PART
I
ITEM
1. Business
Proposed
Merger and Asset Sale
Proposed
Merger with Brooklyn Immunotherapeutics LLC
On
August 12, 2020, we entered into an agreement and plan of merger and reorganization (the “Merger Agreement”) with
Brooklyn Immunotherapeutics LLC (“Brooklyn”), a privately-held, biopharmaceutical company focused on exploring the
role that cytokine-based therapy can have in treating patients with cancer. Pursuant to the Merger Agreement, subject to the satisfaction
or waiver of the conditions set forth in the agreement, BIT Merger Sub, Inc., our wholly-owned subsidiary formed solely for purposes
of carrying out the merger, will merge with and into Brooklyn, with Brooklyn surviving the merger as a wholly-owned subsidiary
of our company and Brooklyn’s members receiving newly issued shares of our common stock in exchange for their ownership
interests in Brooklyn (the “Merger”). The Merger, if completed, will result in a change in control of NTN as described
below. The Merger is expected to close in mid- to late-March 2021.
We
filed a registration statement on Form S-4 relating to the Merger and the proposed sale of our assets to eGames.com Holdings LLC
(described further below) with the SEC and such registration statement was declared effective on February 3, 2021.
We
will be holding our special meeting of stockholders to consider the Merger, the Asset Sale (as defined below) and related proposals
on March 15, 2021 at 9:00 a.m., Pacific Time, unless postponed or adjourned to a later date or time. Additional details regarding
the proposals and the special meeting are in the proxy statement/prospectus/consent solicitation statement relating to the special
meeting filed with the SEC on February 8, 2021 (the “Proxy Statement”).
If
the Merger is completed, NTN expects to change its name to Brooklyn ImmunoTherapeutics, Inc. and the combined company will focus
on Brooklyn’s business of exploring the role that cytokine-based therapy can have on the immune system in treating patients
with cancer. Upon completion of the Merger, the board of directors of the combined company is expected to consist entirely of
individuals designated by Brooklyn and the officers of the combined company are expected to be members of Brooklyn’s current
management team.
If
the Merger is completed, at the effective time of the Merger, Brooklyn’s members will exchange their equity interests in
Brooklyn for shares of NTN common stock representing between approximately 94.08% and 96.74% of the outstanding common stock of
NTN immediately following the effective time of the Merger on a fully diluted basis (less a portion of such shares which will
be allocated to Brooklyn’s banker, Maxim, in respect of the success fee owed to it by Brooklyn), and NTN’s stockholders
as of immediately prior to the effective time, will own between approximately 5.92% and 3.26% of the outstanding common stock
of NTN immediately after the effective time of the Merger on a fully diluted basis. The exact number of shares to be issued in
the Merger will be determined pursuant to a formula in the Merger Agreement that takes into account the amount of Brooklyn’s
cash and cash equivalents as of the closing of the Merger and the amount by which NTN’s net cash is less than zero at the
closing. The Merger Agreement does not include provisions providing for an adjustment to the total shares of NTN common stock
that Brooklyn’s members will be entitled to receive for changes in the market price of NTN common stock.
The
Merger Agreement contains customary representations, warranties and covenants made by NTN and Brooklyn, including covenants relating
to both parties using their commercially reasonable efforts to cause the transactions contemplated by the Merger Agreement to
be satisfied, as well as covenants regarding the conduct of their respective businesses between the date of signing of the Merger
Agreement and the closing.
Consummation
of the Merger is subject to certain closing conditions including, among others, (i) the approval by our stockholders of the issuance
of shares of our common stock to Brooklyn’s members pursuant to the terms of the Merger Agreement and the change of control
of NTN resulting therefrom, (ii) the approval of the Merger and the transactions contemplated by the Merger Agreement by the beneficial
holders of the Class A membership units of Brooklyn, (iii) the amendment of our certificate of incorporation to provide voting
rights to the holders of our Series A Convertible Preferred Stock, (iv) Brooklyn having not less than $10 million in cash and
cash equivalents and not more than $750,000 of indebtedness for borrowed money at the closing, (v) our net cast at the closing
being not less than negative $3 million, and (vi) the shares of our common stock continuing to be traded on the NYSE American
until the effective time of the Merger and the approval for listing of the shares of our common stock to be issued pursuant to
the Merger Agreement on the NYSE American. In addition, the obligation of each party to consummate the Merger is also conditioned
on the other party’s representations and warranties being true and correct (subject to certain materiality qualifications)
and the other party having performed in all material respects its obligations under the Merger Agreement. Each party’s obligations
to consummate the Merger are further subject to the absence of a material adverse effect with respect to the other party since
the date of the Merger Agreement.
The
Merger Agreement contains certain termination rights for each party, including that either party may terminate the Merger Agreement
if the Merger has not been consummated by April 30, 2021, subject to extension under specified circumstances. The Merger Agreement
also provides that, upon the termination of the Merger Agreement under specified circumstances, NTN or Brooklyn will be required
to pay the other party a $750,000 termination fee or reimburse the other party for up to $250,000 of its third party expenses.
The
Merger Agreement requires that NTN not solicit proposals relating to alternative transactions and not enter into discussions concerning
or provide confidential information in connection with alternative transactions. These restrictions are subject to a “fiduciary
out” provision that allows NTN Buzztime under certain limited circumstances to provide confidential information to, enter
into discussions and negotiations with, and enter into an alternative transaction with a third party and/or to make a recommendation
change adverse to the Merger, which may result in payment of the termination fee described above.
In
connection with the Merger and the Merger Agreement, each of our directors and officers and certain beneficial holders of the
Class A membership interests of Brooklyn, including the managers and officers of Brooklyn, signed a Support Agreement, made and
entered into as of August 12, 2020, among NTN, Brooklyn, and each such person (the “Support Agreements”). Pursuant
to the Support Agreements, each director, manager, and officer has agreed that he or she will not, until the termination date
of the Merger Agreement, sell or transfer any shares of our common stock or any of the beneficial interests in the Class A membership
interests of Brooklyn, respectively, that he or she owns or may acquire prior to the termination of the Merger Agreement. Each
such director, manager, and officer has further agreed that he or she will vote all shares of our common stock and all beneficial
interests in the Class A membership units in Brooklyn, respectively, owned by such individual in favor of the Merger and the transactions
contemplated by the Merger Agreement.
The
foregoing description of the Merger Agreement and the Support Agreements do not purport to be complete and is qualified in its
entirety by the full text of the agreements, copies of which have been filed with the SEC and are incorporated by reference in
this report. The copies of the Merger Agreement and the Support Agreements filed with the SEC provide investors with information
regarding its terms. Such copies are not intended to provide any other factual information about NTN or Brooklyn or otherwise
to modify or supplement any factual disclosures about NTN in its reports filed with the SEC. The representations, warranties and
covenants of each party in the Merger Agreement have been made only for the purposes of, and were and are solely for the benefit
of the parties to, the Merger Agreement, may be subject to limitations agreed upon by the contracting parties, and may be subject
to standards of materiality applicable to the contracting parties that differ from those generally applicable to SEC filings,
and may have been used for purposes of allocating risk among the parties to the Merger Agreement. Certain of the exhibits and
schedules that are a part of the Merger Agreement are not filed with the SEC and contain information that modifies, qualifies
and creates exceptions to the representations and warranties and certain covenants set forth in the Merger Agreement. Accordingly,
the representations and warranties may not describe the actual state of affairs at the date they were made or at any other time,
and investors should not rely on them as statements of fact.
Proposed
Asset Sale to eGames.com
When
NTN announced the signing of the Merger Agreement, NTN also announced that it was continuing to explore the sale of substantially
all of the assets relating to its current business to provide additional capital and allow the combined company following the
closing of the Merger, if it closes, to be in a position to focus exclusively on Brooklyn’s business.
On
September 18, 2020, NTN and eGames.com Holdings LLC (“eGames.com”) entered into an asset purchase agreement (as amended
from time to time, the “APA”) pursuant to which, subject to the terms and conditions thereof, NTN will sell and assign
(the “Asset Sale”) all of its right, title and interest in and to the assets relating to its current business (the
“Purchased Assets”) to eGames.com. The Purchased Assets comprise substantially all of NTN’s assets. At the closing
of the Asset Sale, in addition to assuming specified liabilities of NTN, eGames.com will pay NTN $2.0 million in cash. In connection
with entering into the APA, the sole owner of eGames.com absolutely, unconditionally and irrevocably guaranteed to NTN the full
and prompt payment when due of any and all amounts, from time to time, payable by eGames.com under the APA.
The
Asset Sale is expected to close in mid- to late-March 2021. We will be holding our special meeting of stockholders to consider
the Merger, the Asset Sale and related proposals on March 15, 2021 at 9:00 a.m., Pacific Time, unless postponed or adjourned to
a later date or time. Additional details regarding the proposals and the special meeting are in the Proxy Statement.
In
connection with entering into the APA, Fertilemind Management, LLC, an affiliate of eGames.com (“Fertilemind”), on
behalf of eGames.com, made a $1.0 million bridge loan to NTN. On November 19, 2020, NTN, eGames.com and Fertilemind entered into
an omnibus amendment and agreement pursuant to which, among other things, eGames.com agreed to provide, or cause Fertilemind,
on behalf of eGames.com, to provide, an additional $0.5 million bridge loan to NTN on December 1, 2020, and the parties agreed
to increase the interest rate on the $1.0 million bridge loan Fertilemind made to NTN in September 2020 from 8% to 10% effective
December 1, 2020. Fertilemind provided the $0.5 million bridge loan to NTN on December 1, 2020. On January 12, 2021, NTN, eGames.com
and Fertilemind entered into a second omnibus amendment and agreement pursuant to which, among other things, eGames.com agreed
to provide, or cause Fertilemind, on behalf of eGames.com, to provide an additional $0.2 million bridge loan to NTN on January
12, 2021. Fertilemind provided the $0.2 million bridge loan to NTN on January 12, 2021. The principal and accrued interest of
each of the loans provided by Fertilemind to NTN will be applied toward the $2.0 million purchase price at the closing of the
Asset Sale.
The
APA contains customary representations, warranties and covenants made by the parties, including covenants relating to both parties
using their efforts to cause the transactions contemplated by the APA to be satisfied, and covenants regarding the conduct of
NTN’s business between the date the APA was signed and the closing of the Asset Sale.
The
closing of the Asset Sale is subject to the satisfaction or waiver of certain closing conditions, including NTN obtaining, as
required by Delaware law, the approval of the Asset Sale by the holders of a majority of the outstanding shares of common stock
of NTN entitled to vote thereon. Each party’s obligation to close the Asset Sale is also subject to other specified customary
conditions, including (1) the representations and warranties of the other party being true and correct (subject to certain materiality
qualifications, including qualifications with respect to a material adverse effect), and (2) the performance in all material respects
by the other party of its covenants and agreements in the APA required to be performed on or before the closing.
Unless
the parties to the APA agree to an earlier date, the closing of the Asset Sale is expected to occur as promptly as practicable
after the conditions to closing in the APA are satisfied or waived, and, if the conditions to closing the Merger are satisfied
or waived, immediately prior to the closing of the Merger.
Pursuant
to the APA, NTN may not, among other things, solicit proposals relating to alternative transactions or enter into discussions
concerning or provide confidential information in connection with alternative transactions (with an exception related to the Merger)
until the earlier of the termination of the APA and the closing of the Asset Sale. These restrictions are subject to a “fiduciary
out” provision that allows NTN under certain limited circumstances to furnish confidential information to, enter into discussions
and negotiations with, and enter into an alternative transaction with a third party and/or to make a recommendation change adverse
to the Asset Sale, which may result in payment of the termination fee described below.
NTN
will be obligated to indemnify eGames.com against specified losses that eGames.com may incur following the Closing, subject to
the terms of the APA, including certain thresholds and caps on liability, and $100,000 will be deposited into an escrow account
to secure any such indemnification claims.
The
APA contains certain termination rights for each party, including that either party may terminate the APA if the asset sale has
not been consummated by April 30, 2021, subject to extension under specified circumstances. The APA also provides that, upon the
termination of the APA under specified circumstances, NTN will pay eGames.com a $275,000 termination fee.
The
foregoing descriptions of the APA, the personal guaranty, and the promissory notes evidencing the bridge loans do not purport
to be complete and are qualified in their entirety by the full text of the APA, the personal guaranty, and such notes, copies
of which have been filed with the SEC and are incorporated by reference in this report. The APA, the personal guaranty, and such
notes provide investors with information regarding its terms. Such documents are not intended to provide any other factual information
about NTN or eGames.com or otherwise to modify or supplement any factual disclosures about NTN or eGames.com in their respective
reports filed with the SEC. The representations, warranties and covenants of each party in the APA have been made only for the
purposes of, and were and are solely for the benefit of the parties to, the APA, may be subject to limitations agreed upon by
the contracting parties, and may be subject to standards of materiality applicable to the contracting parties that differ from
those generally applicable to SEC filings, and may have been used for purposes of allocating risk among the parties. Certain of
the exhibits and schedules that are a part of the APA are not filed with the SEC and contain information that modifies, qualifies
and creates exceptions to the representations and warranties and certain covenants in the APA. Accordingly, the representations
and warranties may not describe the actual state of affairs at the date they were made or at any other time, and investors should
not rely on them as statements of fact.
About
Our Business and How We Talk About It
As
mentioned above, the Merger and Asset Sale are expected to close in mid- to late-March 2021. If either the Asset Sale or the Merger
close, the description of our business contained in this report will no longer be our business following the closing of the Asset
Sale and/or Merger. If the Merger is completed, the combined company will focus on Brooklyn’s business of exploring the
role that cytokine-based therapy can have on the immune system in treating patients with cancer. If the Asset Sale is completed
but the Merger is not completed, NTN’s board of directors may elect to, among other things, attempt to find another reverse
merger partner or dissolve and liquidate its assets. Because NYSE Regulation, Inc. may begin delisting proceedings if NTN has
no assets or operations, and due to NTN’s limited cash and resources, NTN may be unable to identify and complete another
reverse merger and it would likely be required to dissolve and liquidate its assets. In such case, NTN would likely be required
to pay all its debts and other obligations and to set aside certain reserves for potential future claims. There can be no assurances
as to the amount or timing of available cash, if any, left to distribute to stockholders after paying its debts and other obligations
and setting aside funds for reserves.
We
deliver interactive entertainment and innovative technology to our partners in a wide range of verticals – from bars and
restaurants to casinos and senior living centers. By enhancing the overall guest experience, we believe we help our hospitality
partners acquire, engage, and retain patrons.
Through
social fun and friendly competition, our platform creates bonds between our hospitality partners and their patrons, and between
patrons themselves. We believe this unique experience increases dwell time, revenue, and repeat business for venues – and
has also created a large and engaged audience which we connect with through our in-venue TV network. Until the significant disruptions
to the restaurant and bar industry resulting from the COVID-19 pandemic, or the pandemic, that began in March 2020, over 1 million
hours of trivia, card, sports and arcade games were played on our network each month. Since March 2020, approximately 100,000
hours per month of such games have been played on our network each month.
We
generate revenue by charging subscription fees to our partners for access to our 24/7 trivia network, by selling and leasing tablet
and hardware equipment for custom usage beyond trivia/entertainment, by selling digital-out-of-home (DOOH) advertising direct
to advertisers and on national ad exchanges, by licensing our entertainment and trivia content to other parties, and by providing
professional services such as custom game design or development of new platforms on our existing tablet form factor. Until February
1, 2020, we also generated revenue by hosting live trivia events. We sold all our assets used to host live trivia events in January
2020.
