PART
I
About
Our Business and How We Talk About It
We
deliver interactive entertainment and innovative dining technology to bars and restaurants in North America. Our customers license
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 now also enables competition between venues, referred to as massively multiplayer
gaming. Our current tablet platform, which we refer to as Buzztime Entertainment On Demand, or BEOND, was first introduced as
a pilot program in December 2012, was expanded commercially during 2013, and the expansion was 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, and by selling advertising aired on in-venue screens and as part of customized games. In 2014, we began offering pay-to-play
single player games to certain customers. During the second quarter of 2015, we made a strategic change in our premium
content model by making single player games available on both a free-to-consumer (in exchange for an increased subscription
fee) and pay-to-play basis. This change required us to delay the general availability of pay-to-play games as we retooled
its content, workflow and positioning. As a result, during 2015, we generated additional subscription fee revenue from those venues
offering free-to-consumer single player games. We began rolling out the new pay-to-play single player games during
the second quarter of 2016.
Over
136 million games were played on our network during 2016, and as of December 31, 2016, approximately 54% 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 hospitality 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 “hospitality locations,” “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
Amendments
to East West Bank Credit Facility
In
April 2015, we entered into a loan and security agreement with East West Bank, pursuant to which, we could request advances in
an aggregate outstanding amount at any time up to the lesser of $7,500,000, which we refer to as the revolving line, or an amount
equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. In March 2016, we
entered into a first amendment to the loan and security agreement to allow us the ability to request advances in an aggregate
outstanding amount at any time up to the lesser of (a) $7,500,000, which we refer to as the revolving line, or (b) the sum of
$2,000,000 (which we refer to as the “sublimit”) plus the amount equal to our borrowing base, in each case, less the
aggregate outstanding principal amount of prior advances. The first amendment also amended certain financial covenants. In December
2016, we entered into a second amendment to the loan and security agreement to extend the due date of all advances under the revolving
line from December 31, 2017 to January 15, 2018. In February 2017, we entered into a third amendment to the loan and security
agreement to extend the maturity date of the $2,000,000 sublimit from March 31, 2017 to June 15, 2017, to establish the minimum
adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, targets for each of our 2017 fiscal
quarters, to remove the monthly compliance check of churn rate targets and to amend when compliance with minimum deposit amounts
is measured. 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.
Registered
Direct Offering
As
previously reported, in a registered direct offering that closed on November 4, 2016, we sold 412,071 shares of our common stock
and received net proceeds of approximately $2.7 million, after deducting estimated offering expenses. We are using and will continue
to use the net proceeds of the offering for general corporate purposes, which may include working capital, general and administrative
expenses, capital expenditures and implementation of our strategic priorities.
Reverse/forward
split of our common stock
At
our 2016 annual meeting of stockholders, our stockholders approved an amendment to our restated certificate of incorporation to
give effect to, first, a reverse split of our outstanding common stock at an exchange ratio of 1-for-100 and, then, immediately
following such reverse split, a forward split of our outstanding common stock at a ratio that is not less than 2-for-1 nor greater
than 4-for-1, with the final ratio to be selected by our board of directors in its sole discretion. Our board of directors set
the final ratio of the forward split at 2-for-1. We refer to the reverse split and to the forward split, together, as the “reverse/forward
split.”
The
effective date of the reverse/forward split was June 16, 2016. As of immediately prior to the reverse/forward split, we had 92,439,174
of common stock outstanding, and subsequent to the reverse/forward split, we 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.
Notice
of non-compliance with NYSE MKT continued listing standard
As
previously reported, in November 2015, we received a letter from the NYSE Regulation Inc. stating that we are not in compliance
with Section 1003(a)(iii) of the NYSE MKT Company Guide 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. In December 2015,
we submitted a plan to NYSE Regulation advising of actions we have taken or will take to regain compliance with Section 1003(a)(iii)
by May 13, 2017. In January 2016, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that
extends through May 13, 2017 to regain compliance with Section 1003(a)(iii).
In
April 2016, as previously reported, we received a second letter from NYSE Regulation stating that we are not in compliance with
Section 1003(a)(ii) of the Company Guide 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. As a result, we continue to
be subject to the procedures and requirements of Section 1009 of the Company Guide. Because this instance of noncompliance is
in addition to our noncompliance with Section 1003(a)(iii) of the Company Guide discussed above, we were not required to submit
a new compliance plan.
Under
Section 1003(a)(i) of the Company Guide, the NYSE MKT will normally consider suspending dealings in, or removing from the list,
securities of an issuer which has stockholders’ equity of less than $2 million if such issuer has sustained losses from
continuing operations and/or net losses in two of its three most recent fiscal years. We had net losses in two of our three most
recent fiscal years ended December 31, 2015. Our stockholders’ equity at September 30, 2016 was $1.8 million, and accordingly,
we were below compliance with Section 1003(a)(i), as well. However, due to the offering discussed above, we raised approximately
$2.7 million in that offering, and our stockholders’ equity at December 31, 2016 was approximately $4.1 million.
The
listing of our common stock on the NYSE MKT is being continued during the plan period pursuant to an extension. The NYSE Regulation
staff reviews us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with the listing
requirements with which we are currently not in compliance by May 13, 2017 or if we do not make progress consistent with our plan
during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate. See “ITEM 1A. RISK FACTORS—Risks
Relating to the Market for Our Common Stock—Our common stock could be delisted or suspended from trading on the NYSE MKT
if we do not regain compliance with continued listing criteria with which we are currently not compliant or if we fail to meet
any other continued listing criteria,” below. We have continued to make progress consistent with our plan during the plan
period. Raising capital in the offering discussed above is consistent with the initiatives outlined in our plan to regain compliance,
however, the amount raised in that offering did not increase our stockholders’ equity to the amount required to regain compliance
with all of the listing requirements in Section 1003(a). We are continuing to explore options to address our non-compliance, including
by raising additional capital through additional equity financings.
Our
Strategy
Below
is a discussion of our strategy and highlights of current accomplishments and milestones achieved during 2016 and year to date
in 2017:
Scale
digital menu and payment functionality.
We are heavily focused 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. After ensuring our tablet met the Payment Card Industry, or PCI, compliance
standards applicable to our platform, we launched a digital menu and payment functionality pilot test at Buffalo Wild Wings at
15 sites, which was completed in October 2016. Subsequent to the pilot test, we received certification on our EMV functionality,
which enables additional payment security and fraud protection for our restaurant partners. In March 2017, we announced that
Buffalo Wild Wings chose us to be its provider of digital menu, order, and payment functionality. Rolling out this functionality
will be a key focus for us in 2017.
Improve
value and price for our “independent” customers.
During 2016, we continued to focus
on, and we are continuing to focus on, entertainment, which is a key source of value to our independent customers. We entered
into several partnerships during the year, which centered on driving guest traffic at our customer’s venues, increasing
the guest community and improving loyalty. Such partnerships included the Washington Redskins, FanDuel, and Fandango.
