lease for its corporate headquarters as of June 30, 2020, which is discussed further below. The Company also has property held under finance leases that expire at various dates through 2021. The Company’s leases do not contain any residual value guarantees or material restrictive covenants.
Upon adoption of ASC No. 842, Leases (“ASC No. 842”), the Company recognized on its consolidated balance sheet as of January 1, 2019 an initial measurement of 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, the amounts of which were primarily related to the Company’s corporate headquarters. The initial measurement of the finance leases under ASC No. 842 did not have a material change from the balances of the finance lease liabilities and assets recorded prior to the adoption of ASC No. 842. There was also no cumulative effect adjustment to retained earnings as a result of the transition to ASC No. 842. The Company recorded the initial recognition of the operating leases as a supplemental noncash financing activity on the accompanying consolidated statement of cash flows. The adoption of ASC No. 842 did not have a material impact on the Company’s consolidated statement of operations.
Corporate Headquarters Lease Termination
As part of the Company’s on-going efforts to implement measures designed to reduce operating expenses and preserve capital as it continues to seek to mitigate the substantial negative impact of the COVID-19 pandemic on the Company’s business, on June 25, 2020, the Company entered into a Lease Termination, Surrender and Buy-Out Agreement (the “Lease Termination Agreement”) with Burke Aston Partners, LLC (the “Lessor”) to terminate, effective June 30, 2020, the lease dated July 26, 2018 for the Company’s corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired in accordance with its terms in April 2026. Since January 1, 2020, the Company reduced its headcount from 74 to 19 employees, all of whom are currently working remotely, and the Company did not currently need a corporate headquarters of the size subject to that lease. After paying all the amounts the Company potentially could be required to pay under the Lease Termination Agreement, including both contingent payments described below, the Company will have reduced its future cash obligations under the lease by approximately $3.5 million as compared to the amount of rent the Company would have otherwise paid if the lease remained in effect for the duration of its original term.
Pursuant to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to (i) allow the Lessor to keep its security deposits of approximately $260,000, which includes $200,000 of restricted cash under a letter of credit, (ii) pay the Lessor approximately $121,000 for past due rent, and (iii) pay the Lessor $80,000 if the Company sells all or any material part of its assets or all or any material part of its equity interests and $5,000 if the Lessor needs to dispose of furniture that remained in the office space. In July 2020, the Lessor informed the Company that it needed to dispose of the remaining furniture, and the Company paid the Lessor $5,000 to do so.
As a result of the lease termination, the Company recorded a gain on the termination of the lease of approximately $8,000 during the three months ended June 30, 2020, which includes writing off the remaining balances of the right-of-use asset of approximately $1,913,000 and the corresponding lease liability of approximately $3,135,000, applying the principal portion of past due rents to be paid in July 2020 of approximately $64,000, writing off of the unamortized tenant improvement allowance of approximately $890,000, and applying the security deposit of approximately $260,000.
Additionally, as part of the lease termination and vacating the facility, the Company recorded a loss on the disposal of fixed assets of approximately $282,000 during the three months ended June 30, 2020, which includes approximately $197,000 in furniture and fixtures and the Company’s vehicle, and $85,000 in other leasehold improvement assets.
The tables below show the beginning balances of the operating lease right-of-use assets and liabilities as of January 1, 2019 and the ending balances as of September 30, 2020, including the changes during the periods.
Operating lease right-of-use assets | ||||
| Operating lease right-of use assets at January 1, 2020 | $ | 2,101,000 | ||
| Amortization of operating lease right-of-use assets | (161,000 | ) | ||
| Addition of operating lease right-of -use asset | 28,000 | |||
| Write-off of right-of-use asset due to headquarters lease termination | (1,913,000 | ) | ||
| Write-off of right-of-use asset related to other lease terminations | (50,000 | ) | ||
| Operating lease right-of-use assets at September 30, 2020 | $ | 5,000 | ||
Operating lease liabilities | ||||
| Operating lease liabilities at January 1, 2020 | $ | 3,300,000 | ||
| Principal payments on operating lease liabilities | (154,000 | ) | ||
| Addition of operating lease liability | 28,000 | |||
| Write-off of lease liability related to headquarters lease termination | (3,135,000 | ) | ||
| Write-off of lease liability related to other lease terminations | (34,000 | ) | ||
| Operating lease liabilities at September 30, 2020 | 5,000 | |||
| Less non-current portion | - | |||
| Current portion at September 30, 2020 | $ | 5,000 | ||
As of September 30, 2020, the Company’s operating leases have a weighted-average remaining lease term of 1 month for $5,000 in future payments and a weighted-average discount rate of 5%.
For the three months ended September 30, 2020 and 2019, total lease expense under operating leases was approximately $17,000 and $137,000, respectively. For the nine months ended September 30, 2020 and 2019, total lease expense under operating leases was approximately $281,000 and $407,000, respectively. Lease expense is recorded in selling, general and administrative expenses.
The tables below show the beginning balances of the finance lease right-of-use assets and liabilities as of January 1, 2020 and the ending balances as of September 30, 2020, including the changes during the periods. The Company’s finance lease right-of-use assets are included in “Fixed assets, net” on the accompanying consolidated balance sheet.
Finance lease right-of-use assets | ||||
| Finance lease right-of use assets at January 1, 2020 | $ | 41,000 | ||
| Depreciation of finance lease right-of-use assets | (15,000 | ) | ||
| Finance lease right-of-use assets at September 30, 2020 | $ | 26,000 | ||
Finace lease liabilities | ||||
| Finance lease liabilities at January 1, 2020 | $ | 41,000 | ||
| Principal payments on finance lease liabilities as of September 30, 2020 | (14,000 | ) | ||
| Finance lease liabilities at September 30, 2020 | 27,000 | |||
| Less non-current portion | (4,000 | ) | ||
| Current portion at September 30, 2020 | $ | 23,000 | ||
As of September 30, 2020, the Company’s finance leases have a weighted-average remaining lease term of 1.2 years and a weighted-average discount rate of 5.52%. The maturities of the finance lease liabilities are as follows:
| As of | ||||
| September 30, 2020 | ||||
| 2020 | 7,000 | |||
| 2021 | 21,000 | |||
| Total Finance lease payments | 28,000 | |||
| Less imputed interest | (1,000 | ) | ||
| Present value of Finance lease liabilities | $ | 27,000 | ||
For the three months ended September 30, 2020 and 2019, total lease costs under finance leases were approximately $5,000 and $10,000, respectively. For the nine months ended September 30, 2020 and 2019, total lease costs under finance leases were approximately $15,000 and $41,000, respectively.
As Lessor
ASC No. 842 did not make fundamental changes to lease accounting guidance for lessors. Therefore there was no financial statement impact due to the adoption of ASC No. 842. As a lessor, the Company has two types of customer contracts that involve leases: right-to-use operating leases and sales-type leases.
Right-to-use operating leases. Certain customers enter into contracts to obtain subscription services from the Company, which includes the Company’s content (nonlease component) and equipment installed in the customer locations so the customer can access the content (lease component). The timing and pattern of the transfer of both the subscription services and the equipment are the same, that is, the Company’s subscription services are made available to its customer at the same time as the equipment is installed. Additionally, the Company has determined that the lease component of these customer contracts is an operating lease. Accordingly, the Company has concluded that these contracts qualify for the practical expedient permitted under ASC No. 842 to not separate the nonlease component from the related lease component. Instead, the Company treats the combined component as a single performance obligation under Topic 606, Revenue from Contracts with Customers, as the Company has concluded that the nonlease component (subscription services) is the predominant component of the combined component.
Sales-type leases. As with the contracts under right-of-use operating leases, certain customers enter into contracts to obtain subscription services from the Company, which includes the Company’s content (nonlease component) and equipment installed in the customer locations so the customer can access the content (lease component). Generally, the equipment lease term is for three years and the customer prepays its lease in full. After the lease term, the lessee may purchase the equipment for a nominal fee or lease new equipment. Although the timing and pattern of the transfer of both the subscription services and the equipment may be the same, the provisions of the contract related to the equipment results in a sales-type lease, and therefore, the Company cannot treat both the nonlease component and the lease component as a combined component. Accordingly, the nonlease component is accounted for under Topic 606 and the sales-type lease is accounted for under Topic 842 and separately disaggregated on the Company’s statement of operations. The Company does not anticipate entering into any sales-type lease arrangements after December 31, 2019. The Company has not recognized any sales-type lease revenue for the three or nine months ended September 30, 2020.
Site equipment to be installed consists of fixed assets related to the Company’s tablet platform that have not yet been placed in service and are stated at cost. These assets remain in site equipment to be installed until they are deployed at the Company’s customer sites. For tablet platform customers that are under sales-type lease arrangements, the cost of the equipment is recognized in direct costs upon installation. For all other tablet platform customers, the cost of the equipment is reclassified to fixed assets upon installation and depreciated over its estimated useful life. The Company evaluates the recoverability of site equipment to be installed and fixed assets 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.
The COVID-19 pandemic has had, and continues to have, a significant adverse impact on the Company’s business, cash flows from operations and liquidity. However, based on the cash flows the Company is receiving from its customers during the pandemic and the future undiscounted cash flows the Company expects to receive from these customers, the Company has determined that recoverability of the carrying amounts of its site equipment to be installed and the site equipment in fixed assets is probable and, therefore, during the three months ended September 30, 2020, the Company did not record any impairment charges on these assets, other than disposals of approximately $3,000 in the ordinary course of business. For the nine months ended September 30, 2020, the Company disposed of approximately $229,000 of site equipment, primarily related to older equipment the Company determined would no longer be deployed.
For other fixed assets, as previously discussed, the Company terminated its lease for its corporate headquarters and vacated the facility as of June 30, 2020. (See Note 10) As a result, during the nine months ended September 30, 2020, the Company 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 $85,000 in leasehold improvement assets and $197,000 in furniture and fixtures and the Company’s vehicle.
The Company disposed of approximately $4,000 and $24,000 of site equipment during the three and nine months ended September 30, 2019 in the ordinary course of business.
2021 and 2020.
The Company capitalizes costs related to developing certain software programs in accordance with ASC No. 350, Intangibles – Goodwill and Other. When the Company deploys the programs, it begins to recognize costs related to the programsexpense on a straight-line basis over the programs’ estimated useful lives, generally tworequisite service period.
| 11) | STOCKHOLDERS’ AND MEMBERS’ EQUITY (DEFICIT) |
The Company performed its quarterly review of software development projects for the three months ended September 30, 2019, and determined to abandon certain software development projects that were no long a strategic fit for the Company, which resulted in recognizing approximately $51,000 in capitalized software impairment charges. The Company’s quarterly review for the three months ended September 30, 2020 did not result in recognizing any impairment charges for the period. During the nine months ended September 3, 2020 and 2019, the Company abandoned various software development projects that the Company concluded were no longer a current strategic fit or for which it 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, the Company recognized impairment charges of $238,000 and $52,000, respectively. Impairment of capitalized software is shown separately on the Company’s consolidated statement of operations.
Taking into consideration the impact the COVID-19 pandemic has had, and continues to have, on the Company’s business, the Company determined that based on the future undiscounted cash flows the Company expects to receive from its customers, recoverability of the carrying amounts of capitalized software development costs is probable and, therefore, no additional impairment charges were required to be recognized other than as discussed above. The Company will continue to monitor the recoverability of these assets as it relates to the continued impact of the COVID-19 pandemic on the Company’s business and recognize any additional write-offs during the period in which it determines that impairment exists.
(13) GOODWILL
The Company’s goodwill balance of $696,000 as of December 31, 2019 relates to the excess of costs over the fair value of assets the Company acquired in 2003 related to its Canadian business (the “Reporting Unit”). In the Company’s evaluation of impairment indicators as of March 31, 2020, it 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, the Company compared the estimated fair value of the Reporting Unit to its carrying value at March 31, 2020, determined that a full impairment loss was warranted and recognized an impairment charge of $662,000 for the three months ended March 31, 2020. No further evaluations are necessary after March 31, 2020. There was no goodwill impairment recorded for the three or nine months ended September 30, 2019.