We
own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks
to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our
property. Other trademarks are the property of their respective owners.
Recent
Developments
The
negative impact of the pandemic on the restaurant and bar industry was abrupt and substantial, and our business, cash flows
from operations and liquidity suffered, and continues to suffer, materially as a result. In many jurisdictions, including
those in which we have many customers and prospective customers, restaurants and bars were ordered by the government to
shut-down or close all on-site dining operations in the latter half of March 2020. Since then, governmental orders and
restrictions impacting restaurants and bars in certain jurisdictions were eased or lifted as the number of COVID-19 cases
decreased or plateaued, but as jurisdictions began experiencing a resurgence in COVID-19 cases, many jurisdictions reinstated
such orders and restrictions, including mandating the shut-down of bars and the closing of all on-site dining operations of
restaurants. We have experienced material decreases in subscription revenue, advertising revenue and cash flows from
operations, which we expect to continue for at least as long as the restaurant and bar industry continues to be negatively
impacted by the pandemic, and which may continue thereafter if restaurants and bars seek to reduce their operating costs or
are unable to re-open even if restrictions within their jurisdictions are eased or lifted. For example, at its peak,
approximately 70% of our customers had their subscriptions to our services temporarily suspended. As of March 9, 2021,
approximately 11% of our customers remain on subscription suspensions. As of December 31, 2020, 1,036 customers subscribed
to our service, a decrease of 404 customers, or 28%, from the 1,440 subscribers as of December 31, 2019. We believe the year-over-year decrease was primarily due to
customers terminating their subscriptions or going out of business relating to the effects of the pandemic on their
business.
In
response to the impact of the pandemic on our business, we implemented measures to reduce our operating expenses and preserve
capital, and we may implement additional measures in the future.
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We
reduced our headcount (as of March 9, 2021, we had 22 employees, compared to 74 at December 31, 2019).
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Our
chief executive officer agreed to defer payment of 45% of his base salary between May 1, 2020 and October 31, 2020 until the
earlier of October 31, 2020 or such time as our board of directors determines in good faith that we are in the financial position
to pay his accumulated deferred salary. All such deferred base salary payments were made by November 6, 2020.
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We
terminated the lease for our corporate headquarters, resulting in a reduction in our future cash obligations under the lease
by approximately $3.4 million (see Note 16 to our audited consolidated financial statements included herein).
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We
substantially eliminated all capital projects and are aggressively managing our expenditures to limit further cash outlays
and manage our working capital.
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In
April 2020, we received a loan of approximately $1,625,000 under the Paycheck Protection Program of the Coronavirus Aid, Relief,
and Economic Security Act administered by the U.S. Small Business Administration. The loan matures on April 18, 2022 and bears
interest at a rate of 1.0% per annum. We began making monthly interest only payments in November 2020. One final payment of all
unforgiven principal plus any accrued unpaid interest is due at maturity. In November 2020, we were informed by our lender that
the U.S Small Business Administration approved the forgiveness of approximately $1,093,000 of the $1,625,000 loan, leaving a principal
balance of approximately $532,000. For additional information, see the section entitled “Liquidity and Capital Resources—Paycheck
Protection Program Loan” in “ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” of Part II of this report.
All
amounts outstanding under our term loan we entered into with Avidbank in September 2018 were paid in full on December 31, 2020
and we have no further obligations to Avidbank.
In
January 2020, we sold all of our assets used to conduct the live hosted knowledge-based trivia events known as Stump! Trivia and
OpinioNation for approximately $1.4 million in cash.
Products
and Services
Our
principal product and service is our interactive entertainment system that offers trivia, card, sports and arcade games through
an extended network platform. Generally, as part of the subscription to our platform, we provide the equipment for the platform
to network subscribers (including tablets, cases and charging trays for the tablets), though we have also leased such equipment
to certain network subscribers. We also monetize our network by offering it as an advertising platform through which parties can
advertise their products and services across the thousands of TV and tablet screens in our network. In 2017, we began licensing
our content to customers to be installed on equipment they obtain from other parties. In 2018, we began selling the tablets, cases
and charging trays for the tablets used in our platform to customers who may not subscribe to our network but who can use the
equipment in their business for other purposes. In 2019, we redesigned the personal computer installed in venues to stream our
content to televisions and tablets within the venue. The redesigned personal computer, which we call Site Hub, has a smaller form
factor (about the size of a deck of cards) compared to our historical personal computer. During the second quarter of 2019, we
began field testing a lower cost, entry-level tablet product offering that we call Buzztime Basic. The brains behind Buzztime
Basic is Site Hub. We have deployed Buzztime Basic on a market-by-market basis and as of March 9, 2021, we were in approximately
212 locations. In 2019, we also released our mobile trivia app, allowing our customers’ patrons to play our trivia
games on their mobile devices in addition to on our tablets. The app is the primary means of playing our trivia games in Buzztime
Basic.
During
the first quarter of 2019, we rolled out our new, modernized advertising system, which gives us access to ad buying platforms
where digital advertising inventory is bought and sold on public exchanges and private marketplaces. We work with advertising
sales companies to help us improve our advertisement sales and with an advertisement technology company to improve our ad loading,
management, and delivery and testing capabilities. We can use advertising to monetize Buzztime Basic, as well as our entire network.
We had quarter-over-quarter advertising sales and revenue growth during 2019. In 2020, our advertising sales and revenue was materially
adversely impacted as a result of the pandemic.
Our
primary network subscribers are bars and restaurants in North America, which we target directly through our internal sales organization.
In April 2016, we began offering our platform in adjacent markets, such as senior centers and casinos, which we target through
third parties who have existing business relationships with potential customers in such markets.
We
primarily develop the content and functionality available through our platform internally. We use an Android-based tablet customized
to our specifications by a single unaffiliated third-party manufacturer. Such third-party also manufactures the cases and charging
trays for the tablets and sources the raw materials used to manufacture those cases and trays.
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 UpShow, The Chive and other broadcast entertainment service providers.
Competing forms of technology, entertainment, and marketing available in hospitality venues include games, apps and other forms
of entertainment offerings available directly to consumers on their smart phones and tablets, on-table bar and restaurant entertainment
systems, music and video-based systems, live entertainment and live trivia games, cable, satellite and pay-per-view programming,
coin-operated single-player games/amusements, and traffic-building promotions like happy hour specials.
Significant
Customer
The
table below sets forth the approximate amount of revenue we generated from Buffalo Wild Wings corporate-owned restaurants and
its franchisees during the years ended December 31, 2020 and 2019, and the percentage of total revenue that such amount represents
for such periods. The decrease reflects the loss of 1,088 Buffalo Wild Wings corporate-owned restaurants and franchisees in
November 2019, when their agreements with us terminated in accordance with their terms.
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Year Ended
December 31,
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2020
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2019
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Buffalo Wild Wings revenue
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$
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199,000
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$
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6,820,000
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Percent of total revenue
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3
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%
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34
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%
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As
of December 31, 2020 and 2019, approximately $108,000 and $158,000, respectively, was included in gross accounts receivable from
Buffalo Wild Wings corporate-owned restaurants and its franchisees.
Backlog
We
generally do not have a significant backlog because we normally can deliver and install new systems within the delivery schedule
requested by customers (generally within three to four weeks).
Licensing,
Trademarks, Copyrights and Patents
A
majority of the gaming content available on our platform is internally developed. The balance is licensed from third parties.
We also license third party content for our pay-to-play and free-to-consumer games lobby. The amounts paid for such third-party
licensed content was not material during either of the years ended December 31, 2020 or 2019.
Our
intellectual property assets, including patents, trademarks, and copyrights, are important to our business and, accordingly, we
actively seek to protect the proprietary technology we consider important to our business. No single patent or copyright is solely
responsible for protecting our products.
We
keep confidential as trade secrets our technology, know-how and software. Most of the hardware we use in our platform is purchased
from a third party and customized for use with our service. We enter into agreements with third parties with whom we conduct business,
which contain provisions designed to protect our intellectual property and to limit access to, and disclosure of, our proprietary
information. We also enter into confidentiality and invention assignment agreements with our employees and contractors.
We
believe the duration of our patents is adequate relative to the expected lives of our products. We consider the following United
States and Canadian patents to be important to the protection of our products and service:
Patent No.
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Description
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Expiration Date
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8,562,438
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System and method for television-based services
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4/21/2031
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8,562,442
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Interactive gaming via mobile playmaker
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6/3/2031
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2741999 (CAN)
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Interactive gaming via mobile playmaker
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6/3/2031
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8,790,186
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User-controlled entertainment system, apparatus and method
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2/6/2034
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8,898,075
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Electronic menu system and method
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9/11/2032
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9,044,681
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System and method for television-based services
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10/13/2033
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9,358,463
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Interactive gaming via mobile playmaker
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10/16/2033
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9,498,713
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User-controlled entertainment system, apparatus and method
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2/6/2034
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10,410,188
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Electronic check splitting system, method and apparatus
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8/2/2036
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We
have trademark protection for the names of our key proprietary programming, products, and services to the extent that we believe
trademark protection is appropriate. We are expanding our efforts to protect these investments. We consider the Buzztime, Playmaker,
Mobile Playmaker and PlayersPlus trademarks and our other related trademarks to be valuable assets, and we seek to protect them
through a variety of actions. Our content, branding, and some of our game titles, such as Countdown, SIX, and Showdown are also
protected by copyright and trademark law.
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 tablet charging trays, and in September 2015, we received FCC approval for our third-generation tablet cases with and without
payment electronics. The 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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copyrights;
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gaming,
lottery and alcohol beverage control regulations;
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consumer
protection;
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the
distribution of specific material or content; and
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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 skill, including several interactive card games, such as Texas Hold’em
poker. These games are subject to regulation in many jurisdictions, and some 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. Most of our games are played solely for fun and winner recognition,
however, we recently began awarding nominal cash prizes to winners of certain trivia competitions. We may find it necessary to
eliminate, modify, or cancel certain of our offerings in certain 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 Securities Exchange Act of
1934, as amended (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.
The
SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information
regarding companies that file electronically with the SEC, including our company.
Employees
As
of March 9, 2021, we had 22 full-time employees. We also engage independent contractors for specific projects. None of our employees
are represented by a labor union, and we believe our employee relations are satisfactory.
Our
Corporate History
NTN
Buzztime, Inc. was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate name to NTN Communications,
Inc. in 1985. The name was changed to NTN Buzztime, Inc. in 2005 to better reflect the growing role of the Buzztime consumer brand.
ITEM
1A. Risk Factors
Our
business, financial condition and operating results can be affected by several factors, whether currently known or unknown, many
of which are not exclusively within our control, including but not limited to those described below, any one or more of which
could, directly or indirectly, cause our financial condition and operating results to differ materially from historical or anticipated
future financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect
our business, financial condition, operating results and stock price. We urge investors to carefully consider the risk factors
described below in evaluating our stock and the information in this report.
Risks
Related to the Merger
The
formula for determining the number of shares to be issued in the Merger to Brooklyn members is not adjustable based on the market
price of NTN’s common stock, so the number of shares of NTN common stock that may be issued in the Merger may have a greater
or lesser value than at the time the Merger Agreement was signed.
The
Merger Agreement has set the formula for determining the number of shares to be issued to Brooklyn’s members in the Merger,
and the number of shares to be so issued is only adjustable upward or downward under certain circumstances pursuant to a formula
in the Merger Agreement that takes into account the amount of Brooklyn’s cash and cash equivalents as of the closing of
the Merger and the amount by which NTN’s net cash is less than zero at the closing. Any changes in the market price of NTN
common stock before the completion of the Merger will not affect the number of shares of NTN common stock that Brooklyn members
will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the completion of the Merger the market price
of NTN common stock declines from the market price on the date of the Merger Agreement, then Brooklyn members could receive merger
consideration with substantially lower value for their equity interests in Brooklyn than the value of NTN common stock based on
the market price on the date of the Merger Agreement. Similarly, if before the completion of the Merger the market price of NTN
common stock increases from the market price on the date of the Merger Agreement, then Brooklyn members could receive merger consideration
with substantially more value for their equity interests in Brooklyn than the value of NTN common stock based on the market price
on the date of the Merger Agreement. Because the formula does not adjust as a result of changes in the value of NTN common stock,
for each one percentage point that the market value of NTN common stock rises or declines, there is a corresponding one percentage
point rise or decline, respectively, in the value of the total merger consideration issued to Brooklyn members compared to the
market price of the NTN common stock on the date of the Merger Agreement.
The
number of shares to be issued in the Merger to Brooklyn members will increase to the extent that Brooklyn has more than $10.0
million in cash and cash equivalents at the closing of the Merger, and will further increase to the extent that NTN’s net
cash at the closing of the Merger is less than zero dollars. The increase based on the amount of Brooklyn’s cash and cash
equivalents at the closing of the Merger is subject to a $15.0 million cap, except that to the extent that NTN’s net cash
is less than zero, the number of shares to be issued in the Merger to Brooklyn members will increase to the extent that Brooklyn
has more than $15.0 million in cash and cash equivalents at the closing, up to the absolute amount of NTN’s net cash. Accordingly,
NTN’s stockholders could own less, and Brooklyn members could own more, of the combined company depending on the amount
of cash and cash equivalents Brooklyn has at the closing and on the extent to which NTN’s net cash at the closing is negative.
If
the conditions to closing the Merger are not satisfied, the Merger may not occur.
Even
if NTN’s stockholders approve the issuance of NTN common stock pursuant to the Merger Agreement and the change of control
resulting therefrom (the “Merger Share Issuance Proposal”) and even if the beneficial holders of the Class A membership
interests of Brooklyn approve the Merger and the Merger Agreement, other specified conditions must be satisfied or waived to complete
the Merger, including the shares of NTN common stock shall continue to be traded on the NYSE American through the effective time
of the Merger, the shares of NTN common stock to be issued pursuant to the Merger Agreement shall have been approved for listing
on NYSE American (subject to official notice of issuance), and the NYSE American listing application shall have been approved
such that the NTN common stock will continue to trade on the NYSE American after the effective time of the Merger. No assurances
can be given that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Merger
may not occur or will be delayed, and NTN and Brooklyn each may lose some or all of the intended benefits of the Merger.
For
example, one of the conditions to closing the Merger is that the deficit in NTN’s net cash not exceed $3.0 million. If the
Asset Sale is approved by NTN’s stockholders and the Asset Sale closes, NTN expects that it will satisfy this closing condition.
However, NTN has limited cash on hand and its cash flow from operations has suffered as result of the COVID-19 pandemic and any
delay in the closing of the Asset Sale and/or the Merger, will increase the risk that NTN will not satisfy this closing condition.
See “—Risks Related to NTN Prior to the Merger,” below. Further, if the Asset Sale is not approved by NTN’s
stockholders or if the Asset Sale does not close for any other reason, NTN will likely not satisfy this condition. Similarly,
another of the conditions to closing the Merger is that Brooklyn have not more than $750,000 in indebtedness for borrowed money
at the closing. Although no assurances can be given in this regard, Brooklyn expects that it will satisfy this closing condition.