With
respect to price, we continued to make progress on our hardware design and quality in order to reduce expense and to give us the
ability to offer flexibility in our pricing for quality independent customers. During the fourth quarter of 2016, we began deploying
our own proprietary tablet. Building our own tablet gives us control over the product specifications and allows us to gain control
over the supply chain, which should help ensure stability, all of which has resulted in reduced hardware expenses and allowed
us to offer multiple pricing options for our independent customers. Our proprietary tablet also gives us more flexibility to expand
our product offering and enter adjacent markets. During the fourth quarter of 2016, Harbor Retirement Associates, LLC, which manages
the HarborChase senior care communities, agreed to install our BEOND platform offering in all of its new communities. During 2017,
we will continue working on hardware design and costs and enhancing our product offering on our new tablet platform, such as expanding
the capabilities of our digital signage package and continuing to explore new adjacent markets.
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. During 2016, we have made progress on ramping up our outbound sales team. We continue
to make improvements in our demand generation programs and expect to see results from these programs in 2017. Additionally,
we continue to work with our distribution partner Heartland Digital Dining. Through a dealer network, Digital Dining offers
its own integrated restaurant management system as well as third-party offerings, such as our BEOND platform, to hospitality venues.
During 2016, we became the only tableside menu, order, pay and entertainment platform that Digital Dining’s dealer network
could offer to hospitality venues. During the fourth quarter of 2016, we sold our BEOND platform to a few hospitality venues through
this channel.
Monetize
the network.
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 to the free-to-consumer games we provide to certain
customers, we launched a pay-to-play premium games lobby during the second quarter of 2016 and are in approximately 500
sites as of March 7, 2017. We expect to continue rolling out the games lobby at additional sites throughout 2017, which we expect
to result in accretive revenue from the consumers who play on a pay-to-play basis.
Additionally,
we continued to leverage our network with on-tablet local and national advertising campaigns. Most recently, we completed a four-month
Anheuser-Busch program called Let’s Go. This program was built around the NFL season, and our BEOND tablet platform was
used to provide a companion to the NFL season with scores and stats available for a consumer’s favorite team. Let’s
Go also added an interactive bobble head feature, where consumers could build and customize their own bobble head, complete with
NFL licensed jerseys and gear. We believe this program demonstrated the power of brands connecting with target consumers and delivering
great experiences for the consumers within the restaurant venues.
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 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.
In
addition, we are increasingly competing with games, apps and other forms of entertainment offerings available directly to consumers
on their smart phones and tablets.
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, 2016, 2,814 venues in the U.S. and Canada subscribed to our interactive
entertainment network, of which, approximately 43% were Buffalo Wild Wings corporate-owned restaurants and its franchisees (collectively,
“Buffalo Wild Wings”). For the years ended December 31, 2016 and 2015, revenue generated from Buffalo Wild Wings was
as follows:
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|
Year
Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Buffalo Wild Wings revenue
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|
$
|
8,913,000
|
|
|
$
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10,889,000
|
|
Percent of total revenue
|
|
|
40
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%
|
|
|
44
|
%
|
As
of December 31, 2016 and 2015, amounts included in accounts receivable from Buffalo Wild Wings was as follows:
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|
Year
Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Buffalo Wild Wings accounts
receivable
|
|
$
|
261,000
|
|
|
$
|
172,000
|
|
Backlog
We
generally do not have a significant backlog because we normally can deliver and install new systems at hospitality locations within
the delivery schedule requested by customers (generally within three to four weeks). However, during 2014, we encountered challenges
with the assembly of the cases for our BEOND tablet, which prevented us from delivering and installing new systems within the
30 day period, thereby creating a backlog. As of December 31, 2014, customer agreements worth approximately $1,416,000 were affected
by the backlog. We determined the worth of such agreements based on the sum of the annualized amount of the subscription fees,
which is recognized as revenue as the service is provided, and the amount of equipment lease revenue, if any, subject to such
agreements, which is recognized as revenue upon installation of the equipment leased. During 2015, we resolved the case assembly
issue, and as a result, we returned to our normal delivery and installation schedule with no significant backlog.
Licensing,
Trademarks, Copyrights and Patents
A
majority of the gaming content available on our BEOND 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 2016 or 2015. All of the gaming content available on our Classic platform
is internally developed.
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. Some of the hardware we use in our operations is customized,
and all of it is purchased from outside vendors. 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, BEOND Powered by Buzztime 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, 2016, 2,814 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,
|
|
|
|
2016
|
|
|
2015
|
|
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,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
|
97
|
%
|
|
|
97
|
%
|
Canada
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
Government
Contracts
We
provide our content distribution services through the Buzztime 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:
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user
privacy;
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●
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copyrights;
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|
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●
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gaming,
lottery and alcohol beverage control regulations;
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|
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|
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●
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consumer
protection;
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●
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the
distribution of specific material or content; and
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●
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the
characteristics and quality of interactive entertainment products and services.
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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. 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 products 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 7, 2017, we employed approximately 109 people on a full-time basis and 293 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
Risk
Factors That May Affect Our Business
Our
financial position, results of operations, and cash flows are subject to various risks, many of which are not exclusively within
our control. These risks may cause actual performance to differ materially from historical or projected future performance. We
urge investors to carefully consider the risk factors described below in evaluating the information contained in this report.
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:
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identify
emerging technological trends and industry standards in our market;
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identify
changing consumer needs, desires, or tastes;
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develop
and maintain competitive technology, including new hardware and content products and service offerings;
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●
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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
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●
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bring
technology to the market quickly at cost-effective prices.
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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, 2016, Buffalo Wild Wings accounted for approximately 40%, or $8,913,000, of our total revenue. As
of that date, approximately $261,000 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 built 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 own tablet on a going-forward basis. The third party manufacturing our own tablet also manufactures
our tablet equipment—tablet charging trays and tablet cases. We currently do not have an alternative manufacturing source
for our own tablet or the tablet equipment or alternatives for the tablet equipment.
If
the sole manufacturer of our own tablet 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 the sole manufacturer of the
tablet equipment is delayed in delivering the equipment to us, becomes unavailable, has product quality issues, or shortages occur,
we may be unable to timely obtain replacement tablet equipment. For example, during 2014, we encountered challenges with the assembly
of the cases for our BEOND tablet, which prevented us from delivering and installing new systems within the time frame requested
by customers, thereby creating a backlog of approximately $1,416,000 as of December 31, 2014. See “ITEM 1. BUSINESS—Backlog,”
above. Although we fixed our case assembly issue in 2015 and currently do not have any significant backlog, no assurances can
be given that other challenges will not arise, including challenges related to transitioning to our own tablet. 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 own tablet and tablet equipment is not able to meet our manufacturing
quality standards,” below.
If
our 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 tablet and our tablet equipment is not able to meet
our manufacturing quality standards.
As
discussed above, one unaffiliated third party manufactures our own tablet and our tablet equipment. Continued improvement
in supply-chain management and manufacturing of our own tablet and tablet equipment and manufacturing quality and product
testing are important to our business. Flaws in the design and manufacturing of our own 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.