In addition to the impairment loss recognized, fluctuations in the amount of goodwill shown on the accompanying balance sheets can occur due to changes in the foreign currency exchange rates used when translating NTN Canada’s financial statement from Canadian dollars to US dollars during consolidation. The following table shows the changes in the carrying amount of goodwill for the nine months ended September 30, 2020.
| Goodwill balance at January 1, 2020 | $ | 696,000 | ||
| Activity for the three months ended March 31, 2020 | ||||
| Effects of foreign currency | (34,000 | ) | ||
| Goodwill impairment | (662,000 | ) | ||
| Goodwill balance at March 31, 2020 and September 30, 2020 | $ | - |
(14) ACCUMULATED OTHER COMPREHENSIVE INCOME
The United States dollar is the Company’s functional currency, except for its operations in Canada where the functional currency is the Canadian dollar. The financial position and results of operations of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. In accordance with ASC No. 830, Foreign Currency Matters, revenues and expenses of the Company’s foreign subsidiaries have been translated into U.S. dollars using the average exchange rates during the reporting period,First Purchase Agreement and the assets and liabilitiesSecond Purchase Agreement for total net proceeds of such subsidiaries have been translated using the period end exchange rate. Accumulated other comprehensive income includes the accumulated gains or losses from these foreign currency translation adjustments.$52,025,414. As of September 30, 20202021, there were 445,627 shares remaining to be sold under the Second Purchase Agreement.
(15) RECENT ACCOUNTING PRONOUNCEMENTS
connection with the reverse stock split.
| 12) | RECENT ACCOUNTING PRONOUNCEMENTS |
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 January2021 (January 1, 20232022 for the Company). and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact thatdoes not expect the adoption of this standard willupdate to have a significant impact on its consolidated financial statements.
(16) SUBSEQUENT EVENTS
PPP Loan Forgiveness
Legal Proceedings
From time to time, the Company is subject to legal proceedings in the ordinary course of business. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harmsignificant impact on its financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or outcomes could occur that have, individually or in the aggregate, a material adverse effect on the Company’s business, financial condition or operating results. The Company is not currently subject to any pending material legal proceedings except as described below.
The Company and its directors have been named as defendants in six substantially similar actions brought by purported stockholders of the Company’s arising out of the Merger: Henson v. NTN Buzztime, Inc., Case No. 1:20-cv-08663 (S.D.N.Y. filed Oct. 16, 2020); Chinta v. NTN Buzztime, Inc., Case No. 1:20-cv-01401 (D. Del. filed Oct. 16, 2020); Amanfo v. NTN Buzztime, Inc., Case No. 1:20-cv-08747 (S.D.N.Y. filed Oct. 20, 2020); Falikman v. NTN Buzztime, Inc., Case No. 1:20-cv-05106 (E.D.N.Y. filed Oct. 23, 2020); Haas v. NTN Buzztime, Inc., Case No. 3:20-cv-02123-BAS-JLB (S.D. Cal. filed Oct. 29, 2020); and Monsour v. NTN Buzztime, Inc. Case No. 1:20-cv-08755 (S.D.N.Y filed October 20, 2020). These actions assert claims asserting violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 14a-9 promulgated thereunder. Chinta asserts additional claims for breach of fiduciary duty under Delaware law. The complaints allege that defendants failed to disclose allegedly material information in a Form S-4 Registration Statement filed on October 2, 2020, including (1) certain details regarding any projections or forecasts the Company or Brooklyn may have made, and the analyses performed by the Company’s financial advisor, Newbridge Securities Corporation; (2) conflicts concerning the sales process; and (3) disclosures regarding whether or not the Company entered into any confidentiality agreements with standstill and/or “don’t ask, don’t waive” provisions. The complaints allege that these purported failures to disclose rendered the Form S-4 false and misleading. The complaints request a preliminary and permanent injunction of the Merger; rescission of the Merger if executed and/or rescissory damages in unspecified amounts; direction to the individual directors to disseminate a compliant Registration Statement; an accounting by the Company for all alleged damages suffered; a declaration that certain federal securities laws have been violated; and costs, including attorneys’ and expert fees and expenses. Processstatements.
| 13) | SUBSEQUENT EVENTS |
The Company and its directors deny the allegations asserted against the Company in these actions and intend to oppose them vigorously.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference herein, if any, contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, or the Forward-Looking Statements Safe Harbor, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts could be deemed forward-looking statements. We have tried, whenever possible, to identify these statements by using words such as “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “seeks,” or words of similar meaning, or future or conditional verbs, such as “may,” “will,” “should,” “could,” “aims,” “intends” or “projects,” and similar expressions, whether in the negative or the affirmative. Forward-looking statements reflect management’s beliefs and assumptions, are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statement. For us, particular factors that might cause or contribute to such differences include: (1) the risk that the conditions to the closing of the Asset Sale or the Merger are not satisfied, including the failure to timely or at all obtain stockholder approval for the Asset Sale or the Merger; (2) uncertainties as to the timing of the consummation of the Asset Sale or the Merger and the ability of the parties to consummate the Asset Sale or the Merger; (3) risks related to our ability to correctly estimate our operating expenses and our expenses associated with the Asset Sale or the Merger; (4) unexpected costs, charges or expenses resulting from the Asset Sale or the Merger; (5) if the Merger or the Asset Sale is not consummated, our ability to raise substantial capital in the very near-term to allow us to maintain operations and sustain the negative impact of the COVID-19 pandemic on our business and financial condition, and if we are able to sustain such impact, our ability to recover from the impact; (6) our ability to successfully manage our liquidity and our working capital deficit by managing the timing of payments to our third parties; (7) our ability to comply with our financial covenants in our loan and security agreement with Avidbank and its right to declare a default if we do not, which could lead to all payment obligations becoming immediately due and payable and which could lead to a foreclosure on our assets; (8) when, and the extent to which, the negative impact of the pandemic will improve, including when a substantial majority of restaurants across the U.S. and Canada will be permitted to offer on-site dining and operate at or close to pre-pandemic levels or when a substantial majority of bars across the U.S. and Canada will be permitted to re-open and operate at or close to pre-pandemic levels, when our customers will re-open, or if they will subscribe to our service if and when they do; (9) the negative impact that measures we implemented and may implement to reduce our operating expenses and planned capital expenses (including investments in our business) may have on our ability to effectively manage and operate our business; (10) our ability to maintain or grow our revenue; and (11) the other risks and uncertainties described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (our “2019 10-K”), and described in other documents we file from time to time with the Securities and Exchange Commission, or SEC, including our Current Reports on Form 8-K and our Quarterly Reports on Form 10-Q filed with the SEC thereafter. To the extent the impact of the COVID-19 pandemic adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A “Risk Factors” included in our 2019 10-K.
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 ofevaluated subsequent events through the date of this report. Wefiling and concluded there are including this cautionary noteno material subsequent events to make applicable, and take advantagebe disclosed.
We believe that the expectations reflected in forward-looking statements in this report or incorporated herein by reference are based upon reasonable assumptions at the time made. However, given the risks and uncertainties, you should not rely on any forward- looking statements as a prediction of actual results, developments or other outcomes. You should read these forward-looking statements with the understanding that we may be unable to achieve projected results, developments or other outcomes and that actual results, developments or other outcomes may be materially different from what we expect. You are cautioned not to place undue reliance on these forward-looking statements.
We intend forward-looking statements to speak only as of the time they are made. Except as required by law, we do not undertake, and expressly disclaim any obligation, to disseminate, after the date hereof, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.
INTRODUCTION
Contents
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
OVERVIEW AND HIGHLIGHTS
About Our BusinessNTN Buzztime, Inc.) merged with and How We Talk About It
We deliver interactive entertainment and innovative technology to our partners ininto Brooklyn LLC, with Brooklyn LLC surviving as a wide rangewholly owned subsidiary 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 audienceBrooklyn. This transaction, which we connect with through our in-venue TV network. Until the significant disruptions to the restaurant and bar industry resulting from the COVID-19 pandemic that began in March 2020, over 1 million hours of trivia, card, sports and arcade games were played on our network each month. Since the pandemic, approximately 100,000 hours per month of such games have been played on our network each month.
We generate revenue by charging subscription fees to our partners for access to our 24/7 trivia network, by selling and leasing tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling digital-out-of-home (DOOH) advertising direct to advertisers and on national ad exchanges, by licensing our entertainment and trivia content to other parties, and by providing professional services such as custom game design or development of new platforms on our existing tablet form factor. Until February 1, 2020, we also generated revenue from hosting live trivia events. We sold all our assets used to host live trivia events in January 2020.
We own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our property. Other trademarks are the property of their respective owners.
Unless otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us” and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers,” “customers,” or “partners” refer to venues that subscribe to our network service; (c) to “consumers,” “patrons” or “players” refer toas the individuals that engageMerger, was completed in our games, events, and entertainment experiences available at venues and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant)accordance with the terms of our customers at which our games and entertainment experiences are available to consumers.
Recent Developments
Proposed Reverse Merger and Asset Sale Transactions
Since 2018, we have been exploring and evaluating strategic alternatives focused on maximizing shareholder value, while also exploring and evaluating financing alternatives to increase the likelihood that we would be able to avoid a restructuring (such as a reorganization, bankruptcy or assignment for the benefit of creditors) or a dissolution, liquidation and/or winding up of our company, in the event the strategic process does not result in a transaction.
On August 12, 2020, we entered into an agreement and plan of merger and reorganization (the “Merger Agreement”dated August 12, 2020 among Brooklyn (then known as NTN Buzztime, Inc.), BIT Merger Sub, Inc. and Brooklyn LLC. In accordance with such agreement and plan of merger, on March 25, 2021 Brooklyn Immunotherapeutics LLC (“Brooklyn”), pursuantamended its restated certificate of incorporation in order to which, subjecteffect:
On September 18, 2020, we entered an asset purchase agreement (the “Asset Purchase Agreement”) with eGames.com Holdings LLC (“eGames.com”), pursuant to which, subject to the terms and conditions thereof, we will sell and assign (the “Asset Sale”) all of our right,sold its rights, title and interest in and to the assets relating to our currentthe business (the “Purchased Assets”it operated prior to the Merger, which it had operated under the name “NTN Buzztime, Inc.,” to eGames.com Holdings LLC, or eGames.com, in exchange for eGames.com’s payment of a purchase price of $2.0 million and assumption of specified liabilities relating to such pre-Merger business. This transaction, which we refer to as the Disposition, was completed in accordance with the terms of an asset purchase agreement dated September 18, 2020, as amended, between Brooklyn and eGames.com.
Ifthe Merger are those of Brooklyn LLC, and the historical financial statements of Brooklyn LLC became the historical financial statements of Brooklyn with respect to periods prior to the completion of the Merger. The weighted average shares used in determining loss per common share were retrospectively adjusted to reflect the conversion of the outstanding Class A, Class B, Class C and common units of Brooklyn LLC into shares of Brooklyn’s common stock upon the Merger, and all share and per share amounts of common stock have been retrospectively restated to reflect the Asset Sale are completed,reverse split described above.