As
another example, one of the conditions to closing the Merger is that, at the closing, Brooklyn have not less than $10 million
in cash and cash equivalents on its balance sheet and have not more than $750,000 of indebtedness for borrowed money. As of January
29, 2021, Brooklyn’s indebtedness for borrowed money consisted of (i) assumed notes payable in the amount of $410,000 related
to notes assumed in connection with the acquisition of IRX Therapeutics, and (ii) a loan in the amount of $309,905 under the Paycheck
Protection Program. With respect to the cash balance sheet requirement, in order to help ensure that Brooklyn meets this condition,
Brooklyn has previously engaged in a rights offering to the beneficial holders of its Class A membership interests pursuant to
which such beneficial holders who exercised their rights have agreed to make additional contributions to Brooklyn. Such members
will exchange the additional membership interests they receive for their contribution for a portion of the shares of NTN common
stock issuable to members of Brooklyn in the Merger. Although Brooklyn expects to receive at least $10 million in proceeds from
the rights offering, there can be no assurance that these members will contribute what they have contractually agreed to contribute.
If these members do not make their committed contributions, Brooklyn may not be able to satisfy the closing condition that it
have not less than $10 million in cash and cash equivalents on its balance sheet at the closing of the Merger. If this closing
condition is not satisfied, and if NTN does not waive the condition, the Merger will not occur.
Failure
to complete the Merger may result in NTN or Brooklyn paying a termination fee to the other party and could significantly harm
the market price of NTN’s common stock and negatively affect the future business and operations of both companies.
If
the Merger is not completed and the Merger Agreement is terminated under certain circumstances, NTN or Brooklyn may be required
to pay the other party a termination fee of $750,000, or reimburse the transaction expenses of the other party, up to a maximum
of $250,000. Even if a termination fee is not payable or transaction expenses are not reimbursable in connection with a termination
of the Merger Agreement, each of NTN and Brooklyn will have incurred significant legal, financial, advisory, accounting, audit
and other general operating expenses, which must be paid whether or not the Merger is completed. Further, if the Merger is not
completed, it could significantly harm the market price of NTN common stock and further increase the doubt as to its ability to
continue as a going concern. In addition, if the Merger Agreement is terminated and the board of directors of NTN or the board
of managers of Brooklyn determines to seek another business combination, there can be no assurance that either NTN or Brooklyn
will be able to find a partner and close an alternative transaction on terms that are as or more favorable than the terms set
forth in the Merger Agreement.
Certain
of the officers and directors of NTN and certain of the officers and managers of Brooklyn have interests in the Merger that are
different from the stockholders of NTN and members of Brooklyn, respectively, and that may influence them to support or approve
the Merger without regard to the interests of the stockholders of NTN or the members of Brooklyn.
Certain
officers and directors of NTN and certain officers and managers of Brooklyn participate in arrangements that provide them with
interests in the Merger that are different from the interests of the stockholders of NTN and members of Brooklyn including, among
others, the continued service as an officer or director of the combined company, severance benefits, the acceleration of vesting
of equity awards, continued indemnification and the potential ability to sell an increased number of shares of common stock of
the combined company in accordance with Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”).
These interests, among others, may influence the officers and directors of NTN and the officers and managers of Brooklyn to support
or approve the Merger.
The
market price of NTN common stock following the Merger may decline as a result of the Merger.
The
market price of NTN common stock may decline as a result of the Merger for a number of reasons including if:
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investors
react negatively to the prospects of the combined company’s product candidates, business and financial condition following
the Merger;
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the
effect of the Merger on the combined company’s business and prospects is not consistent with the expectations of financial
or industry analysts; or
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the
combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial
or industry analysts.
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NTN
stockholders and Brooklyn members will have a reduced ownership and voting interest in, and will exercise less influence over
the management of, the combined company following the closing of the Merger as compared to their current ownership and voting
interest in the respective companies.
After
the completion of the Merger, the current stockholders of NTN and the current members of Brooklyn will own a smaller percentage
of the combined company than their ownership in the respective companies prior to the Merger. At the effective time of Merger,
Brooklyn’s members will exchange their equity interests in Brooklyn for shares of NTN common stock representing between
approximately 94.08% and 96.74% of the outstanding common stock of NTN immediately after the effective time of the Merger on a
fully diluted basis (less a portion of such shares which will be allocated to Maxim in respect of the success fee owed to it by
Brooklyn), and NTN’s stockholders as of immediately prior to the effective time, will own between approximately 5.92% and
3.26% of the outstanding common stock of NTN immediately after the effective time on a fully diluted basis. Consequently, NTN
stockholders and Brooklyn members will be able to exercise less influence over the management and policies of the combined company
following the closing of the Merger than they currently exercise over the management and policies of their respective companies.
NTN
stockholders and Brooklyn members may not realize a benefit from the Merger commensurate with the ownership dilution they will
experience in connection with the Merger.
If
the combined company is not able to realize the strategic and financial benefits currently anticipated from the Merger, NTN stockholders
and Brooklyn members will have experienced substantial dilution of their ownership interests in their respective companies without
receiving the expected commensurate benefit, or only receiving part of the commensurate benefit to the extent that the combined
company is able to realize only part of the expected strategic and financial benefits currently anticipated from the Merger.
The
combined company may need to raise additional capital by issuing securities or debt or through licensing or other arrangements,
which may cause dilution to the combined company’s stockholders or restrict the combined company’s operations or impact
its proprietary rights. Future issuances of the combined company’s common stock pursuant to options outstanding following
the Merger and under its equity incentive plan could result in additional dilution.
The
combined company may be required to raise additional funds sooner than currently planned. If either NTN or Brooklyn hold less
cash at the time of the closing of the Merger than the parties currently expect, the combined company may need to raise additional
capital sooner than expected. Additional financing may not be available to the combined company when needed or it may not be available
on favorable terms. To the extent that the combined company raises additional capital by issuing equity securities, such an issuance
may cause significant dilution and the terms of any new equity securities may have preferences over the combined company’s
common stock. Any debt financing the combined company enters into may include covenants that restrict its operations. These restrictive
covenants may include limitations on additional borrowing and specific restrictions on the use of the combined company’s
assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments. In addition,
if the combined company raises additional funds through licensing, partnering or other strategic arrangements, it may be necessary
to relinquish rights to some of the combined company’s technologies or product candidates and proprietary rights, or grant
licenses on terms that are not favorable to the combined company.
In
addition, the exercise or conversion of some or all of the combined company’s outstanding options (or, after the Merger,
the issuance of equity awards under the combined company’s equity incentive plan) could result in additional dilution in
the percentage ownership interest of current NTN stockholders and Brooklyn members in the combined company.
During
the pendency of the Merger, NTN and Brooklyn may not be able to enter into a business combination with another party at a favorable
price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.
Covenants
in the Merger Agreement impede the ability of NTN and Brooklyn to make acquisitions, subject to certain exceptions relating to
fiduciary duties, or to complete other transactions that are not in the ordinary course of business pending completion of the
Merger. As a result, if the Merger is not completed, the parties may be at a disadvantage to their competitors during such period.
In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging
or entering into certain extraordinary transactions, such as a merger, sale of assets, or other business combination outside the
ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties and, with respect
to NTN, other than the asset sale. Any such transactions could be favorable to such party’s securityholders.
Certain
provisions of the Merger Agreement may discourage third parties from submitting alternative acquisition proposals, including proposals
that may be superior to the arrangements contemplated by the Merger Agreement.
The
terms of the Merger Agreement prohibit NTN and Brooklyn from soliciting alternative acquisition proposals or cooperating with
persons making unsolicited acquisition proposals, except in limited circumstances where the board of directors of NTN and the
board of managers of Brooklyn, as applicable, determines in good faith that an unsolicited alternative acquisition proposal is
or is reasonably likely to lead to a superior offer and that failure to cooperate with the proponent of that proposal would reasonably
be likely to be inconsistent with the board’s fiduciary duties.
Because
the lack of a public market for Brooklyn’s securities makes it difficult to evaluate the value of such securities, the members
of Brooklyn may receive shares of NTN common stock in the Merger that have a value that is less than, or greater than, the fair
market value of Brooklyn’s securities and/or NTN may pay more than the fair market value of Brooklyn’s securities.
The
outstanding securities of Brooklyn are privately held and not traded in any public market. The lack of a public market makes it
difficult to determine the fair market value of Brooklyn. Because the percentage of NTN common stock to be issued to Brooklyn
members was determined based on negotiations between NTN and Brooklyn, it is possible that the value of NTN common stock to be
received by Brooklyn members in the Merger will be less than the fair market value of Brooklyn, or NTN may pay more than the aggregate
fair market value for Brooklyn.
Litigation
relating to the Merger could require NTN, Brooklyn or the combined company to incur significant costs and suffer management distraction
and could delay or enjoin the Merger.
NTN
and Brooklyn are subject to litigation relating to the Merger. Such litigation may create uncertainty relating to the Merger,
or delay or enjoin the Merger. Litigation is expensive and diverts management’s attention and resources, which could adversely
affect NTN’s, Brooklyn’s or the combined company’s business. Insurance may not be sufficient to cover all costs
or damages related to this type of litigation.
The
ownership of the combined company common stock is expected to be concentrated, which may prevent you and other stockholders from
influencing significant corporate decisions and may result in conflicts of interest that could cause the combined company stock
price to decline.
Executive
officers and directors of the combined company and their affiliates are expected to beneficially own or control approximately
39.7% of the outstanding shares of the combined company common stock immediately following the effective time of the Merger on
a fully diluted basis (assuming Brooklyn’s members immediately prior to the effective time of the Merger and Maxim own 94.08%
of the outstanding common stock of NTN immediately following the effective time of the Merger on a fully diluted basis). Accordingly,
these executive officers, directors and their affiliates, acting as a group, will have substantial influence over the outcome
of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of
all or substantially all of the combined company assets or any other significant corporate transactions. These stockholders may
also delay or prevent a change of control of the combined company, even if such a change of control would benefit the other stockholders
of the combined company. The significant concentration of stock ownership may adversely affect the trading price of the combined
company’s common stock due to investors’ perception that conflicts of interest may exist or arise.
Risks
Related to the Asset Sale
While
the Asset Sale is pending, it creates unknown impacts on NTN’s future which could materially and adversely affect its business,
financial condition and results of operations.
While
the Asset Sale is pending, it creates unknown impacts on NTN’s future. Therefore, NTN’s current or potential business
partners may decide to delay, defer or cancel entering into new business arrangements with NTN pending consummation of the Asset
Sale. The occurrence of these events individually or in combination could materially and adversely affect NTN’s business,
financial condition and results of operations.
The
failure to consummate the Asset Sale may materially and adversely affect NTN’s business, financial condition and results
of operations.
The
Asset Sale is subject to various closing conditions including stockholder approval of the Asset Sale Proposal as required under
applicable law. NTN cannot control these conditions and cannot assure you that they will be satisfied. If the Asset Sale is not
consummated, NTN may be subject to a number of risks, including the following:
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NTN
may not satisfy the closing condition in the Merger Agreement that the deficit in NTN’s net cash not exceed $3.0 million;
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NTN
may not be able to identify an alternate transaction, or if an alternate transaction is identified, such alternate transaction
may not result in terms as favorable to NTN as compared to the terms of the Asset Sale;
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the
trading price of NTN common stock may decline to the extent that the current market price reflects a market assumption that
the Asset Sale will be consummated;
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NTN’s
expenses related to the Asset Sale, such as legal, accounting and financial advisor fees, must be paid even if the Asset Sale
is not completed; and
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NTN’s
relationships with its customers, suppliers and employers may be negatively impacted which may harm its business.
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The
occurrence of any of these events individually or in combination could materially and adversely affect NTN’s business, financial
condition and results of operations, which could cause the market value of NTN common stock to decline.
In
addition, if the Asset Sale does not close and the Merger does close, the aggregate ownership percentage of the combined company
by NTN stockholders will likely decrease due to an increase in the deficit of NTN’s net cash as a result of not receiving
the $2.0 million in the Asset Sale.
Failure
to complete the Asset Sale may result in NTN paying a termination fee to eGames.com.
If
the Asset Sale is not completed and the APA is terminated under certain circumstances, NTN may be required to pay eGames.com a
termination fee of $250,000. Even if a termination fee is not payable in connection with a termination of the APA, NTN will have
incurred significant legal, financial, advisory, accounting, audit and other general operating expenses, which must be paid whether
or not the Asset Sale is completed.
Certain
of the officers and directors of NTN have interests in the Asset Sale that are different from the stockholders of NTN and that
may influence them to support or approve the Asset Sale without regard to the interests of the stockholders of NTN.
Certain
officers and directors of NTN participate in arrangements that provide them with interests in the Asset Sale that are different
from the interests of the stockholders of NTN including, among others, change-in-control benefits and the acceleration of vesting
of equity awards. These interests, among others, may influence the officers and directors of NTN to support or approve the Asset
Sale.
Risks
Factors that May Affect Our Business
Our
cash flows from operations and liquidity have been materially adversely affected by the effects of the COVID-19 pandemic. We need
to raise capital in the near term and/or complete a strategic transaction, and our inability to do so could result in us pursuing
a restructuring, which may include a reorganization or bankruptcy under Federal bankruptcy laws, assignment for the benefit of
creditors, or a dissolution, liquidation and/or winding up.
The
negative impact of the pandemic on the restaurant and bar industry was abrupt and substantial, and our business, cash flows from
operations and liquidity suffered, and continues to suffer, materially as a result. In many jurisdictions, including those in
which we have many customers and prospective customers, restaurants and bars were ordered by the government to shut-down or close
all on-site dining operations in the latter half of March 2020. Since then, governmental orders and restrictions impacting restaurants
and bars in certain jurisdictions were eased or lifted as the number of COVID-19 cases decreased or plateaued, but as jurisdictions
began experiencing a resurgence in COVID-19 cases, many jurisdictions reinstated such orders and restrictions, including mandating
the shut-down of bars and the closing of all on-site dining operations of restaurants. Jurisdictions that have not imposed governmental
orders and restrictions on restaurants and bars or reinstated them could do so at any time. At its peak, approximately 70% of
our customers had their subscriptions to our services temporarily suspended. As of March 9, 2021, approximately 11% of our customers
remain on subscription suspensions, but that percentage could increase, perhaps materially, at any time due to the effects of
the pandemic on our customers, including as jurisdictions reinstate governmental orders and restrictions impacting our customers.
Even in jurisdictions in which governmental orders and restrictions were eased or lifted, certain of our customers have requested,
and others could request, to continue their subscription suspensions because, for example, such customers choose not to re-open
despite being permitted to do so. As a result, we have experienced material decreases in subscription revenue, advertising revenue
and cash flows from operations, which we expect to continue for at least as long as the restaurant and bar industry continues
to be negatively impacted by the pandemic, and which may continue thereafter if restaurants and bars seek to reduce their operating
costs or are unable to re-open even if restrictions within their jurisdictions are eased or lifted.
The
full extent to which the pandemic will, directly or indirectly, impact our business, results of operations and financial condition
is currently highly uncertain, including due to factors that currently are also highly uncertain, including when, and the extent
to which, the negative impact of the pandemic will improve, including when a substantial majority of restaurants across the U.S.
and Canada will be permitted to offer on-site dining and operate at or close to pre-pandemic levels or when a substantial majority
of bars across the U.S. and Canada will be permitted to re-open and operate at or close to pre-pandemic levels, when our customers
will re-open, or if they will subscribe to our service if and when they do, the ultimate impact of the pandemic and how long it
endures, the impact of the current or future resurgences in COVID-19 cases, and the actions required or recommended to contain
or treat COVID-19. However, unless in the very near term our subscription revenue, advertising revenue and cash flows from operations
return to pre-pandemic levels and/or we raise substantial capital, the amount of time and the amount of cash we have to maintain
operations and sustain the negative effects of the pandemic is very limited.
