PART
I
ITEM
1.
Business
About
Our Business and How We Talk About It
We
deliver interactive entertainment and innovative dining technology to bars and restaurants in North America. Customers subscribe
to our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and single
player games, nationwide competitions, and by offering self-service dining features including dynamic menus, touchscreen ordering
and secure payment. Our platform can improve operating efficiencies, create connections among the players and venues and amplify
guests’ positive experiences. Built on an extended network platform, our interactive entertainment system has historically
allowed multiple players to interact at the venue and more recently allows for competition between venues, referred to as massively
multiplayer gaming. Our current platform, which we refer to as Buzztime Entertainment On Demand, or BEOND, was commercially launched
during 2013 and then scaled during 2014. We continue to enhance our network architecture and the BEOND tablet platform and player
engagement paradigms. We also continue to support our legacy network product line, which we refer to as Classic.
We
currently generate revenue by charging subscription fees for our service to our network subscribers, by leasing equipment (including
tablets used in our BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers, by
hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, from providing professional
services (such as developing certain functionality within our platform for customers), and from pay-to-play single player games.
Since
2015, over 115
million games were played on our network annually,
and as of December 31, 2017, approximately 56% of our network subscriber venues are affiliated with national and regional restaurant
brands, including Buffalo Wild Wings, Buffalo Wings & Rings, Old Chicago, Native Grill & Wings, Houlihans, Beef O’Brady’s,
Boston Pizza, and Arooga’s.
We
own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks
to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our
property. Other trademarks are the property of their respective owners.
Unless
otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us”
and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers”
or “customers” refer to venues that subscribe to our network service; (c) to “consumers” or “players”
refer to the individuals that engage in our games, events, and entertainment experiences available at our customers’ venues
and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant) of our customers at which
our games, events, and entertainment experiences are available to consumers.
Recent
Developments
Amended
and Restated Credit Facility
In
November 2017, we entered into an amended and restated loan and security agreement (the “Amended and Restated Loan Agreement”)
with East West Bank (“EWB”). The Amended & Restated Loan Agreement amends and restates the loan and security agreement
that we entered into with EWB dated as of April 14, 2015 (as the same has been previously amended, the “Prior Loan Agreement”).
The
following is a summary of the material terms of the Amended and Restated Loan Agreement:
●
EWB
loaned us $4,500,000 as a one-time 36-month term loan, $4,450,000 of which we agreed to use, and did use, to refinance the $4,450,000
that we had outstanding under the Prior Loan Agreement. We applied the additional $50,000 to pay the facility fee ($45,000) and
to pay reasonable costs or expenses incurred by EWB in connection with, among other matters, the preparation and negotiation of
the Amended and Restated Loan Agreement.
●
We
are required to make payments on the loan on the last calendar day of each month commencing on December 31, 2017 and through its
maturity date, November 29, 2020. Payments will be interest only until the payment due on June 30, 2018, at which time payments
will become principal plus interest.
● Other
than during the continuance of an event of default, the loan bears interest, on the outstanding daily balance thereof, at our
option, at either: (A) a variable rate per annum equal to the prime rate as set forth in The Wall Street Journal plus 1.75%, or
(B) a fixed rate per annum equal to the LIBOR rate for the interest period for the advance plus 4.50%.
● We
continue to grant and pledge to EWB a first-priority security interest in all our existing and future personal property, including
our intellectual property, subject to customary exceptions.
● Subject
to customary exceptions, we continue to generally be prohibited from borrowing additional Indebtedness other than subordinated
debt and up to $2.0 million in the aggregate for the purpose of equipment financing to the extent EWB approves such debt. “Indebtedness”
means (i) all our other indebtedness for borrowed money or the deferred purchase price of property or services, (ii) all our obligations
evidenced by notes, bonds, debentures and similar instruments, (iii) all our capital lease obligations, and (iv) all our contingent
obligations.
For
additional information regarding this credit facility, see “PART II—ITEM 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity and Capital Resources,” below.
Our
Strategy
Below
is a discussion of our strategy and highlights of accomplishments and milestones achieved during 2017:
Scale
digital menu and payment functionality.
We continue focusing on delivering digital menu and payment functionality on the tablet
platform, which we believe will improve the operational and marketing value of our product offering. This expanded functionality
will help us deliver an enhanced guest experience. Rolling out this functionality will continue to be a key focus for us in 2018.
As previously announced in March 2017, we have expanded our relations with Buffalo Wild Wings, who chose us to be its provider
of digital menu, order, and payment functionality, and since that time, we have continued making progress on the software integration.
In the fourth quarter of 2017, we completed much of the integration work required for payment functionality and subsequently delivered
the first batch of tablets with magnetic swipe, Europay, MasterCard® and Visa® (“EMV”) and Near-Field
Communication (“NFC”) capabilities to 28 Buffalo Wild Wings locations. Due to the acquisition of
Buffalo Wild Wings by Arby’s Restaurant Group, Inc., and to the attendant changes with Buffalo Wild Wings’ operations,
the rollout of our expanded functionality has been put on hold until its new management has time to assess all of the programs
at Buffalo Wild Wings. Based on discussions to date, we expect that the rollout could be put on hold for up to
six months and that we could re-commence the rollout at additional Buffalo Wild Wings locations shortly thereafter.
After the initial set of locations is running smoothly, we anticipate rolling out our system throughout the rest of Buffalo Wild
Wings corporate and franchise locations with which we have partnered. We expect our inventory balances to fluctuate as
we prepare to expand and support this relationship.
Improve
value and price for our “independent” customers.
During 2017, we continued to make progress on our hardware
design and quality in order to reduce expense, while expanding capabilities, retaining consistency in the design and giving
us the ability to offer flexibility in our pricing for quality independent customers. We are now deploying our new tablets
and cases into the market and are better positioned in 2018 to acquire new independent sites and new venues in other
vertical markets to help grow sites.
Refine
our commercial execution.
We are focused on increasing our site count of both independent customers and chain customers. Receiving
a reference from a national chain account, such as Buffalo Wild Wings, is critical to our chain efforts, and our ability to demonstrate
Buffalo Wild Wings as a strategic user of the menu, order and pay functionality is critical to receiving that reference. For our
independent customers, we continue to model and test our go-to-market efforts by improving our sales processes, technology and
people.
Expand
revenue opportunities.
We intend to grow the consumer audience by engaging them more with improved entertainment experiences
and providing premium content that we can monetize through direct payment. In addition, we have been researching and testing our
services within adjacent markets, such as senior centers, car dealerships and casinos. Although the growth of our previously
announced partnership with Heartland has been slower than anticipated due to a variety of technical issues, we continue to work
with Heartland and its dealer network. As we announced earlier this year, we entered into a licensing agreement with Scientific
Games to license our trivia games for installation on casino slot machines where we will earn a per game license fee for each
slot machine that has one of our trivia games installed on it. We have since sold a few contracts and are awaiting installation,
which we expect to occur during the second quarter of 2018. We also developed a stand-alone, single unit tablet to serve Scientific
Games customers in the market where casinos use tablets in retail settings to redeem loyalty points. We are excited about the
value we feel we can bring to this market with both of these product offerings. We also continue to monetize the network through
local and national advertising revenue streams. During the third quarter of 2017, we partnered with The Chive, a digital media
company, to expand the size and reach of our network, which we believe will allow us to expand our advertising revenues. They
have delivered sales as well as a pipeline for growth. Lastly, in January 2018, we signed our first contract to sell several thousands
of our tablets to a customer who will deliver their services to their market. We expect to deliver these
tablets and recognize revenue sometime between the second and third quarter of 2018. We are also working with this customer
to license our gaming content for its customers, which may represent revenue sharing opportunity. We anticipate several follow-on
tablet orders and believe that this is an exciting recurring revenue opportunity that can scale.
Products
and Services
Our
principal product and service is our BEOND platform. Built on an extended network platform, our interactive entertainment system
offers trivia, card, sports and single player games, nationwide competitions, and self-service features including dynamic menus,
touchscreen ordering and secure payment. Generally, as part of the subscription to our BEOND platform, we provide the equipment
used in our BEOND platform (including tablets used in our BEOND tablet platform and the cases and charging trays for the tablets)
to network subscribers, though we also lease such equipment to certain network subscribers. In 2017, we began licensing our content
to customers to be installed on equipment that they obtain from other parties. In 2018, we began selling the equipment used in
our BEOND platform to customers who may not subscribe to our BEOND platform but who can use the equipment in their business for
other purposes.
Our
primary network subscribers are bars and restaurants in North America, which we target directly through our internal sales organization.
More recently we have begun offering our BEOND platform in adjacent markets, such as senior centers, car dealerships and casinos,
which we target through third parties who have existing business relationships with potential customers in such markets.
We
primarily develop the content and functionality available through our BEOND platform internally. The tablet used in our BEOND
platform is an Android-based tablet customized to our specifications by a single unaffiliated third-party manufacturer. Such third-party
also manufacturers the cases and charging trays for the tablets. Such manufacturer sources the raw materials used to manufacture
such equipment. See ITEM 1A., Risk Factors—Risk Factors That May Affect Our Business—"A disruption in the supply
of equipment could negatively impact our subscriptions and revenue” and “—Our business could be adversely impacted
if the sole manufacturer of our customized tablet and our tablet equipment is not able to meet our manufacturing quality standards,”
below.
Competition
We
face direct competition in venues and face competition for total entertainment and marketing dollars in the marketplace from other
companies offering similar content and services. A relatively small number of direct competitors are active in the hospitality
marketing services and entertainment markets, including Ziosk and E la Carte, Inc. Competing forms of technology, entertainment,
and marketing available in hospitality venues include games, apps and other forms of entertainment offerings available directly
to consumers on their smart phones and tablets, on-table bar and restaurant entertainment systems, music and video-based systems,
live entertainment and games, cable, satellite and pay-per-view programming, coin-operated single-player games/amusements, and
traffic-building promotions like happy hour specials and buffets.
Buzztime
Significant Customer
Our
customers 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 December 31, 2017, 2,730 venues in the U.S. and Canada subscribed to our interactive
entertainment network, of which, approximately 45% were Buffalo Wild Wings corporate-owned restaurants and its franchisees (collectively,
“Buffalo Wild Wings”). For the years ended December 31, 2017 and 2016, revenue generated from Buffalo Wild Wings was
as follows:
|
|
Year
Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Buffalo Wild Wings revenue
|
|
$
|
8,678,000
|
|
|
$
|
8,913,000
|
|
Percent of total revenue
|
|
|
41
|
%
|
|
|
40
|
%
|
As
of December 31, 2017 and 2016, amounts included in accounts receivable from Buffalo Wild Wings was as follows:
|
|
Year
Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Buffalo Wild Wings accounts
receivable
|
|
$
|
191,000
|
|
|
$
|
261,000
|
|
Backlog
We
generally do not have a significant backlog because we normally can deliver and install new systems at venues within the delivery
schedule requested by customers (generally within three to four weeks).
Licensing,
Trademarks, Copyrights and Patents
A
majority of the gaming content available on our platform is internally developed. The balance is licensed from third parties.
We also license third party content for our pay-to-play and free-to-consumer games lobby. The amounts paid for such third party
licensed content was not material during either 2017 or 2016.
Our
intellectual property assets, including patents, trademarks, and copyrights, are important to our business and, accordingly, we
actively seek to protect the proprietary technology that we consider important to our business. No single patent or copyright
is solely responsible for protecting our products.
We
keep confidential as trade secrets our technology, know-how and software. Most of the hardware we use in our operations is purchased
from a third party and customized for use with our service. We enter into agreements with third parties with whom we conduct business,
which contain provisions designed to protect our intellectual property and to limit access to, and disclosure of, our proprietary
information. We also enter into confidentiality and invention assignment agreements with our employees and contractors.
We
believe the duration of our patents is adequate relative to the expected lives of our products. We consider the following United
States patents to be important to the protection of our products and service:
Patent
No.
|
|
Description
|
|
Expiration
Date
|
8,562,438
|
|
System
and method for television-based services
|
|
4/21/2031
|
8,562,442
|
|
Interactive
gaming via mobile playmaker
|
|
6/3/2031
|
8,790,186
|
|
User-controlled
entertainment system, apparatus and method
|
|
2/6/2034
|
8,898,075
|
|
Electronic
menu system and method
|
|
9/11/2032
|
9,044,681
|
|
System
and method for television-based services
|
|
10/13/2033
|
9,358,463
|
|
Interactive
gaming via mobile playmaker
|
|
10/16/2033
|
9,498,713
|
|
User-controlled
entertainment system, apparatus and method
|
|
2/6/2034
|
We
have trademark protection for the names of our key proprietary programming, products, and services to the extent that we believe
trademark protection is appropriate. We are expanding our efforts to protect these investments. We consider the Buzztime, Playmaker,
Mobile Playmaker and PlayersPlus trademarks and our other related trademarks to be valuable assets, and we seek to protect them
through a variety of actions. Our content, branding, and some of our game titles, such as Countdown, SIX, and Showdown are also
protected by copyright and trademark law.