Pursuantcancer, both as a single agent and in combination with other anti-cancer therapies. We are seeking to develop IRX‑2, a novel cytokine-based therapy, to treat patients with cancer. IRX‑2 active constituents, namely Interleukin-2, or IL‑2, and other key cytokines, are postulated to signal, enhance and restore immune function suppressed by the tumor, thus enabling the immune system to attack cancer cells, unlike existing cancer therapies, which rely on targeting the termscancer directly. We also are exploring opportunities to advance oncology, blood disorder, and subjectmonogenic disease therapies using gene-editing cell‑therapy technology through a license with Factor Bioscience Limited, or Factor, and through the Acquisition.
| • | Advance our product candidate IRX-2 through clinical development. IRX-2 is a human blood-based IL 2 therapy being studied for multiple types of cancer, including squamous cell cancer of the head and neck. Treatment of patients in the INSPIRE trial has been completed, and patients who participated in the trial are currently being monitored for event-free survival with top-line data estimated to be available in the first half of 2022. |
| • | Advance combination trials with checkpoint inhibitors. Once INSPIRE trial data are released, we plan to use those results as a catalyst in addition to data from the other clinical trials in the program with multiple data read-outs anticipated in 2022 and later. |
| • | Pursue partnerships to advance the IRX-2 clinical program. We are pursuing partnering opportunities with leading biopharmaceutical companies for the development and commercialization of IRX-2. |
| • | Regulatory strategy. We believe that our assets may present opportunities for potential breakthroughs in the treatment of cancer and other indications. We will endeavor to seek breakthrough therapy designation with regulatory agencies for IRX-2 for one or more indications. We cannot, however, assure that we will receive breakthrough therapy designation for any future indications or that any breakthrough therapy designation we do receive will necessarily lead to a faster approval time. |
| • | Intellectual Property. We continue to pursue additional intellectual property based on data from IRX clinical studies. |
| • | BR-101 - A study involving 16 patients with neoadjuvant breast cancer performed at the Providence Portland Medical Center. Details of this trial can be found at clinicaltrials.gov (NCT02950259). |
| • | CIN-201 - An open label single arm Phase 2 trial of the IRX‑2 regimen in women with cervical squamous intraepithelial neoplasia 3 or squamous vulvar intraepithelial neoplasia 3. Details of this trial can be found at clinicaltrials.gov (NCT03267680). |
| • | BAS-104 - A basket study originally intended to enroll 100 patients with metastatic bladder, renal, non-small cell lung cancer, or NSCLC, melanoma, and head and neck cancer being held at the Moffitt Cancer Center, using IRX‑2 in conjunction with Opdivo (Nivolumab), an immunotherapy cancer treatment marketed by Bristol-Myers Squibb Company. This trial was discontinued after 11 subjects were enrolled due to insurance reimbursement challenges. Details of this trial can be found on clinicaltrials.gov (NCT03758781). |
| • | HCC-107 - A study involving 28 patients with metastatic hepatocellular carcinoma, or HCC, being held at City of Hope Medical Center, HonorHealth Research Institute, and Texas Oncology at Baylor Charles A. Simmons Cancer Center using IRX‑2 in conjunction with Opdivo, a cancer treatment marketed by Bristol-Myers Squibb Company. Details of this trial can be found at clinicaltrials.gov (NCT03655002). |
| • | GI-106 - A study involving 20 patients with metastatic gastric and gastroesophageal junction cancers (GI) being held at City of Hope Medical Center, HonorHealth Research Institute, and Texas Oncology at Baylor Charles A. Simmons Cancer Center using IRX‑2 in conjunction with Keytruda (Pembrolizumab), an immunotherapy cancer treatment marketed by Merck. Details of this trial can be found at clinicaltrials.gov (NCT03918499). |
| • | MHN-102 - A study involving 15 patients with metastatic head and neck cancer being held at the H. Lee Moffitt Cancer Center and Research Institute and University of Michigan Health System using IRX‑2 in conjunction with Imfinzi (Durvalumab), a cancer treatment marketed by AstraZeneca plc. Details of this trial can be found at clinicaltrials.gov (NCT03381183). |
| • | BR-202 - A study involving 30 patients with neoadjuvant triple negative breast cancer, held at the Providence Portland Medical Center using IRX‑2 in conjunction with a programmed cell death protein 1, or PD1, and chemotherapy treatments. Details of this trial can be found at clinicaltrials.gov (NCT04373031). |
Upon completion of the Merger, the board of directors of the combined company is expected to consist entirely of individuals designated by Brooklyn and the officers of the combined company are expected to be members of Brooklyn’s current management team. The employment of Allen Wolff, our chief executive officer, with us will terminate upon the closing of the Asset Sale, and he will become employed by eGames.com. Sandra Gurrola, our senior vice president of finance, has had discussions regarding her possible employment with eGames.com following the closing of the Merger, and as of the date of this report, the partiescould continue to be, in discussionsdisrupted and Ms. Gurrola has not accepted an offer.
Consummationmaterially adversely affected by past and continuing impacts of the MergerCOVID-19 pandemic. This is subject to certain closing conditions, including, among other things, approval by our stockholders anda result of measures imposed by the beneficial holdersgovernments and hospitals in affected regions, businesses and schools were suspended due to quarantines intended to contain this outbreak. The spread of SARS CoV‑2 from China to other countries resulted in the Director General of the Class A membership units of Brooklyn. The Merger Agreement contains certain termination rights for each of us and Brooklyn, including that either party may terminateWorld Health Organization declaring COVID-19 a pandemic in March 2020. While the Merger Agreement if the Merger has not been consummated by December 31, 2020, subject to extension under specified circumstances. The Merger Agreement also provides that, upon the terminationconstraints of the Merger Agreement under specified circumstances,pandemic are being lifted, we or Brooklyn will be required to payare still assessing the other party a $750,000 termination fee or reimburse the other party for up to $250,000 of its third party expenses.
We devoted significant resources and effort to identify, evaluate and negotiate the Merger Agreement with Brooklyn and the Asset Purchase Agreement with eGames.com, and continue to devote significant resources and effort to consummate the transactions contemplated by the Merger Agreement and the Asset Purchase Agreement. However, no assurances are, or can be given, that the Merger or the Asset Sale will be consummated.
If the Merger is not completed, we cannot predict whether and to what extent we would be successful in consummating an alternative transaction, the timing of such a transaction or our future cash needs required to complete such a transaction, and we may choose or be forced to effectuate a restructuring or to dissolve and liquidate our assets. Even if the Merger is completed, it ultimately may not deliver the anticipated benefits or enhance stockholder value.
If neither the Merger nor the Asset Sale are completed, we will reconsider our strategic alternatives and could attempt to complete another strategic transaction like the Merger or the Asset Sale, continue to operate our business, or dissolve and liquidate our assets. However, because of our limited cash and resources, we would likely be required to dissolve and liquidate our assets.
If the Merger does not close and the Asset Sale closes, we may attempt to find another reverse merger partner or dissolve and liquidate our assets. Because the NYSE Regulation, Inc. may begin delisting proceedings if we had no assets or operations and due to our limited cash availability, we may be unable to identify and complete another reverse merger and we would likely be required to dissolve and liquidate our assets. In such case, we would be required to pay all our debts and contractual obligations and to set aside certain reserves for potential future claims.
If the Merger closes and our stockholders do not approve the Asset Sale Proposal, the combined company will focus its resources on executing Brooklyn’s business plan, and the board of directors of the combined company may elect to, among other things, attempt to sell or otherwise dispose of the assets related to our historical business, including to eGames.com under the Asset Purchase Agreement. Because as of immediately following the closing of the Merger, the assets related to our historical business are not expected to constitute all or substantially all of the combined company’s assets, the combined company may be able sell or otherwise dispose of the assets related to our historical business without stockholder approval, including to eGames.com under the Asset Purchase Agreement.
The descriptions above of Merger Agreement and the Asset Purchase Agreement do not purport to be complete and are qualified in their entirety by reference to the Merger Agreement and the Asset Purchase Agreement that have been filed with the Securities and Exchange Commission (the “SEC”), and are incorporated by reference in this report. The assertions embodied in the representations and warranties contained in the Merger Agreement and the Asset Purchase Agreement are qualified by information in confidential disclosure schedules delivered by the parties in connection with the signing of those agreements. Moreover, certain representations and warranties contained in those agreements were made as of a specified date; may have been made for the purposes of allocating contractual risk between the parties to such agreements; and may be subject to contractual standards of materiality different from what might be viewed as material to our stockholders. Accordingly, the representations and warranties in those agreements should not be relied on by any persons as characterizations of the actual state of facts and circumstances of our company or any other parties thereto at the time they were made and should consider the information in these agreements in conjunction with the entirety of the factual disclosure about our company in this report. Information concerning the subject matter of the representations and warranties may have changed after the date of those agreements, which subsequent information may or may not be fully reflected in our public disclosures. Those agreements should not be read alone, but should instead be read in conjunction with each other and other information included in this report and in the registration statement on Form S-4 we filed with the SEC on October 2, 2020, to register the offer and sale of the shares of our common stock to be issued pursuant to the Merger Agreement (the “Registration Statement”). The Registration Statement also serves as our proxy statement for the special meeting of stockholders that we intend to convene as promptly as practicable following the effectiveness of the Registration Statement at which our stockholders will be asked to vote to approve (i) the issuance of shares of our common stock to the members of Brooklyn pursuant to the terms of the Merger Agreement and the change of control resulting therefrom, (ii) a reverse stock split of the outstanding shares of our common stock within a range of one new share for every 3 to 10 (or any number in between) shares outstanding (if the reverse stock split is implemented in connection with the Merger, the ratio will be mutually agreed upon by our board of directors and Brooklyn’s managers, and if not implemented in connection with the Merger, will be determined by our board of directors), (iii) amendments to our certificate of incorporation to increase the authorized number of shares of our common stock, change our corporate name to “Brooklyn Immunotherapeutics, Inc.”, and provide the holders of our Series A Convertible Preferred Stock with voting rights (in order to help ensure the tax-deferred nature of the transactions contemplated by the Merger Agreement), (iv) a new stock incentive plan, which will become effective upon the Merger and will authorize the issuance of no more than 7.5% of the fully-diluted outstanding shares of our common stock immediately following the effective date of the merger, (v) the Asset Sale and (vi) on a non-binding, advisory basis, the compensation that will be paid or may become payable to our named executive officers in connection with the Merger and the Asset Sale.
Bridge Loan
In connection with entering into the Asset Purchase Agreement with eGames.com on September 18, 2020, we issued to Fertilemind Management, LLC, an affiliate of eGames.com, an unsecured promissory note in the principal amount of $1,000,000, evidencing a $1,000,000 loan received from Fertilemind Management, LLC on behalf of eGames.com. We may use the loan proceeds for, among other things, the payment of obligations related to the transactions contemplated by the Asset Purchase Agreement and the Merger Agreement and other general working capital purposes. Upon the closing of the Asset Sale, the loan be applied against the purchase price under the Asset Purchase Agreement, and the promissory note evidencing the loan will be extinguished. See “—Liquidity and Capital Resources,” below.
We are in discussions with Fertilemind Management, LLC regarding the possibility of borrowing an additional $500,000 on approximately December 1, 2020, which, if received, would also be applied toward the purchase price at the closing of the Asset Sale. No assurances can be given that we will obtain such $500,000 loan from Fertilemind Management, LLC or from any other party.
COVID-19 Impact
The negativelonger-term impact of the COVID-19 pandemic on our development plans, and on the restaurant and bar industry was abrupt and substantial, andability to conduct our business, cash flowsclinical trials There can be no assurance that this analysis will enable us to avoid or remediate part or all of any impact 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 of March 2020. Since then, governmental orders and restrictions impacting restaurants and bars in certain jurisdictions were eased or lifted as the numberspread of COVID-19 cases decreased or plateaued, but as jurisdictions began experiencing a resurgenceits consequences, including downturns 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,business sentiment generally. The extent to 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 ongoing global efforts to contain its spread will impact our operations will depend on future developments, which may continue thereafter if restaurantsare highly uncertain 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,cannot be predicted at its peak, approximately 70% of our customers had their subscriptions to our services temporarily suspended. As of November 10, 2020, approximately 11% of our customers remain on subscription suspensions.
In response tothis time, and include the impactduration, severity and scope of the pandemic and the actions taken to contain or treat the COVID‑19 pandemic. Further, the specific clinical outcomes, or future pandemic related impacts of emerging SARS-CoV-2 variants cannot be reliably predicted.