As
of December 31, 2020, we had cash and cash equivalents of approximately $777,000. As of December 31, 2020, $0.5 million of principal
was outstanding under the loan we received under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic
Security Act. In connection with entering into the APA, we received a $1.0 million bridge loan from an affiliate of eGames.com,
and on December 1, 2020 and January 12, 2021, we received an additional $0.5 million bridge loan and an additional $0.2 million
bridge loan, respectively, from that affiliate, all of which, together with accrued interest, will be applied against the $2.0
million purchase price payable to us at the closing of the Asset Sale; however, if the Asset Sale does not close, we will owe
the $1.7 million of principal of those bridge loans plus accrued interest to the affiliate of eGames.com. For additional information
regarding these bridge loans, see the section entitled “Liquidity and Capital Resources—Bridge Loans” in “ITEM
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of this report.
As a result of the impact of the pandemic on our business and taking into account our current financial condition and our existing
sources of projected revenue and our projected subscription revenue, advertising revenue and cash flows from operations, we believe
we will have sufficient cash resources to pay forecasted cash outlays only through mid-March 2021, assuming we are able to continue
to successfully manage our working capital deficit by managing the timing of payments to our vendors and other third parties.
We
expect that the earliest the Asset Sale and the Merger will be completed is the week of March 15, 2021. If the completion of the
Asset Sale and the Merger is delayed beyond that week, we will need to raise additional capital to maintain operations through
the completion of the Asset Sale and the Merger. We currently have no arrangements for such capital and no assurances can be given
that we will be able to raise such capital when needed, on acceptable terms, or at all. The effects of the pandemic on macroeconomic
conditions and the capital markets make it more challenging to raise capital. The going concern explanatory paragraph included
in the report of our independent registered public accounting firm on our consolidated financial statements as of and for the
year ended December 31, 2020 could also impair our ability to raise capital. If we are unable to complete the Merger or the Asset
Sale or raise sufficient additional capital in the very near term, we will likely be required to curtail or terminate some or
all of our business operations and we may have no choice but to pursue a restructuring, which may include a reorganization or
bankruptcy under Federal bankruptcy laws, assignment for the benefit of creditors, or a dissolution, liquidation and/or winding
up. In such event, our investors may lose their entire investment.
See
also, “The measures we implemented and may implement in the future to reduce operating expenses and to preserve capital
could adversely affect our business and we may not realize the operational or financial benefits from such actions,”
and “Raising additional capital may cause dilution to our existing stockholders and may restrict our operations,”
below.
The
measures we implemented and may implement in the future to reduce operating expenses and to preserve capital could adversely affect
our business and we may not realize the operational or financial benefits from such actions.
We
implemented measures to reduce operating expenses and to preserve capital. Since January 1, 2020, we implemented the following
measures:
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We
reduced our headcount (as of March 9, 2021, we had 22 employees, as compared to 74 at December 31, 2019);
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Our
chief executive officer agreed to defer payment of 45% of his base salary between May 1, 2020 and October 31, 2020 until the
earlier of October 31, 2020 or such time as our board of directors determines in good faith that we are in the financial position
to pay his accumulated deferred salary. All deferred base salary payments were made by November 6, 2020;
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We
terminated the lease for our corporate headquarters, resulting in a reduction in our future cash obligations under the lease
by approximately $3.4 million; and
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We
substantially eliminated all capital projects and are aggressively managing our expenditures to limit further cash outlays
and manage our working capital.
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We
may implement additional measures in the future. In addition to distracting management from the core operations of our business,
any of these actions may negatively impact our ability to effectively manage, operate and grow our business, to introduce new
offerings to our customers, to increase market awareness and encourage the adoption of the Buzztime brand and our Buzztime network,
to retain customers, and to generate revenue. For example, the reduction in headcount resulted in the loss of a number of long-term
employees, the loss of institutional knowledge and expertise and the reallocation and combination of certain roles and responsibilities
across the organization, all of which could adversely affect our operations. In addition, we may not be able to effectively realize
all the cost savings anticipated by the reductions in operational costs and we may incur unanticipated charges or make cash payments
as a result that were not previously contemplated which could result in an adverse effect on our business or results of operations.
Our
success depends on our ability to recruit and retain skilled professionals.
The
success of our business depends on our ability to identify, hire, and retain knowledgeable and experienced programmers, creative
designers, application developers, and sales and marketing personnel. If we cannot motivate and retain knowledgeable and experienced
professionals, our business, financial condition, and results of operations will suffer. There is significant competition from
other businesses for individuals with the experience and skills required to successfully operate our business and the recent reductions
in headcount and other measures we implemented to reduce operating expenses may decrease the morale of our remaining employees
and make retaining them more challenging. Moreover, in light of the small number of employees on our staff to manage our key functions,
we may not be able to adequately support current and future business initiatives or attract or retain customers, which risk could
be increased if we are unable to retain existing personnel.
We
have experienced significant losses and expect to incur significant losses in the future.
We
have a history of significant losses, including net losses of $4,415,000 and $2,047,000 for the years ended December 31, 2020
and 2019, respectively, and have an accumulated deficit of $135,888,000 as of December 31, 2020. We expect to incur future operating
and net losses, and we may not achieve or maintain profitability. Even if we achieve profitability, the level of profitability
cannot be predicted and may vary significantly from quarter to quarter and year to year. See also “—Risks Relating
to the Market for NTN Common Stock— Our common stock could be delisted or suspended from trading on the NYSE American
if we are determined to be non-compliant with any of the NYSE American continued listing standards,” below.
We
may not 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. For example, we face significant competition in the hospitality market
from companies offering services that compete with ours. Our services also compete with games, apps and other forms of entertainment
offerings available directly to consumers on their mobile devices. See “Competition,” above. Many of our current and
potential competitors enjoy substantial competitive advantages, including greater financial resources that they can deploy for
content development, research and development, strategic acquisitions, alliances, joint ventures, and sales and marketing. As
a result, our current and potential competitors may respond more quickly and effectively than we can to new or changing opportunities,
technologies, standards, or consumer preferences.
With
the rapid pace of change in product and service offerings, we must also be able to compete in terms of technology, content, and
management strategy. If we fail to provide competitive, engaging, quality services and products, it will be challenging to gain
new customers and we will lose customers to competitors. Increased competition may also result in price reductions, fewer customer
orders, reduced gross margins, longer sales cycles, reduced revenue, and loss of market share.
New
products and rapid technological change 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. Our future performance
depends on our ability to:
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identify
and successfully respond to emerging technological trends and industry standards in our market;
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identify
and successfully respond to 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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improve
the performance, features, and reliability of our products and services, particularly in response to changes in consumer preferences,
technological changes, and competitive offerings; and
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bring
appealing technology to market quickly at cost-effective prices.
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Our
inability to succeed in one or more of the above areas would have a material adverse effect on our financial condition and business.
In
addition, we have to incur substantial costs to modify or adapt our products or services to respond to developments, customer
needs, and changing preferences. We must be able to incorporate new technologies into the products we design and develop 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, would have a material adverse effect on our financial condition and business.
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 few 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 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, which could result in substantial cost to us.
We
believe that the success of our business also depends on such factors as the technical expertise and innovative capabilities of
our employees. It is our policy that all employees and consultants sign non-disclosure agreements and assignment of invention
agreements. Our competitors, former employees, and consultants may, however, misappropriate our technology or independently develop
technologies that are as good as or better than ours. Our competitors may also challenge or circumvent our proprietary rights.
If we have to initiate or defend against an infringement claim to protect our proprietary rights, the litigation over any such
claim, with or without merit, could be time-consuming and costly to us.
From
time to time, we hire or retain employees or consultants who may have worked for other companies developing products similar to
those that we offer. These other companies may claim that our products are based on their products and that we have misappropriated
their intellectual property. Any such claim, with or without merit, could be time-consuming and costly to us, adversely affecting
our financial condition.
We
may be liable for the content and services we make available on our Buzztime network and the internet.
We
make content and entertainment services available on our Buzztime network and the internet which includes games and game content,
software, and a variety of other entertainment content. The availability of this content and services and our branding could result
in claims against us based on a variety of theories, including defamation, obscenity, negligence, or copyright or trademark infringement.
We could also be exposed to liability for third-party content accessed through the links from our websites to other websites.
Federal laws may limit, but not eliminate, our liability for linking to third-party websites that include materials that infringe
copyrights or other rights. 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 harm our business.
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 skill, and we award
nominal cash prizes to winners of certain games and may provide items of nominal value (e.g., key chains, etc.) to venues who
may award such items to consumers. These games are regulated in many jurisdictions and the laws and regulations vary from jurisdiction
to jurisdiction. See “Government Regulations” above. We may find it necessary to eliminate, modify, suspend, or cancel
certain features of our offerings (including the games we offer) in certain jurisdictions based on the adoptions of new laws and
regulations or changes in law or regulations or the enforcement thereof, which could result in additional development costs and/or
the loss of customers and revenue.
Communication
or other system failures could result in customer cancellations and a decrease in our revenues.
We
rely on the continuous operation of our information technology and communications systems and those of third parties to communicate
with and to distribute our services to the locations of our network subscribers. We currently transmit our data to our customers
via broadband internet connections including telephone and cable TV networks. Our systems and those of third parties on which
we rely are vulnerable to damage or interruption from many causes, including earthquakes, terrorist attacks, floods, storms, fires,
power loss, telecommunications and other network failures, equipment failures, computer viruses, computer denial of service or
other attacks. These systems are also subject to break-ins, sabotage, vandalism, and to other disruptions, for example if we or
the operators of these systems and system facilities have financial difficulties. Some of our systems are not fully redundant,
and our system protections and disaster recovery plans cannot prevent all outages, errors, or data losses. In addition, our services
and systems are highly technical and complex and may contain errors or other vulnerabilities. Any errors or vulnerabilities in
our products and services, damage to or failure of our systems, any natural or man-made disaster, or other unanticipated problems
at our facilities or those of a third party, could result in lengthy interruptions in our service to our customers, which could
reduce our revenues and cash flow, and damage our brand. Any interruption in communications or failure of proper hardware or software
function at our or our customers’ venues could also decrease customer loyalty and satisfaction and result in a cancellation
of our services.
We
have incurred significant net operating loss carryforwards that we will likely be unable to use.
At
December 31, 2020, we had net operating loss (“NOL”) carryforwards of approximately $5,310,000 available for federal
income tax purposes, and of approximately $16,051,000 available for state income tax purposes. There can be no assurance that
we will ever be able to realize the benefit of some or all of the federal and state loss carryforwards due to continued operating
losses. We performed an analysis as of December 31, 2020 to determine the limitations on our ability to utilize our NOL carryforwards
under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”) resulting from any changes in ownership.
This analysis indicates that an ownership change occurred on June 9, 2020 that would limit the use of approximately $61,965,000
of NOLs. Under IRC Section 382 and similar state provisions, ownership changes will limit the annual utilization of net operating
loss carryforwards existing prior to a change in control that are available to offset future taxable income. Such limitations
have reduced our gross deferred tax assets related to the NOL carryforwards by approximately $11,021,000. We have established
a full valuation allowance for substantially all deferred tax assets, including the NOL carryforwards, since we could not conclude
that it was more likely than not that we would be able to generate future taxable income to realize these assets.
The
Merger will likely result in an ownership change for purposes of Section 382, but no formal analysis has been or is expected to
be undertaken in this regard.
Risks
Relating to the Market for NTN Common Stock
Our
common stock could be delisted or suspended from trading on the NYSE American if we do not regain compliance with continued listing
criteria with which we are currently not compliant or if we fail to meet any other continued listing criteria.
In
March 2020, we received a letter from NYSE Regulation Inc. stating that we are not in compliance with Section 1003(a)(iii) of
the NYSE American Company Guide because we reported stockholders’ equity of less than $6 million as of December 31, 2019
and had net losses in five of our most recent fiscal years ended December 31, 2019. Our stockholders’ equity was $5.1 million
as of December 31, 2019. On June 11, 2020, NYSE Regulation notified us that we are not in compliance with Section 1003(a)(ii)
of the NYSE American Company Guide because we reported stockholders’ equity of less than $4.0 million as of March 31, 2020
and had net losses in five of our most recent fiscal years ended December 31, 2019.
On
June 11, 2020, NYSE Regulation notified us that it has accepted our plan to regain compliance with Section 1003(a)(iii) of the
NYSE American Company Guide and granted us a plan period through September 27, 2021 to regain compliance.
On
August 12, 2020, NYSE Regulation notified us that we are not in compliance with Section 1003(a)(i) of the NYSE American Company
Guide because we reported stockholders’ equity of less than $2.0 million as of June 30, 2020 and had net losses in five
of our most recent fiscal years ended December 31, 2019. We continue to be subject to the procedures and requirements of Section
1009 of the NYSE American Company Guide.
The
listing of our common stock on the NYSE American is being continued during the plan period pursuant to an extension. The NYSE
Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance
with Sections 1003(a)(i), (ii) and (iii) by September 27, 2021 or if we do not make progress consistent with our plan during the
plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate.
We
can give no assurances that we will be able to address our non-compliance with the NYSE American continued listing standards or,
even if we do, that we will be able to maintain the listing of our common stock on the NYSE American. Our common stock could be
delisted because we do not make progress consistent with our plan during the plan period, because we do not regain compliance
by September 27, 2021, or because we become out of compliance with other NYSE American listing standards. In addition, we may
determine to pursue business opportunities that reduces our stockholders’ equity below the level required to maintain compliance
with NYSE American continued listing standards. The delisting of our common stock for whatever reason could, among other things,
substantially impair our ability to raise additional capital; result in a loss of institutional investor interest and fewer financing
opportunities for us; and/or result in potential breaches of representations or covenants in agreements pursuant to which we made
representations or covenants relating to our compliance with applicable listing requirements. Claims related to any such breaches,
with or without merit, could result in costly litigation, significant liabilities and diversion of our management’s time
and attention and could have a material adverse effect on our 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. See also “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,” below.
The
initial listing application to be filed with the NYSE American in connection with the Merger in order to continue the listing
of the shares of common stock of the combined company on the NYSE American may not be approved if the combined company does not
meet the initial listing standards.
In
order to continue the listing of the shares of common stock of the combined company on the NYSE American following the closing
of the Merger, the combined company must meet the NYSE American’s initial listing standards and the NYSE American must approve
an initial listing application that NTN filed with the NYSE American in early March 2021. Although no assurances can be given that the combined company will meet such initial listing standards
or that the NYSE American will approve such application, assuming that the reverse stock split proposal being submitted to NTN’s
stockholders at the special meeting is approved, NTN and Brooklyn expect that the combined company will meet the initial listing
standard of the NYSE American that requires that: (1) the stockholders’ equity of the combined company be at least $4.0
million; (2) the combined company have a minimum of 800 public shareholders and a minimum of 500,000 shares in the public distribution,
or a minimum of 400 public shareholders and a minimum of 1,000,000 shares in the public distribution; (3) the minimum price of
the common stock of the combined company be at least $3.00 per share; and (4) the minimum market value of publicly held shares
be at least $15.0 million. For purposes of the foregoing, “public shareholders” means the stockholders of the combined
company other than its officers, directors, controlling stockholders and other concentrated (i.e. 10% or greater) stockholders
and their respective affiliates, and “public distribution” and “publicly held shares” means the outstanding
shares of common stock of the combined company held by public shareholders. If the reverse stock split proposal is not approved
by NTN stockholders, the combined company may not meet the requirement that the minimum price of the common stock of the combined
company be at least $3.00 per share. If that requirement or any other initial listing standard requirement is not met, the NYSE
American will not approve the initial listing application and the shares of common stock of the combined company will not be listed
on the NYSE American following the closing of the Merger. If Brooklyn waives the conditions to closing the Merger relating to
the continued listing of the common stock on the NYSE American and the Merger closes, the shares of the combined company would
not be listed on a national securities exchange immediately following the closing of the Merger, which could have a material adverse
effect on the combined company and its stockholders. See “If the NYSE American does not approve the initial listing application
to be filed with it in connection with the Merger, the Merger may not close, but if Brooklyn waives this closing condition and
the Merger does close, the failure of the common stock of the combined company to be listed on a national securities exchange
could have a material adverse effect on the combined company and its stockholders,” and “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,”
below.