As
previously reported, in early 2014, we began to manufacture, design and manage the supply chain of the equipment related to our
BEOND second generation tablet platform in-house and experienced problems with the design and manufacturing processes. As a result,
during 2015, we recognized approximately $979,000 of repair expense related to the second generation in-house designed BEOND tablet
equipment that we have had to repair or deem we will need to repair in the future. We can give no assurances that the amount of
repair expense that we have accrued with respect to tablet equipment that we estimate will need repair in the future is adequate.
If more equipment needs repair than the amount currently estimated, we may have to accrue for additional repair expense.
During
2015, due to our design and manufacturing process problems discussed above with the second generation tablet platform equipment,
we re-evaluated the strategy of managing the manufacture, design and supply chain in-house. In connection with that re-evaluation,
we determined to write off approximately $797,000 of tablet components that became obsolete due to upcoming changes in the tablet
platform. Also during 2015, and as part of our re-evaluation, we out-sourced the supply-chain management and manufacturing of
certain equipment related to our third generation BEOND tablet platform to an unaffiliated third party manufacturer. This relationship
is in its early stages, and we are unable to predict if it will be successful. Among other things, the equipment manufactured
by this manufacturer may not meet our quality standards. For example, during the fourth quarter of 2015, some of the tablet cases
produced by this manufacturer had quality defects, and although we have not yet incurred any direct costs associated with addressing
these defects, all of which have been or will be borne by the manufacturer, our tablet case inventory level may decrease as a
result. See also “A disruption in the supply of equipment could negatively impact our subscriptions and revenue,”
above.
There
can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for
our equipment will be sufficient to permit us to avoid equipment quality issues. Significant equipment 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 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 could cause us to incur substantial costs, which in turn could materially adversely
affect our business.
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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our
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 technology 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.
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 $2,923,000 and $7,226,000 for the years ended December 31, 2016
and 2015, respectively, and have an accumulated deficit of $128,026,000 as of December 31, 2016. 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—Our common stock could be delisted or suspended from trading on the NYSE MKT if we do not regain
compliance with continued listing criteria with which we are currently not compliant or if we fail to meet any other continued
listing criteria,” 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 technology 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 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,
award prizes. 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 the cancellation of subscribers 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 Buzztime 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,
a decision to close a facility we are using without adequate notice for financial or other reasons, 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
management turnover creates uncertainties.
We
have experienced significant changes in our senior management team over the past several years. Ram Krishnan was appointed as
our chief executive officer in September 2014 and, before he was appointed, we had three different individuals and an interim
committee serve as our chief executive officer or perform the functions of a chief executive between February 2009 and September
2014. Allen Wolff was appointed as our chief financial officer in December 2014, and was appointed as our chief financial officer
and executive vice president effective February 1, 2016 due to his expanded responsibilities following the departure of our former
chief revenue officer, our former chief development officer, our former chief product officer and our former senior vice president
of sales and marketing during 2014 and 2015. Because of our recent financial and stock performance, geographic location, and other
business factors in a relatively small industry, we face substantial challenges in attracting and retaining experienced senior
executives. Changes in senior management are inherently disruptive, and efforts to implement any new strategic or operating goals
may not succeed in the absence of a long-term management team. Changes to strategic or operating goals with the appointment of
new executives may themselves prove to be disruptive. Periods of transition in senior management leadership are often difficult
as the new executives gain detailed knowledge of our operations and due to cultural differences and friction that may result from
changes in strategy and style. Without consistent and experienced leadership, our employees, customers, creditors, stockholders,
and others may lose confidence in us.
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, 2016, we had federal income tax net operating loss (“NOL”) carryforwards of approximately $65,291,000,
which will begin to expire in 2017. As of December 31, 2016, we had state income tax NOL carryforwards of approximately $35,969,000,
portions of which will continue expiring in 2017. 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
compromising 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 patrons.
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 patrons, 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 patrons. 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 patrons.
Risks
Relating to the Market for Our Common Stock
Our
common stock could be delisted or suspended from trading on the NYSE MKT if we do not regain compliance with continued listing
criteria with which we are currently not compliant or if we fail to meet any other continued listing criteria.
As
previously reported in November 2015, we are not in compliance with the continued listing standards of the NYSE MKT. Specifically,
we are not in compliance with Section 1003(a)(iii) of the NYSE MKT Company Guide (the “Company Guide”) 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. As a result, we became subject to the procedures and requirements of Section 1009 of the
Company Guide. We were required to submit a plan to NYSE Regulation, Inc. advising of actions we have taken or will take to regain
compliance with Section 1003(a)(iii) of the Company Guide by May 13, 2017. We submitted such a plan in December 2015. In January
2016, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that extends through May 13, 2017
to regain compliance with Section 1003(a)(iii).
In
April 2016, we received a letter from NYSE Regulation stating that we are not in compliance with Section 1003(a)(ii) of the Company
Guide 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. As a result, we continue to be subject to the procedures and requirements
of Section 1009 of the Company Guide. Because this instance of noncompliance was in addition to our noncompliance with Section
1003(a)(iii) of the Company Guide, we were not required to submit a new compliance plan.
Under
Section 1003(a)(i) of the Company Guide, the NYSE MKT will normally consider suspending dealings in, or removing from the list,
securities of an issuer which has stockholders’ equity of less than $2 million if such issuer has sustained losses from
continuing operations and/or net losses in two of its three most recent fiscal years. We had net losses in two of our three most
recent fiscal years ended December 31, 2015. Our stockholders’ equity at September 30, 2016 was $1.8 million, and accordingly,
we were below compliance with Section 1003(a)(i), as well. However, due to the offering discussed above, we raised approximately
$2.7 million in that offering, and our stockholders’ equity at December 31, 2016 was approximately $4.1 million.
The
listing of our common stock on the NYSE MKT is being continued during the plan period pursuant to an extension. The NYSE Regulation
staff reviews us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with the listing
requirements with which we are currently not in compliance by May 13, 2017 or if we do not make progress consistent with our plan
during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate. We have continued to make progress
consistent with our plan during the plan period. Raising capital in the offering discussed above is consistent with the initiatives
outlined in our plan to regain compliance, however, the amount raised in that offering did not increase our stockholders’
equity to the amount required to regain compliance with all of the listing requirements in Section 1003(a). We are continuing
to explore options to address our non-compliance, including by raising additional capital through additional equity financings.
We can give no assurances that we will be able to address our non-compliance with the NYSE MKT continued listing standards or,
even if we do, that we will be able to maintain the listing of our common stock on the NYSE MKT. Our common stock could be delisted
because we do not make progress consistent with our plan during the plan period, because we do not regain compliance with Sections
1003(a)(i), 1003(a)(ii) and 1003(a)(iii) by May 13, 2017, or because we fall below compliance with other NYSE MKT listing standards.
In addition, we may determine to pursue business opportunities or grow our business at levels or on timelines that reduces our
stockholders’ equity below the level required to maintain compliance with NYSE MKT 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 was delisted or suspended from trading on the NYSE MKT, 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 on the secondary market.