Paycheck Protection Program Loan
1970s and have been isolated from various tissue sources including muscle, umbilical cord, liver, placenta, skin, amniotic fluid, synovial membrane, and tooth root. MSC have been intensely investigated for clinical applications within the last decades with a very strong record of safety and tolerability. However, the majority of registered clinical trials applying MSC therapy for diverse human diseases have fallen short of expectations, despite the encouraging pre-clinical outcomes in varied animal disease models. This can be attributable to inconsistent properties of MSC across studies as a result of variations in tissue source, donor variability, as well as isolation and manufacturing methodologies.
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 acceptedpending patent applications in the United States, (“GAAP”).Europe, and Japan, along with other major life sciences markets.
significant up-front expenditures. We anticipate paying significant portions of a study’s or trial’s cost before such begins and incurring additional expenditures as the study or trial progresses and reaches certain milestones.
RESULTS OF OPERATIONS
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.
| Three months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | 1,466,652 | $ | 923,529 | $ | 543,123 | 59 | % | ||||||||
| Acquired IPR&D | 80,537,551 | - | 80,537,551 | N/A | ||||||||||||
| General and administrative | 4,258,178 | 1,084,057 | 3,174,121 | 293 | % | |||||||||||
| Change in fair value of contingent consideration | 70,000 | - | 70,000 | N/A | ||||||||||||
| Total operating expenses | 86,332,381 | 2,007,586 | 84,324,795 | 4,200 | % | |||||||||||
| Loss from operations | (86,332,381 | ) | (2,007,586 | ) | (84,324,795 | ) | 4,200 | % | ||||||||
| Other income (expenses): | ||||||||||||||||
| Other income (expense), net | 277,069 | (12,559 | ) | 289,628 | 2,306 | % | ||||||||||
| Total other income (expenses), net | 277,069 | (12,559 | ) | 289,628 | 2,306 | % | ||||||||||
| Net loss | $ | (86,055,312 | ) | $ | (2,020,145 | ) | $ | (84,035,167 | ) | 4,160 | % | |||||
| Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | 8,379,062 | $ | 2,299,669 | $ | 6,079,393 | 264 | % | ||||||||
| Acquired IPR&D | 80,537,551 | - | 80,537,551 | N/A | ||||||||||||
| General and administrative | 10,515,088 | 2,741,652 | 7,773,436 | 284 | % | |||||||||||
| Transaction costs | 5,765,407 | - | 5,765,407 | N/A | ||||||||||||
| Change in fair value of contingent consideration | (750,000 | ) | - | (750,000 | ) | N/A | ||||||||||
| Total operating expenses | 104,447,108 | 5,041,321 | 99,405,787 | 1,972 | % | |||||||||||
| Loss from operations | (104,447,108 | ) | (5,041,321 | ) | (99,405,787 | ) | 1,972 | % | ||||||||
| Other expenses: | ||||||||||||||||
| Loss on sale of NTN assets | (9,648,173 | ) | - | (9,648,173 | ) | N/A | ||||||||||
| Other income (expense), net | 252,318 | (31,482 | ) | 283,800 | 901 | % | ||||||||||
| Total other expenses | (9,395,855 | ) | (31,482 | ) | (9,364,373 | ) | 29,745 | % | ||||||||
| Net loss | (113,842,963 | ) | (5,072,803 | ) | (108,770,160 | ) | 2,144 | % | ||||||||
| Series A convertible preferred stock dividend | (7,806 | ) | - | (7,806 | ) | N/A | ||||||||||
| Net loss attributable to common stockholders | $ | (113,850,769 | ) | $ | (5,072,803 | ) | $ | (108,777,966 | ) | 2,144 | % | |||||
Revenue
We generate revenue by charging subscription fees to our partners for access to our 24/7 trivia network, by selling and leasing tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling DOOH advertising direct to advertisers and on national ad exchanges, by licensing our entertainment and trivia content to other parties, and by providing professional services such as custom game design or development of new platforms on our existing tablet form factor. Until February 1, 2020, we also generated revenue from hosting live trivia events. We sold all our assets used to host live trivia events in January 2020. The table below summarizes the type of revenue we generated for the three and nine months ended September 30, 2020 and 2019 and the change in such revenue between the two periods:
| Three months ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| $ | % of Total Revenue | $ | % of Total Revenue | $ Change | % Change | |||||||||||||||||||
| Subscription revenue | 1,053,000 | 71.3 | % | 3,723,000 | 81 | % | (2,670,000 | ) | (71.7 | )% | ||||||||||||||
| Hardware revenue | 379,000 | 25.7 | % | 11,000 | 0 | % | 368,000 | 3,345.5 | )% | |||||||||||||||
| Other revenue | 45,000 | 3.0 | % | 846,000 | 19 | % | (801,000 | ) | (94.7 | )% | ||||||||||||||
| Total | 1,477,000 | 100.0 | % | 4,580,000 | 100 | % | (3,103,000 | ) | (67.8 | )% | ||||||||||||||
| Nine months ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| $ | % of Total Revenue | $ | % of Total Revenue | $ Change | % Change | |||||||||||||||||||
| Subscription revenue | 3,779,000 | 82 | % | 11,356,000 | 78 | % | (7,577,000 | ) | (67 | )% | ||||||||||||||
| Hardware revenue | 421,000 | 9 | % | 811,000 | 6 | % | (390,000 | ) | (48 | )% | ||||||||||||||
| Other revenue | 425,000 | 9 | % | 2,471,000 | 17 | % | (2,046,000 | ) | (83 | )% | ||||||||||||||
| Total | 4,625,000 | 100 | % | 14,638,000 | 100 | % | (10,013,000 | ) | (68 | )% | ||||||||||||||
Subscription Revenue
The decrease in subscription revenue for the three and nine months ended September 30, 2020 was due to lower average site count, lower average revenue per site and the impact of the COVD-19 pandemic on our business when compared to the same periods in 2019. We previously reported that our subscription revenue would materially decrease beginning in the first quarter of 2020 if we did not add network subscribers or other revenue sources sufficient to replace the revenue historically received from Buffalo Wild Wings corporate-owned restaurants and its franchisees, after our existing relationships with BWW terminated in November 2019. To date, we have not offset the lost subscription revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees, and, in light of the substantial negative impact the pandemic has had, continues to have and is expected to continue to have, on the restaurant and bar industry and on our business, and taking into account the measures we implemented in response to the impact of the pandemic on our business to reduce operating expenses and preserve capital, including reducing our headcount and sales and marketing team, we do not expect that will be able to do so in the foreseeable future.
Because shelter-in-place orders and governmental orders and restrictions on the operations of restaurants and bars to shut-down or close all on-site dining were generally issued toward the end of the first quarter of 2020, the negative impacts of the COVID-19 pandemic on our subscription revenue were significantly greater in the second quarter of 2020 compared to the first quarter of 2020. Although restrictions have been lifted or reduced for many of our customers, our subscription revenue suffered during the third quarter of 2020 and we expect that it will continue to suffer as a result of the pandemic, including because we expect governmental orders and restrictions impacting restaurants and bars will remain in effect or be reinstated in response to resurgences in COVID-19 cases. See “Item 1A. Risk Factors” in Part II of this report for additional information regarding the impact of the pandemic on our business and outlook.
ASC No. 606 specifies certain criteria that an arrangement with a customer must have in order for a contract to exist for purposes of revenue recognition, one of which is that it must be probable that we will collect the consideration to which we will be entitled under the contract. As a result of the impact that the COVID-19 pandemic has had, and continues to have, on our customers, we determined that due to the uncertainty of collectability of the subscription fees for certain customers, our arrangement with those customers no longer meets all the criteria needed for a contract to exist for revenue recognition purposes. Therefore, we did not recognize revenue for these customers and fully reserved for accounts receivable in the allowance for doubtful accounts. We only recognize revenue for the arrangements that continued to meet the contract criteria, including the criteria that collectability was probable.
The table below provides a geographic breakdown of our site count as of the date indicated:
| Network Subscribers as of September 30, | ||||||||
| 2020 | 2019 | |||||||
| United States | 981 | 2,431 | ||||||
| Canada | 99 | 134 | ||||||
| Total | 1,080 | 2,565 | ||||||
Hardware Revenue
The increase in hardware revenue for the three months ended September 30, 2020 was due to the final delivery of tablets to our jail services partner. In September 2020, we entered into an agreement with our jail service partner to terminate our existing contract and cancel the remaining tablets to be delivered under our contract. We expect our hardware revenue to materially decrease in the future.
The decrease in hardware revenue for the nine months ended September 30, 2020 was primarily due to decreased sales-type lease arrangements when compared to the same periods in 2019. As previously reported, we did not, and do not, expect to continue recognizing hardware revenue under sales-type lease arrangements during 2020 or thereafter.
Other Revenue
The decrease in other revenue for the three and nine months ended September 30, 2020 was primarily due to a decrease in revenue from our live-hosted trivia events when compared to the same periods in 2019 as a result of the sale in January 2020 of all our assets used to conduct such events. We do not expect to recognize revenue from live-hosted trivia events in the future.
We also recognized less license revenue and advertising revenue during the three and nine months ended September 30, 2020 when compared to the same periods in 2019. We expect our advertising revenue will continue to be materially adversely impacted because of a decrease in advertising sales arising from a slowdown in consumer traffic in the restaurant and bars that subscribe to our service as a result of the COVID-19 pandemic.
Direct Operating Costs and Gross Margin
A comparison of direct operating costs and gross margin for the periods indicated is shown in the table below:
| Three months ended September 30, | ||||||||||||||||
| 2020 | 2019 | Change | % Change | |||||||||||||
| Revenues | $ | 1,477,000 | $ | 4,580,000 | $ | (3,103,000 | ) | (68 | )% | |||||||
| Direct Operating Costs | 801,000 | 1,344,000 | (543,000 | ) | (40 | )% | ||||||||||
| Gross Margin | $ | 676,000 | $ | 3,236,000 | $ | (2,560,000 | ) | (79 | )% | |||||||
| Gross Margin Percentage | 46 | % | 71 | % | ||||||||||||
| Nine months ended September 30, | ||||||||||||||||
| 2020 | 2019 | Change | % Change | |||||||||||||
| Revenues | $ | 4,625,000 | $ | 14,638,000 | $ | (10,013,000 | ) | (68 | )% | |||||||
| Direct Operating Costs | 2,364,000 | 4,545,000 | (2,181,000 | ) | (48 | )% | ||||||||||
| Gross Margin | $ | 2,261,000 | $ | 10,093,000 | $ | (7,832,000 | ) | (78 | )% | |||||||
| Gross Margin Percentage | 49 | % | 69 | % | ||||||||||||
Development Expenses
| Three months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| Payroll-related | $ | 743,528 | $ | 433,435 | $ | 310,093 | 72 | % | ||||||||
| Stock-based compensation | 447,780 | - | 447,780 | N/A | ||||||||||||
| Other expenses, net | 275,344 | 490,094 | (214,750 | ) | -44 | % | ||||||||||
| Total research and development expense | $ | 1,466,652 | $ | 923,529 | $ | 543,123 | 59 | % | ||||||||
| Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| License fees | $ | 4,000,000 | $ | - | $ | 4,000,000 | N/A | |||||||||
| Payroll-related | 1,797,317 | 1,291,038 | 506,279 | 39 | % | |||||||||||
| Stock-based compensation | 1,018,428 | - | 1,018,428 | N/A | ||||||||||||
| Other expenses, net | 1,563,317 | 1,008,631 | 554,686 | 55 | % | |||||||||||
| Total research and development expense | $ | 8,379,062 | $ | 2,299,669 | $ | 6,079,393 | 264 | % | ||||||||
2020. For the nine months ended September 30, 2020, the decrease in direct costs was primarily2021, our research and development expenses increased due to decreased (1) direct wages of approximately $828,000 as a result of no longer providing live-hosted trivia events after January 2020; (2) equipment expense of approximately $71,000 due primarily to reduction in hardware revenue; (3) depreciation expense of $677,000; (4) service providerupfront payments associated with licensed technology, increased clinical trial expenses, increased headcount and freight expense of approximately $398,000; and (5) other miscellaneous expenses of $206,000, in each case,increased stock-based compensation when compared to the same period in 2019.