Geographic
Markets
As
of December 31, 2017, 2,730 venues in the U.S. and Canada subscribed to our interactive entertainment network. The following table
presents the geographic breakdown of our revenue for the last two fiscal years.
|
|
Year
Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
|
97
|
%
|
|
|
97
|
%
|
Canada
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
The
following table presents the geographic breakdown of our long-term tangible assets for our last two fiscal years.
|
|
Year
Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
|
93
|
%
|
|
|
97
|
%
|
Canada
|
|
|
7
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
Government
Contracts
We
provide our content distribution services through our network to colleges, universities, and a small number of government agencies,
typically military base recreation units. However, the number of government customers is small compared to our overall customer
base. We provide our products and services to government agencies under contracts with substantially the same terms and conditions
as are in place with non-government customers.
Government
Regulations
The
cost of compliance with federal, state, and local laws has not had a material effect on our capital expenditures, earnings, or
competitive position to date. In December 2012, we received approval from the Federal Communications Commission, or the FCC, for
our BEOND tablet charging trays, and in September 2015, we received FCC approval for our third generation BEOND tablet cases with
and without payment electronics. The BEOND tablets we currently use have been certified by its manufacturer.
In
addition to laws and regulations applicable to businesses generally, we are also subject to laws and regulations that apply directly
to the interactive entertainment and product marketing industries. Additionally, state and federal governments may adopt additional
laws and regulations that address issues related to certain aspects of our business such as:
|
●
|
user
privacy;
|
|
|
|
|
●
|
copyrights;
|
|
|
|
|
●
|
gaming,
lottery and alcohol beverage control regulations;
|
|
|
|
|
●
|
consumer
protection;
|
|
|
|
|
●
|
the
distribution of specific material or content; and
|
|
|
|
|
●
|
the
characteristics and quality of interactive entertainment products and services.
|
As
part of our service, we operate games of chance and games of skill. These games are subject to regulation in many jurisdictions.
Our games are played just for fun and winner recognition. None of our games award anything of value to winners. In the future,
we may provide nominal monetary prizes to trivia competition participants, in compliance with applicable regulations. Included
in our offering are a number of interactive card games, such as Texas Hold’em poker. These card games are restricted in
certain jurisdictions. The laws and regulations that govern these games, however, vary from jurisdiction to jurisdiction and are
subject to legislative and regulatory change, as well as law enforcement discretion. We may find it necessary to eliminate, modify,
or cancel certain components of our offerings in certain states or jurisdictions based on changes in law, regulations and law
enforcement discretion, which could result in additional development costs and/or the possible loss of customers and revenue.
Web
Site Access to SEC Filings
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, and
proxy statements and other information we file or furnish pursuant to Section 13(a) or 15(d) of the Exchange Act are available
on our website at
www.buzztime.com/business/investor-relations/
under the heading
SEC Filings
as soon as
reasonably practicable after we electronically file such reports with, or furnish them to, the SEC. In addition, we make available
on that same website under the heading
Corporate Governance
our (i) our code of conduct and ethics; (ii) our corporate
governance guidelines; and (iii) the charter of each active committee of our board of directors. We intend to disclose any amendment
to, or a waiver from, a provision of our code of conduct and ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any
element of the code of ethics definition enumerated in paragraph (b) of Item 406 of Regulation S-K by posting such information
on that website.
Materials
we file with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC
also maintains a website at
www.sec.gov
that contains reports, proxy and information statements, and other information
regarding our company that we file electronically with the SEC.
Employees
As
of March 6, 2018, we employed approximately 104 people on a full-time basis and 342 people on a part-time basis.
We also utilize independent contractors for specific projects. None of our employees are represented by a labor union, and we
believe our employee relations are satisfactory.
Our
Corporate History
NTN
Buzztime, Inc. was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate name to NTN Communications,
Inc. in 1985. The name was changed to NTN Buzztime, Inc. in 2005 to better reflect the growing role of the Buzztime consumer brand.
ITEM
1A
. Risk Factors
Our
business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown,
many of which are not exclusively within our control, including but not limited to those described below, any one or more of which
could, directly or indirectly, cause our actual financial condition and operating results to differ materially from historical
or anticipated future financial condition and operating results. Any of these factors, in whole or in part, could materially and
adversely affect our business, financial condition, operating results and stock price. We urge investors to carefully consider
the risk factors described below in evaluating the information contained in this report.
Risk
Factors That May Affect Our Business
We
may not be able to compete effectively within the highly competitive and evolving interactive games, entertainment and marketing
services industries.
We
face intense competition in the markets in which we operate. We face significant competition for entertainment and marketing services
in hospitality venues from other companies offering similar content and services. Our services also compete with games, apps and
other forms of entertainment offerings available directly to consumers on their smart phones and tablets. See “ITEM 1. Business—Competition,”
above. Some of our current and potential competitors enjoy substantial competitive advantages, including greater financial resources
for competitive activities, such as content development and programming, research and development, strategic acquisitions, alliances,
joint ventures, and sales and marketing. As a result, our current and potential competitors may be able to respond more quickly
and effectively than we can to new or changing opportunities, technologies, standards, or consumer preferences.
The
increased availability of the internet and wireless networks provides consumers with an increasing number of alternatives to our
entertainment offerings. With this increasing competition and the rapid pace of change in product and service offerings, we must
be able to compete in terms of technology, content, and management strategy. If we fail to provide competitive, engaging, quality
services and products, we will lose revenues to competing companies and technologies. Increased competition may also result in
price reductions, fewer customer orders, reduced gross margins, longer sales cycles, reduced revenues, and loss of market share.
New
products and rapid technological change, especially in the mobile and wireless markets, may render our operations obsolete or
noncompetitive.
The
emergence of new entertainment products and technologies, changes in consumer preferences, the adoption of new industry standards,
and other factors may limit the life cycle and market penetration of our technologies, products, and services. In particular,
the mobile and wireless device, content, applications, social media, and entertainment markets are highly competitive and rapidly
changing. Accordingly, our future performance will depend on our ability to:
|
●
|
identify
emerging technological trends and industry standards in our market;
|
|
|
|
|
●
|
identify
changing consumer needs, desires, or tastes;
|
|
|
|
|
●
|
develop
and maintain competitive technology, including new hardware and content products and service offerings;
|
|
|
|
|
●
|
improve
the performance, features, and reliability of our existing products and services, particularly in response to changes in consumer
preferences, technological changes, and competitive offerings; and
|
|
|
|
|
●
|
bring
technology that is appealing to consumers to the market quickly at cost-effective prices.
|
If
we do not compete successfully in developing new products and keep pace with rapid technological change, we will be unable to
achieve profitability or sustain a meaningful market position.
We
may not be successful in developing and marketing new products and services that respond to technological and competitive developments,
changing customer needs, and consumer preferences. We may have to incur substantial costs to modify or adapt our products or services
to respond to these developments, customer needs, and changing preferences. We must be able to incorporate new technologies into
the products we design and develop in order to address the increasingly complex and varied needs of our customer base. Any significant
delay or failure in developing new or enhanced technology, including new product and service offerings, could result in a loss
of actual or potential market share and a decrease in revenues.
We
receive a significant portion of our revenues from Buffalo Wild Wings, and any decrease in the amount of their business could
materially and adversely affect our cash flow and revenue.
For
the year ended December 31, 2017, Buffalo Wild Wings accounted for approximately 41%, or $8,678,000, of our total revenue. As
of that date, approximately $191,000 was included in accounts receivable. If a significant number of the Buffalo Wild Wings corporate-owned
restaurants or its franchisees, or any other customer who may in the future represent a significant portion of our revenue, breach
or terminate their subscriptions or otherwise decrease the amount of business they transact with us, we could lose a significant
portion of our revenues and cash flow.
A
disruption in the supply of equipment could negatively impact our subscriptions and revenue.
During
the fourth quarter of 2016, we began having an unaffiliated third party manufacture an Android-based tablet customized to our
specifications. Other than a small amount of inventory of the third-party tablet we have historically used in our BEOND platform,
we expect to use our customized tablet on a going-forward basis. This third party manufacturer also manufactures our tablet equipment—tablet
charging trays and tablet cases. We currently do not have an alternative manufacturing source for our customized tablet or the
tablet equipment or alternatives for the tablet equipment.
If
our sole manufacturer is delayed in delivering tablets to us, becomes unavailable, has product quality issues, or shortages occur,
in addition to not realizing the benefits of having a tablet manufactured to our specifications, we would need to return to the
historical third-party tablets or find an alternative device. Similarly, if our sole manufacturer is delayed in delivering the
tablet equipment to us, becomes unavailable, has product quality issues, or shortages occur, we may be unable to timely obtain
replacement tablet equipment. Delays, unavailability of the tablet or tablet equipment, product quality issues and shortages could
damage our reputation and customer loyalty, cause subscription cancellations, increase our expense and reduce our revenue. See
also “Our business could be adversely impacted if the sole manufacturer of our customized tablet and tablet equipment is
not able to meet our manufacturing quality standards,” below.
If
our sole manufacturer and/or suppliers were to go out of business or otherwise become unable to meet our needs for reliable equipment,
the process of locating and qualifying alternate sources could take months, during which time our production could be delayed,
and may, in some cases, require us to redesign our products and systems. Such delays and potentially costly re-sourcing and redesign
could have a material adverse effect on our business, operating results, and financial condition.
Our
business could be adversely impacted if the sole manufacturer of our customized tablet and our tablet equipment is not able to
meet our manufacturing quality standards.
As
discussed above, one unaffiliated third party manufactures our customized tablet and our tablet equipment. Continued improvement
in supply-chain management and in manufacturing of our customized tablet and tablet equipment and manufacturing quality and product
testing are important to our business. Flaws in the design and manufacturing of our customized tablet or tablet equipment or both
(by us or our supplier) could result in substantial delays in shipment and in substantial repair, replacement or service costs,
could damage our reputation and customer loyalty, could cause subscription cancellations, and could increase our expense and reduce
our revenue. Costs associated with tablet or tablet equipment defects due to, for example, problems in our design and manufacturing
processes, could include: (a) writing off the value of inventory; (b) disposing of items that cannot be fixed; (c) recalling items
that have been shipped; and (d) providing replacements or modifications. These costs could be significant and may increase expenses
and lower gross margin. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test
and manufacturing processes for our tablet and related equipment will be sufficient to permit us to avoid quality issues. Significant
quality issues could have a material adverse effect on our business, results of operations or financial condition.
If
we do not adequately protect our proprietary rights and intellectual property or we are subjected to intellectual property claims
by others, our business could be seriously damaged.
We
rely on a combination of trademarks, copyrights, patents, and trade secret laws to protect our proprietary rights in our products.
We have a small number of patents and patent applications pending in jurisdictions related to our business activities. Our pending
patent applications and any future applications might not be approved. Moreover, our patents might not provide us with competitive
advantages. Third parties might challenge our patents or trademarks or attempt to use infringing technologies or brands which
could harm our ability to compete and reduce our revenues, as well as create significant litigation expense. In addition, patents
and trademarks held by third parties might have an adverse effect on our ability to do business and could likewise result in significant
litigation expense. Furthermore, third parties might independently develop similar products, duplicate our products or, to the
extent patents are issued to us, design around those patents. Others may have filed and, in the future may file, patent applications
that are similar or identical to ours. Such third-party patent applications might have priority over our patent applications.
To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States
Patent and Trademark Office. Such interference proceedings could result in substantial cost to us.
We
believe that the success of our business also depends on such factors as the technical expertise and innovative capabilities of
our employees. It is our policy that all employees and consultants sign non-disclosure agreements and assignment of invention
agreements. Our competitors, former employees, and consultants may, however, misappropriate our technology or independently develop
technologies that are as good as or better than ours. Our competitors may also challenge or circumvent our proprietary rights.
If we have to initiate or defend against an infringement claim to protect our proprietary rights, the litigation over any such
claim, with or without merit, could be time-consuming and costly to us, adversely affecting our financial condition.
From
time to time, we hire or retain employees or consultants who may have worked for other companies developing products similar to
those that we offer. These other companies may claim that our products are based on their products and that we have misappropriated
their intellectual property. Any such claim, with or without merit, could be time-consuming and costly to us, adversely affecting
our financial condition.
We
may be liable for the content and services we make available on our Buzztime network and the internet.
We
make content and entertainment services available on our Buzztime network and the internet which includes games and game content,
software, and a variety of other entertainment content. The availability of this content and services and our branding could result
in claims against us based on a variety of theories, including defamation, obscenity, negligence, or copyright or trademark infringement.
We could also be exposed to liability for third-party content accessed through the links from our websites to other websites.
Federal laws may limit, but not eliminate, our liability for linking to third-party websites that include materials that infringe
copyrights or other rights, so long as we comply with certain statutory requirements. We may incur costs to defend against claims
related to either our own content or that of third parties, and our financial condition could be materially adversely affected
if we are found liable for information that we make available. Implementing measures to reduce our exposure may require us to
spend substantial resources and may limit the attractiveness of our services to users which would impair our profitability and
harm our business operations.