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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commencement
of delisting proceedings by the NYSE MKT; 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
a private placement we completed in November 2013, we issued 120,000 shares of our common stock and warrants to purchase 72,000
shares of our common stock at an exercise price of $20.00 per share. A registration statement registering the resale of all of
those shares 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, since 2009, in connection with acquisitions, we issued (directly or upon the exercise of warrants issued in connection
with such acquisitions) an aggregate of approximately 56,000 shares of our common stock. As of December 31, 2016, there were outstanding
warrants to purchase an aggregate of 132,000 shares of common stock at exercise prices ranging from $20.00 to $75.00 per share
(including the warrants to purchase 72,000 shares we issued in our November 2013 private placement). In addition, as of December
31, 2016, 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 issued in connection with the acquisitions, the shares we may issue upon exercise of warrants
and 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, subject to any applicable holding period with respect to the shares issued upon exercise of warrants the
exercise price of which is paid with cash.
As
of December 31, 2016, there were also approximately 165,000 shares of common stock reserved for issuance upon the exercise of
outstanding stock options at exercise prices ranging from $6.50 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 MKT continued listing standards, in particular, options to address
our low stockholders’ equity. We currently have a shelf registration statement on file under which we could sell up to approximately
$25 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
and November 2016 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. After taking into account the shares we sold in the offering
that closed in November 2016, our public float is currently approximately $15.0 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 an additional approximately $2.3 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 MKT equities market, there can be no assurance that we will be able to maintain such listing. See also “Our
common stock could be delisted or suspended from trading on the NYSE MKT if we do not regain compliance with continued listing
criteria with which we are currently not compliant or if we fail to meet any other continued listing criteria,” above.
Our
ability to timely raise sufficient additional capital also may be limited by the NYSE MKT’s stockholder approval requirements
for transactions involving the issuance of our common stock or securities convertible into our common stock. For instance, the
NYSE MKT 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 MKT 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 MKT 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 MKT also requires that we obtain stockholder approval if the issuance or potential issuance of additional shares
will be considered by the NYSE MKT 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 MKT 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.
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. The facilities that
we lease are suitable for our current needs and are considered adequate to support expected growth.
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ITEM
3.
|
Legal
Proceedings
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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.
In
the past, we have been involved in sales tax inquiries with certain states and provinces. As a result of those inquiries, we recorded
a total net liability of $25,000 as of December 31, 2015 with respect to tax assessments to which we may be subject as a result
of such inquiries. Based on the guidance set forth by the Financial Accounting Standards Board (“FASB) Accounting Standards
Codification (“ASC”) No. 450,
Contingencies,
we deemed the likelihood that we will be required to pay all or
part of these assessments as reasonably possible. During the year ended December 31, 2016, we resolved all matters under inquiry,
and the previously recognized $25,000 was sufficient under the assessments.
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ITEM
4.
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Mine
Safety Disclosures
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Not
Applicable.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2016 and 2015
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1.
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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
license 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 now 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 first introduced as a pilot program in December 2012, was expanded commercially during
2013, and the expansion was 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 its service to its network subscribers, by leasing equipment
(including tablets used in its BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers,
by hosting live trivia events, and by selling advertising aired on in-venue screens and as part of customized games. In 2014,
the Company began offering pay-to-play single player games to certain customers. During the second quarter of 2015, the
Company made a strategic change in its premium content model by making single player games available on both a free-to-consumer
(in exchange for an increased subscription fee) and pay-to-play basis. This change required the Company to delay the general availability
of pay-to-play games as it retooled its content, workflow and positioning. As a result, during 2015, the Company generated
additional subscription fee revenue from those venues offering free-to-consumer single player games. The Company began
rolling out the new pay-to-play single player games during the second quarter of 2016.
At December 31, 2016, 2,814 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment
network, of which approximately 71% 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.
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2.
|
Summary
of Significant Accounting Policies and Estimates
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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 April 2015, the Company entered into a loan and security agreement with East West Bank, or EWB, which
was amended in March 2016, December 2016 and February 2017. The Company refers to the loan and security agreement as amended in
March 2016, December 2016 and February 2017 as the EWB credit facility. Under the EWB credit facility, through June 15, 2017,
the Company may request advances in an aggregate outstanding amount at any time up to the lesser of (a) $7,500,000, which the
Company refers to as the revolving line, or (b) the sum of $2,000,000 (which the Company refers to as the “sublimit”)
plus the amount equal to its borrowing base, in each case, less the aggregate outstanding principal amount of prior advances.
On June 15, 2017, the sublimit becomes zero. If the aggregate amount of advances as of June 15, 2017 exceeds the lesser of the
revolving line or the amount equal to our borrowing base, then the Company must pay EWB the amount of such excess. So long as
there is no event of default, the Company may make a one-time request to increase the revolving line by up to $2,500,000, which
EWB may accept or decline. All advances on the revolving line are due on January 15, 2018. The Company uses the proceeds available
under this credit facility to fund strategic growth initiatives and for general working capital purposes. As of December 31, 2016,
the Company borrowed $6,500,000 under this credit facility and approximately $97,000 is available. As discussed below, the Company
used approximately $3,381,000 of the proceeds to pay down existing indebtedness and to pay related prepayment fees. The Company
will continue use the proceeds available under this credit facility to fund strategic growth initiatives and for general working
capital purposes.
The
Company has a financing arrangement with a 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, 2016,
the Company borrowed $9,690,000, which is recorded in short-term and long-term debt on the accompanying consolidated balance sheet.
As of December 31, 2016, $1,611,000 remained outstanding. 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, 2016, 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, 2016, 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, 2016
and 2015 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:
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The
lease transfers ownership of the property to the lessee by the end of the lease term;
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There
is a bargain purchase option;
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The
lease term is equal to or greater than 75% of the economic life of the equipment; or
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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.
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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 $386,000 and $993,000 for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016 and 2015,
approximately $642,000 and $421,000, 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, 2016 and determined there
were no indications of impairment for that period. During its annual review for the year ended December 31, 2015, the Company
determined to abandon various software development projects that it concluded were no longer a current strategic fit or for which
the Company 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 $295,000 was recognized for the year ended
December 31, 2015, which is separately stated on the Company’s consolidated statements of operations.
Advertising
Costs –
There were no marketing-related advertising costs for the either of the years ended December 31, 2016 or 2015.
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 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
January 2017, the FASB issued Accounting Standards Update (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
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.
This update is intended to simplify various aspects of accounting for employee share-based
payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well
as classification in the statement of cash flows. This update is effective for fiscal periods beginning after December 15, 2016
(which is January 1, 2017 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. Entities have the option of using either a full retrospective
or a modified approach to adopting the guidance. The Company will apply the full-retrospective transition method when adopting
this guidance. The Company does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial
statements.