The decrease in gross margin for2020.
Operating Expenses
| Three months ended September 30, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| Selling, general and administrative | $ | 2,068,000 | $ | 3,413,000 | $ | (1,345,000 | ) | |||||
| Impairment of capitalized software | $ | - | $ | 51,000 | $ | (51,000 | ) | |||||
| Depreciation and amortization (non-direct) | $ | 26,000 | $ | 88,000 | $ | (62,000 | ) | |||||
| Nine months ended September 30, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| Selling, general and administrative | $ | 6,743,000 | $ | 10,303,000 | $ | (3,560,000 | ) | |||||
| Impairment of capitalized software | $ | 238,000 | $ | 52,000 | $ | 186,000 | ||||||
| Impairment of goodwill | $ | 662,000 | $ | - | $ | 662,000 | ||||||
| Depreciation and amortization (non-direct) | $ | 189,000 | $ | 273,000 | $ | (84,000 | ) | |||||
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses for the three and nine months ended September 30, 2020 when compared to the same period in 2019 was primarily due to decreased (1) payroll and related expense of $1,498,000 and $3,320,000, respectively, as a result of reduced headcount; (2) marketing fees of $168,000 and $609,000, respectively, due to managing discretionary spending; (3) lease expense of approximately $118,000 and $127,000, respectively, due to terminating our lease and vacating our corporate headquarters in June 2020, and (4) miscellaneous expense of $192,000 and $208,000, respectively, in each case, when compared to the same periods in 2019. These decreases were partially offset by increased professional fees of $630,000 and $613,000 for the three and nine months ended September 30, 2020, respectively, primarily due to costs associated with the Merger and Asset Sale transactions.
In light of the recent measures we implemented to reduce operating expenses and to preserve capital, we expect our selling, general and administrative expenses to continue to decrease in the fourth quarter of 2020 when compared to the prior year period. However, such actions, and any similar actions we may implement in the future, could adversely affect our business and we may not realize the operation or financial benefits of such actions.
Impairment of Capitalized Software
For the nine months ended September 30, 2020, we abandoned certain capitalized software development projects that we concluded were no longer a current strategic fit or for which we determined that the marketability of the content had decreased due to obtaining additional information regarding the specific purpose for which the content was intended. We did not incur any impairment charges during the three months ended September 30, 2020. For the three and nine months ended September 30, 2019, we also abandoned certain capitalized software projects, which resulted in impairments charges during each of those periods.
Impairment of Goodwill
Through March 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$80,537,551 fair value of the Reporting UnitIPR&D acquired in the Acquisition because there is less than its carrying amount. If there are indications of impairment, then we perform a quantitative impairment test.
During out evaluation of impairment indicators as of March 31, 2020, we determined that the uncertainty relating to the impact of the COVID-19 pandemic on the Reporting Unit’sno future operating results represented an indicator of impairment. Accordingly, we compared the estimated fair value of the Reporting Unit to its carrying value at March 31, 2020, determined that a full impairment loss was warranted and recognized an impairment charge of $662,000alternative use for the nine months ended September 30, 2020, all of which was recorded during the three months ended March 31, 2020. There was no goodwill impairment recordedIPR&D other than for the three or nine months ended September 30, 2019.
Depreciationits intended purpose.
Administrative Expenses
| Three months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| Professional fees | $ | 1,587,573 | $ | 779,119 | $ | 808,454 | 104 | % | ||||||||
| Stock-based compensation | 1,280,524 | 22,734 | 1,257,790 | 5,533 | % | |||||||||||
| Payroll-related | 540,769 | 28,513 | 512,256 | 1,797 | % | |||||||||||
| Insurance | 366,986 | 39,709 | 327,277 | 824 | % | |||||||||||
| Other expenses, net | 482,326 | 213,982 | 268,344 | 125 | % | |||||||||||
| Total general and administrative expense | $ | 4,258,178 | $ | 1,084,057 | $ | 3,174,121 | 293 | % | ||||||||
| Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| Professional fees | $ | 5,553,661 | $ | 1,827,002 | $ | 3,726,659 | 204 | % | ||||||||
| Stock-based compensation | 2,283,269 | 68,202 | 2,215,067 | 3,248 | % | |||||||||||
| Payroll-related | 706,066 | 86,553 | 619,513 | 716 | % | |||||||||||
| Insurance | 766,951 | 83,627 | 683,324 | 817 | % | |||||||||||
| Other expenses, net | 1,205,141 | 676,268 | 528,873 | 78 | % | |||||||||||
| Total general and administrative expense | $ | 10,515,088 | $ | 2,741,652 | $ | 7,773,436 | 284 | % | ||||||||
Other Income (Expense), Net
| Three months ended September 30, | Increase in other | |||||||||||
| 2020 | 2019 | expense, net | ||||||||||
| Total other expense, net | $ | (82,000 | ) | $ | (16,000 | ) | $ | (66,000 | ) | |||
| Nine months ended September 30, | Increase in other | |||||||||||
| 2020 | 2019 | income, net | ||||||||||
| Total other income (expense), net | $ | 826,000 | $ | (189,000 | ) | $ | 1,015,000 | |||||
Forpublicly traded company.
2021. For the nine months ended September 30, 2020,2021, the increase$5,765,407 in other income, net was primarily due to a $1,225,000 gaintransaction costs related to the saleissuance of all our assets usedcommon stock to conduct live-hosted trivia events, increased foreign currency gains related to our Canadian subsidiary, and decreased interest expense due to lower long-term debt balances, offset by a $286,000 loss related toBrooklyn LLC’s financial advisor upon consummation of the terminating our leases and disposingMerger.
Income Taxes
| Three months ended September 30, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| Benefit (provision) for income taxes | $ | 19,000 | $ | (19,000 | ) | $ | 38,000 | |||||
| Nine months ended September 30, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| Benefit (provision) for income taxes | $ | 23,000 | $ | (30,000 | ) | $ | 53,000 | |||||
We expect to incur state income tax liability in 2020 related to our U.S. operations. Contingent Consideration
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2020, we had cash, cash equivalents and restricted cash of approximately $1.7 million, including the $1.0 million bridge loan we received in connection with entering into the Asset Purchase Agreement, which is discussed further below, compared to approximately $3.4 million as of December 31, 2019. During the three and nine months ended September 30, 2020,2021, the change in fair value of the contingent consideration was an increase to the liability of $70,000 and a decrease to the liability of $750,000, respectively, based on our quarterly valuation analyses. There were no changes to the fair value of contingent consideration for the three and months ended September 30, 2020.
In connection with preparing our financial statements as of and forcompleted the Disposition.
| Three months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| Income from Brooklyn PPP Loan forgiveness | $ | 309,905 | $ | - | $ | 309,905 | N/A | |||||||||
| Interest expense, net | (20,210 | ) | (12,559 | ) | (7,651 | ) | 61 | % | ||||||||
| Other expenses, net | (12,626 | ) | - | (12,626 | ) | N/A | ||||||||||
| Total other income (expense), net | $ | 277,069 | $ | (12,559 | ) | $ | 289,628 | -2,306 | % | |||||||
| Nine months ended September 30, | ||||||||||||||||
| 2021 | 2020 | Change | % Change | |||||||||||||
| Income from Brooklyn PPP Loan forgiveness | $ | 309,905 | $ | - | $ | 309,905 | N/A | |||||||||
| Interest expense, net | (55,974 | ) | (31,482 | ) | (24,492 | ) | 78 | % | ||||||||
| Other expenses, net | (1,613 | ) | - | (1,613 | ) | N/A | ||||||||||
| Total other income (expense), net | $ | 252,318 | $ | (31,482 | ) | $ | 283,800 | -901 | % | |||||||
Our primary sourceother income, net of capital is cash from operations. We have experienced material decreases in subscription revenue, advertising revenue and cash flows from operationsexpense primarily as a result of the impactforgiveness of our PPP Loan, which was primarily offset by interest accrued on notes payable of that we assumed as part of the COVID-19 pandemic on the restaurant and bar industry. We expect the negative impact on our business to continue for as long as restaurants and bars continue to be negatively impacted by the pandemic, and which may continue thereafter if restaurants and bars seek to reduce their operating costs or choose not to re-open even if governmental orders and restrictions are eased or lifted. See “Recent Developments—COVID-19 Impact,” above.
As a resultacquisition of the impactassets of IRX Therapeutics, LLC in 2018. The notes bear interest at the pandemicrate of 14% and were due on December 31, 2019. On January 27, 2020, the notes were amended to extend the maturity date to the earlier of (i) a change of control and (ii) December 31, 2021, whichever comes first.
We expect to meet our near term debt service obligations on our term loan with Avidbank and we satisfied our financial covenants under our related loan and security agreement as of September 30, 2020. However, unless in the very near term our subscription revenue, advertising revenue and cash flows from operations return to pre-pandemic levels and/or we raise substantial capital, we may not satisfy the liquidity covenant under the loan and security agreement, which is measured on a daily basis, at all times during December 2020, which may result in Avidbank declaring a default and foreclosing on our assets. See Item 1A. Risk Factors in Part II of this report, below.
Based on the factors described above, management concluded that there is substantial doubt regarding our ability to continue as a going concern through the twelve-month period subsequent to the issuance datefiling of these financial statements. As discussedThere can be no assurance that we will ever be in greater detaila position to commercialize IRX-2 or any other drug candidate we may acquire, or that we will obtain any additional financing that we require in the section entitled “—Overviewfuture or, even if such financing is available, that it will obtainable on terms acceptable to us.
The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplatesour business.
Avidbank Term Loan
Under a loan and security agreementsecond quarter, we entered into with Avidbank in September 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. In February 2020, we made a pre-payment on the term loan of approximately $150,000 following the sale in January 2020 of all our assets used to conduct live-hosted trivia events. In March 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 for March 2020 plus accrued interest and a $350,000 principal prepayment. As of September 30, 2020, the outstanding principal balance on the term loan was $725,000. See Note 9 to the unaudited condensed consolidated financial statements included herein for additional information regarding the Avidbank LSA.
The monthly principal payment amounts under the Avidbank LSA was $300,000 for each of July, August, September, and October 2020, and will be $300,000 for November 2020 and $125,000 for December 2020.
We must satisfy two financial covenants under the Avidbank LSA: a monthly minimum asset coverage ratio covenant, which we refer to as the ACR covenant, and a minimum liquidity covenant. Under the ACR covenant, the ratio of (i) our unrestricted cash at Avidbank as of the last day of a calendar month plus 75% of our outstanding accounts receivable accounts that are within 90 days of invoice date to (ii) the outstanding principal balance of our term loan on such day must be no less than 1.25 to 1.00. Under the minimum liquidity covenant, the aggregate amount of unrestricted cash we have in deposit accounts or securities accounts maintained with Avidbank must be at all times not less than the principal balance outstanding under our term loan. As of September 30, 2020, we were in compliance with both of those covenants. However, unless in the very near term our subscription revenue, advertising revenue and cash flows from operations return to pre-pandemic levels and/or we raise substantial capital, we may not satisfy the liquidity covenant under the loan and security agreement, which is measured on a daily basis, at all times during December 2020, which may result in Avidbank declaring a default and foreclosing on our assets.
Under the Avidbank LSA, subject to customary exceptions, we are prohibited from borrowing additional indebtedness. We granted and pledged to Avidbank a first-priority security interest in all our existing and future personal property. On June 1, 2020, we and Avidbank entered into a second amendment to the loan and security agreement to formally memorialize Avidbank’s consent to our borrowing of the PPP Loan (as defined below). We received Avidbank’s initial consent to borrow the PPP Loan in April 2020.
We incurred approximately $26,000 of debt issuance costs related to the Original LSAFirst Purchase Agreement and the amendmentSecond Purchase Agreement with Lincoln Park, pursuant to the LSA. The debt issuance costs are being amortized to interest expense using the effective interest rate method over the life of the loan. The unamortized balance of the debt issuance costs as of September 30, 2020 was approximately $1,000 and is recorded as a reduction of long-term debt.