Our
cash flow may not cover our capital needs and we may need to raise additional funds in the future. Such funds may not be available
on favorable terms or at all and, if available, may dilute current stockholders.
Our
capital requirements will depend on many factors, including:
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ability to generate cash from operating activities;
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acceptance
of, and demand for, our interactive games and entertainment;
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the
costs of continuing to develop and implement our BEOND tablet platform and product line;
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the
costs of developing new entertainment content, products, or technology or expanding our offering to new media platforms such
as the internet and mobile phones;
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the
extent to which we invest in the creation of new entertainment content and new technology; and
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the
number and timing of acquisitions and other strategic transactions, if any.
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In
addition, in order to fully execute on our long-term strategic initiatives discussed above under the section entitled “ITEM
1. Business—Our Strategy,” we believe we will likely require additional funding in the future. If we need to raise
additional funds in the future, such funds may not be available on favorable terms, or at all. Furthermore, if we issue equity
or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities
may have rights, preferences, and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable
terms, or at all, we may not be able to continue to develop and implement our BEOND technology platform and product line, develop
or enhance our other products and services, successfully execute our business plan or any or all of our strategic initiatives,
take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.
We
have experienced significant losses, and we may incur significant losses in the future.
We
have a history of significant losses, including net losses of $1,077,000 and $2,923,000 for the years ended December 31, 2017
and 2016, respectively, and have an accumulated deficit of $129,119,000 as of December 31, 2017. We may also incur future operating
and net losses, due in part to expenditures required to continue to implement our business strategies, including the continued
development and implementation of our BEOND technology platform and product line. Despite significant expenditures, we may not
be able to achieve or maintain profitability. Moreover, even if we do achieve profitability, the level of any profitability cannot
be predicted and may vary significantly from quarter to quarter and year to year. See also “—Risks Relating to the
Market for Our Common Stock—If we are again determined to be non-compliant with any of the NYSE American continued listing
standards within twelve months of May 12, 2017, depending on the nature of such non-compliance, NYSE Regulation may truncate the
compliance procedures available to us or immediately initiate delisting proceedings,” below.
We
may not be able to significantly grow our subscription revenue and implement our other business strategies.
Our
success depends on our ability to increase market awareness and encourage the adoption of the Buzztime brand and our Buzztime
network among hospitality venues such as restaurants, sports bars, taverns and pubs, and within the interactive game player community.
Our success also depends on our ability to improve customer retention. We may not be able to leverage our resources to expand
awareness of and demand for our Buzztime network. In addition, our efforts to improve our game platform and content may not succeed
in generating additional demand for our products or in strengthening the loyalty and retention of our existing customers. The
degree of market adoption of our Buzztime network will depend on many factors, including consumer preferences, the availability
and quality of competing products and services, and our ability to leverage our brand.
Our
success also depends on our ability to implement our other business strategies, which include developing our BEOND tablet platform
that allows for consumer play across the digital platform, developing more premium content that allow us to grow the revenue stream
directly from consumers, developing dynamic menuing and point-of-sale, or POS, integration competency, and growing our marketing
services and sponsorship revenues. Implementing these strategies will require us to dedicate significant resources to, among other
things, fully developing and implementing our BEOND tablet platform and product line, expanding our other product offerings, customizing
our products and services to meet the unique needs of select accounts, and expanding and improving our marketing services and
promotional efforts. We may be unable to successfully implement these strategies as currently planned.
Our
products and services are subject to government regulations that may restrict our operations or cause demand for our products
to decline significantly.
In
addition to laws and regulations applicable to businesses generally, we are also subject to laws and regulations that apply specifically
to the interactive entertainment and product marketing industries. In addition, we operate games of chance and, in some instances,
we may provide items of nominal value (e.g., key chains, etc.) to the venue that hosts a game, and the venue may award
such items to consumers. These games are regulated in many jurisdictions and the laws and regulations vary from jurisdiction to
jurisdiction. See “ITEM 1. BUSINESS—Government Regulations.”
We
may find it necessary to eliminate, modify, suspend, or cancel certain features of our products (including the games we offer)
in certain jurisdictions based on the adoptions of new laws and regulations or changes in law or regulations or the enforcement
thereof, which could result in additional development costs and/or the loss of customers and revenue.
Communication
or other system failures could result in customer cancellations and a decrease in our revenues.
We
rely on continuous operation of our information technology and communications systems, and those of a variety of third parties,
to communicate with and to distribute our services to the locations of our network subscribers. We currently transmit our data
to our customers via broadband internet connections including telephone and cable TV networks. Both our communications systems
and those of third parties on which we rely are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods,
storms, fires, power loss, telecommunications and other network failures, equipment failures, computer viruses, computer denial
of service or other attacks, and other causes. These systems are also subject to break-ins, sabotage, vandalism, and to other
disruptions, for example if we or the operators of these systems and system facilities have financial difficulties. Some of our
systems are not fully redundant, and our system protections and disaster recovery plans cannot prevent all outages, errors, or
data losses. In addition, our services and systems are highly technical and complex and may contain errors or other vulnerabilities.
Any errors or vulnerabilities in our products and services, damage to or failure of our systems, any natural or man-made disaster,
or other unanticipated problems at our facilities or those of a third party, could result in lengthy interruptions in our service
to our customers, which could reduce our revenues and cash flow, and damage our brand. Any interruption in communications or failure
of proper hardware or software function at our or our customers’ venues could also decrease customer loyalty and satisfaction
and result in a cancellation of our services.
Our
success depends on our ability to recruit and retain skilled professionals.
Our
business requires experienced programmers, creative designers, application developers, and sales and marketing personnel. Our
success will depend on identifying, hiring, training, and retaining such experienced and knowledgeable professionals. We must
recruit and retain talented professionals in order for our business to grow. There is significant competition for the individuals
with the skills required to develop the products and perform the services we offer. We may be unable to attract a sufficient number
of qualified individuals in the future to sustain and grow our business, and we may not be successful in motivating and retaining
the individuals we are able to attract. If we cannot attract, motivate, and retain qualified technical and sales and marketing
professionals, our business, financial condition, and results of operations will suffer.
We
have incurred significant net operating loss carryforwards that we will likely be unable to use.
As
of December 31, 2017, we had federal income tax net operating loss (“NOL”) carryforwards of approximately $66,554,000,
portions of which will continue expiring in 2018. As of December 31, 2017, we had state income tax NOL carryforwards of approximately
$29,185,000, portions of which will continue expiring in 2018. We believe that our ability to utilize our NOL carryforwards may
be substantially restricted by the passage of time and the limitations of Section 382 of the Internal Revenue Code, which apply
when there are certain changes in ownership of a corporation. To the extent we begin to realize significant taxable income, these
Section 382 limitations may result in our incurring federal income tax liability notwithstanding the existence of otherwise available
NOL carryforwards. We have established a full valuation allowance for substantially all of our deferred tax assets, including
the NOL carryforwards, since we do not believe we are likely to generate future taxable income to realize these assets.
We
are subject to cybersecurity risks and incidents.
Our
business involves transmitting payment information of our customers and certain personal information of consumers (such as their
name, date of birth, and email address). In the future, we may store and transmit additional personal information of consumers,
particularly as the services of the BEOND tablet platform become more advanced to include POS integration. While we have implemented
measures designed to prevent security breaches and cyber incidents, any failure of these measures and/or any material security
breaches, theft, misplaced or lost data, programming errors, employee errors and/or malfeasance could potentially lead to the
compromise of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks,
unauthorized access, use, disclosure, modification or destruction of information, system downtimes, and operational disruptions.
In addition, a cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness,
remediation or increased protection costs, litigation or regulatory action.
We
could become subject to additional regulations and compliance requirements as we introduce features in direct payments from consumers.
In
preparation for expanding features and functionality to our BEOND tablet platform that involve us accepting credit card and other
forms of payments directly from consumers, we certified our compliance with Payment Card Industry (“PCI”) Data Security
Standard v3.1 as a service provider, and will be required to do so annually. Compliance with additional regulations and requirements
may be difficult for us; thereby limiting our ability to grow the amount of revenue we receive directly from consumers. In addition
to these additional regulations and requirements, if we fail to comply with the rules or requirements of any provider of a payment
method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods we accept,
or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction
fees and may lose, or face restrictions placed upon, our ability to accept credit card and debit card payments from consumers.
Risks
Relating to the Market for Our Common Stock
If
we are again determined to be non-compliant with any of the NYSE American continued listing standards within twelve months of
May 12, 2017, depending on the nature of such non-compliance, NYSE Regulation may truncate the compliance procedures available
to us or immediately initiate delisting proceedings.
On
May 12, 2017, as previously reported, we received a letter from NYSE Regulation Inc. notifying us that we have regained compliance
with Sections 1003(a)(ii) and (iii) of the NYSE American Company Guide. As previously reported, NYSE Regulation previously notified
us that we were not in compliance with Section 1003(a)(iii) because we reported stockholders’ equity of less than $6 million
as of September 30, 2015 and had net losses in five of our most recent fiscal years ended December 31, 2014, and that we were
not in compliance with Section 1003(a)(ii) because we reported stockholders’ equity of less than $4 million as of December
31, 2015 and had net losses in three of our four most recent fiscal years ended December 31, 2015.
We
believe that the NYSE Regulation may notify us that we are not in compliance with Section 1003(a)(iii) because our stockholders’
equity was less than $6 million as of December 31, 2017 (it was $5,536,000) and because we had net losses in five of our most
recent fiscal years ended December 31, 2017. As of March 9, 2018, we have not received such a notice from the NYSE Regulation.
In accordance with Section 1009(h) of the Company Guide, if we are again determined to be below any of the NYSE American continued
listing standards within twelve months of May 12, 2017, NYSE Regulation will examine the relationship between the two incidents
of noncompliance and re-evaluate our method of financial recovery from the first incident. NYSE Regulation will then take appropriate
action, which, depending on the circumstances, may include truncating the compliance procedures described in Section 1009 of the
Company Guide or immediately initiating delisting proceedings.
We
are exploring options to address our low stockholders’ equity. We can give no assurances that we will be able to address
it successfully, or that, if we receive a notice of non-compliance from NYSE Regulation, that we will be able to address such
non-compliance or, even if we do, that we will be able to maintain the listing of our common stock on the NYSE American. In addition,
we may determine to pursue business opportunities or grow our business at levels or on timelines that further 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 of our warrants or other agreements pursuant to which we made representations or covenants relating to our compliance
with applicable listing requirements. Claims related to any such breaches, with or without merit, could result in costly litigation,
significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on
our financial condition, business and results of operations. In addition, the delisting of our common stock for whatever reason
may materially impair our stockholders’ ability to buy and sell shares of our common stock and could have an adverse effect
on the market price of, and the efficiency of the trading market for, our common stock.
If
our common stock 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 subject 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 share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities
exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice
requirements on broker-dealers, subject to certain exceptions. If our common stock 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.
The
market price of our common stock historically has been and likely will continue to be highly volatile and our common stock is
thinly traded.
The
market price for our common stock historically has been highly volatile, and the market for our common stock has from time to
time experienced significant price and volume fluctuations, based both on our operating performance and for reasons that appear
to us unrelated to our operating performance. Our stock is also thinly traded, which can affect market volatility, which could
significantly affect the market price of our common stock without regard to our operating performance. In addition, the market
price of our common stock may fluctuate significantly in response to a number of factors, including:
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level of our financial resources;
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announcements
of entry into or consummation of a financing;
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announcements
of new products or technologies, commercial relationships or other events by us or our competitors;
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announcements
of difficulties or delays in entering into commercial relationships with our customers;
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changes
in securities analysts’ estimates of our financial performance or deviations in our business and the trading price of
our common stock from the estimates of securities analysts;
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fluctuations
in stock market prices and trading volumes of similar companies;
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sales
of large blocks of our common stock, including sales by significant stockholders, our executive officers or our directors
or pursuant to shelf or resale registration statements that register shares of our common stock that may be sold by us or
certain of our current or future stockholders;
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discussion
of us or our stock price by the financial press and in online investor communities;
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announcement
of non-compliance with any of the NYSE American continued listing standards;
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commencement
of delisting proceedings by NYSE Regulation; and
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additions
or departures of key personnel.
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The
realization of any of the foregoing could have a dramatic and adverse impact on the market price of our common stock.
Future
sales of substantial amounts of our common stock in the public market or the anticipation of such sales could have a material
adverse effect on then-prevailing market prices.
In
April 2017, March 2017, and November 2016, we sold an aggregate of approximately 642,000 shares of our common stock in registered
direct offerings. In a private placement we completed in November 2013, we issued approximately 120,000 shares of our common stock
and warrants to purchase approximately 72,000 shares of our common stock at an exercise price of $20.00 per share. A registration
statement registering the resale of the shares we issued in such private placement and the shares issuable upon exercise of the
warrants we issued in such private placement is currently effective, and we are obligated to use commercially reasonable efforts
to maintain such registration statement continuously effective until all such registered shares have been sold.