Fixed
assets are recorded at cost and consist of the following at December 31, 2016 and 2015:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Broadcast equipment
|
|
$
|
10,671,000
|
|
|
$
|
13,001,000
|
|
Machinery and equipment
|
|
|
2,523,000
|
|
|
|
2,479,000
|
|
Furniture and fixtures
|
|
|
271,000
|
|
|
|
265,000
|
|
Leasehold improvements
|
|
|
610,000
|
|
|
|
610,000
|
|
Other equipment
|
|
|
15,000
|
|
|
|
16,000
|
|
|
|
|
14,090,000
|
|
|
|
16,371,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(10,989,000
|
)
|
|
|
(12,456,000
|
)
|
Total
|
|
$
|
3,101,000
|
|
|
$
|
3,915,000
|
|
Depreciation
expense totaled $2,451,000 and $2,061,000 for the years ended December 31, 2016 and 2015, respectively.
|
4.
|
Goodwill
and Other Intangible Assets
|
The
Company’s goodwill balance of $937,000 and $909,000 as of December 31, 2016 and 2015, 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, 2016 and determined there were no indications of impairment.
The
Company performed its annual review of its other intangible assets as of December 31, 2016 and 2015 and determined that there
were no indications of impairment for either of the years ended on those dates.
The
weighted average remaining useful life for all intangible assets is 0.6 years as of December 31, 2016. Amortization expense relating
to all intangible assets totaled $50,000 for each of the years ended December 31, 2016 and 2015.
As
of December 31, 2016 and 2015, intangible assets with estimable lives were comprised of the following:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Acquired technology
|
|
$
|
150,000
|
|
|
$
|
(121,000
|
)
|
|
$
|
29,000
|
|
|
$
|
150,000
|
|
|
$
|
(71,000
|
)
|
|
$
|
79,000
|
|
Acquired customer lists
|
|
|
435,000
|
|
|
|
(435,000
|
)
|
|
|
-
|
|
|
|
435,000
|
|
|
|
(435,000
|
)
|
|
|
-
|
|
Trivia database
|
|
|
332,000
|
|
|
|
(332,000
|
)
|
|
|
-
|
|
|
|
332,000
|
|
|
|
(332,000
|
)
|
|
|
-
|
|
Trademarks and trademark licenses
|
|
|
67,000
|
|
|
|
(67,000
|
)
|
|
|
-
|
|
|
|
67,000
|
|
|
|
(67,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
984,000
|
|
|
$
|
(955,000
|
)
|
|
$
|
29,000
|
|
|
$
|
984,000
|
|
|
$
|
(905,000
|
)
|
|
$
|
79,000
|
|
The
estimated aggregate amortization expense relating to the Company’s intangible assets for the year ending December 31, 2017
is $29,000 and zero thereafter.
|
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, 2016.
Accrued
compensation consisted of the following at December 31, 2016 and 2015:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued bonuses
|
|
$
|
487,000
|
|
|
$
|
340,000
|
|
Accrued vacation
|
|
|
291,000
|
|
|
|
423,000
|
|
Accrued salaries
|
|
|
264,000
|
|
|
|
243,000
|
|
Accrued commissions
|
|
|
18,000
|
|
|
|
18,000
|
|
Total
accrued compensation
|
|
$
|
1,060,000
|
|
|
$
|
1,024,000
|
|
|
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, 2016 and 2015, the Company generated approximately $8,913,000 and $10,889,000, respectively, of total
revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees, which represented approximately 40% and 44% of
total revenue in each of those years, respectively. As of December 31, 2016 and 2015, approximately $261,000 and $172,000, 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, 2015 approximately $127,000 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 453,000 and 424,000 shares (after taking into account the proportion adjustments as
a result of the reverse/forward split described in Note 9) were excluded from the computations of diluted net loss per common
share for the years ended December 31, 2016 and 2015, respectively, as their effect was anti-dilutive.
Registered
Direct Offering
On
November 1, 2016, the Company entered into a subscription agreement with certain investors relating to the issuance and sale of
shares of the Company’s common stock at a purchase price of $6.64 per share, which was the closing price of its common stock
on October 31, 2016. The offering closed on November 4, 2016. The Company sold 412,071 shares of its common stock and received
net proceeds of approximately $2.7 million, after deducting estimated offering expenses.
The
Company intends to use the net proceeds of the offering for general corporate purposes, which may include working capital, general
and administrative expenses, capital expenditures and implementation of its strategic priorities.
The
terms of the offering were approved by a committee of the Company’s board of directors comprised solely of independent directors,
none of whom invested in the offering. The Company’s board of directors gave that committee the power and authority to direct
the process and procedures related to the review and evaluation of possible offerings, including the authority to determine not
to proceed with any particular offering, to review, evaluate and negotiate, or designate officers of the Company to review, evaluate
and negotiate, the terms of one or more offerings, and to authorize and approve one or more offerings and its terms. The investors
in the offering included certain existing stockholders and the Company’s chief executive officer, chief financial officer
and senior vice president marketing, Ram Krishnan, Allen Wolff and Dave Miller, respectively.
The
shares were offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration
Statement No. 333-193012) filed with the Securities and Exchange Commission on December 20, 2013 and declared effective by the
SEC on January 9, 2014, and the base prospectus included therein, as supplemented by a prospectus supplement filed with the SEC
in connection with the takedown relating to the offering.
Reverse/Forward
Split of Common Stock
At
the Company’s annual meeting of stockholders held on June 3, 2016, the Company’s stockholders approved an amendment
to the Company’s restated certificate of incorporation to give effect to, first, a reverse split of the Company’s
outstanding common stock at an exchange ratio of 1-for-100 and, then, immediately following such reverse split, a forward split
of its outstanding common stock at a ratio that is not less than 2-for-1 nor greater than 4-for-1, with the final ratio to be
selected by the Company’s board of directors in its sole discretion. The board of directors set the final ratio of the forward
split at 2-for-1. The Company refers to the reverse split and to the forward split, together, as the “reverse/forward split.”
On
June 16, 2016 (the “Effective Date”), the Company filed with the Secretary of State of Delaware the amendment to its
restated certificate of incorporation to effect the reverse/forward split. The 1-100 reverse split was effective at 6:00 p.m.
Eastern Time on the Effective Date and the 2-for-1 forward split was effective at 6:01 p.m. Eastern Time on the Effective Date.
Any fractional share of common stock resulting from the forward split was rounded up to the nearest whole share. Any stockholder
who, as of immediately prior to 6:00 p.m. Eastern Time on the Effective Date, 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 MKT over the five trading
days immediately before and including the Effective Date. As of immediately prior to the reverse split/forward split on the Effective
Date, 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 on the Effective Date.
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.
As
provided for in the Company’s equity incentive plans and outstanding warrant agreements, the number of shares subject to
the equity plans and warrant agreements along with any exercise prices of outstanding awards, were equitably and proportionately
adjusted and are reflected. Additionally, the conversion rate for the Company’s Series A convertible preferred stock was
also equitably and proportionately adjusted so that holders of the Series A convertible preferred stock would be entitled to receive,
upon conversion, the number of shares of the Company’s common stock that such holders would have been entitled to receive
immediately following the reverse/forward split, had such shares of the Series A convertible preferred stock been converted into
shares of the Company’s common stock immediately prior to the reserve/forward split.