If
the NYSE American does not approve the initial listing application to be filed with it in connection with the Merger, the Merger
may not close, but if Brooklyn waives this closing condition and the Merger does close, the failure of the common stock of the
combined company to be listed on a national securities exchange could have a material adverse effect on the combined company and
its stockholders.
Conditions
to closing the Merger include that NTN’s common stock continue to be traded on the NYSE American until the effective time
of the Merger, the NTN common stock to be issued in the Merger be approved for listing (subject to official notice of issuance)
on the NYSE American as of the effective time of the Merger, and the NTN common stock will continue to trade on the NYSE American
after the effective time of the Merger. Brooklyn could waive the satisfaction of any of the foregoing closing conditions, but
there can be no assurance that Brooklyn will do so. If Brooklyn waives any of those closing conditions that are not satisfied
at the closing and the Merger closes, the common stock of the combined company would be expected to trade on an over-the-counter
market, which could, among other things, substantially impair the ability of the combined company to raise additional capital,
result in a loss of institutional investor interest and fewer financing opportunities for the combined company, materially impair
the ability of stockholders to buy and sell shares of the common stock of the combined company, and could have an adverse effect
on the market price of, and the efficiency of the trading market for, the common stock of the combined company. See also “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,”
below.
If
our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to
trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
If
our common stock were delisted or suspended from trading on the NYSE American, it may be subject to the so-called “penny
stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has
a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities
exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice
requirements on broker-dealers, subject to certain exceptions. If our common stock were delisted and determined to be a “penny
stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult
to acquire or dispose of our common stock.
The
market price of our common stock historically has been and likely will continue to be highly volatile and our common stock is
thinly traded.
The
market price for our common stock historically has been highly volatile, and the market for our common stock has from time to
time experienced significant price and volume fluctuations, based both on our operating performance and for reasons that appear
to us unrelated to our operating performance. Our stock is also thinly traded, which can affect market volatility, which could
significantly affect the market price of our common stock without regard to our operating performance. In addition, the market
price of our common stock may fluctuate significantly in response to several factors, including:
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the
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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failure
to obtain compliance with any of the NYSE American continued listing standards;
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commencement
of delisting proceedings by NYSE Regulation; and
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additions
or departures of key personnel.
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The
realization of any of the foregoing could have a dramatic and adverse impact on the market price of our common stock.
Future
sales of substantial amounts of our common stock in the public market or the anticipation of such sales could have a material
adverse effect on then-prevailing market prices.
As
of March 9, 2021, there were approximately (1) 26,000 shares of common stock reserved for issuance upon the exercise of outstanding
stock options at exercise prices ranging from $2.43 to $27.50 per share, (2) 75,000 shares of common stock reserved for issuance
upon the settlement of outstanding restricted stock units, and (3) 156,112 shares of our Series A Convertible Preferred Stock
outstanding which, based on their conversion price as of March 9, 2021, would convert into approximately 84,000 shares of common
stock. Registration statements registering the shares of common stock underlying the outstanding options and restricted stock
units are currently effective. Generally, the shares of common stock issuable upon conversion of the Series A Convertible Preferred
Stock, which the holders may do at any time, may be sold under Rule 144 of the Securities Act of 1933. 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 any of our outstanding options are exercised
exceeds their exercise price or at the time any of our outstanding shares of Series A Convertible Preferred Stock are converted
exceeds their conversion price, such exercise or conversion 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. 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 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 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. In the past, most recently in June 2018,
we raised capital through equity offerings conducted under a “shelf” Form S-3 registration statement. Using a shelf
registration statement on to raise 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, SEC rules and regulations. Under 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. Based on the closing price of our common stock on March 9, 2021, the highest closing price of
our common stock within the past 60 days, our public float is approximately $17.7 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 must evaluate
it, we will only be able to sell up to approximately $5.9 million if we seek to use a shelf registration statement. If our ability
to use a shelf 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 alternative to increase the cost of raising additional capital relative to utilizing a Form
S-3 registration statement.
In
addition, under SEC rules and regulations, our common stock must be listed and registered on a national securities exchange in
order to utilize a Form S-3 registration statement (i) for a primary offering, if our public float is not at least $75.0 million
as of a date within 60 days prior to the date of filing the Form S-3 or a re-evaluation date, whichever is later, and (ii) to
register the resale of our securities by persons other than us (i.e., a resale offering). While currently our common stock is
listed on the NYSE American, there can be no assurance we can maintain such listing. See also “Our common stock could
be delisted or suspended from trading on the NYSE American if we do not regain compliance with continued listing criteria with
which 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 American’s stockholder approval requirements
for transactions involving the issuance of our common stock or securities convertible into our common stock. For instance, the
NYSE American requires that we obtain stockholder approval of any transaction involving the sale, issuance or potential issuance
by us of our common stock (or securities convertible into our common stock) at a price less than the greater of book or market
value, which (together with sales by our officers, directors and principal stockholders) equals 20% or more of our then outstanding
common stock, unless the transaction is considered a “public offering” by the NYSE American staff. In addition, certain
prior sales by us may be aggregated with any offering we may propose in the future, further limiting the amount we could raise
in any future offering not considered a public offering by the NYSE American staff and involves the sale, issuance or potential
issuance by us of our common stock (or securities convertible into our common stock) at a price less than the greater of book
or market value. The NYSE American also requires that we obtain stockholder approval if the issuance or potential issuance of
additional shares will be considered by the NYSE American staff to result in a change of control of our company.
Obtaining
stockholder approval is a costly and time-consuming process. If we must obtain stockholder approval for a potential transaction,
we would expect to spend substantial additional money and resources. In addition, seeking stockholder approval would delay our
receipt of otherwise available capital, which may materially and adversely affect our ability to execute our business strategy,
and there is no guarantee our stockholders ultimately would approve a proposed transaction. A public offering under the NYSE American
rules typically involves broadly announcing the proposed transaction, which often depresses 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 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 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.
Our
amended and restated bylaws, as amended, designates the state courts of the State of Delaware (or, if no such state court has
jurisdiction, the federal district court for the District of Delaware) as the sole and exclusive forum for certain types of actions
that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum
for disputes with us or with our directors, our officers or other employees, or our majority stockholder.
Section
8.12 of our amended and restated bylaws, as amended, provides that, unless we consent in writing to the selection of an alternative
forum, the state courts of the State of Delaware (or, if no such state court has jurisdiction, the federal district court for
the District of Delaware) shall be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf
of NTN, (B) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or stockholder of NTN to
NTN or its stockholders, (C) any action asserting a claim against NTN or any director or officer or stockholder of NTN arising
pursuant to any provision of the Delaware General Corporation Law (the “DGCL”) or NTN’s restated certificate
of incorporation or amended and restated bylaws, or (D) any action asserting a claim against NTN or any director or officer or
stockholder of NTN governed by the internal affairs doctrine.
Section
8.12 of NTN’s amended and restated bylaws, as amended, also provides that if any provision of Section 8.12 is held to be
invalid, illegal or unenforceable as applied to any person or entity or circumstance for any reason whatsoever, then, to the fullest
extent permitted by law, the validity, legality and enforceability of such provision in any other circumstance and of the remaining
provisions of this Section 8.12 (including, without limitation, each portion of any sentence of Section 8.12 containing any such
provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) and the
application of such provision to other persons or entities or circumstances shall not in any way be affected or impaired thereby.
Section
8.12 may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with
us or with our directors, our officers or other employees, or our other stockholders, which may discourage such lawsuits against
us and such other persons.
Section
8.12 is intended to apply to the fullest extent permitted by law to the types of actions specified therein, including, to the
extent permitted by the federal securities laws, to lawsuits asserting both the claims specified in Section 8.12 and claims under
the federal securities laws. Application of the choice of forum provision in Section 8.12 may be limited in some instances by
applicable law. Section 27 of the Exchange Act, creates exclusive federal jurisdiction over all suits brought to enforce any duty
or liability created by the Exchange Act or the rules and regulations thereunder. As a result, Section 8.12 will not apply to
actions arising under the Exchange Act or the rules and regulations thereunder. Section 22 of the Securities Act creates concurrent
jurisdiction for federal and state courts over suits brought to enforce any duty or liability created by the Securities Act or
the rules and regulations thereunder, subject to a limited exception for certain “covered class actions.” The enforceability
of choice of forum provisions in other companies’ charter documents similar to Section 8.12 has been challenged in legal
proceedings, and it is possible that, in connection with any applicable action brought against NTN, a future court could find
the choice of forum provisions contained in Section 8.12 to be inapplicable or unenforceable in such action. If a court were to
find the choice of forum provision contained in our amended and restated bylaws to be inapplicable or unenforceable in an action,
we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business,
financial condition or results of operations.
ITEM
1B. Unresolved Staff Comments
We
do not have any unresolved comments issued by the SEC Staff.
ITEM
2. Properties
We
lease approximately 7,500 square feet of warehouse space in Hilliard, Ohio for equipment storage. The term of that lease expires
in October 2021. We believe that this leased property meets our current needs.
In
June 2020, as part of our efforts to reduce our operating expenses and preserve capital as we continued to seek to mitigate the
substantial negative impact of the pandemic on our business, we terminated the lease for our former corporate headquarters in
Carlsbad, California. When we entered into the lease, we had approximately 86 full-time employees. When we terminated the lease,
we had reduced our headcount to 18 employees, all of whom were working remotely. Currently, all of our employees continue to work
remotely.
ITEM
3. Legal Proceedings
From
time to time, we become subject to legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course
of business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business
operations. Moreover, the results of legal proceedings are difficult to predict. An unfavorable resolution of one or more legal
proceedings could materially adversely affect our business, results of operations, or financial condition. In addition, defending
any claim requires resources, including cash to pay legal fees and expenses, and our limited financial resources could severely
impact our ability to defend any such claim. We are not currently subject to any pending material legal proceedings, except as
described below.
We
and our directors were named as defendants in ten substantially similar actions brought by purported stockholders of ours arising
out of the Merger: Henson v. NTN Buzztime, Inc., No. 1:20-cv-08663-LGS (S.D.N.Y. filed Oct. 16, 2020); Monsour v. NTN
Buzztime, Inc., No. 1:20-cv-08755-LGS (S.D.N.Y. filed Oct. 20, 2020); Amanfo v. NTN Buzztime, Inc., No. 1:20-cv-08747-LGS
(S.D.N.Y. filed Oct. 20, 2020); Carlson v. NTN Buzztime, Inc., No. 1:21-cv-00047-LGS (S.D.N.Y. filed Jan. 4, 2021); Finger
v. NTN Buzztime, Inc., No. 1:21-cv-00728-LGS (S.D.N.Y. filed Jan. 26, 2021); Falikman v. NTN Buzztime, Inc., No. 1:20-cv-05106-EK-SJB
(E.D.N.Y. filed Oct. 23, 2020); Haas v. NTN Buzztime, Inc., No. 3:20-cv-02123-BAS-JLB (S.D. Cal. Oct. 29, 2020); Gallo
v. NTN Buzztime, Inc., No. 3:21-cv-00157-WQH-AGS (S.D. Cal. filed Jan. 28, 2021); Chinta v. NTN Buzztime, Inc., No.
1:20-cv-01401-CFC (D. Del. filed Oct. 16, 2020); and Nicosia v. NTN Buzztime, Inc., No. 1:21-cv-00125-CFC (D. Del. filed
Jan. 30, 2021 ) (collectively, the “Stockholder Actions”). Brooklyn also was named as a defendant in two of the actions
(Chinta and Nicosia). The Stockholder Actions assert claims asserting violations of Sections 14(a) and 20(a) of the Securities
Exchange Act of 1934 and Rule 14a-9 promulgated thereunder. Henson and Monsour assert additional claims for breach
of fiduciary duty. The complaints allege that defendants failed to disclose allegedly material information in the Form S-4 Registration
Statement filed with the SEC on October 2, 2020, including (1) certain details regarding any projections or forecasts we or Brooklyn
may have made, and the analyses performed by our financial advisor, Newbridge Securities Corporation; (2) conflicts concerning
the sales process; and (3) disclosures regarding whether or not we entered into any confidentiality agreements with standstill
and/or “don’t ask, don’t waive” provisions. The complaints allege that these purported failures to disclose
rendered the Form S-4 false and misleading. The complaints request a preliminary and permanent injunction of the Merger; rescission
of the Merger if executed and/or rescissory damages in unspecified amounts; direction to the individual directors to disseminate
a compliant Registration Statement; an accounting by us for all alleged damages suffered; a declaration that certain federal securities
laws have been violated; and costs, including attorneys’ and expert fees and expenses. Process was served in Henson,
Chinta, Amanfo, Falikman, Carlson and Gallo, but not in any of the other Stockholder Actions.
Although plaintiffs request injunctive relief in their complaints, they have not filed motions for such relief.
We
and our directors deny any wrongdoing or liability with respect to the allegations and claims asserted, or which could have been
asserted, in the Stockholder Actions, as we believe
the disclosures set forth in the Form S-4 complied fully with applicable law. Nevertheless,
in order to avoid nuisance, potential expense and delay, and to provide additional information to the our stockholders,
we determined to voluntarily supplement the Form S-4 with further disclosures (the “Supplemental Disclosures”) on
Form 8-K, which we filed with the SEC on February 26, 2021. These Supplemental Disclosures discussed, inter alia, (1) certain
details regarding any projections or forecasts we or Brooklyn may have made, and the analyses performed by our financial advisor,
Newbridge Securities Corporation; and (2) information regarding whether or not we entered into any confidentiality agreements
with standstill and/or “don’t ask, don’t waive” provisions. We believe that as a consequence of the issuance
of the Supplemental Disclosures all claims asserted in the Stockholder Actions have been rendered moot, and have requested that
all plaintiffs in the Stockholder Actions dismiss their claims voluntarily (or immediately inform us if they are not willing to
do so). Since the issuance of the Supplemental Disclosures, the plaintiffs in Henson, Chinta, Monsour, Amanfo,
Carlson and Nicosia have voluntarily dismissed their cases. We expect the plaintiffs in the other Stockholder Actions
to do the same. On March 2, 2021, the court in Haas issued an order to show cause why the case should not be dismissed
for failure to prosecute. Plaintiffs in the Stockholder Actions reserve the right to seek payment by us to their attorneys of
a “mootness fee” in an amount yet to be determined in connection with the issuance of the Supplemental Disclosures.
On
March 5, 2021, we and our directors were named as defendants in a putative class action brought by a purported stockholder in
the Court of Chancery of the State of Delaware, entitled Carlson v. NTN Buzztime, Inc., Case No. 2021-0193- (Del. Ch. filed
Mar. 5, 2021). The action asserts claims for violations of Section 211(c) of the Delaware General Corporation Law and our bylaws
(and a concomitant breach of fiduciary duty), alleging that we failed to conduct an annual meeting of stockholders within thirteen
months of the previous annual meeting of stockholders, which took place on June 7, 2019. Plaintiff is requesting certification
of a class, declaratory relief, injunctive relief to compel an annual meeting of stockholders, and fees and costs. The complaint
does not yet appear to have been served upon any of the defendants. We expect this action will be rendered moot upon our
holding of our special meeting of stockholders on March 15, 2021.