In
addition, as of December 31, 2017, there were approximately 156,000 shares of our Series A Preferred Stock outstanding. The holders
of such shares may elect to convert them into shares of our common stock at any time. Based on the current conversion price, we
would issue approximately 11,000 shares of our common stock if all of the outstanding shares of our Series A Preferred Stock were
so converted. Generally, all of the shares of common stock we may issue upon conversion of the Series A Preferred Stock may be
sold under Rule 144 of the Securities Act of 1933.
As
of December 31, 2017, there were also approximately 156,000 shares of common stock reserved for issuance upon the exercise of
outstanding stock options at exercise prices ranging from $5.10 to $35.00 per share. Registration statements registering such
shares of common stock are currently effective.
Accordingly,
a significant number of shares of our common stock could be sold at any time. Depending upon market liquidity at the time our
common stock is resold by the holders thereof, such resales could cause the trading price of our common stock to decline. In addition,
the sale of a substantial number of shares of our common stock, or anticipation of such sales, could make it more difficult for
us to obtain future financing. To the extent the trading price of our common stock at the time of exercise of any of our outstanding
options or warrants exceeds their exercise price, such exercise will have a dilutive effect on our stockholders.
Raising
additional capital may cause dilution to our existing stockholders and may restrict our operations.
We
may raise additional capital at any time and may do so through one or more financing alternatives, including public or private
sales of equity or debt securities directly to investors or through underwriters or placement agents. As discussed above, we are
exploring options to address our non-compliance with the NYSE American continued listing standards, in particular, options to
address our low stockholders’ equity. We have a shelf registration statement on file under which we could currently sell
up to approximately $23.2 million worth of securities. See also “
Our ability to raise capital may be limited by applicable
laws and regulations
,” below. Raising capital through the issuance of common stock (or securities convertible into or
exchangeable or exercisable for shares of our common stock) may depress the market price of our stock and may substantially dilute
our existing stockholders. In addition, our board of directors may issue preferred stock with rights, preferences and privileges
that are senior to those of the holders of our common stock. Debt financings could involve covenants that restrict our operations.
These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of our assets,
as well as prohibitions on our ability to create liens or make investments and may, among other things, preclude us from making
distributions to stockholders (either by paying dividends or redeeming stock) and taking other actions beneficial to our stockholders.
In addition, investors could impose more one-sided investment terms and conditions on companies that have or are perceived to
have limited remaining funds or limited ability to raise additional funds. The lower our cash balance, the more difficult it is
likely to be for us to raise additional capital on commercially reasonable terms, or at all.
Our
ability to raise capital may be limited by applicable laws and regulations.
Over
the past few years we have raised capital through the sale of our equity securities. The offerings we completed in April 2014,
November 2016, March 2017 and April 2017 were equity offerings conducted under the “shelf” registration statement
on Form S-3. Using a shelf registration statement on Form S-3 to raise additional capital generally takes less time and is less
expensive than other means, such as conducting an offering under a Form S-1 registration statement. However, our ability to raise
capital using a shelf registration statement may be limited by, among other things, current SEC rules and regulations. Under current
SEC rules and regulations, we must meet certain requirements to use a Form S-3 registration statement to raise capital without
restriction as to the amount of the market value of securities sold thereunder. One such requirement is that we periodically evaluate
the market value of our outstanding shares of common stock held by non-affiliates, or public float, and if, at an evaluation date,
our public float is less than $75.0 million, then the aggregate market value of securities sold by us or on our behalf under the
Form S-3 in any 12-month period is limited to an aggregate of one-third of our public float. Our public float is currently approximately
$8.1 million and therefore we are currently subject to the one-third of our public float limitation. Assuming our public float
remains the same amount the next time we are required to evaluate it, we will only be able to sell up to an additional approximately
$2.7 million using the “shelf” registration statement. If our ability to utilize a Form S-3 registration statement
for a primary offering of our securities is limited to one-third of our public float, we may conduct such an offering pursuant
to an exemption from registration under the Securities Act or under a Form S-1 registration statement, and we would expect either
of those alternatives to increase the cost of raising additional capital relative to utilizing a Form S-3 registration statement.
In
addition, under current SEC rules and regulations, our common stock must be listed and registered on a national securities exchange
in order to utilize a Form S-3 registration statement (i) for a primary offering, if our public float is not at least $75.0 million
as of a date within 60 days prior to the date of filing the Form S-3 or a re-evaluation date, whichever is later, and (ii) to
register the resale of our securities by persons other than us (i.e., a resale offering). While currently our common stock is
listed on the NYSE American, there can be no assurance that we will be able to maintain such listing. See also our risk factor
“Although we have regained compliance with the continued listing standards of the NYSE American with which we were previously
not compliant, if we are again determined to be non-compliant with any of its continued listing standards within twelve months
of May 12, 2017, depending on the nature of such non-compliance, NYSE Regulation may truncate the compliance procedures available
to us or immediately initiate delisting proceedings” above.
Our
ability to timely raise sufficient additional capital also may be limited by the NYSE American’s stockholder approval requirements
for transactions involving the issuance of our common stock or securities convertible into our common stock. For instance, the
NYSE American requires that we obtain stockholder approval of any transaction involving the sale, issuance or potential issuance
by us of our common stock (or securities convertible into our common stock) at a price less than the greater of book or market
value, which (together with sales by our officers, directors and principal stockholders) equals 20% or more of our then outstanding
common stock, unless the transaction is considered a “public offering” by the NYSE American staff. In addition, certain
prior sales by us may be aggregated with any offering we may propose in the future, further limiting the amount we could raise
in any future offering that is not considered a public offering by the NYSE American staff and involves the sale, issuance or
potential issuance by us of our common stock (or securities convertible into our common stock) at a price less than the greater
of book or market value. The NYSE American also requires that we obtain stockholder approval if the issuance or potential issuance
of additional shares will be considered by the NYSE American staff to result in a change of control of our company.
Obtaining
stockholder approval is a costly and time-consuming process. If we are required to obtain stockholder approval for a potential
transaction, we would expect to spend substantial additional money and resources. In addition, seeking stockholder approval would
delay our receipt of otherwise available capital, which may materially and adversely affect our ability to execute our business
strategy, and there is no guarantee our stockholders ultimately would approve a proposed transaction. A public offering under
the NYSE American rules typically involves broadly announcing the proposed transaction, which often times has the effect of depressing
the issuer’s stock price. Accordingly, the price at which we could sell our securities in a public offering may be less,
and the dilution existing stockholders experience may in turn be greater, than if we were able to raise capital through other
means.
Our
charter contains provisions that may hinder or prevent a change in control of our company, which could result in our inability
to approve a change in control and potentially receive a premium over the current market value of your stock.
Certain
provisions of our certificate of incorporation could make it more difficult for a third party to acquire control of us, even if
such a change in control would benefit our stockholders, or to make changes in our board of directors. For example, our certificate
of incorporation (i) prohibits stockholders from filling vacancies on our board of directors, calling special stockholder meetings,
or taking action by written consent, and (ii) requires a supermajority vote of at least 80% of the total voting power of our outstanding
shares, voting together as a single class, to remove our directors from office or to amend provisions relating to stockholders
taking action by written consent or calling special stockholder meetings.
Additionally,
our certificate of incorporation and restated bylaws contain provisions that could delay or prevent a change of control of our
company. Some of these provisions:
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authorize
the issuance of preferred stock which can be created and issued by our board of directors without prior stockholder approval,
with rights senior to those of the common stock;
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prohibit
our stockholders from making certain changes to our bylaws except with 66 2/3% stockholder approval; and
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require
advance written notice of stockholder proposals and director nominations.
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These
provisions could discourage third parties from taking control of our company. Such provisions may also impede a transaction in
which you could receive a premium over then current market prices and your ability to approve a transaction that you consider
in your best interest.
In
addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business
combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate
of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain
control of our board of directors or initiate actions that are opposed by the then-current board of directors, including delaying
or impeding a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction
or changes in our board of directors could cause the market price of our common stock to decline.
ITEM
1B.
Unresolved
Staff Comments
We
do not have any unresolved comments issued by the SEC Staff.
ITEM
2.
Properties
We
lease approximately 28,000 square feet of office space in Carlsbad, California. The term of the lease is from June 2011 through
November 2018, and we have the option to renew the lease for an additional five-year extension. We also lease approximately 7,500
square feet of warehouse space in Hilliard, Ohio. The term of this lease is from May 2013 through April 2018, and we anticipate
extending this lease through April 2019. The facilities that we lease are suitable for our current needs and are considered
adequate to support expected growth.
ITEM
3.
Legal Proceedings
From
time to time, we become subject to legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course
of business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business
operations. Moreover, the results of legal proceedings are difficult to predict. An unfavorable resolution of one or more legal
proceedings could materially adversely affect our business, results of operations, or financial condition. In addition, defending
any claim requires resources, including cash to pay legal fees and expenses, and our limited financial resources could severely
impact our ability to defend any such claim.
Also
from time to time, state and provincial tax agencies have made, and we anticipate will make in the future, inquiries as to whether
our service offerings are subject to taxation in their jurisdictions. Many states have expanded their interpretation of their
sales and use tax statutes, which generally had the effect of increasing the scope of activities that may be subject to such statutes.
We evaluate inquiries from state and provincial tax agencies on a case-by-case basis and have favorably resolved the majority
of these inquiries in the past, though we can give no assurances as to our ability to favorably resolve such inquiries in the
future. Any such inquiry could, if not resolved favorably to us, materially adversely affect our business, results of operations,
or financial condition.
ITEM
4.
Mine
Safety Disclosures
Not
Applicable.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2017 and 2016
1.
Organization of Company
Description
of Business
NTN
Buzztime, Inc. (the “Company”) was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate
name to NTN Communications, Inc. in 1985. The Company changed its name to NTN Buzztime, Inc. in 2005 to better reflect the growing
role of the Buzztime consumer brand.
The
Company delivers interactive entertainment and innovative dining technology to bars and restaurants in North America. Customers
subscribe to the Company’s customizable solution to differentiate themselves via competitive fun by offering guests trivia,
card, sports and single player games, nationwide competitions, and by offering self-service dining features including dynamic
menus, touchscreen ordering and secure payment. The Company’s platform can improve operating efficiencies, create connections
among the players and venues and amplify guests’ positive experiences. Built on an extended network platform, the Company’s
interactive entertainment system has historically allowed multiple players to interact at the venue and also enables competition
between venues, referred to as massively multiplayer gaming. The Company’s current platform, which it refers to as Buzztime
Entertainment On Demand, or BEOND, was commercially launched during 2013 and then scaled during 2014. The Company continues to
enhance its network architecture and the BEOND tablet platform and player engagement paradigms. The Company also continues to
support its legacy network product line, which it refers to as Classic.
The
Company currently generates revenue by charging subscription fees for our service to our network subscribers, by leasing equipment
(including tablets used in our BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers,
by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, from providing
professional services (such as developing certain functionality within our platform for customers), and from pay-to-play single
player games.
At
December 31, 2017, 2,730 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network, of
which approximately 81% were using the BEOND tablet platform.
Basis
of Accounting Presentation
The
consolidated financial statements include the accounts of NTN Buzztime, Inc. and its wholly-owned subsidiaries: IWN, Inc., IWN,
L.P., Buzztime Entertainment, Inc., NTN Wireless Communications, Inc., NTN Software Solutions, Inc., NTN Canada, Inc., and NTN
Buzztime, Ltd., all of which, other than NTN Canada, Inc., are dormant subsidiaries. Unless otherwise indicated, references to
the Company include its consolidated subsidiaries.
2.
Summary of Significant Accounting Policies and Estimates
Consolidation
—The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
—Preparing the Company’s consolidated financial statements requires it to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to deferred costs and revenues;
depreciation of fixed assets; allowance for doubtful accounts; site equipment to be installed; stock-based compensation assumptions;
impairment of fixed assets, software development costs, intangible assets and goodwill; contingencies, including the reserve for
sales tax inquiries; and the provision for income taxes, including the valuation allowance. The Company bases its estimates on
a combination of historical experience and various other assumptions that it believes are reasonable under the circumstances,
the results of which form the basis for making judgments about significant carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ materially from these estimates.
Cash
and Cash Equivalents
—Accounting Standards Codification (“ASC”) No. 230,
Statement of Cash Flows
,
defines “cash and cash equivalents” as any short-term, highly liquid investment that is both readily convertible to
known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in
interest rates. For the purpose of financial statement presentation, the Company has applied the provisions of ASC No. 230, as
it considers all highly liquid investment instruments with original maturities of three months or less, or any investment redeemable
without penalty or loss of interest, to be cash equivalents.