The Avidbank LSA includes customary representations, warranties and covenants (affirmative and negative), including restrictive covenants that,which, subject to specified exceptions, limit our ability to: disposeterms and conditions, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to an aggregate of $60.0 million in shares of our common stock. As of November 9, 2021, we had issued and sold 3,551,990 shares of common stock for total gross proceeds of $54.1 million and net proceeds of $52.0 million and a total of $5.9 million of common stock remained available for sale under the Second Purchase Agreement. For further information, see “—Recent Developments—Purchase Agreements.”
Paycheck Protection Programpre-Merger business.
.
in the aggregate amount of $1,625,000, pursuant to the PPP under the CARES Act. Under the terms of the PPP, certain amounts of the Brooklyn PPP Loan maycould be forgiven if they arewere used for qualifying expenses as described in the CARES Act. In October 2020 we submitted our loan forgiveness application for the PPP Loan, and in November 2020, the U.SU.S. Small Business Administration approved the forgiveness of approximately $1,093,000 of the $1,625,000 loan,principal amount of the Brooklyn PPP Loan, leaving a principal balance of approximately $532,000,.
Bridge Loan
In connection all of which, plus accrued and unpaid interest, was due and, in accordance with entering into the Asset Purchase Agreement with eGames.com, we issued to Fertilemind Management, LLC, an affiliateterms of eGames.com, an unsecured promissory note (the “Note”) in the principal amount of $1,000,000, evidencing a $1,000,000 loan received from Fertilemind Management, LLC on behalf of eGames.com (the “Bridge Loan”). We may use the loan proceeds for, among other things, the payment of obligations related to the transactions contemplated by the Asset Purchase Agreement and the Merger Agreement, and other general working capital purposes. The principal amount accrues interest at rate of 8% per annum (increasing to 15% per annumpaid by Brooklyn upon the occurrence of an event of default), compounded annually. The principal amount of the Bridge Loan and accrued interest thereon is due and payable upon the earlier of (i) the termination of the Asset Purchase Agreement, (ii) the closing of a Business Combination (as defined in the Note), and (iii) December 31, 2020. Upon the closing of the Asset Sale, the Bridge Loan will be applied against the purchase price under the Asset Purchase Agreement, and theMerger.
All of our obligations under the Note are subordinate12 to the indebtedness and all other obligations owed by us to Avidbank including under the Avidbank LSA.
The Note includes customary events of default, including if any portion of the Note is not paid when due; if we default in the performance of any other material term, agreement, covenant or condition of the Note, subject to a cure period; if any final judgment for the payment of money is rendered against us and we do not discharge the same or cause it to be discharged or vacated within 90 days; if we make an assignment for the benefit of creditors, if it generally does not pay its debts as they become due; if a receiver, liquidator or trustee of ours is appointed, or if we are adjudicated bankrupt or insolvent. In the event of an event of default, the Note will accelerate and become immediately due and payable at the option of the holder.
We are in discussions with Fertilemind Management, LLC regarding the possibility of borrowing an additional $500,000 on approximately December 1, 2020, which, if received, would also be applied toward the purchase price at the closing of the Asset Sale. No assurances can be given that we will obtain such $500,000 loan from Fertilemind Management, LLC or from any other party.
Working Capital
As of September 30, 2020, we had negative working capital (current liabilities in excess of current assets) of $137,000 compared to negative working capital of $25,000 as of December 31, 2019. The following table shows our change in working capital from December 31, 2019 to September 30, 2020.
| Increase (Decrease) | ||||
| Working capital as of December 31, 2019 | $ | (25,000 | ) | |
| Changes in current assets: | ||||
| Cash and cash equivalents | (1,499,000 | ) | ||
| Restricted cash | (50,000 | ) | ||
| Accounts receivable, net | (1,063,000 | ) | ||
| Income tax receivable | 13,000 | |||
| Site equipment to be installed | (298,000 | ) | ||
| Prepaid expenses and other current assets | (380,000 | ) | ||
| Net decrease in current assets | (3,277,000 | ) | ||
| Changes in current liabilities: | ||||
| Accounts payable | (560,000 | ) | ||
| Accrued compensation | (463,000 | ) | ||
| Accrued expenses | - | |||
| Sales taxes payable | (117,000 | ) | ||
| Income taxes payable | (3,000 | ) | ||
| Current portion of long-term debt, net | (1,015,000 | ) | ||
| Current portion of obligations under operating leases | (404,000 | ) | ||
| Current portion of obligations under finance leases | 2,000 | |||
| Current portion of deferred revenue | (340,000 | ) | ||
| Other current liabilities | (265,000 | ) | ||
| Net decrease in current liabilities | (3,165,000 | ) | ||
| Net decrease in working capital | (112,000 | ) | ||
| Working capital as of September 30, 2020 | $ | (137,000 | ) | |
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows, are summarized as follows:
| Nine months ended September 30, | ||||||||||||
| 2020 | 2019 | Change | ||||||||||
| Cash (used in) provided by: | ||||||||||||
| Operating activities | $ | (3,280,000 | ) | $ | 1,761,000 | $ | (5,041,000 | ) | ||||
| Investing activities | (194,000 | ) | (964,000 | ) | 770,000 | |||||||
| Financing activities | 1,765,000 | (826,000 | ) | 2,591,000 | ||||||||
| Effect of exchange rates | 10,000 | 27,000 | (17,000 | ) | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (1,699,000 | ) | $ | (2,000 | ) | $ | (1,697,000 | ) | |||
Net cash (used in) provided by operations. The increase in cash used in operating activities was due to an increase in net loss of $4,635,000, after giving effect to adjustments made for non-cash transactions of negative $667,000, and an increase in cash used for operating assets and liabilities of $406,000, during the nine months ended September 30, 2020 when compared to the same period in 2019.
Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $3,661,000 to $3,725,000 for the nine months ended September 30, 2020 from $7,386,000 for the same period in 2019, primarily due to reduced headcount. See “—Results of Operations—Operating Expenses,” above.
Our primary source of cash is cash we generate from customers. Cash received from customers decreased $9,477,000 to $5,578,000 for the nine months ended September 30, 2020 from $15,055,000 for the same period in 2019. This decrease was primarily related to decreased subscription revenue, hardware revenue and revenue from live-hosted trivia events. The negative impact of the COVID-19 pandemic on the restaurant and bar industry was abrupt, and our business suffered materially as a result. See “Recent Developments—COVID-19 Impact,” above, and “—Results of Operations—Revenue,” above.
Net cash used in investing activities. The $770,000 decrease in cash used in investing activities was primarily due to decreased capital expenditures and capitalized software development expenses.
Net cash provided by (used in) financing activities. During the nine months ended September 30, 2020, we received $1,226,000 in net proceeds from the sale of all our assets used to conduct live-hosted trivia events, $1,625,000 in proceeds from the PPP Loan and $1,000,000 in proceeds from the Bridge Loan. There were no similar transactions during the same period in 2019. During the nine months ended September 30, 2020, we made $1,275,000 more in principal payments on long-term debt when compared to the same period in 2019.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2019, the Financial 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 after December 15, 2020, (which will be January 1, 2021 for us); early adoption is permitted. We are currently assessing the impact of this pronouncement to ourcondensed 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 resultstatements included 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 are evaluating the impact that the adoption of this standard will have on our consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
report.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We will continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to time make changes to enhance their effectiveness and ensure that our systems evolve with our business. 1 by reference. cash flows.Item 4. Controls and Procedures. or the Exchange Act, designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act reportsof 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.SeniorPresident (who serves as our principal executive officer) and our Vice President of Finance (who serves as our principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures.ourthis evaluation, and subject to the foregoing, our Chief Executive Officer and SeniorPresident and our Vice President of Finance concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective as of the end of the period covered by this report in providingand did not provide reasonable assurance of achieving the desired control objectives.Thereour most recently completed fiscal quarterthe three months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 1. Legal Proceedings. 1. Legal Proceedings.are subject tomay become involved in legal proceedings arising in the ordinary course of business. While management presently believesExcept as described above, we do not believe there is any litigation pending that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or outcomes could occur that have, individually or in the aggregate, a material adverse effect on our business,results of operations, financial condition or operating results. We are not currently subject to any pending material legal proceedings except as described below.We and our directors have been named as defendants in six substantially similar actions brought by purported stockholders of ours arising out of the Merger: Henson v. NTN Buzztime, Inc., Case No. 1:20-cv-08663 (S.D.N.Y. filed Oct. 16, 2020); Chinta v. NTN Buzztime, Inc., Case No. 1:20-cv-01401 (D. Del. filed Oct. 16, 2020); Amanfo v. NTN Buzztime, Inc., Case No. 1:20-cv-08747 (S.D.N.Y. filed Oct. 20, 2020); Falikman v. NTN Buzztime, Inc., Case No. 1:20-cv-05106 (E.D.N.Y. filed Oct. 23, 2020); Haas v. NTN Buzztime, Inc., Case No. 3:20-cv-02123-BAS-JLB (S.D. Cal. filed Oct. 29, 2020); and Monsour v. NTN Buzztime, Inc., Case No. 1:20-cv-08755 (S.D.N.Y. file Oct. 20, 2020). These actions assert claims asserting violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule 14a-9 promulgated thereunder. Chinta asserts additional claims for breach of fiduciary duty under Delaware law. The complaints allege that defendants failed to disclose allegedly material information in a Form S-4 Registration Statement filed on October 2, 2020, including (1) certain details regarding any projections or forecasts we or Brooklyn Immunotherapeutics, Inc. may have made, and the analyses performed by our financial advisor, Newbridge Securities Corporation; (2) conflicts concerning the sales process; and (3) disclosures regarding whether or not we entered into any confidentiality agreements with standstill and/or “don’t ask, don’t waive” provisions. The complaints allege that these purported failures to disclose rendered the Form S-4 false and misleading. The complaints request a preliminary and permanent injunction of the Merger; rescission of the Merger if executed and/or rescissory damages in unspecified amounts; direction to the individual directors to disseminate a compliant Registration Statement; an accounting by us for all alleged damages suffered; a declaration that certain federal securities laws have been violated; and costs, including attorneys’ and expert fees and expenses. Process has been served in Henson, but not in any of the other actions. The deadline for defendants to respond to the complaint in Henson is December 21, 2020. Although plaintiffs request injunctive relief in their complaints, they have not filed motions for such relief. We and our directors deny the allegations asserted against us in these actions and intend to oppose them vigorously.Item 1A. Risk Factors.
| Item 1A. | Risk Factors. |
RISKS RELATED TO THE PROPOSED MERGER AND ASSET SALE
Risks Related to the Merger
The formula for determining the number of shares to be issued in the Merger to Brooklyn members is not adjustable based on the market price of NTN’s common stock, so the number of shares of NTN common stock that may be issued in the Merger may have a greater or lesser value than at the time the Merger Agreement was signed.
The Merger Agreement has set the formula for determining the number of shares to be issued to Brooklyn’s members in the Merger, and the number of shares to be so issued is only adjustable upward or downward under certain circumstances as described in the Merger Agreement. Any changes in the market price of NTN common stock before the completion of the Merger will not affect the number of shares of NTN common stock that Brooklyn members will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the completion of the Merger the market price of NTN common stock declines from the market price on the date of the Merger Agreement, then Brooklyn members could receive merger consideration with substantially lower value for their equity interests in Brooklyn than the value of NTN common stock based on the market price on the date of the Merger Agreement. Similarly, if before the completion of the Merger the market price of NTN common stock increases from the market price on the date of the Merger Agreement, then Brooklyn members could receive merger consideration with substantially more value for their equity interests in Brooklyn than the value of NTN common stock based on the market price on the date of the Merger Agreement. Because the formula does not adjust as a result of changes in the value of NTN common stock, for each one percentage point that the market value of NTN common stock rises or declines, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration issued to Brooklyn members compared to the market price of the NTN common stock on the date of the Merger Agreement.