ITEM
4. Mine Safety Disclosures
Not
Applicable.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2020 and 2019
1.
|
Organization
of Company
|
Description
of Business
NTN
Buzztime, Inc. (the “Company”) was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate
name to NTN Communications, Inc. in 1985. The Company changed its name to NTN Buzztime, Inc. in 2005 to better reflect the growing
role of the Buzztime consumer brand.
The
Company delivers interactive entertainment and innovative technology to its partners in a wide range of verticals – from
bars and restaurants to casinos and senior living centers. By enhancing the overall guest experience, the Company believes it
helps its hospitality partners acquire, engage, and retain patrons.
Through
social fun and friendly competition, the Company’s platform creates bonds between our hospitality partners and their patrons,
and between patrons themselves. The Company believes this unique experience increases dwell time, revenue, and repeat business
for venues – and has also created a large and engaged audience which it connects with through its in-venue TV network. Until
the significant disruptions to the restaurant and bar industry resulting from the COVID-19 pandemic, or the pandemic, that began
in March 2020, over 1 million hours of trivia, card, sports and arcade games were played on the Company’s network each month.
Since March 2020, approximately 100,000 hours per month of such games have been played on the network each month.
The
Company generates revenue by charging subscription fees to partners for access to its 24/7 trivia network, by selling and leasing
tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling digital-out-of-home (DOOH) advertising
direct to advertisers and on national ad exchanges, by licensing the Company’s entertainment and trivia content to other
parties, and by providing professional services such as custom game design or development of new platforms on the Company’s
existing tablet form factor. Until February 1, 2020, the Company also generated revenue by hosting live trivia events. The Company
sold all of its assets used to host live trivia events in January 2020. (See Note 4).
As
of December 31, 2020, 1,036 venues subscribed to the Company’s interactive entertainment network and approximately 18% of
its network subscriber venues were affiliated with national and regional restaurant brands. See Note 2 for more information regarding
the impact of the COVID-19 pandemic on these venues and the Company’s subscription revenues.
The
Company owns several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime
trademarks to be among its most valuable assets. These and the Company’s other registered and unregistered trademarks used
in this document are the Company’s property. Other trademarks are the property of their respective owners.
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., NTN Buzztime,
Ltd. and BIT Merger Sub Inc., all of which, other than NTN Canada, Inc. and BIT Merger Sub, Inc., are dormant subsidiaries. Unless
otherwise indicated, references to the Company include its consolidated subsidiaries.
Reclassifications
Certain
reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. These
reclassifications had no effect on previously reported results of operations or retained earnings.
The
negative impact of the COVID-19 pandemic on the restaurant and bar industry was abrupt and substantial, and the Company’s
business, cash flows from operations and liquidity suffered, and continues to suffer, materially as a result. In many jurisdictions,
including those in which the Company has many customers and prospective customers, restaurants and bars were ordered by the government
to shut-down or close all on-site dining operations in the latter half of March 2020. Since then, governmental orders and restrictions
impacting restaurants and bars in certain jurisdictions were eased or lifted as the number of COVID-19 cases decreased or plateaued,
but as jurisdictions began experiencing a resurgence in COVID-19 cases, many jurisdictions reinstated such orders and restrictions,
including mandating the shut-down of bars and the closing of all on-site dining operations of restaurants. The Company has experienced
material decreases in subscription revenue, advertising revenue and cash flows from operations, which the Company expects to continue
for at least as long as the restaurant and bar industry continues to be negatively impacted by the COVID-19 pandemic, and which
may continue thereafter if restaurants and bars seek to reduce their operating costs or are unable to re-open even if restrictions
within their jurisdictions are eased or lifted. For example, at its peak, approximately 70% of the Company’s customers had
their subscriptions to our services temporarily suspended. As of December 31, 2020, approximately 19% of the Company’s customers
remain on subscription suspensions.
The
Company’s consolidated financial statements reflect estimates and assumptions made by management that affect the reported
amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses
during the reporting periods presented. Such estimates and assumptions affect, among other things, the allowance for doubtful
accounts, site equipment to be installed, fixed assets, capitalized software development and right-of-use assets. Events and changes
in circumstances that affect such estimates and assumptions after December 31, 2020, including those resulting from the impacts
of the pandemic, will be reflected in future periods.
3.
|
Merger
Agreement and Asset Purchase Agreement
|
Proposed
Merger with Brooklyn Immunotherapeutics LLC
On
August 12, 2020, the Company entered into an agreement and plan of merger and reorganization (the “Merger Agreement”)
with Brooklyn Immunotherapeutics LLC (“Brooklyn”), a privately-held, biopharmaceutical company focused on exploring
the role that cytokine-based therapy can have in treating patients with cancer. Pursuant to the Merger Agreement, subject to the
satisfaction or waiver of the conditions set forth in the agreement, BIT Merger Sub, Inc., the Company’s wholly-owned subsidiary
formed solely for purposes of carrying out the merger, will merge with and into Brooklyn, with Brooklyn surviving the merger as
a wholly-owned subsidiary of the Company and Brooklyn’s members receiving newly issued shares of the Company’s common
stock in exchange for their ownership interests in Brooklyn (the “Merger”). The Merger, if completed, will result
in a change in control of the Company. If the Merger is completed, the Company expects to change its name to Brooklyn ImmunoTherapeutics,
Inc. and the combined company will focus on Brooklyn’s business of exploring the role that cytokine-based therapy can have
on the immune system in treating patients with cancer. Upon completion of the Merger, the board of directors of the combined company
is expected to consist entirely of individuals designated by Brooklyn and the officers of the combined company are expected to
be members of Brooklyn’s current management team.
If
the Merger is completed, at the effective time of the Merger, Brooklyn’s members will exchange their equity interests in
Brooklyn for shares of the Company’s common stock representing between approximately 94.08% and 96.74% of the outstanding
common stock of the Company immediately following the effective time of the Merger on a fully diluted basis (less a portion of
such shares which will be allocated to Brooklyn’s banker, Maxim, in respect of the success fee owed to it by Brooklyn),
and the Company’s stockholders as of immediately prior to the effective time, will own between approximately 5.92% and 3.26%
of the outstanding common stock of the Company immediately after the effective time of the Merger on a fully diluted basis. The
exact number of shares to be issued in the Merger will be determined pursuant to a formula in the Merger Agreement that takes
into account the amount of Brooklyn’s cash and cash equivalents as of the closing of the Merger and the amount by which
the Company’s net cash is less than zero at the closing.
Proposed
Asset Sale to eGames.com Holdings LLC
When
the Company announced the signing of the Merger Agreement, it also announced that it was continuing to explore the sale of substantially
all of the assets relating to its current business to provide additional capital and allow the combined company following the
closing of the Merger, if it closes, to be in a position to focus exclusively on Brooklyn’s business.
On
September 18, 2020, the Company and eGames.com Holdings LLC (“eGames.com”) entered into an asset purchase agreement
(as amended from time to time, the “APA”) pursuant to which, subject to the terms and conditions thereof, the Company
will sell and assign (the “Asset Sale”) all of its right, title and interest in and to the assets relating to its
current business (the “Purchased Assets”) to eGames.com. The Purchased Assets comprise substantially all of the Company’s
assets. At the closing of the Asset Sale, in addition to assuming specified liabilities of the Company, eGames.com will pay the
Company $2.0 million in cash. In connection with entering into the APA, the sole owner of eGames.com absolutely, unconditionally
and irrevocably guaranteed to the Company the full and prompt payment when due of any and all amounts, from time to time, payable
by eGames.com under the APA.
In
connection with entering into the APA, Fertilemind Management, LLC, an affiliate of eGames.com (“Fertilemind”), on
behalf of eGames.com, made a $1.0 million bridge loan to the Company. On November 19, 2020, the Company, eGames.com and Fertilemind
entered into an omnibus amendment and agreement pursuant to which, among other things, eGames.com agreed to provide, or cause
Fertilemind, on behalf of eGames.com, to provide, an additional $0.5 million bridge loan to the Company on December 1, 2020, and
the parties agreed to increase the interest rate on the $1.0 million bridge loan Fertilemind made to the Company in September
2020 from 8% to 10% effective December 1, 2020. Fertilemind provided the $0.5 million bridge loan to the Company on December 1,
2020. On January 12, 2021, the Company, eGames.com and Fertilemind entered into a second omnibus amendment and agreement pursuant
to which, among other things, eGames.com agreed to provide, or cause Fertilemind, on behalf of eGames.com, to provide an additional
$0.2 million bridge loan to the Company on January 12, 2021. Fertilemind provided the $0.2 million bridge loan to the Company
on January 12, 2021. The principal and accrued interest of each of the loans provided by Fertilemind to the Company will be applied
toward the $2.0 million purchase price at the closing of the Asset Sale.
4.
|
Live
Hosted Trivia Asset Sale
|
On
January 13, 2020, the Company entered into an asset purchase agreement with Sporcle, Inc., a Delaware corporation (“Sporcle”),
pursuant to which the Company agreed to sell to Sporcle all of its assets necessary for Sporcle to conduct the live-hosted knowledge-based
trivia events known as Stump! Trivia and OpinioNation for $1,360,000 in gross proceeds. On the closing date of the transaction
(January 31, 2020), the Company received $1,260,000. The remaining $100,000 was being held back until the one-year anniversary
of the closing date, or January 31, 2021, to satisfy indemnification claims, if any, for which the Company is liable. In August
2020, the Company and Sporcle entered into an agreement and amendment to the asset purchase agreement to change the end of the
indemnification period from January 31, 2021 to August 31, 2020 in exchange for a $40,000 reduction to the $100,000 holdback amount.
On September 1, 2020, the Company received the $60,000 holdback amount. The Company recorded a net gain of approximately $1,225,000
on this asset sale.
5.
|
Going
Concern Uncertainty
|
In
connection with preparing its financial statements as of and for the year ended December 31, 2020, the Company’s management
evaluated whether there are conditions or events, considered in the aggregate, that are known and reasonably knowable that would
raise substantial doubt about the Company’s ability to continue as a going concern through twelve months after the date
that such financial statements are issued. During the year ended December 31, 2020, the Company incurred a net loss of $4,415,000.
As of December 31, 2020, the Company had $777,000 of cash, total debt outstanding of $2,032,000, and negative working capital
of $636,000. The total debt outstanding consists of $532,000 of principal outstanding under the loan the Company received in April
2020 under the Paycheck Protection Program and $1,500,000 of principal outstanding under the loans the Company received in connection
with entering into the APA, as amended, which, if the closing of the Asset Sale occurs, will be applied toward the $2.0 million
purchase price eGames.com will owe the Company at the closing of the Asset Sale. See Note 2 for more information on the Asset
Sale. In November 2020, the Company was informed that approximately $1,093,000 of the $1,625,100 loan under the Paycheck Protection
Program would be forgiven, leaving a principal balance of approximately $532,000. All amounts owing under the loan and security
agreement with Avidbank were paid on December 31, 2020, when the term loan matured, and Avidbank released its security interest
in all of the Company’s existing personal property.
As
a result of the impact of the COVID-19 pandemic on the Company’s business and taking into account its current financial
condition and its existing sources of projected revenue and cash flows from operations, the Company believes it will have sufficient
cash resources to pay forecasted cash outlays only through mid-March 2021, assuming the Company is able to continue to successfully
manage its working capital deficit by managing the timing of payments to its vendors and other third parties.
Based
on the factors described above, management concluded that there is substantial doubt regarding the Company’s ability to
continue as a going concern through the twelve-month period subsequent to the issuance date of these financial statements. The
Company needs to complete the Merger or the Asset Sale or raise capital to meet its debt service obligations and fund its working
capital needs. The Company currently has no arrangements for such capital and no assurances can be given that it will be able
to raise such capital when needed, on acceptable terms, or at all.
The
accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. The accompanying consolidated financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result from uncertainty related to the Company’s ability to continue
as a going concern.
6.
|
Summary
of Significant Accounting Policies and Estimates
|
Consolidation—The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates—Preparing the Company’s consolidated financial statements requires it to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to deferred costs and revenues;
depreciation of fixed assets; allowance for doubtful accounts; site equipment to be installed; stock-based compensation assumptions;
impairment of fixed assets, software development costs, intangible assets and goodwill; contingencies, including the reserve for
sales tax inquiries; and the provision for income taxes, including the valuation allowance. The Company bases its estimates on
a combination of historical experience and various other assumptions that it believes are reasonable under the circumstances.
Actual results may differ materially from these estimates.
Cash
and Cash Equivalents—The Company 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.
Assessments
of Functional Currencies—The United States dollar is the Company’s functional currency, except for its operations
in Canada where the functional currency is the Canadian dollar. The financial position and results of operations of the Canadian
subsidiary is measured using the foreign subsidiary’s local currency as the functional currency. In accordance with Accounting
Standards Codification (“ASC”) No. 830, Foreign Currency Matters, revenues and expenses of its foreign subsidiary
have been translated into U.S. dollars at weighted average exchange rates prevailing during the period. Assets and liabilities
have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are
recorded as a separate component of shareholders’ equity, unless there is a sale or complete liquidation of the underlying
foreign investments. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of operations as incurred. For the years ended December
31, 2020 and 2019, the Company recorded $16,000 and $48,000 of foreign currency transaction losses, respectively, due to settlements
of intercompany transactions, re-measurement of intercompany balances with its Canadian subsidiary and other non-functional currency
denominated transactions, which are included in other income (expense) in the accompanying consolidated statements of operations.
Fluctuations in the rate of exchange between the U.S. dollar and Canadian dollar may affect the Company’s results of operations
and period-to-period comparisons of its operating results. The Company does not currently engage in hedging or similar transactions
to reduce these risks. For the year ended December 31, 2020, the net impact to the Company’s results of operations from
the effect of exchange rate fluctuations was immaterial.
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 consists of fixed assets related to the Company’s tablet
platform that have not yet been placed in service and are stated at cost. Such equipment includes the Classic Playmaker, tablets,
other associated electronics and the computers located at customer’s sites. These assets remain in site equipment to be
installed until installed at the Company’s customer sites, at which point, the cost of the deployed site equipment is reclassified
to fixed assets and depreciated over the estimated useful life. The Company evaluates the recoverability of site equipment to
be installed for impairment whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable.
Recoverability is measured by comparing the carrying amount of an asset or asset group to estimated undiscounted future net cash
flows expected to be generated. If the carrying amount of the asset or asset group is not recoverable on an undiscounted cash
flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined
through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent
appraisals, as considered necessary. During the year ended December 31, 2020 and 2019, the Company recognized a loss of approximately
$307,000 and $591,000, respectively, for the disposition of site equipment to be installed for which the Company did not expect
to generate future cash flows.
Fixed
Assets — Fixed assets are recorded at cost. Equipment under finance leases is recorded at the present value of future
minimum lease payments. The Company evaluates the recoverability of its fixed assets for impairment whenever events or circumstances
indicate that the carrying amounts of such assets may not be recoverable. If the carrying amount of the asset or asset group is
not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds
its fair value. During the year ended December 31, 2020, the Company recognized a loss of approximately $54,000 of fixed assets
related to deployed site equipment in the ordinary course of business. As discussed further in Note 16, the Company terminated
its lease for its corporate headquarters and vacated the facility as of June 30, 2020. As a result, during the year ended December
31, 2020, the Company wrote-off approximately $890,000 of unamortized tenant improvement allowance that is recorded as part of
the gain on termination of lease, as well as approximately $87,000 in leasehold improvement assets and $197,000 in furniture and
fixtures and the Company’s vehicle. During the year ended December 31, 2019, total loss for the disposition of fixed assets
was approximately $127,000.