Capital
Resources
— In November 2017, the Company entered into an amended and restated loan and security agreement (the “Amended
and Restated Loan Agreement”) with East West Bank (“EWB”). The Amended & Restated Loan Agreement amends
and restates the loan and security agreement that the Company entered into with EWB dated as of April 14, 2015 (as the same has
been previously amended, the “Prior Loan Agreement”). The Amended and Restated Loan Agreement provides for $4,500,000
as a one-time 36-month term loan, of which the Company used $4,450,000 to refinance the $4,450,000 the Company had outstanding
under the Prior Loan Agreement. The Company applied the additional $50,000 to pay the $45,000 facility fee and to pay reasonable
costs or expenses incurred by EWB in connection with the Amended and Restated Loan Agreement. The Company is required to make
payments on the loan on the last calendar day of each month commencing on December 31, 2017 and through its maturity date, November
29, 2020. Payments will be interest only until the payment due on June 30, 2018, at which time payments will become principal
plus interest. As of December 31, 2017, $4,500,000 was outstanding under the Amended and Restated Loan Agreement, all of
which is recorded in current portion of long-term debt on the accompanying consolidated balance sheet as a result of
the covenant non-compliance as of December 31, 2017 discussed in Note 11, Long-Term Debt, below. The Company recorded total
debt issuance costs of $59,000, which includes the $45,000 facility fee. The debt issuance costs will be amortized to interest
expense using the effective interest rate method over the life of the loan. As of December 31, 2017, the unamortized portion of
the debt issuance costs was $56,000 and is recorded as a reduction of long term debt. We have no more borrowing availability under
the Amended and Restated Loan Agreement.
The
Company has another financing arrangement with an equipment lender under which the Company may request funds to finance the purchase
of certain capital equipment. The lender determines whether to extend such funds on a case-by-case basis, taking into account
such factors as the lender considers relevant, including the amount outstanding under this financing arrangement. Through December
31, 2017, the Company borrowed $9,690,000. As of December 31, 2017, $623,000 remained outstanding, of which $615,000 is recorded
in current portion of long-term debt and $8,000 is recorded in long-term debt on the accompanying consolidated balance sheet.
The Company currently does not expect the lender to lend any additional funds under this financing arrangement.
In
connection with preparing the financial statement as of and for the year ended December 31, 2017, the Company evaluated whether
there are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial
doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.
As a result of such evaluation, the Company believes it will have sufficient cash to meet its operating cash requirements and
to fulfill its debt obligations for at least the next twelve months from the issuance date of these financial statements. In order
to increase the likelihood that the Company will be able to successfully execute its operating and strategic plan and to position
the Company to better take advantage of market opportunities for growth, the Company is continuing to evaluate additional financing
alternatives, including additional equity financings and alternative sources of debt. If the Company’s cash and cash equivalents
are not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenses, reduce operational
cash uses or raise capital on terms that are not as favorable to the Company as they otherwise might be. Any actions the Company
may undertake to reduce planned capital purchases or reduce expenses may be insufficient to cover shortfalls in available funds.
If the Company requires additional capital, it may be unable to secure additional financing on terms that are acceptable to the
Company, or at all.
Allowance
for Doubtful Accounts
—The Company maintains allowances for doubtful accounts for estimated losses resulting from nonpayment
by its customers. The Company reserves for all accounts that have been suspended or terminated from its Buzztime network services
and for customers with balances that are greater than a predetermined number of days past due. The Company analyzes historical
collection trends, customer concentrations and creditworthiness, economic trends and anticipated changes in customer payment patterns
when evaluating the adequacy of its allowance for doubtful accounts for specific and general risks. Additional reserves may also
be established if specific customers’ balances are identified as potentially uncollectible. If the financial condition of
its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be
required.
Site
Equipment to be Installed –
Site equipment to be installed consist of finished goods related to the Company’s
BEOND product platform and are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Rapid
technological change or new product development could result in an increase in the quantity of obsolete site equipment to be installed
on hand, and the Company could recognize losses from disposal of excess or obsolete site equipment to be installed. Additionally,
the Company’s carrying costs of its site equipment to be installed are dependent on accurate estimates of customer demand
for its products. A significant increase in the demand for the Company’s products could result in a short-term increase
in the cost of site equipment purchases, while a significant decrease in demand could result in an increase in the amount of excess
site equipment quantities on hand. As a result, although the Company attempts to maximize the accuracy of its forecasts of future
product demand, any significant unanticipated changes in demand or technological developments could have a significant impact
on the value of the Company’s site equipment to be installed and its reported operating results.
The
BEOND tablet platform equipment remains in site equipment to be installed until it is installed in customer sites. For BEOND 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 BEOND tablet platform customers, the cost of the equipment is reclassified to fixed assets upon installation
and depreciated over its useful life.
Fixed
Assets
— Fixed assets are recorded at cost. Equipment under capital leases is recorded at the present value of future
minimum lease payments. Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives
of the assets. Depreciation of leasehold improvements and fixed assets under capital leases is computed using the straight-line
method over the shorter of the estimated useful lives of the assets or the lease period.
The
Company incurs a relatively significant level of depreciation expense in relation to its operating income. The amount of depreciation
expense in any fiscal year is largely related to the equipment located at the Company’s customers’ sites that are
not under sales-type lease arrangements. Such equipment includes the Classic Playmaker, BEOND tablet, other associated electronics
and the computers located at customer’s sites (collectively, “Site Equipment”). The components within Site Equipment
are depreciated over two to five years based on the shorter of the contractual capital lease period or the estimated useful life,
which considers anticipated technology changes. If the Company’s Site Equipment turns out to have longer lives, on average,
than estimated, then its depreciation expense would be significantly reduced in those future periods. Conversely, if the Site
Equipment turns out to have shorter lives, on average, than estimated, then its depreciation expense would be significantly increased
in those future periods.
Goodwill
and Other Intangible Assets
—Goodwill represents the excess of costs over fair value of assets of businesses acquired.
Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite useful life are not amortized,
but instead are assessed quarterly for impairment based on qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of the goodwill is less than its carrying
amount. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial
performance and other relevant events. If after assessing the totality of events or circumstances the Company determines it is
not more likely than not that the goodwill is less than its carrying amount, then performing the two-step impairment test outlined
in ASC No. 350 is unnecessary. During the year ended December 31, 2017, the Company performed the annual assessment of its goodwill
related to NTN Canada, Inc., and determined that there were no indications of impairment.
ASC
No. 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance with ASC No. 360,
Property, Plant and Equipment
.
In accordance with ASC No. 360, the Company assesses potential impairments of its long-lived assets whenever events or changes
in circumstances indicate the asset’s carrying value may not be recoverable. An impairment loss would be recognized when
the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of
a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from
the use and eventual disposition of the asset or asset group. The Company performed its annual review as of December 31, 2017
and 2016 of its other intangible assets and determined that there were no indications of impairment for either of those periods.
Revenue
Recognition
—The Company recognizes revenue from recurring subscription fees for its service earned from its network
subscribers, from leasing equipment (including tablets used in its BEOND tablet platform and the cases and charging trays for
the tablets) to certain network subscribers, from hosting live trivia events, from selling advertising aired on in-venue screens
and as part of customized games and directly from consumers who pay to play or use the premium content the Company began offering
via its BEOND tablet platform in 2014. To the extent any of the foregoing contain multiple deliverables, the Company evaluates
the criteria in ASC No. 605,
Revenue Recognition
, to determine whether such deliverables represent separate units of accounting.
In order to be considered a separate unit of accounting, the delivered items in an arrangement must have stand-alone value to
the customer and objective and reliable evidence of fair value must exist for any undelivered elements. The Company’s arrangements
for the transmission of the Buzztime network contain two deliverables: the installation of its equipment and the transmission
of its network content for which the Company receives monthly subscription fees. As the installation deliverable does not have
stand-alone value to the customer, it does not represent a separate unit of accounting. Therefore, for the Company’s Classic
product, all installation fees received are deferred and recognized as revenue on a straight-line basis over the estimated life
of the customer relationship. Because deployment of the Company’s BEOND tablet platform is so new, the Company has not yet
established an estimated life of a BEOND customer, and therefore, it is deferring and recognizing installation fees as revenue
on a straight-line basis over the customer contract term. All installation fees not recognized in revenue have been recorded as
deferred revenue in the accompanying consolidated balance sheets.
In
addition, the direct expenses of the installation, commissions, setup and training are deferred and amortized on a straight-line
basis and are classified as deferred costs on the accompanying consolidated balance sheets. For these direct expenses that are
associated with the Classic product, the amortization period approximates the estimated life of the customer relationship for
deferred direct costs that are of an amount that is less than or equal to the deferred revenue for the related contract. For costs
that exceed the deferred revenue, the amortization period is the initial term of the contract, in accordance with ASC No. 605,
which is generally one year. For direct costs associated with the BEOND tablet platform, the amortization period approximates
the life of the contract.
The
Company evaluated its lease transactions in accordance with ASC No. 840,
Leases,
to determine classification of the leases
against the following criteria:
|
●
|
The
lease transfers ownership of the property to the lessee by the end of the lease term;
|
|
|
|
|
●
|
There
is a bargain purchase option;
|
|
|
|
|
●
|
The
lease term is equal to or greater than 75% of the economic life of the equipment; or
|
|
|
|
|
●
|
The
present value of the minimum payments is equal to or greater than 90% of the fair market value of the equipment at the inception
of the lease.
|
Because
the Company’s current leasing agreement meets at least one of the criteria above, because collectability of the minimum
lease payments is reasonably assured and because there are no important uncertainties surrounding the amount of reimbursable costs
yet to be incurred under the lease, the Company classifies the lease as a sales-type lease, and it recognizes revenue when persuasive
evidence of an arrangement exists, product delivery has occurred or the services have been rendered, the price is fixed and determinable
and collectability is reasonably assured.
The
Company recognizes revenues from selling advertising, from hosting live trivia events and from consumers who pay to play the Company’s
premium content when all material services or conditions relating to the transaction have been performed or satisfied.
The
Company has arrangements with certain third parties to share in revenue generated from some of its products and services. The
Company evaluates recognition of the associated revenue in accordance with ASC No. 605-45,
Revenue Recognition, Principal Agent
Considerations.
When indicators suggest that the Company is functioning as a principal, it records revenue gross and the corresponding
amounts paid to third parties are recorded as direct expense. Conversely, when indicators suggest that the Company is functioning
as an agent, it records revenue net of amounts paid to third parties.
Software
Development Costs
—The Company capitalizes costs related to developing certain software products in accordance with ASC
No. 350. Amortization of costs related to interactive programs is recognized on a straight-line basis over the programs’
estimated useful lives, generally two to three years. Amortization expense relating to capitalized software development costs
totaled $230,000 and $386,000 for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016,
approximately $784,000 and $642,000, respectively, of capitalized software costs were not subject to amortization as the development
of various software projects was not complete.
The
Company performed its annual review of software development projects for the year ended December 31, 2017 and determined to abandon
various software development projects that it 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, an impairment of $5,000 was recognized for the year ended December 31, 2017, which was
recorded in selling, general and administrative expenses on the Company’s consolidated statements of operations. The Company
also performed its annual review for the year ended December 31, 2016 and determined that there were no indications of impairments
during this period.
Advertising
Costs –
There were no marketing-related advertising costs for the either of the years ended December 31, 2017 or 2016.
Shipping
and Handling Costs
—Shipping and handling costs are included in direct operating costs in the accompanying consolidated
statements of operations and are expensed as incurred.
Stock-Based
Compensation
— The Company estimates the fair value of its stock options using a Black-Scholes option pricing model,
consistent with the provisions of ASC No. 718
, Compensation – Stock Compensation
and ASC No. 505-50,
Equity –
Equity-Based Payments to Non-Employees.
The fair value of stock options granted is recognized to expense over the requisite
service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line
single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair
value on the grant date and is periodically re-measured as the underlying awards vest. Stock-based compensation expense is reported
as selling, general and administrative based upon the departments to which substantially all of the associated employees report.
Income
Taxes
—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC
No. 740,
Income Taxes,
defines the threshold for recognizing the benefits of tax return positions in the financial statements
as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not”
criterion are measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.
The Company reviewed its tax positions and determined that an adjustment to the tax provision is not considered necessary nor
is a reserve for income taxes required.
Earnings
Per Share
—Basic and diluted loss per common share have been computed by dividing the losses applicable to common stock
by the weighted average number of common shares outstanding. The Company’s basic and fully diluted earnings per share (“EPS”)
calculation are the same since the increased number of shares that would be included in the diluted calculation from assumed exercise
of common stock equivalents would be anti-dilutive to the net loss in each of the years shown in the consolidated financial statements.
Segment
Reporting
—In accordance with ASC No. 280,
Segment Reporting
, the Company has determined that it operates as one
operating segment. Decisions regarding the Company’s overall operating performance and allocation of its resources are assessed
on a consolidated basis.
Recent
Accounting Pronouncements
In
February 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-02,
Income Statement—Reporting
Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
This update was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income
due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive
income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which changed the Company’s
income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax
effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December
15, 2018 (which is January 1, 2019 for the Company), although early adoption is permitted. The Company does not anticipate that
the adoption of this ASU will have a material impact on its consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480),
Derivatives and Hedging (Topic 815).