Equity
Incentive Plans
All
amounts 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, 2016, 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, 2016, there were options to
purchase approximately 79,000 shares of the Company’s common stock outstanding 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 MKT 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 2016 and 2015 under the ASC No. 718 requirements:
|
|
2016
|
|
|
2015
|
|
Weighted average risk-free rate
|
|
|
1.20
|
%
|
|
|
1.20
|
%
|
Weighted average volatility
|
|
|
111.02
|
%
|
|
|
82.80
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected life
|
|
|
6.17
years
|
|
|
|
4.31
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 2016 and 2015 was $419,000 and $456,000, 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, 2016 and 2015:
|
|
Outstanding
Options
|
|
|
Weighted
Average Exercise
Price per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
January 1, 2015
|
|
|
144,000
|
|
|
$
|
24.99
|
|
|
|
8.60
|
|
|
$
|
285,000
|
|
Granted
|
|
|
43,000
|
|
|
|
20.59
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(2,000
|
)
|
|
|
14.32
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(26,000
|
)
|
|
|
37.56
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(23,000
|
)
|
|
|
29.20
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31,
2015
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested and exercisable at December 31, 2016
|
|
|
75,000
|
|
|
$
|
20.06
|
|
|
|
7.55
|
|
|
$
|
4,000
|
|
The
aggregate intrinsic value of options at December 31, 2016 is based on the Company’s closing stock price on that date of
$8.50 per share as reported by the NYSE MKT. The total intrinsic value of options exercised during the year ended December 31,
2015 was approximately $7,000. Under the 2004 Plan and the Amended 2010 Plan, stock options may be exercised on a net-exercise
arrangement, where shares of common stock with a value equal to the exercise price are withheld as payment therefor. Under such
net-exercise arrangements, options to purchase approximately 2,000 shares of common stock were exercised and approximately 360
shares of common stock were issued during the year ended December 31, 2015. The Company received less than $1,000 in cash payments
for the exercise of options to purchase approximately 43 shares during the years ended December 31, 2015. No options were exercised
during the year ended December 31, 2016.
The
per share weighted average grant-date fair value of stock options granted during the years ended December 31, 2016 and 2015 was
$6.48 and $12.74, respectively.
As
of December 31, 2016, the unamortized compensation expense related to outstanding unvested options was approximately $647,000
with a weighted average remaining requisite service period of 2.09 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, 2016 and 2015:
|
|
Outstanding
Warrants
|
|
|
Weighted
Average Exercise
Price per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Outstanding
January 1, 2015
|
|
|
132,000
|
|
|
$
|
33.64
|
|
|
|
3.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31,
2015
|
|
|
132,000
|
|
|
$
|
33.64
|
|
|
|
2.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
December 31, 2016
|
|
|
132,000
|
|
|
$
|
33.64
|
|
|
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance exercisable
at December 31, 2016
|
|
|
132,000
|
|
|
$
|
33.64
|
|
|
|
1.18
|
|
During
2009, the Company issued warrants to purchase an aggregate of 60,000 shares of common stock in connection with asset acquisitions
of i-am TV. 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 as of December 31, 2016.
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, 2016.
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, 2016 and 2015, 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. During the year ended December 31, 2016, the Company paid approximately
$16,000 in cash for payment of dividends. During the year ended December 31, 2015, the Company issued approximately 1,000 shares
of common stock for payment of dividends.
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, 2016 and 2015. There is no mandatory conversion term, date or any redemption features
associated with the Series A Preferred Stock.
For
each of the years 2016 and 2015, current tax provisions and current deferred tax provisions were recorded as follows:
|
|
2016
|
|
|
2015
|
|
Current Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
(25,000
|
)
|
|
|
(26,000
|
)
|
Foreign
|
|
|
(1,000
|
)
|
|
|
24,000
|
|
|
|
|
(26,000
|
)
|
|
|
(2,000
|
)
|
Deferred Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(4,000
|
)
|
|
|
(4,000
|
)
|
Foreign
|
|
|
(8,000
|
)
|
|
|
(6,000
|
)
|
|
|
|
(12,000
|
)
|
|
|
(10,000
|
)
|
Total Tax Provison
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(29,000
|
)
|
|
|
(30,000
|
)
|
Foreign
|
|
|
(9,000
|
)
|
|
|
18,000
|
|
|
|
$
|
(38,000
|
)
|
|
$
|
(12,000
|
)
|
The
net deferred tax assets and liabilities have been reported in other assets in the consolidated balance sheets at December 31,
2016 and 2015 as follows:
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
NOL
carryforwards
|
|
$
|
23,291,000
|
|
|
$
|
21,462,000
|
|
UK NOL carryforwards
|
|
|
516,000
|
|
|
|
693,000
|
|
Capital loss
|
|
|
-
|
|
|
|
416,000
|
|
Allowance for doubtful
accounts
|
|
|
139,000
|
|
|
|
-
|
|
Compensation and
vacation accrual
|
|
|
92,000
|
|
|
|
221,000
|
|
Operating accruals
|
|
|
147,000
|
|
|
|
213,000
|
|
Deferred revenue
|
|
|
-
|
|
|
|
677,000
|
|
Research and experimentation,
AMT and foreign tax credits
|
|
|
147,000
|
|
|
|
156,000
|
|
Texas Margin Tax
Credit
|
|
|
126,000
|
|
|
|
129,000
|
|
Fixed assets and
intangibles
|
|
|
199,000
|
|
|
|
204,000
|
|
Foreign
|
|
|
-
|
|
|
|
181,000
|
|
Other
|
|
|
664,000
|
|
|
|
504,000
|
|
Total gross deferred
tax assets
|
|
|
25,321,000
|
|
|
|
24,856,000
|
|
Valuation
allowance
|
|
|
(24,880,000
|
)
|
|
|
(24,441,000
|
)
|
Net deferred tax
assets
|
|
|
441,000
|
|
|
|
415,000
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
|
359,000
|
|
|
|
349,000
|
|
Amortization
|
|
|
-
|
|
|
|
18,000
|
|
Foreign
|
|
|
45,000
|
|
|
|
42,000
|
|
Deferred revenue
|
|
|
49,000
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
6,000
|
|
Total
gross deferred liabilities
|
|
|
453,000
|
|
|
|
415,000
|
|
Net
deferred taxes
|
|
$
|
(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,
|
|
|
|
2016
|
|
|
2015
|
|
Tax at federal income tax
rate
|
|
$
|
962,000
|
|
|
$
|
2,435,000
|
|
State provision
|
|
|
(29,000
|
)
|
|
|
(30,000
|
)
|
Foreign tax differential
|
|
|
2,000
|
|
|
|
38,000
|
|
Change in valuation allowance
|
|
|
(917,000
|
)
|
|
|
(2,407,000
|
)
|
Permanent items
|
|
|
(56,000
|
)
|
|
|
(48,000
|
)
|
Total
Provision
|
|
$
|
(38,000
|
)
|
|
$
|
(12,000
|
)
|
The
net change in the total valuation allowance for the year ended December 31, 2016 was an increase of $917,000. The net change in
the total valuation allowance for the year ended December 31, 2015 was an increase of $2,407,000. 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, 2016, the Company has available net operating loss (“NOL”) carryforwards of approximately $65,291,000
for federal income tax purposes, which will begin to expire in 2017. The NOL carryforwards for state purposes, which will continue
expiring in 2017, are approximately $35,969,000. 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, under Internal Revenue
Code 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 completed a Section 382
analysis for the period from January 1, 1992 through September 30, 2016 and determined that the Company does not expect to be
limited in regards to utilizing the total NOL carryforwards that existed as of September 30, 2016, provided it generates sufficient
future earnings prior to the expiration of the NOLs and that future changes in ownership do not trigger a Section 382 limitation.