Depreciation
of fixed assets is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold
improvements and fixed assets under finance leases is computed using the straight-line method over the shorter of the estimated
useful lives of the assets or the lease period.
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. Such equipment
is depreciated over one to three years based on the shorter of the contractual finance lease period or the estimated useful life,
which considers anticipated technology changes. Machinery and equipment are depreciated over three to five years. If the Company’s
fixed assets turn out to have longer lives, on average, than estimated, then its depreciation expense would be significantly reduced
in those future periods. Conversely, if the fixed assets turn out to have shorter lives, on average, than estimated, then its
depreciation expense would be significantly increased in those future periods. As of December 31, 2020, the Company determined
there were no changes to the estimated useful lives for any of its assets.
Goodwill—Goodwill
represents the excess of costs over fair value of assets of businesses acquired (reporting unit). Goodwill and intangible assets
acquired in a purchase combination determined to have an indefinite useful life are not amortized, but instead are assessed annually,
or at interim periods, for impairment based on qualitative factors to determine whether the existence of events or circumstances
leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount.
Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial
performance and other relevant events. If after assessing the totality of events or circumstances the Company determines it is
more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company must perform
the one-step impairment test outlined in ASC No. 350, Intangibles – Goodwill and Other.
Revenue
Recognition—The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”)
No. 606, Revenue from Contracts with Customers.
The
Company generates revenue by charging subscription fees to partners for access to its 24/7 trivia network, by selling and leasing
tablet and hardware equipment for custom usage beyond trivia/entertainment, by selling DOOH advertising direct to advertisers
and on national ad exchanges, by licensing its entertainment and trivia content to other entities, and by providing professional
services such as custom game design or development of new platforms on its existing tablet form factor. Until February 1, 2020,
the Company also generated revenue from hosting live trivia events. The Company sold all of its assets used to host live trivia
events in January 2020.
In
general, when multiple performance obligations are present in a customer contract, the transaction price is allocated to the individual
performance obligation based on the relative stand-alone selling prices, and the revenue is recognized when or as each performance
obligation has been satisfied. Discounts are treated as a reduction to the overall transaction price and allocated to the performance
obligations based on the relative stand-alone selling prices. All revenues are recognized net of sales tax collected from the
customer.
ASC
No. 606 specifies certain criteria that an arrangement with a customer must have in order for a contract to exist for purposes
of revenue recognition, one of which is that it must be probable that the Company will collect the consideration to which it will
be entitled under the contract. As a result of the impact that the COVID-19 pandemic has had, and continues to have, on the Company’s
customers, the Company determined that due to the uncertainty of collectability of the subscription fees for certain customers,
the Company’s arrangement with those customers no longer meets all the criteria needed for a contract to exist for revenue
recognition purposes. Therefore, the Company did not recognize revenue for these customers and fully reserved for accounts receivable
in the allowance for doubtful accounts. The Company only recognized revenue for the arrangements that continued to meet the contract
criteria, including the criteria that collectability was probable.
Revenue
Streams
The
Company disaggregates revenue by material revenue stream as follows:
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
% of Total
Revenue
|
|
|
$
|
|
|
% of Total
Revenue
|
|
Subscription revenue
|
|
|
4,882,000
|
|
|
|
84.2
|
%
|
|
|
14,278,000
|
|
|
|
72.1
|
%
|
Hardware revenue
|
|
|
426,000
|
|
|
|
7.3
|
%
|
|
|
2,350,000
|
|
|
|
11.9
|
%
|
Other revenue
|
|
|
492,000
|
|
|
|
8.5
|
%
|
|
|
3,178,000
|
|
|
|
16.0
|
%
|
Total
|
|
|
5,800,000
|
|
|
|
100.0
|
%
|
|
|
19,806,000
|
|
|
|
100.0
|
%
|
The
following describes how the Company recognizes revenue under ASC No. 606.
Subscription
Revenue - Prior to the COVID-19 pandemic, the Company recognized the recurring subscription fees it received for its services
over time as customers received and consumed the benefits of such services, the Company’s equipment to access the Company’s
content and the installation of the equipment. In general, customers pay for the subscription services during the month in which
they receive the services. Due to the timing of providing the services and receiving payment for the services, the Company does
not record any unbilled contract asset. Occasionally, a customer will prepay up to one year of services, in which case, the Company
will record deferred revenue on the balance sheet related to such prepayment and will recognize the revenue over the time the
customer receives the Company’s services. Revenue from installation services is also recorded as deferred revenue and recognized
over the longer of the contract term and the expected term of the customer relationship using the straight-line method. The Company
has certain contingent performance obligations with respect to repairing or replacing equipment and will recognize any revenue
related to the performance of such obligations at the point in time the Company performs them.
As
discussed above, as a result of the impact that the COVID-19 pandemic has had, and continues to have, on the Company’s customers,
the Company determined that due to the uncertainty of collectability of the subscription fees for certain customers, the Company’s
arrangement with those customers no longer meets all the criteria needed for a contract to exist for revenue recognition purposes.
Therefore, the Company did not recognize revenue for these customers and fully reserved for accounts receivable in the allowance
for doubtful accounts.
Costs
associated with installing the equipment are considered direct costs. Costs associated with sales commissions are considered incremental
costs for obtaining the contract because such costs would not have been incurred without obtaining the contract. The Company expects
to recover both costs through future fees it collects and both costs are recorded in deferred costs on the balance sheet and amortized
on a straight-line basis. For installation costs that are of an amount that is less than or equal to the deferred installation
revenue for the related contract, the amortization period approximates the longer of the contract term and the expected term of
the customer relationship. For any excess costs that exceed the deferred revenue, the amortization period of the excess cost is
the initial term of the contract, which is generally one to two years because the Company can still recover that excess cost in
the initial term of the contract. The Company amortizes commissions over the longer of the contract term and the expected term
of the customer relationship.
Sales-type
Lease Revenue – For certain customers that lease equipment under sale-type lease arrangements, the Company recognizes
revenue in accordance with ASC No. 842, Leases. Such revenue is recognized at the time of installation based on the net
present value of the leased equipment. Interest income is recognized over the life of the lease for customers who have remaining
lease payments to make. In the event a customer under a sales-type lease arrangement prepays for the lease in full prior to receiving
the equipment under the lease, such amounts are recorded in deferred revenue and recognized as revenue once the equipment has
been installed and activated at the customer’s location. The cost of the leased equipment is recognized at the same time
as the revenue. The Company has not recognized revenue under sales-type lease arrangements after the year ended December 31, 2019
and does not expect to in the future.
Equipment
Sales – The Company recognizes revenue from equipment sales at a point in time, which is when control has been transferred
to the customer, the customer holds legal title and the customer has significant risks and rewards of ownership. Generally, the
Company has determined that any customer acceptance provisions of the equipment is a formality, as the Company has historically
demonstrated the ability to produce and deliver similar equipment. If the Company sells equipment with unique specifications,
then customer control of the equipment will occur upon customer acceptance as defined in the contract, and revenue will be recognized
at that time. Costs associated with the equipment sold is recognized at the same point in time as the revenue. The Company expects
to recognize an immaterial amount of equipment sales revenue in the future.
Advertising
Revenue – The Company recognizes advertising revenue either over the time the advertising campaign airs in its customers’
locations or at a point in time by impression. For advertising campaigns that are airing over a specific period of time (regardless
of number of impressions), the Company uses the time elapsed output method to measure its progress toward satisfying the performance
obligation. When the Company contracts with an advertising agent, the Company shares in the advertising revenue generated with
that agent. In these cases, the Company generally recognizes revenue on a net basis, as the agent typically has the responsibility
for the relationship with the advertiser and the credit risk. When the Company contracts directly with the advertiser, it will
recognize the revenue on a gross basis and will recognize any revenue share arrangement it has with a third party as a direct
expense, as the Company has the responsibility for the relationship with the advertiser and the credit risk. Generally, there
is no unbilled revenue associated with the Company’s advertising activities.
Content
Licensing – The Company licenses content (trivia packages) to a certain customer, who in turn installs the content on
its equipment that it sells to its customers. The content license is characterized as a “right to use intellectual property
as it exists at the point in time at which the license is granted,” meaning the Company is not expected to undertake activities
that affect the intellectual property or any such activities would not affect the intellectual property the customer is using.
The content license is considered to be on consignment, and the Company retains title of the licensed content throughout the license
period. The Company’s customer has no obligation to pay for the licensed content until the customer sells and installs the
content to its customer. Accordingly, the Company recognizes revenue at the point in time when such installation occurs. The Company
recognizes costs related to developing the content during the period incurred.
Live-hosted
Trivia Revenue – As of February 1, 2020, the Company no longer has revenue related to hosting live- trivia events as
a result of the sale of all of the Company’s assets used to host live trivia events in January 2020. The Company recognized
revenue from hosting live-trivia events at a point in time, which is when the event took place. Some customers hosted their own
trivia events and the Company provided the game materials. In those cases, the Company recognized the revenue at the point in
time the Company sent the game materials to the customer. The Company recognized related costs at the same point in time the revenue
was recognized. Generally, there was no unbilled revenue or deferred revenue associated with live-hosted trivia events.
Professional
Development Revenue – Depending on the type of development work the Company is performing, the Company will recognize
revenue, and associated costs, at the point in time when the Company satisfies each performance obligation, which is generally
when the customer can direct the use of, and obtain substantially all of the remaining benefits of the goods or service provided.
For services provided over time, the corresponding revenue is generally recognized over the time the Company provides such services.
Any payments received before satisfying the performance obligations are recorded as deferred revenue and recognized as revenue
when or as such obligations are satisfied. The Company does not have unbilled revenue assets associated with professional development
services.
Revenue
Concentrations
The
Company’s customers predominantly range from small independently operated bars and restaurants to bars and restaurants operated
by national chains. This results in diverse venue sizes and locations. During 2019, the Company’s agreements with Buffalo
Wild Wings corporate-owned restaurants and most of its franchisees ended in November 2019 in accordance with their terms. As a
result, the Company ended 2019 with 1,440 sites. As of December 31, 2020, the number of sites declined to 1,036 venues, primarily
due to customers terminating their subscriptions or going out of business relating to the effects of the COVID-19 pandemic on
their business.
The
table below sets forth the approximate amount of revenue the Company generated from Buffalo Wild Wings corporate-owned restaurants
and its franchisees during the years ended December 31, 2020 and 2019, and the percentage of total revenue that such amount represents
for such periods:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Buffalo Wild Wings revenue
|
|
$
|
199,000
|
|
|
$
|
6,820,000
|
|
Percent of total revenue
|
|
|
3
|
%
|
|
|
34
|
%
|
As
of December 31, 2020 and 2019, approximately $112,000 and $158,000, respectively, was included in gross accounts receivable from
Buffalo Wild Wings corporate-owned restaurants and its franchisees.
The
geographic breakdown of the Company’s revenue for the years ended December 31, 2020 and 2019 were as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
5,480,000
|
|
|
$
|
19,153,000
|
|
Canada
|
|
|
320,000
|
|
|
|
653,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,800,000
|
|
|
$
|
19,806,000
|
|
Contract
Assets and Liabilities
The
Company enters into contracts and may recognize contract assets and liabilities that arise from these contracts. The Company recognizes
revenue and corresponding cash for customers who auto pay via their bank account or credit card, or the Company recognizes a corresponding
accounts receivable for customers the Company invoices. The Company may receive consideration from customers, per the terms of
the contract, prior to transferring goods or services to the customer. In such instances, the Company records a contract liability
and recognizes the contract liability as revenue when all revenue recognition criteria are met. The table below shows the balance
of contract liabilities as of January 1, 2020 and December 31, 2020, including the change during the period.
|
|
Deferred
Revenue
|
|
Balance at January 1, 2020
|
|
$
|
460,000
|
|
New performance obligations
|
|
|
218,000
|
|
Revenue recognized
|
|
|
(600,000
|
)
|
Balance at December 31, 2020
|
|
|
78,000
|
|
Less non-current portion
|
|
|
(2,000
|
)
|
Current portion at December 31, 2020
|
|
$
|
76,000
|
|
The
Company capitalizes installation costs associated with installing equipment in a customer location and sales commissions as a
deferred cost asset on the balance sheet. For installation costs that are of an amount that is less than or equal to the deferred
installation revenue for the related contract, the amortization period approximates the longer of the contract term and the expected
term of the customer relationship. For any excess installation costs that exceed the deferred revenue, the amortization period
of the excess cost is the initial term of the contract, which is generally one to two years because the Company can still recover
that excess cost in the initial term of the contract. The Company amortizes commission costs over the longer of the contract term
and the expected term of the customer relationship. The table below shows the balance of the unamortized installation cost and
sales commissions as of January 1, 2020 and December 31, 2020, including the change during the period.
|
|
Installation
Costs
|
|
|
Sales
Commissions
|
|
|
Total
Deferred Costs
|
|
Balance at January 1, 2020
|
|
$
|
187,000
|
|
|
$
|
87,000
|
|
|
$
|
274,000
|
|
Incremental costs deferred
|
|
|
98,000
|
|
|
|
70,000
|
|
|
|
168,000
|
|
Deferred costs recognized
|
|
|
(233,000
|
)
|
|
|
(137,000
|
)
|
|
|
(370,000
|
)
|
Balance at December 31, 2020
|
|
|
52,000
|
|
|
|
20,000
|
|
|
|
72,000
|
|
Research
and Development— Research and development costs, which include the cost of equipment the Company is evaluating for future
integration or use, are expensed as incurred. For the years ended December 31, 2020 and 2019, research and developments costs
totaled $2,000 and $26,000, respectively, and are included in selling, general and administrative expense.
Software
Development Costs—The Company capitalizes costs related to developing certain software products in accordance with ASC
No. 350. The Company recognizes costs related to interactive programs on a straight-line basis over the programs’ estimated
useful lives, generally two to three years. Amortization expense relating to capitalized software development costs totaled $551,000
and $519,000 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, approximately $123,000
and $177,000, respectively, of capitalized software costs were not subject to amortization as the development of various software
projects was not complete.
The
Company performed its annual review of software development projects for the years ended December 31, 2020 and 2019, and determined
to abandon various software development projects that the Company concluded were no longer a current strategic fit or for which
it determined that the marketability of the content had decreased due to obtaining additional information regarding the specific
industry for which the content was intended. As a result, for the year ended December 31, 2020 and 2019, the Company recognized
an impairment charge of $248,000 and $550,000, respectively. Impairment of capitalized software is shown separately on the Company’s
consolidated statement of operations.
Advertising
Costs – There were no marketing-related advertising costs for the either of the years ended December 31, 2020 or 2019.
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 records stock-based compensation in accordance with ASC No. 718, Compensation – Stock
Compensation. 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 is recognized using the straight-line single-option method.
Income
Taxes—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC
No. 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements
as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not”
criterion is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.
The Company reviewed its tax positions and determined that an adjustment to the tax provision is not considered necessary nor
is a reserve for income taxes required.
Earnings
Per Share—Basic and diluted loss per common share have been computed by dividing the losses applicable to common stock
by the weighted average number of common shares outstanding. The Company’s basic and fully diluted earnings per share (“EPS”)
calculation are the same since the increased number of shares that would be included in the diluted calculation from assumed exercise
of common stock equivalents would be anti-dilutive to the net loss in each of the years shown in the consolidated financial statements.