The amendments in Part I of this update change the classification analysis of certain
equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion
option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round
feature. For freestanding equity classified financial instruments, the amendments require entities that present EPS in accordance
with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and
as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options
that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic
470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part
II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending
content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities,
the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018 (which is January 1, 2019 for the Company). Early adoption is permitted for all entities, including adoption
in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. The Company does not anticipate that the adoption of this
ASU will have a material impact on its consolidated financial statements.
In
May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,
which
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. This update is effective for annual reporting periods beginning after December 15, 2017 (which is January
1, 2018 for the Company). Early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have
a material impact on its consolidated financial statements.
In
January 2017, the FASB issued ASU No 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment.
This update removes the requirement to perform step two of the quantitative two-step goodwill impairment
test. An entity still has the option to perform the qualitative assessment for an entity to determine if the quantitative impairment
test is necessary. This update is effective on a prospective basis for fiscal years beginning after December 15, 2019 (which is
January 1, 2020 for the Company). Early adoption is permitted for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company does not anticipate that the adoption of this ASU will have a material impact on its
consolidated financial statements.
In
November 2016, the FASB issued Accounting Standards Update (ASU) No 2016-18,
Statement of Cash Flows (Topic 230): Restricted
Cash.
This update requires amounts generally described as restricted cash and restricted cash equivalents be included with
cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash
flows. This update is effective for fiscal years beginning after December 15, 2018 (which is January 1, 2019 for the Company),
including interim periods within those periods, using a retrospective transition method to each period presented. The Company
does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.
In
October 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers
of Assets Other than Inventory.
This update requires entities to recognize the income tax consequences of an intra-entity
transfer of an asset other than inventory when the transfer occurs. This update is effective for fiscal years beginning after
December 15, 2017 (which is January 1, 2018 for the Company), including interim periods within those fiscal years. Early adoption
is permitted as of the beginning of a fiscal year. The new standard must be adopted using a modified retrospective transition
method, which is a cumulative-effective adjustment to retained earnings as of the beginning of the first effective reporting period.
The Company does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. This update is
intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows
and to eliminate the diversity in practice related to such classifications. This update is effective for fiscal periods beginning
after December 15, 2017 (which is January 1, 2018 for the Company), with early adoption permitted. The Company does not anticipate
that the adoption of this ASU will have a material impact on its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
This update requires lessees to recognize at the lease
commencement date a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured
on a discounted basis, and a right-of-use assets, which is an asset that represents the lessee’s right to use, or control
the use of, a specified asset for the lease term. Lessees will no longer be provided with a source of off-balance sheet financing.
This update is effective for fiscal periods beginning after December 15, 2018 (which is January 1, 2019 for the Company), including
interim periods within those fiscal years. Early adoption is permitted. Lessees and lessors must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Applying a full retrospective transition approach is not allowed. The Company
does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This update outlines a new,
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a
five-step analysis in determining when and how revenue is recognized. The new model will require 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. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date
, which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09 is
now effective for fiscal periods beginning after December 15, 2017 (which is January 1, 2018 for the Company), including interim
periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December
15, 2016, including interim reporting periods within that reporting period. The Company has the option of using either a full
retrospective or a modified approach to adopting the guidance. The Company will apply the full-retrospective method when adopting
this guidance. This update requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and
cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required for customer
contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.
The Company continues to evaluate the effect of adopting this update and expects to complete its assessment by the end
of the quarter ending March 31, 2018.
3.
Fixed Assets
Fixed
assets are recorded at cost and consist of the following at December 31, 2017 and 2016:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Broadcast equipment
|
|
$
|
10,419,000
|
|
|
$
|
10,671,000
|
|
Machinery and equipment
|
|
|
2,678,000
|
|
|
|
2,523,000
|
|
Furniture and fixtures
|
|
|
279,000
|
|
|
|
271,000
|
|
Leasehold improvements
|
|
|
610,000
|
|
|
|
610,000
|
|
Other equipment
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
|
14,001,000
|
|
|
|
14,090,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(10,323,000
|
)
|
|
|
(10,989,000
|
)
|
Total
|
|
$
|
3,678,000
|
|
|
$
|
3,101,000
|
|
Depreciation
expense totaled $2,058,000 and $2,451,000 for the years ended December 31, 2017 and 2016, respectively.
4.
Goodwill and Other Intangible Assets
The
Company’s goodwill balance of $1,004,000 and $937,000 as of December 31, 2017 and 2016, respectively, relates to the purchase
of NTN Canada, Inc. Fluctuations in the amount of goodwill shown on the accompanying balance sheets are due to changes in the
foreign currency exchange rates used when translating NTN Canada, Inc.’s financial statement from Canadian dollars to US
dollars during consolidation. The Company performed its annual assessment of goodwill impairment for NTN Canada as of December
31, 2017 and determined there were no indications of impairment.
The
Company performed its annual review of its other intangible assets as of December 31, 2017 and 2016 and determined that there
were no indications of impairment for either of the years ended on those dates.
As
of December 31, 2017, all intangible assets were fully amortized with no remaining useful lives. Amortization expense relating
to all intangible assets totaled $29,000 and $50,000 for the years ended December 31, 2017 and 2016, respectively.
5.
Fair Value of Financial Instruments
The
carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, long-term debt and obligations
under capital leases approximate fair value due to the short maturity of these instruments.
ASC
No. 820,
Fair Value Measurements and Disclosures,
applies to certain assets and liabilities that are being measured and
reported on a fair value basis. Broadly, the ASC No. 820 framework requires fair value to be determined based on the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants. ASC No. 820 also establishes a fair value
hierarchy for ranking the quality and reliability of the information used to determine fair values. This hierarchy is as follows:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level
3: Unobservable inputs that are not corroborated by market data.
Assets
and Liabilities that are Measured at Fair Value on a Recurring Basis:
The
Company does not have assets or liabilities that are measured at fair value on a recurring basis.
Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
Certain
assets are measured at fair value on a non-recurring basis and are subject to fair value adjustments only in certain circumstances.
Included in this category are goodwill written down to fair value when determined to be impaired, acquired assets and long-lived
assets including capitalized software that are written down to fair value when they are held for sale or determined to be impaired.
The valuation methods for goodwill, assets and liabilities resulting from acquisitions, and long-lived assets involve assumptions
concerning interest and discount rates, growth projections, and/or other assumptions of future business conditions. As all of
the assumptions employed to measure these assets and liabilities on a nonrecurring basis are based on management’s judgment
using internal and external data, these fair value determinations are classified in Level 3 of the valuation hierarchy.
There
were no transfers between fair value measurement levels during the year ended December 31, 2017.
6.
Accrued Compensation
Accrued
compensation consisted of the following at December 31, 2017 and 2016:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued vacation
|
|
$
|
290,000
|
|
|
$
|
291,000
|
|
Accrued salaries
|
|
|
278,000
|
|
|
|
264,000
|
|
Accrued bonuses
|
|
|
61,000
|
|
|
|
487,000
|
|
Accrued commissions
|
|
|
17,000
|
|
|
|
18,000
|
|
Total
accrued compensation
|
|
$
|
646,000
|
|
|
$
|
1,060,000
|
|
7.
Concentrations of Risk
Credit
Risk
At
times, the Company’s cash balances held in financial institutions are in excess of federally insured limits. The Company
performs periodic evaluations of the relative credit standing of financial institutions and seeks to limit the amount of risk
by selecting financial institutions with a strong credit standing. The Company believes it is not exposed to any significant credit
risk with respect to its cash and cash equivalents.
The
Buzztime network provides services to group viewing locations, generally restaurants, sports bars and lounges throughout North
America. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising
the Company’s customer base, and their dispersion across many different geographic locations. The Company performs credit
evaluations of new customers and generally requires no collateral. The Company maintains an allowance for doubtful accounts to
provide for credit losses.
Significant
Customer
For
the years ended December 31, 2017 and 2016, the Company generated approximately $8,678,000 and $8,913,000, respectively, of total
revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees, which represented approximately 41% and 40% of
total revenue in each of those years, respectively. As of December 31, 2017 and 2016, approximately $191,000 and $261,000, respectively,
was included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and its franchisees.
Sole
Equipment Supplier
The
Company currently purchases the tablets, cases and charging trays used in its BEOND platform from one unaffiliated third-party
manufacturer. The Company currently does not have an alternative manufacturer for its tablets or an alternative manufacturer or
device for the tablet cases or tablet charging trays. The Company no longer purchases playmakers for its Classic platform.
As
of December 31, 2017, approximately $2,000 was included in accounts payable or accrued expenses for the tablet equipment purchased
from its sole supplier. There were no amounts outstanding in accounts payable or accrued expenses as of December 31, 2016 related
to the sole supplier.
8.
Basic and Diluted Earnings Per Common Share
Basic
earnings per share excludes the dilutive effects of options, warrants and other convertible securities. Diluted earnings per share
reflects the potential dilutions of securities that could share in the Company’s earnings. Options, warrants and convertible
preferred stock representing approximately 384,000 and 453,000 shares were excluded from the computations of diluted net loss
per common share for the years ended December 31, 2017 and 2016, respectively, as their effect was anti-dilutive.
9.
Stockholders’ Equity
Registered
Direct Offerings
In
November 2016, the Company sold approximately 412,000 shares of its common stock at a purchase price of $6.64 per share and received
net proceeds of approximately $2,692,000, after deducting estimated offering expenses.
In
March 2017, the Company sold approximately 200,000 shares of its common stock at a purchase price of $7.85 per share and received
net proceeds of approximately $1,554,000, after deducting estimated offering expenses.
In
April 2017, the Company sold approximately 30,000 shares of its common stock at a purchase price of $7.78 per share and received
net proceeds of approximately $219,000, after deducting estimated offering expenses.
The
Company used the net proceeds from the offerings for general corporate purposes, which included working capital, general and administrative
expenses, capital expenditures and implementation of its strategic priorities.
Reverse/Forward
Split of Common Stock
In
June 2016, the Company effected a stockholder-approved 1-100 reverse split immediately followed by a 2-for-1 forward split. Any
fractional share of common stock resulting from the forward split was rounded up to the nearest whole share. The Company refers
to the reverse split and to the forward split, together, as the “reverse/forward split.” Any stockholder who, as of
immediately prior to the effective time of the reverse split, held fewer than 100 shares of the Company’s common stock in
one account and, subsequent to the reverse split, would otherwise have been entitled to less than one full share of common stock,
received, instead of the fractional share, $0.12 in cash for each such share held in that account, which was equal to the average
of the closing price per share of the Company’s common stock on the NYSE American over the five trading days immediately
before and including the effective date of the reverse/forward split. As of immediately prior to the reverse split/forward split,
the Company had 92,439,174 of common stock outstanding, and subsequent to the reverse/forward split, it had 1,848,597 shares of
common stock outstanding. Approximately $3,000 was paid to cashed-out stockholders who owned less than 100 shares immediately
prior to the reverse split.
The
number of shares of the Company’s authorized common stock did not change in connection with the reverse/forward split. However,
upon the effectiveness of the reverse/forward split, the number of authorized shares of the Company’s common stock that
were not issued or outstanding increased due to the reduction in the number of shares of its common stock issued and outstanding
as a result of the reverse/forward split. The reverse/forward split did not affect the par value of a share of the Company’s
common stock, which remains at $0.005 per share. As a result, the stated capital attributable to common stock on the Company’s
consolidated balance sheet has been reduced proportionately based on the reverse/forward split exchange ratio, and the additional
paid-in capital account was credited with the amount by which the stated capital was reduced. Comparative financial statements
have been retroactively adjusted. There are no other accounting consequences arising from the reverse/forward split.
Equity
Incentive Plans
All
amounts for the year ended December 31, 2016 reported below have been proportionately adjusted as a result of the reverse/forward
split discussed above, when applicable.
2004
Performance Incentive Plan
In
September 2004 at a Special Meeting of Stockholders, the Company’s stockholders approved the 2004 Performance Incentive
Plan (the “2004 Plan”). The 2004 Plan provided for the issuance of up to 50,000 shares of NTN common stock. In addition,
all shares that remained unissued under the 1995 Employee Stock Option Plan (the “1995 Plan”) on the effective date
of the 2004 Plan, and all shares issuable upon exercise of options granted pursuant to the 1995 Plan that expire or become unexercisable
for any reason without having been exercised in full, were available for issuance under the 2004 Plan. Options under both the
1995 Plan and the 2004 Plan have a term of up to ten years, and are exercisable at a price per share not less than the fair market
value on the date of grant. In September 2009, the 2004 Plan expired. All awards that were granted under the 2004 Plan will continue
to be governed by the 2004 Plan until they are exercised or expire in accordance with that plan’s terms. As of December
31, 2017, there were approximately 1,000 options outstanding under the 2004 Plan.