The formula for determining the number of shares to be issued in the Merger to Brooklyn members is subject to an upward adjustment to the extent that Brooklyn has more than $10.0 million in cash and cash equivalents at the closing of the Merger and to the extent that NTN’s net cash at the closing of the Merger is less than zero dollars, and as a result, NTN’s stockholders could own less, and Brooklyn members could own more, of the combined company.
The number of shares to be issued in the Merger to Brooklyn members will increase to the extent that Brooklyn has more than $10.0 million in cash and cash equivalents at the closing of the Merger, and will further increase to the extent that NTN’s net cash at the closing of the Merger is less than zero dollars. The increase based on the amount of Brooklyn’s cash and cash equivalents at the closing of the Merger is subject to a $15.0 million cap, except that to the extent that NTN’s net cash is less than zero, the number of shares to be issued in the Merger to Brooklyn members will increase to the extent that Brooklyn has more than $15.0 million in cash and cash equivalents at the closing, up to the absolute amount of NTN’s net cash. Accordingly, NTN’s stockholders could own less, and Brooklyn members could own more, of the combined company depending on the amount of cash and cash equivalents Brooklyn has at the closing and on the extent to which NTN’s net cash at the closing is negative.
If the conditions to closing the Merger are not satisfied, the Merger may not occur.
Even if NTN’s stockholders approve the issuance of shares of NTN common stock to Brooklyn’s members under the Merger Agreement and the change of control resulting therefrom and even if the beneficial holders of the Class A membership interests of Brooklyn approve the Merger and the Merger Agreement, other specified conditions must be satisfied or waived to complete the Merger. No assurances
For example, one of the conditions to closing the Merger is that the deficit in NTN’s net cash not exceed $3.0 million. If the Asset Sale Proposal is approved by NTN’s stockholders and the Asset Sale closes, NTN expects that it will satisfy this closing condition. However, NTN has limited cash on hand and its cash flow from operations has suffered as result of the COVID-19 pandemic and any delay in the closing of the Asset Sale and/or the Merger, will increase the risk that NTN will not satisfy this closing condition. Further, if the Asset Sale is not approved by NTN’s stockholders or if the Asset Sale does not close for any other reason, NTN will likely not satisfy this condition.
As another example, one of the conditions to closing the Merger is that, at the closing, Brooklyn have not less than $10 million in cash and cash equivalents on its balance sheet and have not more than $750,000 of indebtedness for borrowed money. To help ensure that Brooklyn meets this condition, Brooklyn has previously engaged in a rights offering to the beneficial holders of its Class A membership interests pursuant to which such beneficial holders who exercised their rights have agreed to make additional contributions to Brooklyn. Such members will exchange the additional membership interests they receive for their contribution for a portion of the shares of NTN common stock issuable to members of Brooklyn in the Merger. Although Brooklyn expects to receive at least $10 million in proceeds from the rights offering, there can beprovide no assurance that these membersclaims will contribute what they have contractually agreed to contribute. If these members do not make their committed contributions, Brooklyn may not be ablemade to satisfychallenge the closing condition that it have not less than $10 million in cash and cash equivalents on its balance sheet at the closingvalidity of the Merger. If this closing condition is not satisfied, and if NTN does not waive the condition, the Merger will not occur.
Failure to complete the Merger may result in NTN or Brooklyn paying a termination fee to the other party and could significantly harm the market price of NTN’s common stock and negatively affect the future business and operations of both companies.
If the Merger is not completed and the Merger Agreement is terminated under certain circumstances, NTN or Brooklyn may be required to pay the other party a termination fee of $750,000, or reimburse the transaction expensesratification of the other party, up to a maximum of $250,000. Even if a termination fee is not payable or transaction expenses are not reimbursable in connection with a terminationfiling and effectiveness of the Merger Agreement, we will have incurred significant legal, financial, advisory, accounting, audit and other general operating expenses, which must be paid whether or not the Merger is completed. Further, if the Merger is not completed, it could significantly harm the market pricecertificate of our common stock and further increase the doubt asamendment to our ability to continue as a going concern. In addition, if the Merger Agreement is terminated and our board of directors Brooklyn determines to seek another business combination, there can be no assurance that we will be able to find a partner and close an alternative transaction on terms that are as or more favorable than the terms set forth in the Merger Agreement.
The Merger is subject to the approval by our stockholders of various proposals at the special meeting and approval by the beneficial holders of the Class A membership interests of Brooklyn of the Merger and the Merger Agreement. Failure to obtain these approvals would prevent the closing of the Merger.
Before the Merger can be completed, our stockholders of must approve various proposals—(i) the issuance of shares of our common stock to the members of Brooklyn pursuant to the terms of the Merger Agreement and the change of control resulting therefrom, (ii) a reverse stock split of the outstanding shares of our common stock within a range of one new share for every 3 to 10 (or any number in between) shares outstanding (if the reverse stock split is implemented in connection with the merger, the ratio will be mutually agreed upon by our board of directors and Brooklyn’s managers, and if not implemented in connection with the merger, will be determined by our board of directors), and (iii) amendments to ourrestated certificate of incorporation to increasefiled with the authorized numberSecretary of shares of our common stock and provide the holders of our Series A Convertible Preferred Stock with voting rights (in order to help ensure the tax-deferred natureState of the transactions contemplated by the Merger Agreement)—and the holdersState of a majority of the beneficial interests in the Class A membership interests of Brooklyn must approve the Merger and the Merger Agreement. The failure to obtain these approvals would result in the Merger not being completed unless,Delaware on March 25, 2021 with respect to the proposed amendment to our certificate of incorporation to increase in the authorized number of shares of our common stock, such failure is waived by Brooklyn, and we have a sufficient number of shares of authorized common stock, including following the implementation of the reverse stock split, to issue the number shares of our common stock required to be issued in the Merger.
Certain of the officers and directors of NTN and certain of the officers and managers of Brooklyn have interests in the Merger that are different from the stockholders of NTN and members of Brooklyn, respectively, and that may influence them to support or approve the Merger without regard to the interests of the stockholders of NTN or the members of Brooklyn.
Certain officers and directors of NTN and certain officers and managers of Brooklyn participate in arrangements that provide them with interests in the Merger that are different from the interests of the stockholders of NTN and members of Brooklyn including, among others, the continued service as an officer or director of the combined company, severance benefits, the acceleration of vesting of equity awards, continued indemnification and the potential ability to sell an increased number of shares of common stock pursuant to Section 204 of the combined company in accordance with Rule 144 underDelaware General Corporation Law.
The market price of our common stock following the Merger may decline as a resultShare Increase Ratification, of the Merger.
The market priceamendment to our
NTN stockholders and Brooklyn members will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the closing of the Merger as compared to their current ownership and voting interest in the respective companies.
After the completion of the Merger, the current stockholders of NTN and the current members of Brooklyn will own a smaller percentage of the combined company than their ownership in the respective companies prior to the Merger. At the effective time of Merger, Brooklyn’s members will exchange their equity interests in Brooklyn for shares of NTN common stock representing between approximately 94.08% and 96.74% of the outstanding common stock of NTN immediately after the effective time of the MergerDelaware on a fully diluted basis (less a portion of such sharesMarch 25, 2021, which will be allocated to Maxim Group, LLC in respect of the success fee owed to it by Brooklyn), 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 on a fully diluted basis. Consequently, NTN stockholders and Brooklyn members will be able to exercise less influence over the management and policies of the combined company following the closing of the Merger than they currently exercise over the management and policies of their respective companies.
NTN stockholders and Brooklyn members may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger.
If the combined company is not able to realize the strategic and financial benefits currently anticipated from the Merger, NTN stockholders and Brooklyn members will have experienced substantial dilution of their ownership interests in their respective companies without receiving the expected commensurate benefit, or only receiving part of the commensurate benefit to the extent that the combined company is able to realize only part of the expected strategic and financial benefits currently anticipated from the Merger.
The combined company may need to raise additional capital by issuing securities or debt or through licensing or other arrangements, which may cause dilution to the combined company’s stockholders or restrict the combined company’s operations or impact its proprietary rights. Future issuances of the combined company’s common stock pursuant to options outstanding following the Merger and under its equity incentive plan could result in additional dilution.
The combined company may be required to raise additional funds sooner than currently planned. If either NTN or Brooklyn hold less cash at the time of the closing of the Merger than the parties currently expect, the combined company may need to raise additional capital sooner than expected. Additional financing may not be available to the combined company when needed or it may not be available on favorable terms. To the extent that the combined company raises additional capital by issuing equity securities, such an issuance may cause significant dilution and the terms of any new equity securities may have preferences over the combined company’s common stock. Any debt financing the combined company enters into may include covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of the combined company’s assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments. In addition, if the combined company raises additional funds through licensing, partnering or other strategic arrangements, it may be necessary to relinquish rights to some of the combined company’s technologies or product candidates and proprietary rights, or grant licenses on terms that are not favorable to the combined company.
In addition, the exercise or conversion of some or all of the combined company’s outstanding options (or, after the Merger, the issuance of equity awards under the combined company’s equity incentive plan) could result in additional dilution in the percentage ownership interest of current NTN stockholders and Brooklyn members in the combined company.
During the pendency of the Merger, NTN and Brooklyn may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.
Covenants in the Merger Agreement impede the ability of NTN and Brooklyn to make acquisitions, subject to certain exceptions relating to fiduciary duties, or to complete other transactions that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, the parties may be at a disadvantage to their competitors during such period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets, or other business combination outside the ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties and, with respect to NTN, other than the asset sale. Any such transactions could be favorable to such party’s securityholders.
Certain provisions of the Merger Agreement may discourage third parties from submitting alternative acquisition proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.
The terms of the Merger Agreement prohibit NTN and Brooklyn from soliciting alternative acquisition proposals or cooperating with persons making unsolicited acquisition proposals, except in limited circumstances where the board of directors of NTN and the board of managers of Brooklyn, as applicable, determines in good faith that an unsolicited alternative acquisition proposal is or is reasonably likely to lead to a superior offer and that failure to cooperate with the proponent of that proposal would reasonably be likely to be inconsistent with the board’s fiduciary duties.
Because the lack of a public market for Brooklyn’s securities makes it difficult to evaluate the value of such securities, the members of Brooklyn may receive shares of NTN common stock in the Merger that have a value that is less than, or greater than, the fair market value of Brooklyn’s securities and/or NTN may pay more than the fair market value of Brooklyn’s securities.
The outstanding securities of Brooklyn are privately held and not traded in any public market. The lack of a public market makes it difficult to determine the fair market value of Brooklyn. Because the percentage of NTN common stock to be issued to Brooklyn members was determined based on negotiations between NTN and Brooklyn, it is possible that the value of NTN common stock to be received by Brooklyn members in the Merger will be less than the fair market value of Brooklyn, or NTN may pay more than the aggregate fair market value for Brooklyn.
Litigation relating to the Merger could require NTN, Brooklyn or the combined company to incur significant costs and suffer management distraction and could delay or enjoin the Merger.
NTN and Brooklyn are subject to shareholder litigation relating to the Merger. See “Item 1. Legal Proceedings,” above for information regarding such litigation. Such litigation may create uncertainty relating to the Merger, or delay or enjoin the Merger. The combined company may continue to be involved in this litigation after the closing of the Merger. Litigation is often expensive and may divert management’s attention and resources, which could adversely affect NTN’s, Brooklyn’s or the combined company’s business. By virtue of the applicable self-insured retention in NTN’s directors and officers insurance policy, NTN and the combined company may bear all or a significant amount of the costs associated with this litigation. In addition, such insurance may not be sufficient to cover all costs or damages related to this litigation.
The ownership of the combined company common stock is expected to be concentrated, which may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the combined company stock price to decline.
Executive officers and directors of the combined company and their affiliates are expected to beneficially own or control approximately 39.7% of the outstanding shares of the combined company common stock following the closing of the Merger on a fully diluted basis. Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of the combined company, even if such a change of control would benefit the other stockholders of the combined company. The significant concentration of stock ownership may adversely affect the trading price of the combined company’s common stock due to investors’ perception that conflicts of interest may exist or arise.