Based on the Company’s analysis of its stockholder activity for the three months ended December 31, 2016, there does not
appear to be ownership changes that would have caused an annual limitation under the provisions of Section 382. 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 $190,000 of state tax credit tax carryforwards that expire in the years 2017
through 2026.
The
deferred tax assets as of December 31, 2016 include a deferred tax asset of $631,000 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 2011. 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.
Revolving
Line of Credit
In
April 2015, the Company entered into a loan and security agreement (the “Original Loan Agreement”) with East West
Bank, or EWB, pursuant to which, the Company may request advances in an aggregate outstanding amount at any time up to the lesser
of $7,500,000, which is referred to as the revolving line, or an amount equal to its borrowing base, in each case, less the aggregate
outstanding principal amount of prior advances. So long as there is no event of default, the Company may make a one-time request
to increase the revolving line by up to $2,500,000, which EWB may accept or decline. In March 2016, the Company and EWB entered
into an amendment (the “First Amendment”) to the Original Loan Agreement. The Original Loan Agreement as amended by
the First Amendment is referred to as the “Amended Loan Agreement.” Under the Amended Loan Agreement, through March
31, 2017, the Company may request advances in an aggregate outstanding amount at any time up to the lesser of (a) the revolving
line (or $7,500,000) or (b) the sum of $2,000,000 (which the Company refers to as the “sublimit”) plus the amount
equal to the Company’s borrowing base, in each case, less the aggregate outstanding principal amount of prior advances.
On March 31, 2017, the sublimit becomes zero. If the aggregate amount of advances as of March 31, 2017 exceeds the lesser of the
revolving line or the amount equal to the Company’s borrowing base, then it must pay EWB the amount of such excess.
Under
the Original Loan Agreement, the Company’s borrowing base was, as of the date of determination, an amount equal to the product
of: (a) the average monthly recurring revenue for the immediately preceding three months; times (b) one plus the average churn
rate for the immediately preceding three months (not to exceed zero); times (c) 300%. The churn rate, with respect to any month,
is the quotient of the Company’s monthly net revenue change calculated with respect to such month, divided by its monthly
revenue from subscriptions for the month. The manner in which the borrowing base is determined is unchanged under the Amendment,
except that the monthly recurring revenue is limited to all recurring subscription revenue attributable to software that the Company
sold or licensed and all recurring revenue relating to services it delivered and 50% of all revenue attributable to the Company’s
“Stump” product line.
In
addition, under the Amended Loan Agreement, the Company is required to meet a minimum adjusted earnings before interest, taxes,
depreciation and amortization (“Adjusted EBITDA”), target and churn rate targets, in each case, as specified in the
Amended Loan Agreement. Adjusted EBITDA is the sum (a) net profit (or loss), after provision for taxes, plus (b) interest expense,
plus (c) to the extent deducted in the calculation of net profit (or loss), depreciation expense and amortization expense, plus
(d) income tax expense, plus (e) non-cash stock compensation expenses, plus (f) other non-cash expenses and charges, plus (g)
to the extent approved by the EWB, other one-time charges, plus (h) to the extent approved by the EWB, any losses arising from
the sale, exchange, transfer or other disposition of assets not in the ordinary course of business. Under the Original Loan Agreement,
the Adjusted EBITDA target was measured as of the last day of each fiscal quarter with respect to the immediately prior six-month
period. Under the Amended Loan Agreement, the Adjusted EBITDA target is measured as of the last day of each fiscal quarter with
respect to the immediately prior three-month period. The churn rate targets, which were unchanged in the Amendment, are measured
on a monthly and trailing three-month basis. The Company met the Adjusted EBITDA and the trailing three-month churn rate targets
as of the quarter ended March 31, 2016. The Company did not meet the monthly churn rate for the month ended January 31, 2016,
which constituted an event of default under the Original Loan Agreement, however, EWB waived that event of default.
The
Amended Loan Agreement requires: (a) that the Company maintain a balance on deposit with the EWB equal to (i) on March 31, 2017,
100% of the aggregate outstanding principal amount of the advances at such time, and (ii) at all times after March 31, 2017, an
amount determined by EWB based on the Company’s 2017 financial projections; and (b) that the sum of the following be not
less than $2,000,000: (i) the aggregate amount of unrestricted cash that the Company holds in accounts maintained with EWB and
(ii) the amount available to the Company under the Amended Loan Agreement.
Under
the Amended Loan Agreement, all then-outstanding advances are due on December 31, 2017 (under the Original Loan Agreement, the
due date was April 14, 2018). On or before March 31, 2017, advances will bear interest, at the Company’s option, at the
rate of either (A) a variable rate per annum equal to the prime rate as set forth in
The Wall Street Journal
plus 2.75%,
up from 1.25% under the original terms, or (B) at a fixed rate per annum equal to the LIBOR rate for the interest period for the
advance plus 5.50%, up from 4.00% under the original terms. After March 31, 2017, the interest rates will revert to their original
terms.
On
December 30, 2016, the Company entered into a second amendment (the “Second Amendment”) to the loan and security agreement
with EWB. Under the terms of the Second Amendment, the due date of all advances under the revolving line was extended from December
31, 2017 to January 15, 2018. No other terms of the Loan Agreement were changed under the Second Amendment.
As
of December 31, 2016, the Company requested and received advances in the aggregate of $6,500,000, all of which were advanced at
the LIBOR rate plus the applicable margin with a three-month interest period. Each time the interest period expired on these advances,
the Company elected to renew the advance at the LIBOR rate plus the applicable margin with a three-month interest period. Prior
to the Amendment, the interest rate on advances ranged from 4.313% to 4.688% per annum. The interest rate on advances since the
Amendment have ranged from 6.125% to 6.50% per annum. As of December 31, 2016, $6,500,000 remained outstanding under this credit
facility, of which, $2,000,000 is recorded in current portion of long-term debt on the accompanying consolidated balance sheet.
The Company had approximately $97,000 available to borrow as of December 31, 2016 based on its borrowing base calculated as of
that date. The Company used approximately $3,381,000 of the total amount borrowed under this credit facility to pay down existing
indebtedness that was owed to an equipment lender (see “—Equipment Notes Payable,” below). Under the Amended
Loan Agreement, the amount that the Company may owe under its current financing arrangement with that equipment lender is not
limited to any specified amount. In addition, with EWB’s consent, the Company may incur additional indebtedness with other
equipment lenders of up to $2,000,000 in the aggregate for equipment financing.