2010
Amended Performance Incentive Plan
In
June 2010, the Company’s stockholders approved the 2010 Performance Incentive Plan (the “2010 Plan”). The 2010
Plan provided for the issuance of up to 120,000 shares of the Company’s common stock. At the Company’s 2015 Annual
Meeting of Stockholders, the Company’s stockholders approved the Amended 2010 Performance Plan (the “Amended 2010
Plan”), which, among other things, amended the 2010 Plan to increase the authorized shares to be issued thereunder from
120,000 to 240,000. The Amended 2010 Plan expires in February 2020. Under the Amended 2010 Plan, options to the purchase the Company’s
common stock or other instruments such as restricted stock units may be granted to officers, directors, employees and consultants.
The Company’s Board of Directors designated its Nominating and Corporate Governance/Compensation Committee as the Amended
2010 Plan Committee. Stock options granted under the Amended 2010 Plan may either be incentive stock options or nonqualified stock
options. A stock option granted under the Amended 2010 Plan generally cannot be exercised until it becomes vested. The Amended
2010 Plan Committee establishes the vesting schedule of each stock option at the time of grant. At its discretion, the Amended
2010 Plan Committee can accelerate the vesting, extend the post-termination exercise term or waive restrictions of any stock options
or other awards under the Amended 2010 Plan. Options under the Amended 2010 Plan have a term of up to ten years, and are exercisable
at a price per share not less than the fair market value on the date of grant. As of December 31, 2017, there were options to
purchase approximately 70,000 shares of the Company’s common stock outstanding under the Amended 2010 Plan. As of December
31, 2017, there were approximately 108,000 share-based awards available to be granted under the Amended 2010 Plan.
2014
Inducement Plan
In
August 2014, the Nominating and Corporate Governance/Compensation Committee of the Company’s Board of Directors (the “Committee”)
approved the 2014 Inducement Plan (the “2014 Plan”) in reliance on Section 771(a) of the NYSE American Company Guide
as an inducement material to Ram Krishnan entering into employment with the Company as its Chief Executive Officer. The 2014 Plan
provides for the issuance of up to 85,000 shares of the Company’s common stock, of which, an option to purchase 70,000 shares
of common stock was issued to Mr. Krishnan in September 2014. In accordance with the terms of his employment agreement, in April
2015, Mr. Krishnan was granted another performance-based option to purchase 15,000 shares of common stock. Options under the 2014
Plan have a term of up to ten years and are exercisable at a price per share not less than the fair market value on the date of
grant. Both of the option grants described above will, subject to Mr. Krishnan’s continued employment through the applicable
vesting date and, with respect to the performance-based option granted in April 2015, subject to meeting performance goals, vest
as to 25% of the total number of shares subject to the option on the first anniversary of the grant date and the remaining 75%
of the total number of shares subject to the option will vest in 36 substantially equal monthly installments thereafter. There
are no share-based awards available to be granted under the 2014 Plan. The 2014 Plan expires in September 2024.
Stock-Based
Compensation Valuation Assumptions
The
Company records stock-based compensation in accordance with ASC No. 718
, Compensation – Stock Compensation
and ASC
No. 505-50,
Equity – Equity-Based Payments to Non-Employees.
The Company estimates the fair value of stock options
using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite
service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line
single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair
value on the grant date and is periodically re-measured as the underlying awards vest.
The
Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term
of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise
patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate,
the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend
yield assumption is based on the Company’s history and expectation of dividend payouts.
The
following weighted-average assumptions were used for grants issued during 2017 and 2016 under the ASC No. 718 requirements:
|
|
2017
|
|
|
2016
|
|
Weighted average risk-free rate
|
|
|
1.97
|
%
|
|
|
1.20
|
%
|
Weighted average volatility
|
|
|
113.57
|
%
|
|
|
111.02
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected life
|
|
|
7.19
years
|
|
|
|
6.17
years
|
|
ASC
No. 718 requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeiture
rates differ from those estimates. Forfeitures were estimated based on historical activity for the Company. Stock-based compensation
expense for employees in 2017 and 2016 was $457,000 and $419,000, respectively, and is expensed in selling, general and administrative
expenses and credited to the additional paid-in-capital account.
Stock
Option Activity
The
following table summarizes stock option activity for the year ended December 31, 2017 and 2016:
|
|
Outstanding
Options
|
|
|
Weighted
Average
Exercise
Price per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding January 1,
2016
|
|
|
136,000
|
|
|
$
|
20.38
|
|
|
|
8.67
|
|
|
$
|
2,000
|
|
Granted
|
|
|
35,000
|
|
|
|
7.73
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(3,000
|
)
|
|
|
21.49
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(3,000
|
)
|
|
|
15.51
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
165,000
|
|
|
|
17.78
|
|
|
|
8.02
|
|
|
|
36,000
|
|
Granted
|
|
|
8,000
|
|
|
|
6.66
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(8,000
|
)
|
|
|
16.76
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(9,000
|
)
|
|
|
9.87
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
December 31, 2017
|
|
|
156,000
|
|
|
$
|
17.74
|
|
|
|
7.12
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested
and exercisable at December 31, 2017
|
|
|
112,000
|
|
|
$
|
18.71
|
|
|
|
6.92
|
|
|
$
|
-
|
|
No
options were exercised during the years ended December 31, 2017 or 2016. The per share weighted average grant-date fair value
of stock options granted during the years ended December 31, 2017 and 2016 was $5.87 and $6.48, respectively.
As
of December 31, 2017, the unamortized compensation expense related to outstanding unvested options was approximately $383,000
with a weighted average remaining requisite service period of 1.21 years. The Company expects to amortize this expense over the
remaining requisite service period of these stock options. A deferred tax asset generally would be recorded related to the expected
future tax benefit from the exercise of the non-qualified stock options. However, due to a history of net operating losses, a
full valuation allowance has been recorded related to the tax benefit for non-qualified stock options.
Warrant
Activity
The
following summarizes warrant activity for the year ended December 31, 2017 and 2016:
|
|
Outstanding
Warrants
|
|
|
Weighted
Average
Exercise
Price per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Outstanding January 1,
2016
|
|
|
132,000
|
|
|
$
|
33.64
|
|
|
|
2.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
132,000
|
|
|
$
|
33.64
|
|
|
|
1.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(60,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding
December 31, 2017
|
|
|
72,000
|
|
|
$
|
20.00
|
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance exercisable at December
31, 2017
|
|
|
72,000
|
|
|
$
|
20.00
|
|
|
|
0.87
|
|
During
2009, the Company issued warrants to purchase an aggregate of 60,000 shares of common stock in connection with an asset acquisition.
The fair value of the warrants was approximately $537,000 in aggregate and were determined using the Black-Scholes model using
the following weighted-average assumptions: risk-free interest rates of 2.79%; dividend yield of 0%; expected volatility of 78.1%;
and a term of 8 years. None of these warrants were exercised and all expired as of December 31, 2017.
During
2013, the Company issued warrants to purchase an aggregate of 72,000 shares of common stock in connection with a private placement.
The fair value of the warrants was approximately $1,379,000 in aggregate and was determined using the Black-Scholes model using
the following weighted-average assumptions: risk-free interest rates of 1.06%; dividend yield of 0%; expected volatility of 80.25%;
and a term of 5 years. The Company has concluded that these warrants qualify as equity instruments and not liabilities. None of
these warrants were exercised as of December 31, 2017.
Cumulative
Convertible Preferred Stock
The
Company has authorized 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series. The only
series currently designated is a series of 5,000,000 shares of Series A Cumulative Convertible Preferred Stock (Series A Preferred
Stock).
As
of December 31, 2017 and 2016, there were 156,000 shares of Series A Preferred Stock issued and outstanding. The Series A Preferred
Stock provides for a cumulative annual dividend of $0.10 per share, payable in semi-annual installments in June and December.
Dividends may be paid in cash or with shares of common stock. The Company paid approximately $16,000 in cash for payment of dividends
in each of the years ended December 31, 2017 and 2016.
The
Series A Preferred Stock has no voting rights and has a $1.00 per share liquidation preference over common stock. The registered
holder has the right at any time to convert shares of Series A Preferred Stock into that number of shares of common stock that
equals the number of shares of Series A Preferred Stock that are surrendered for conversion divided by the conversion rate. The
conversion rate is subject to adjustment in certain events and is established at the time of each conversion. There were no conversions
during either of the years ended December 31, 2017 and 2016. There is no mandatory conversion term, date or any redemption features
associated with the Series A Preferred Stock.
10.
Income Taxes
For
each of the years 2017 and 2016, current tax provisions and current deferred tax provisions were recorded as follows:
|
|
2017
|
|
|
2016
|
|
Current Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
(27,000
|
)
|
|
|
(25,000
|
)
|
Foreign
|
|
|
(5,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
(32,000
|
)
|
|
|
(26,000
|
)
|
Deferred Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(24,000
|
)
|
|
|
(4,000
|
)
|
Foreign
|
|
|
(10,000
|
)
|
|
|
(8,000
|
)
|
|
|
|
(34,000
|
)
|
|
|
(12,000
|
)
|
Total Tax Provison
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(51,000
|
)
|
|
|
(29,000
|
)
|
Foreign
|
|
|
(15,000
|
)
|
|
|
(9,000
|
)
|
|
|
$
|
(66,000
|
)
|
|
$
|
(38,000
|
)
|
The
net deferred tax assets and liabilities have been reported in other liabilities in the consolidated balance sheets at December
31, 2017 and 2016 as follows:
|
|
2017
|
|
|
2016
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
NOL
carryforwards
|
|
$
|
15,337,000
|
|
|
$
|
23,291,000
|
|
UK NOL carryforwards
|
|
|
567,000
|
|
|
|
516,000
|
|
Allowance for doubtful
accounts
|
|
|
119,000
|
|
|
|
139,000
|
|
Compensation and
vacation accrual
|
|
|
64,000
|
|
|
|
92,000
|
|
Operating accruals
|
|
|
47,000
|
|
|
|
147,000
|
|
Research and experimentation,
AMT and foreign tax credits
|
|
|
148,000
|
|
|
|
147,000
|
|
Texas Margin Tax
Credit
|
|
|
136,000
|
|
|
|
126,000
|
|
Fixed assets and
intangibles
|
|
|
(220,000
|
)
|
|
|
199,000
|
|
Other
|
|
|
514,000
|
|
|
|
664,000
|
|
Total gross deferred
tax assets
|
|
|
16,712,000
|
|
|
|
25,321,000
|
|
Valuation
allowance
|
|
|
(16,340,000
|
)
|
|
|
(24,880,000
|
)
|
Net deferred tax
assets
|
|
|
372,000
|
|
|
|
441,000
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
|
375,000
|
|
|
|
359,000
|
|
Foreign
|
|
|
49,000
|
|
|
|
45,000
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
49,000
|
|
Total
gross deferred liabilities
|
|
|
424,000
|
|
|
|
453,000
|
|
Net
deferred taxes
|
|
$
|
(52,000
|
)
|
|
$
|
(12,000
|
)
|
The
reconciliation of computed expected income taxes to effective income taxes by applying the federal statutory rate of 34% is as
follows:
|
|
For
the year ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Tax at federal income tax
rate
|
|
$
|
316,000
|
|
|
$
|
962,000
|
|
State provision
|
|
|
(51,000
|
)
|
|
|
(29,000
|
)
|
Foreign tax differential
|
|
|
3,000
|
|
|
|
2,000
|
|
Change in valuation allowance
|
|
|
8,898,000
|
|
|
|
(917,000
|
)
|
Impact related to tax reform
|
|
|
(8,791,000
|
)
|
|
|
-
|
|
Permanent items
|
|
|
(441,000
|
)
|
|
|
(56,000
|
)
|
Total
Provision
|
|
$
|
(66,000
|
)
|
|
$
|
(38,000
|
)
|
On
December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation
makes significant change in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards
and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from
the current rate of 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liability
at the enacted rate. This revaluation resulted in an expense of $8,791,000 recorded in continuing operations and a corresponding
reduction in the valuation allowance. The new legislation will require the Company to pay tax on the unremitted earnings of its
foreign subsidiaries though December 31, 2017. Because of the complexities involved in determining the previously unremitted earnings
and profits of all our foreign subsidiaries, the Company is still in the process of obtaining, preparing, and analyzing the required
information and recorded an initial estimate of the impact in our Consolidated Financial Statements.
The
net change in the total valuation allowance for the year ended December 31, 2017 was a decrease of $8,898,000. The net change
in the total valuation allowance for the year ended December 31, 2016 was an increase of $917,000. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and planning strategies in making this assessment. Based on the level of historical
operating results and projections for the taxable income for the future, management has determined that it is more likely than
not that the portion of deferred taxes not utilized through the reversal of deferred tax liabilities will not be realized. Accordingly,
the Company has recorded a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be
realized.