Risks Related to the Asset Sale
While the Asset Sale is pending, it creates unknown impacts on NTN’s future which could materially and adversely affect its business, financial condition and results of operations.
While the Asset Sale is pending, it creates unknown impacts on NTN’s future. Therefore, NTN’s current or potential business partners may decide to delay, defer or cancel entering into new business arrangements with NTN pending consummation of the Asset Sale. The occurrence of these events individually or in combination could materially and adversely affect NTN’s business, financial condition and results of operations.
The failure to consummate the Asset Sale may materially and adversely affect NTN’s business, financial condition and results of operations.
The Asset Sale is subject to various closing conditions including stockholder approval of the Asset Sale as required under applicable law. NTN cannot control these conditions and cannot assure you that they will be satisfied. If the Asset Sale is not consummated, NTN may be subject to a number of risks, including the following:
The occurrence of any of these events individually or in combination could materially and adversely affect NTN’s business, financial condition and results of operations, which could cause the market value of NTN common stock to decline.
In addition, if the Asset Sale does not close and the Merger does close, the aggregate ownership percentage of the combined company by NTN stockholders will likely decrease due toeffected an increase in the deficitnumber of NTN’s net cashauthorized shares of common stock by 85,000,000, from 15,000,000 shares to 100,000,000 shares, and which we refer to as the Share Increase Amendment. We subsequently filed a resultcertificate of not receivingvalidation with respect to the $2.0 million inShare Increase Amendment with the Asset Sale.
Failure to complete the Asset Sale may result in NTN paying a termination fee to eGames.com.
If the Asset Sale is not completed and the Asset Purchase Agreement is terminated under certain circumstances, NTN may be required to pay eGames.com a termination feeSecretary of $250,000. Even if a termination fee is not payable in connection with a terminationState of the Asset Purchase Agreement, NTN will have incurred significant legal, financial, advisory, accounting, audit and other general operating expenses,State of Delaware, which must be paid whether or notwe refer to as the Asset Sale is completed.
CertainCertificate of the officers and directors of NTN have interests in the Asset Sale that are different from the stockholders of NTN and that may influence them to support or approve the Asset Sale without regard to the interests of the stockholders of NTN.
Certain officers and directors of NTN participate in arrangements that provide them with interests in the Asset Sale that are different from the interests of the stockholders of NTN including, among others, change-in-control benefits and the acceleration of vesting of equity awards. In addition, as an inducement to eGames.com to enter into the Asset Purchase Agreement, eGames.com required that, contingent and effective upon the closing of the Asset Sale, Allen Wolff, our chief executive officer, become the chief executive officer of eGames.com, and that his employment as NTN’s chief executive officer terminate at such time. Mr. Wolff entered into an employment agreement with eGames.comValidation, on September 18, 2020,3, 2021.
RISKS RELATED TO 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 our lender foreclosing on all of our assets and/or 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.
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 shutdown or close all on-site dining operations in the latter half of March 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 decreasedauthorized shares of common stock and related issuance of such shares ratified pursuant to the Share Increase Ratification is void or plateaued, but as jurisdictions began experiencing a resurgence in COVID-19 cases, many jurisdictions reinstated such orders and restrictions, including mandating the shutdown of bars and the closing of all on-site dining operations of restaurants. Jurisdictions that have not imposed governmental orders and restrictions on restaurants and bars or reinstated them could do so at any time. At its peak, approximately 70% of our customers had their subscriptions to our services temporarily suspended. As of November 10, 2020, approximately 11% of our customers remain on subscription suspensions, but that percentage could increase, perhaps materially, at any timevoidable due to a failure of authorization, or (ii) the effectsDelaware Court of Chancery should declare in its discretion that the Share Increase Ratification not be effective or be effective only on certain conditions, which we refer to collectively as the Subsequent Claims, may still be brought within 120 days from the time that the filing of the pandemic on our customers, including as jurisdictions reinstate governmental orders and restrictions impacting our customers. Even in jurisdictions in which governmental orders and restrictions were eased or lifted, certainCertificate of our customers have requested, and others could request, to continue their subscription suspensions because, for example, such customers choose not to re-open despite being permitted to do so. As a result, 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 asValidation with 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.
The full extent to which the COVID-19 pandemic will, directly or indirectly, impact our business, resultsSecretary of operations and financial condition is currently highly uncertain, including due to factors that currently are also highly uncertain, including when, and the extent to which, the negative impactState of the pandemic will improve, including when a substantial majorityState of restaurants acrossDelaware becomes effective in accordance with the U.S. and Canada will be permitted to offer on-site dining and operate at or close to pre-pandemic levels or when a substantial majority of bars across the U.S. and Canada will be permitted to re-open and operate at or close to pre-pandemic levels, when our customers will re-open, or if they will subscribe to our service if and when they do, the ultimate impact of the pandemic and how long it endures, the impact of the current or future resurgences in COVID-19 cases, and the actions required or recommended to contain or treat COVID-19. However, unless in the very near term our subscription revenue, advertising revenue and cash flows from operations return to pre-pandemic levels and/or we raise substantial capital, the amount of time and the amount of cash we have to maintain operations and sustain the negative effects of the pandemic is very limited.
As of September 30, 2020, we had cash, cash equivalents and restricted cash of approximately $1,710,000. As of September 30, 2020, $0.7 million of principal was outstanding under our term loan with Avidbank, $1.6 million of principal was outstanding under the PPP Loan, and $1.0 million of principal was outstanding under the Bridge Loan. As a result of the impact of the pandemic on our business and taking into account our current financial condition and our existing sources of projected revenue and our projected subscription revenue, advertising revenue and cash flows from operations, if we are able to borrow an additional $500,000 from Fertilemind Management, LLC or any other party on or before December 1, 2020, we believe we will have sufficient cash resources to pay forecasted cash outlays only through mid-January 2021, but if we do not borrow such amount from the Fertilemind Management, LLC or any other party, we believe we will have sufficient cash resources to pay forecasted cash outlays only through mid-December 2020, in each case, assuming Avidbank does not take actions to foreclose on our assets in the event we are out of compliance with our financial covenants, and we are able to continue to successfully manage our working capital deficit by managing the timing of payments to our vendors and other third parties. See, “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,” below.
DGCL.
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 unrestricted cash we have in deposit accounts or securities accounts maintained with Avidbank must be not less than the outstanding principal at all times and our asset coverage ratio must be no less than 1.25 to 1.00 at each month-end. As of September 30, 2020, we were in compliance with these covenants. There can beprovide no assurance however, that weSubsequent Claims will satisfy these covenants through December 31, 2020. 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 would 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 disposenot be made within the available time period for making such claims or what the resolution of such property to satisfy our payment obligations.
Our common stock could be delisted or suspended from trading on the NYSE American if we do not regain compliance with continued listing criteria with which weSubsequent Claims would be. If Subsequent Claims are currently not compliant or if we fail to meet any other continued listing criteria.
As previously reported, in March 2020, we received a letter from NYSE Regulation Inc. stating that we are not in compliance with Section 1003(a)(iii) of the NYSE American Company Guide (the “Company Guide”) because we reported stockholders’ equity of less than $6 million as of December 31, 2019 and had net losses in five of our most recent fiscal years ended December 31, 2019. Our stockholders’ equity was $5.1 million as of December 31, 2019. On June 11, 2020, NYSE Regulation notified us that we are not in compliance with Section 1003(a)(ii) of the Company Guide because we reported stockholders’ equity of less than $4.0 million as of March 31, 2020 and had net losses in five of our most recent fiscal years ended December 31, 2019.
On June 11, 2020, the NYSE Regulation notified us thatmade, it has accepted our plan to regain compliance with Section 1003(a)(iii) of the Company Guide and granted us a plan period through September 27, 2021 to regain compliance. On August 12, 2020, NYSE Regulation notified us that we are not in compliance with Section 1003(a)(i) of the Company Guide because we reported stockholders’ equity of less than $2.0 million as of June 30, 2020 and had net losses in five of our most recent fiscal years ended December 31, 2019. We continue to be subject to the procedures and requirements of Section 1009 of the Company Guide.
The listing of our common stock on the NYSE American is being continued during the plan period pursuant to an extension. The NYSE Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with Sections 1003(a)(i), (ii) and (iii) by September 27, 2021 or if we do not make progress consistent with our plan during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate.
We can give no assurances that we will be able to address our non-compliance with the NYSE American continued listing standards or, even if we do, that we will be able to maintain the listing of our common stock on the NYSE American. Our common stock could be delisted because we do not make progress consistent with our plan during the plan period, because we do not regain compliance by September 27, 2021, or because we become out of compliance with other NYSE American listing standards. In addition, we may determine to pursue business opportunities that reduces our stockholders’ equity below the level required to maintain compliance with NYSE American continued listing standards. The delisting of our common stock for whatever reason could, among other things, substantially impair our ability to raise additional capital; result in a loss of institutional investor interest and fewer financing opportunities for us; and/or result in potential breaches of representations or covenants in agreements pursuant to which we made representations or covenants relating to our compliance with applicable listing requirements. Claims related to any such breaches, with or without merit, could result in costly litigation, significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on our liquidity, which could result in our filing for bankruptcy or an involuntary petition for bankruptcy being filed against us.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
If our common stockappropriate legends were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
If our common stock were delisted or suspended from trading on the NYSE American, it may be subjectaffixed to the so-called “penny stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has a market price per shareinstruments representing such securities issued in such transactions.
Contents
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not Applicable
None
| Exhibits. |
| Exhibit | Description | Incorporated | ||
| Restated Certificate of Incorporation | Exhibit to Form 10-Q filed on August 14, 2013 | |||
| Certificate of Amendment to the Restated Certificate of Incorporation (reverse/forward split) | Exhibit to Form 8-K filed on June 17, 2016 | |||
| Certificate of Decrease of the Series A Convertible Preferred Stock | Exhibit to Form 8-K filed on April 12, 2017 | |||
| Certificate of Amendment to the Restated Certificate of Incorporation (decrease in authorized capital stock) | Exhibit to Form 8-K filed on June 9, 2017 | |||
| Exhibit to Form 8-K filed on | ||||
| Certificate of Amendment to Restated Certificate of Amendment, dated March 25, 2021 (Authorized Share Increase) | Exhibit to Form 8-K filed on March 31, 2021 | |||
| Certificate of Amendment to Restated Certificate of Amendment, dated March 25, 2021 (Name Change) | Exhibit to Form 8-K filed on March 31, 2021 | |||
| (q) Certificate of Validation of Brooklyn ImmunoTherapeutics, Inc., as filed with the Secretary of State of the State of Delaware on September | Exhibit to Form 8-K filed on September | |||
| Exhibit to Form 8-K filed on September | ||||
| Agreement and Plan of Acquisition, dated as of July 16, 2021, by and among Brooklyn ImmunoTherapeutics, Inc., Brooklyn Acquisition Sub, Inc., Novellus LLC, Novellus, Inc., and the Sellers’ Representative. | Exhibit to Form 8-K filed on July 19, 2021 | |||
| Registration Rights Agreement, dated as of July 16, 2021, by and among Brooklyn ImmunoTherapeutics, Inc. and the individuals and entities named therein. | Exhibit to Form 8-K filed on July 19, 2021 | |||
| Executive Employment Agreement, | Exhibit to Form 8-K filed on July 19, 2021 | |||
| Executive Employment Agreement, effective as of September | Exhibit to Form 8-K filed on September | |||
| Form of | Exhibit to Form 8-K filed on | |||
| Filed herewith | ||||
| Brooklyn ImmunoTherapeutics, Inc. | Exhibit to Form 8-K filed on | |||
| Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | |||
| Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | |||
| Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
| Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | Filed herewith | ||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith | ||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||
| Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | |||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
| * | Certain |
| + | Indicates management contract or compensatory plan. |
| † | Schedules and exhibits have been omitted pursuant to | |||
| Date: November | By: | /s/ |