Pursuant
to the Amended Loan Agreement, the Company continues to grant and pledge to EWB a first-priority security interest in all the
Company’s existing and future personal property.
The
Company paid $37,500 to EWB as a facility fee at the time of closing in April 2014, and has incurred approximately $9,000 for
fees associated with the amendments. An additional facility fee (equal to the product of (x) 0.50% of the increase in the revolving
line times (y) the quotient of the number of days remaining between the effective date of such increase and January 15, 2018,
divided by 1,095) will be due if the revolving line is increased pursuant to the Company’s request. The Company also pays
an unused line fee equal to 0.50% per year of the difference between the amount of the revolving line as in effect from time to
time and the average monthly balance in each month, which is payable monthly in arrears. The average monthly balance is calculated
by adding the ending outstanding balance under the revolving line for each day in the month divided by the number of days in the
month.
On
February 28, 2017, the Company entered into a third amendment to the loan and security agreement with EWB. See Note 17 for more
information.
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, 2016, 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 from the East West Bank credit facility to pay
down a portion of the principal amount the Company had borrowed under this financing arrangement, accrued interest and a prepayment
fee. As of December 31, 2016, approximately $1,611,000 of principal remained outstanding under this financing arrangement, of
which $975,000 is recorded in current portion of long-term debt on the accompanying consolidated balance sheet.
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 East West Bank.
Long-Term
Debt Principal Payments
Future
minimum principal payments under long-term debt as of December 31, 2016 are as follows:
Years
Ending December 31,
|
|
Principal
Payment
|
|
2017
|
|
$
|
2,988,000
|
|
2018
|
|
|
5,115,000
|
|
2019
|
|
|
8,000
|
|
Total
|
|
$
|
8,111,000
|
|
Interest
expense related to long-term debt for the years ended December 31, 2016 and 2015 was $517,000 and $283,000, respectively.
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 $582,000 and $620,000 in 2016 and 2015, respectively.
As
of December 31, 2016, future minimum lease payments under operating leases are as follows:
Years
Ending December 31,
|
|
Lease
Payment
|
|
2017
|
|
$
|
659,000
|
|
2018
|
|
|
586,000
|
|
Total
|
|
$
|
1,245,000
|
|
Capital
Leases
As
of December 31, 2016 and 2015, property held under current capital leases was as follows:
|
|
For
the Years Ended
|
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Office equipment
|
|
$
|
328,000
|
|
|
$
|
299,000
|
|
Other
|
|
|
250,000
|
|
|
|
-
|
|
Accumulated depreciation
|
|
|
(185,000
|
)
|
|
|
(97,000
|
)
|
Total
|
|
$
|
393,000
|
|
|
$
|
202,000
|
|
Total
depreciation expense under capital leases was $88,000 and $56,000 for the years ended December 31, 2016 and 2015, respectively.
As
of December 31, 2016, future minimum principal payments under capital leases are as follows:
Years
Ending December 31,
|
|
Prinicipal
Payment
|
|
2017
|
|
$
|
155,000
|
|
2018
|
|
|
158,000
|
|
2019
|
|
|
99,000
|
|
2020
|
|
|
1,000
|
|
2021
|
|
|
1,000
|
|
Total
|
|
$
|
414,000
|
|
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.
Equipment
Repairs
Beginning
in the fourth quarter of 2014, the Company encountered challenges with assembling its second generation cases for its BEOND tablet.
As a result, the Company accrued approximately $716,000 and $204,000 of expense during the years ended December 31, 2015 and 2014,
respectively, for cases deployed at customer sites that the Company has deemed probable it will need to repair. This expense was
recognized in direct costs on the consolidated statement of operations and other current liabilities on the consolidated balance
sheets. As of December 31, 2016, approximately $175,000 remained in other current liabilities. The Company may continue to experience
challenges with its tablet equipment, and as a result, it may be required to recognize additional repair expense contingencies
in the future.
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.
The
Company has been involved in sales tax inquiries with certain states and provinces. As a result of those inquiries, the Company
recorded a total net liability of $25,000 as of December 31, 2015, which is included in the sales taxes payable balance in the
accompanying consolidated balance sheets. Based on the guidance set forth by ASC No. 450,
Contingencies,
management has
deemed the likelihood as reasonably possible that it will be required to pay all or part of these assessments. During the year
ended December 31, 2016, the Company resolved all matters under inquiry, and the previously recognized $25,000 was sufficient
under the assessments. Accordingly, there was no liability recorded as of December 31, 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, 2016 and 2015, $223,000 and $172,000, 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,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
21,559,000
|
|
|
$
|
23,678,000
|
|
Canada
|
|
|
753,000
|
|
|
|
841,000
|
|
Total
revenue
|
|
$
|
22,312,000
|
|
|
$
|
24,519,000
|
|
Geographic
breakdown of the Company’s long-term tangible assets for the last two fiscal years were as follows:
|
|
As
of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
3,015,000
|
|
|
$
|
3,799,000
|
|
Canada
|
|
|
86,000
|
|
|
|
116,000
|
|
Total
assets
|
|
$
|
3,101,000
|
|
|
$
|
3,915,000
|
|
|
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.
On
February 28, 2017, the Company entered into a third amendment to the loan and security agreement with EWB that provided for the
following:
|
●
|
The
date on which the $2.0 million sublimit becomes zero was extended from March 31, 2017 to June 15, 2017. As was the case prior
to the third amendment, if the aggregate amount of advances as of the date the sublimit becomes zero exceeds the lesser of
the revolving line or the amount equal to our borrowing base, then the Company must pay EWB the amount of such excess.
|
|
|
|
|
●
|
The
minimum adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, targets for each of the
Company’s 2017 fiscal quarters were established. The manner in which adjusted EBITDA is calculated was not changed.
|
|
|
|
|
●
|
Compliance
with the churn rate target is now measured only on trailing three-month basis; previously it was also measured monthly.
|
|
|
|
|
●
|
The
amount the Company must maintain on deposit with EWB (which amount is equal to 100% of the aggregate outstanding principal
amount of advances) is now measured only at June 15, 2017, or if earlier, at such time that the $2.0 million sublimit has
been paid off. Previously, compliance was going to be measured on March 31, 2017 and thereafter the Company was going to be
required to maintain an amount determined by EWB based on the Company’s 2017 financial projections.
|
|
|
|
|
●
|
The
interest rates on amounts advanced was increased by 0.50%, such that under the third amendment, advances bear interest, at
the Company’s option, at the rate of either of the following: (A) for amounts advanced as a prime rate loan, a variable
rate per annum equal to the prime rate as set forth in The Wall Street Journal plus 3.25% (was previously 2.75%), and (B)
for amounts advanced as a LIBOR loan, at a fixed rate per annum equal to the LIBOR rate for the interest period for the advance
plus 6.00% (was previously 5.50%). After the earlier of June 15, 2017 (was previously March 31, 2017) or such time as the
Company pays off in full in cash the $2.0 million sublimit, the additional margins decrease to 1.75% for prime rate loans
(was previously 1.25%) and to 4.50% for LIBOR loans (was previously 4.00%).
|