At
December 31, 2017, the Company has available net operating loss (“NOL”) carryforwards of approximately $66,554,000
for federal income tax purposes, which will begin to expire in 2018. The NOL carryforwards for state purposes, which will continue
expiring in 2018, are approximately $29,185,000. There can be no assurance that the Company will ever be able to realize the benefit
of some or all of the federal and state loss carryforwards due to continued operating losses. Further, the Company had
a Section 382 analysis performed to determine the impact of any changes in ownership. Based on this analysis, no
ownership change has occurred that would limit the use of the NOLs. Under Internal Revenue Code (IRC) Section 382 and similar
state provisions, ownership changes may limit the annual utilization of NOL carryforwards existing prior to a change in control
that are available to offset future taxable income. Such limitations would reduce, potentially significantly, the gross deferred
tax assets disclosed in the table above related to the NOL carryforwards. The Company continues to disclose the NOL carryforwards
at their original amount in the table above as no potential limitation has been quantified. The Company has also established a
full valuation allowance for substantially all deferred tax assets, including the NOL carryforwards, since the Company could not
conclude that it was more likely than not able to generate future taxable income to realize these assets. In addition, the Company
has approximately $171,000 of state tax credit tax carryforwards that expire in the years 2018 through 2026.
The
deferred tax assets as of December 31, 2017 include a deferred tax asset of $437,000 representing NOLs arising from the exercise
of stock options by Company employees for 2005 and prior years. To the extent the Company realizes any tax benefit for the NOLs
attributable to the stock option exercises, such amount would be credited directly to stockholders’ equity.
United
States income taxes were not provided on unremitted earnings from non-United States subsidiaries. Such unremitted earnings are
considered to be indefinitely reinvested and determination of the amount of taxes that might be paid on these undistributed earnings
is not practicable.
The
Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state jurisdictions. With few
exceptions, the Company is no longer subject to income tax examination by tax authorities in major jurisdictions for years prior
to 2013. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs
were generated and carried forward, and make adjustments up to the amount of the carryforwards. The Company is not currently under
examination by the IRS or state taxing authorities.
11.
Long-term Debt
Term
Loan
In
November 2017, the Company entered into an amended and restated loan and security agreement (the “Amended and Restated Loan
Agreement”) with East West Bank (“EWB”). The Amended & Restated Loan Agreement amends and restates the loan
and security agreement that the Company entered into with EWB dated as of April 14, 2015 (as the same has been previously amended,
the “Prior Loan Agreement”).
The
following is a summary of the material terms of the Amended and Restated Loan Agreement:
|
●
|
EWB
loaned the Company $4,500,000 as a one-time 36-month term loan, $4,450,000 of which the Company agreed to use, and did use,
to refinance the $4,450,000 that it had outstanding under the Prior Loan Agreement. The Company applied the additional $50,000
to pay the facility fee ($45,000) and to pay reasonable costs or expenses incurred by EWB in connection with, among other
matters, the preparation and negotiation of the Amended and Restated Loan Agreement.
|
|
|
|
|
●
|
The
Company are required to make payments on the loan on the last calendar day of each month commencing on December 31, 2017 and
through its maturity date, November 29, 2020. Payments will be interest only until the payment due on June 30, 2018, at which
time payments will become principal plus interest.
|
|
|
|
|
●
|
Other
than during the continuance of an event of default, the loan bears interest, on the outstanding daily balance thereof, at
the Company’s option, at either: (A) a variable rate per annum equal to the prime rate as set forth in The Wall Street
Journal plus 1.75%, or (B) a fixed rate per annum equal to the LIBOR rate for the interest period for the advance plus 4.50%.
|
|
|
|
|
●
|
The
Company continues to grant and pledge to EWB a first-priority security interest in all its existing and future personal property,
including its intellectual property, subject to customary exceptions.
|
|
|
|
|
●
|
Subject
to customary exceptions, the Company continues to generally be prohibited from borrowing additional Indebtedness other than
subordinated debt and up to $2.0 million in the aggregate for the purpose of equipment financing to the extent EWB approves
such debt. “Indebtedness” means (i) all the Company’s other indebtedness for borrowed money or the deferred
purchase price of property or services, (ii) all the its obligations evidenced by notes, bonds, debentures and similar instruments,
(iii) all its capital lease obligations, and (iv) all its contingent obligations.
|
|
|
|
|
●
|
The
Company must comply with the following financial covenants:
|
|
o
|
Minimum
Fixed Charge Coverage Ratio – The Company must not have a Fixed Charge Coverage Ratio (as defined below) as of the last
day of a fiscal quarter less than 1.25 to 1.00. However, if the Company’s unrestricted cash exceeds the loan principal
outstanding, then what would otherwise be a breach of the covenant will be deemed automatically cured. The automatic cure
may not be used more than (A) two times in any fiscal year or (B) four times during the term of the Amended and Restated Loan
Agreement. Fixed Charge Coverage Ratio means the ratio of (a) Adjusted EBITDA (as defined below) for the four fiscal quarters
ending on the applicable measuring date, less (i) unfinanced capital expenditures during such period and (ii) cash taxes paid
during such period, to (b) the sum of (i) scheduled principal and interest payments with respect to the loan, (ii) scheduled
principal and interest payments with respect to other Indebtedness (as defined below) and (C) scheduled lease payments. “Adjusted
EBITDA” means (a) EBITDA (which is net income, plus interest expense, plus, to the extent deducted in the calculation
of net income, depreciation expense and amortization expense, plus income tax expense) plus (b) other noncash expenses and
charges, plus (c) to the extent approved by EWB, other onetime charges, plus (g) to the extent approved by EWB, any losses
arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business.
|
|
|
|
|
o
|
Minimum
Liquidity – The aggregate amount of unrestricted cash the Company has in deposit accounts or securities accounts
maintained with EWB must not be less than $2,000,000. This liquidity test will be measured the last day of each calendar month.
|
|
|
|
|
o
|
Maximum
Sr. Leverage Ratio – As of the last day of a fiscal quarter, the ratio of (a) all the Company’s Indebtedness outstanding
on such day, other than subordinated debt, to (b) Adjusted EBITDA for four fiscal quarters ending on such day, must not be
greater than 2.75 to 1.00 for fiscal quarters ending December 31, 2017 through March 31, 2018, and must not be greater than
2.50 to 1.00 for fiscal quarters ending June 30, 2018 and later.
|
As
of December 31, 2017, the Company was in compliance with all covenants except the Fixed Charge Coverage
Ratio. The Company anticipates that EWB will waive such non-compliance, and EWB informed the Company that it would forbear
from taking action with respect to the event of default caused by such non-compliance. Accordingly, the Company expects that its
repayment terms will not change as a result of this non-compliance.
As
of December 31, 2017, $4,500,000 was outstanding under the Amended and Restated Loan Agreement, all which is recorded
in current portion of long-term debt on the accompanying consolidated balance sheet as a result of the covenant
non-compliance as of December 31, 2017 discussed above. The Company recorded total debt issuance costs of $59,000, which
includes the $45,000 facility fee. The debt issuance costs will be amortized to interest expense using the effective interest
rate method over the life of the loan. As of December 31, 2017, the unamortized portion of the debt issuance costs was
$56,000 and is recorded as a reduction of long term debt. The Company has no more borrowing availability under the
Amended and Restated Loan Agreement.
Equipment
Notes Payable
In
May 2013, the Company entered into a financing arrangement with a lender under which the Company may borrow funds to purchase
certain equipment. Initially, the maximum amount the Company could borrow under this financing arrangement was $500,000. Over
time, the lender increased that maximum amount, and as of December 31, 2017, the maximum amount was $9,690,000, all of which has
been borrowed. In April 2015, the Company used approximately $3,381,000 of the proceeds received under the Prior Loan Agreement
with EWB to pay down a portion of the principal amount the Company had borrowed under this financing arrangement, accrued interest
and a prepayment fee.
The
Company was able to borrow up to the maximum amount available under this financing arrangement in tranches as needed. Each tranche
borrowed through August 2015 incurred interest at 8.32% per annum; the interest for tranches borrowed thereafter was reduced to
rates between 7.32% to 8.05% per annum. With respect to the first $1,000,000 in the aggregate borrowed, principal and interest
payments are due in 36 equal monthly installments. With respect to amounts borrowed in excess of the first $1,000,000 in the aggregate,
the first monthly payment will be equal to 24% of the principal amount outstanding, and the remaining principal and interest due
is payable in 35 equal monthly installments. The Company granted the lender a first security interest in the equipment purchased
with the funds borrowed. This equipment lender entered into a subordination agreement with EWB.
As
of December 31, 2017, $623,000 was outstanding under this financing arrangement, of which $615,000 is recorded in current portion
of long-term debt and $8,000 is recorded in long-term debt on the accompanying consolidated balance sheet. The Company currently
does not expect the lender to lend any additional funds under this financing arrangement.
Long-Term
Debt Principal Payments
Future
minimum principal payments under long-term debt as of December 31, 2017 are as follows:
Years
Ending December 31,
|
|
Principal
Payments
|
|
2018
|
|
$
|
1,665,000
|
|
2019
|
|
|
1,808,000
|
|
2020
|
|
|
1,650,000
|
|
Total
|
|
$
|
5,123,000
|
|
Interest
expense related to long-term debt for the years ended December 31, 2017 and 2016 was $425,000 and $517,000, respectively.
12.
Commitments
Operating
Leases
The
Company leases office and production facilities and equipment under agreements that expire at various dates through 2018. Certain
leases contain renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance,
taxes and other operating expenses. Lease expense under operating leases totaled $510,000 and $582,000 in 2017 and 2016, respectively.
As
of December 31, 2017, future minimum lease payments under operating leases are as follows:
Years
Ending December 31,
|
|
Lease
Payment
|
|
2017
|
|
$
|
624,000
|
|
2018
|
|
|
10,000
|
|
Total
|
|
$
|
634,000
|
|
Capital
Leases
As
of December 31, 2017 and 2016, property held under current capital leases was as follows:
|
|
For
the Years Ended
|
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Office equipment
|
|
$
|
362,000
|
|
|
$
|
328,000
|
|
Site equipment
|
|
|
250,000
|
|
|
|
250,000
|
|
Accumulated depreciation
|
|
|
(322,000
|
)
|
|
|
(185,000
|
)
|
Total
|
|
$
|
290,000
|
|
|
$
|
393,000
|
|
Total
depreciation expense under capital leases was $95,000 and $88,000 for the years ended December 31, 2017 and 2016, respectively.
As
of December 31, 2017, future minimum principal payments under capital leases are as follows:
Years
Ending December 31,
|
|
Prinicipal
Payment
|
|
2018
|
|
$
|
176,000
|
|
2019
|
|
|
119,000
|
|
2020
|
|
|
22,000
|
|
2021
|
|
|
21,000
|
|
2022
|
|
|
2,000
|
|
Total
|
|
$
|
340,000
|
|
13.
Contingencies
Litigation
The
Company is subject to litigation from time to time in the ordinary course of its business. There can be no assurance that any
claims will be decided in the Company’s favor and the Company is not insured against all claims made. During the pendency
of such claims, the Company will continue to incur the costs of its legal defense. Currently, there is no material litigation
pending or threatened against the Company.
Sales
and Use Tax
From
time to time, state tax authorities will make inquiries as to whether or not a portion of the Company’s services require
the collection of sales and use taxes from customers in those states. Many states have expanded their interpretation of their
sales and use tax statutes to subject more activities to tax. The Company evaluates such inquiries on a case-by-case basis and
has favorably resolved the majority of these tax issues in the past without any material adverse consequences. There were no liabilities
recorded in either of the years ended December 31, 2017 or 2016.
14.
Accumulated Other Comprehensive Income
Accumulated
other comprehensive income includes the accumulated gains or losses from foreign currency translation adjustments. The Company
translated the assets and liabilities of its Canadian statement of financial position into U.S. dollars using the period end exchange
rate. Revenue and expenses were translated using the weighted-average exchange rates for the reporting period. As of December
31, 2017 and 2016, $345,000 and $223,000, respectively, of accumulated foreign currency translation adjustments were recorded
in accumulated other comprehensive income, respectively.
15.
Geographical Information
Geographic
breakdown of the Company’s revenue for the last two fiscal years were as follows:
|
|
For
the years ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
20,570,000
|
|
|
$
|
21,559,000
|
|
Canada
|
|
|
704,000
|
|
|
|
753,000
|
|
Total
revenue
|
|
$
|
21,274,000
|
|
|
$
|
22,312,000
|
|
Geographic
breakdown of the Company’s long-term tangible assets for the last two fiscal years were as follows:
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
3,406,000
|
|
|
$
|
3,015,000
|
|
Canada
|
|
|
272,000
|
|
|
|
86,000
|
|
Total
assets
|
|
$
|
3,678,000
|
|
|
$
|
3,101,000
|
|
16.
Retirement Savings Plan
In
1994, the Company established a defined contribution plan, organized under Section 401(k) of the Internal Revenue Code, which
allows employees who have completed at least three months of service, have worked a minimum of 250 hours in a quarter, and have
reached age 18 to defer up to 50% of their pay on a pre-tax basis. The Company does not contribute a match to the employees’
contribution.