Segment
Reporting—In accordance with ASC No. 280, Segment Reporting, the Company has determined that it operates as one
operating segment. Decisions regarding the Company’s overall operating performance and allocation of its resources are assessed
on a consolidated basis.
Recent
Accounting Pronouncements
In
December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2019-12, Income Taxes (Topic
740) – Simplifying the Accounting for Income Taxes. This ASU enhances and simplifies various aspect of the income tax
accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business
combination, ownership changes in investments, methodology for calculating income taxes in an interim period when a year-to-date
loss exceeds the anticipated loss for the year and interim-period accounting for enacted changes in tax law. The amendment is
effective for public companies with fiscal years beginning after December 15, 2020, (which was January 1, 2021 for the Company);
early adoption is permitted. The Company does not expect that the adoption of this accounting standard update to have a material
impact on its consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current
guidance requiring recognition of credit losses when it is probable that a loss has been incurred. The ASU requires an entity
to establish an allowance for estimated credit losses on financial assets, including trade and other receivables, at each reporting
date. This ASU will result in earlier recognition of allowances for losses on trade and other receivables and other contractual
rights to receive cash. For smaller reporting companies, the effective date for this standard has been delayed and will be effective
for fiscal years beginning after December 15, 2022 (which will be January 1, 2023 for the Company). The Company is evaluating
the impact that the adoption of this accounting standard update will have on its consolidated financial statements.
At
the commencement date of the Company’s lease for its corporate headquarters on December 1, 2018, the Company’s primary
lender, Avidbank, issued a $250,000 letter of credit to the lessor as security, which amount was reduced by $50,000 to $200,000
on December 1, 2019 and was to be reduced by the same amount December 1 of each year thereafter, provided there has been no default
under the lease. Avidbank required the Company to deposit $250,000 in a restricted cash account maintained with the bank, which
amount was and would be reduced as the amount required under the letter of credit is reduced. The Company recorded the $250,000
deposit as restricted cash on its balance sheet, with $50,000 plus any earned interest being recorded in short-term restricted
cash and the balance being recorded in long-term restricted cash.
In
June 2020, the Company terminated its lease for its corporate headquarters, and as part of the consideration to the lessor for
the early least termination, the lessor received the $200,000 of restricted cash provided for under the letter of credit in July
2020. (See Note 16 for more information on the lease termination.)
Fixed
assets are recorded at cost and consist of the following at December 31, 2020 and 2019:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Site equipment
|
|
$
|
7,830,000
|
|
|
$
|
8,856,000
|
|
Machinery and equipment
|
|
|
1,423,000
|
|
|
|
1,570,000
|
|
Furniture and fixtures
|
|
|
-
|
|
|
|
314,000
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
1,240,000
|
|
Vehicle
|
|
|
-
|
|
|
|
15,000
|
|
|
|
|
9,253,000
|
|
|
|
11,995,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
(8,751,000
|
)
|
|
|
(9,173,000
|
)
|
Total
|
|
$
|
502,000
|
|
|
$
|
2,822,000
|
|
Depreciation
expense totaled $1,188,000 and $2,358,000 for the years ended December 31, 2020 and 2019, respectively.
The
geographic breakdown of the Company’s long-term tangible assets for the last two fiscal years were as follows:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
487,000
|
|
|
$
|
2,760,000
|
|
Canada
|
|
|
15,000
|
|
|
|
62,000
|
|
Total fixed assets
|
|
$
|
502,000
|
|
|
$
|
2,822,000
|
|
The
Company’s goodwill balance of $696,000 as of December 31, 2019 related to the excess of costs over the fair value of assets
the Company acquired in 2003 related to its Canadian business (the “Reporting Unit”). In the Company’s evaluation
of impairment indicators as of March 31, 2020, it determined that the uncertainty relating to the impact of the COVID-19 pandemic
on the Reporting Unit’s future operating results represented an indicator of impairment. Accordingly, the Company compared
the estimated fair value of the Reporting Unit to its carrying value at March 31, 2020, determined that a full impairment loss
was warranted and recognized an impairment charge of $662,000 for the three months ended March 31, 2020. No further evaluations
are necessary after March 31, 2020.
In
addition to the impairment loss recognized, fluctuations in the amount of goodwill shown on the accompanying balance sheets can
occur due to changes in the foreign currency exchange rates used when translating NTN Canada’s financial statement from
Canadian dollars to US dollars during consolidation. The following table shows the changes in the carrying amount of goodwill
for the year ended December 31, 2020.
Goodwill balance at January 1, 2020
|
|
$
|
696,000
|
|
Activity for the three months ended March 31, 2020
|
|
|
|
|
Effects of foreign currency
|
|
|
(34,000
|
)
|
Goodwill impairment
|
|
|
(662,000
|
)
|
Goodwill balance at December 31, 2020
|
|
$
|
-
|
|
10.
|
Fair
Value of Financial Instruments
|
The
carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities
approximate fair value due to the short maturity of these instruments. The carrying value of the Company’s debt approximates
fair value as interest rates approximate market rates for similar types of borrowing arrangements.
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.
During
the year ended December 31, 2020, there were no assets or liabilities that were measures at fair value on a recurring or non-recurring
basis. There were no transfers between fair value measurement levels during the year ended December 31, 2020.
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.
12.
|
Basic
and Diluted Earnings Per Common Share
|
Basic
net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period,
without consideration of potential common shares. Diluted net loss per share is calculated by dividing net loss by the weighted-average
number of common shares outstanding plus potential common shares. Stock options, restricted stock units, and other convertible
securities are considered potential common shares and are included in the calculation of diluted net loss per share using the
treasury method when their effect is dilutive. Options, restricted stock units and convertible preferred stock representing approximately
201,000 and 210,000 shares of common stock were excluded from the computations of diluted net loss per common share for the years
ended December 31, 2020 and 2019, respectively, as their effect was anti-dilutive.
Equity
Incentive Plans
The
Company’s stock-based compensation plans include the NTN Buzztime, Inc. 2019 Performance Incentive Plan (the “2019
Plan”), the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan (the “2010 Plan”) and the NTN Buzztime,
Inc. 2014 Inducement Plan (the “2014 Plan”). The Company’s board of directors designated its nominating and
corporate governance/compensation committee as the administrator of the foregoing plans (the “Plan Administrator”).
Among other things, the Plan Administrator selects persons to receive awards and determines the number of shares subject to each
award and the terms, conditions, performance measures, if any, and other provisions of the award.
At
the Company’s 2019 Annual Meeting of Stockholders, the Company’s stockholders approved the 2019 Plan, which provides
for the issuance of up to 240,000 shares of Company common stock. Awards the under the 2019 Plan may be granted to officers, directors,
employees and consultants of the Company. Stock options granted under the 2019 Plan may either be incentive stock options or nonqualified
stock options, 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, 2020, there were stock options to purchase approximately 2,000 shares of common stock and
82,000 restricted stock units outstanding under the 2019 Plan.
As
a result of stockholder approval of the 2019 Plan, no future grants will be made under the 2010 Plan. All awards that are outstanding
under the 2010 Plan will continue to be governed by the 2010 Plan until they are exercised or expire in accordance with the terms
of the applicable award or the 2010 Plan. As of December 31, 2020, there were stock options to purchase approximately 24,000 shares
of common stock and 9,000 restricted stock units outstanding under the 2010 Plan.
The
2014 Plan provides for the grant of up to 85,000 share-based awards to a new employee as an inducement material to the new employee
entering into employment with the Company and expires in September 2024. As of December 31, 2020, there were no stock options
or restricted stock units outstanding under the 2014 Plan.
Stock-Based
Compensation Valuation Assumptions
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 2019 under the ASC No. 718 requirements:
|
|
2019
|
|
Weighted average risk-free rate
|
|
|
1.68
|
%
|
Weighted average volatility
|
|
|
105.53
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Expected term
|
|
|
5.37 years
|
|
There
were no stock option grants issued during the year ended December 31, 2020.
The
Company estimates forfeitures, based on historical activity, at the time of grant and revised if necessary in subsequent periods
if actual forfeiture rates differ from those estimates. Stock-based compensation expense for employees during the years ended
December 31, 2020 and 2019 was $199,000 and $206,000, 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 activities for the years ended December 31, 2020 and 2019:
|
|
Outstanding
Options
|
|
|
Weighted
Average Exercise
Price per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate Intrinsic
Value
|
|
Outstanding January 1, 2019
|
|
|
147,000
|
|
|
$
|
18.20
|
|
|
|
6.08
|
|
|
$
|
-
|
|
Granted
|
|
|
3,000
|
|
|
|
3.15
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(6,000
|
)
|
|
|
13.32
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(2,000
|
)
|
|
|
6.24
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2019
|
|
|
142,000
|
|
|
|
18.26
|
|
|
|
5.14
|
|
|
|
-
|
|
Cancelled
|
|
|
(115,000
|
)
|
|
|
17.55
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(1,000
|
)
|
|
|
8.09
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2020
|
|
|
26,000
|
|
|
$
|
21.76
|
|
|
|
4.56
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable at December 31, 2020
|
|
|
26,000
|
|
|
$
|
21.76
|
|
|
|
4.56
|
|
|
$
|
-
|
|
The
per-share weighted average grant-date fair value of stock options granted during the year ended December 31, 2019 and $2.49. There
were no stock options granted during the year ended December 31, 2020.
As
of December 31, 2020, all stock options were fully vested and there was no unamortized stock based compensation expense remaining.
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 (“NOLs”), a full valuation allowance has been recorded
related to the tax benefit for non-qualified stock options.
Restricted
Stock Unit Activity
Outstanding
restricted stock units (“RSUs”) are settled in an equal number of shares of common stock on the vesting date of the
award. A stock unit award is settled only to the extent vested. Vesting generally requires the continued employment or service
by the award recipient through the respective vesting date. Because RSUs are settled in an equal number of shares of common stock
without any offsetting payment by the recipient, the measurement of cost is based on the quoted market price of the stock at the
measurement date, which is the grant date. During the years ended December 31, 2020 and 2019, the Company granted approximately
172,000 and 77,000 RSUs, respectively. The weighted average grant date fair value of the restricted stock units awarded during
the years ended December 31, 2020 and 2019 was $2.51 and $3.35, respectively.
During
the year ended December 31, 2019, 30,000 of the 77,000 RSUs granted for the period were awarded as a performance-based award granted
to the Company’s former chief executive officer in connection with his resignation. The award would have vested in full
upon the effective date of a change in control transaction in which an individual, entity or group acquired all of the Company’s
then-outstanding equity interests on or before March 17, 2020, or in which an individual, entity or group acquired 51% of our
then-outstanding equity interests on or before March 17, 2020, and then that same individual, entity or group acquired the remaining
equity so that it held all of the Company’s then-outstanding equity interests on or before June 17, 2020. Continuing service
was not required for vesting to occur. Because a change in control is not considered probable until a change in control occurs,
and because the change in control did not occur as discussed above, the Company did not recognize stock compensation expense on
this award and this award expired unvested.
In
connection with the resignation of the Company’s former chief executive officer, the vesting of 10,000 of his RSUs was accelerated,
5,000 in September 2019 and 5,000 in October 2019. The modification of this award resulted in the Company recognizing stock compensation
expense for the accelerated vesting of RSUs in the period in which the accelerated vesting occurred.
With
the exception of the performance-based award and the acceleration of vesting of RSUs discussed above, RSUs typically vest over
a period of two to three years, generally in monthly or quarterly increments. Some awards may have an initial cliff period of
six months before the monthly vesting begins. All outstanding RSUs as of December 31, 2020 are subject to accelerated vesting
in the event of a change in control.
The
following table summarizes restricted stock unit activity for the years ended December 31, 2020 and 2019:
|
|
Outstanding
Restricted Stock Units
|
|
|
Weighted
Average Fair Value per Share
|
|
January 1, 2019
|
|
|
61,000
|
|
|
$
|
4.94
|
|
Granted
|
|
|
77,000
|
|
|
|
3.35
|
|
Released
|
|
|
(38,000
|
)
|
|
|
4.09
|
|
Canceled
|
|
|
(43,000
|
)
|
|
|
4.17
|
|
December 31, 2019
|
|
|
57,000
|
|
|
$
|
3.57
|
|
Granted
|
|
|
172,000
|
|
|
|
2.51
|
|
Released
|
|
|
(58,000
|
)
|
|
|
3.05
|
|
Cancelled
|
|
|
(80,000
|
)
|
|
|
2.65
|
|
December 31, 2020
|
|
|
91,000
|
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
|
Balance expected to vest at December 31, 2020
|
|
|
78,000
|
|
|
|
|
|
Under
the 2010 Plan, in lieu of paying cash to satisfy withholding taxes due upon the settlement of vested restricted stock units, an
employee may elect to have shares of common stock withheld that would otherwise be issued at settlement, the value of which is
equal to the amount of withholding taxes payable. During the years ended December 31, 2020 and 2019, approximately 58,000 and
38,000 restricted stock units vested and were settled, respectively, and as a result of employees electing to satisfy applicable
withholding taxes by having the Company withhold shares, approximately 42,000 and 26,000 shares of common stock were issued, respectively.
Cumulative
Convertible Preferred Stock
The
Company has authorized 156,000 shares of preferred stock, all of which is designated as Series A Cumulative Convertible Preferred
Stock (the “Series A Preferred Stock”), and all of which were issued and outstanding as of December 31, 2020 and 2019.
The
Series A Preferred Stock provides for a cumulative annual dividend of $0.10 per share, payable in semi-annual installments in
June and December. Dividends may be paid in cash or with shares of common stock. The Company paid approximately $16,000 in cash
for payment of dividends in each of the years ended December 31, 2020 and 2019.
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. At
December 31, 2020, the conversion rate was 1.8563 and, based on that conversion rate, one share of Series A Convertible Preferred
Stock would have converted into approximately 0.54 shares of common stock, and all the outstanding shares of the Series A Convertible
Preferred Stock would have converted into approximately 84,000 shares of common stock in the aggregate. There were no conversions
during either of the years ended December 31, 2020 and 2019. There is no mandatory conversion term, date or any redemption features
associated with the Series A Preferred Stock. The conversion rate will adjust under the following circumstances:
|
1.
|
If
the Company (a) pays a dividend or makes a distribution in shares of its common stock, (b) subdivides its outstanding shares
of common stock into a greater number of shares, (c) combines its outstanding shares of common stock into a smaller number
of shares, or (d) issues by reclassification of its shares of common stock any shares of its common stock (other than a change
in par value, or from par value to no par value, or from no par value to par value), then the conversion rate in effect immediately
prior to the applicable event will be adjusted so that the holders of the Series A Convertible Preferred Stock will be entitled
to receive the number of shares of common stock which they would have owned or have been entitled to receive immediately following
the happening of the event, had the Series A Convertible Preferred Stock been converted immediately prior to the record or
effective date of the applicable event.
|
|
|
|
|
2.
|
If
the outstanding shares of the Company’s common stock are reclassified (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a subdivision, combination or stock dividend),
or if the Company consolidates with or merge into another corporation and the Company is not the surviving entity, or if the
Company sells all or substantially all of its property, assets, business and goodwill, then the holders of the Series A Convertible
Preferred Stock will thereafter be entitled upon conversion to the kind and amount of shares of stock or other equity securities,
or other property or assets which would have been receivable by such holders upon such reclassification, consolidation, merger
or sale, if the Series A Convertible Preferred Stock had been converted immediately prior thereto.
|
|
|
|
|
3.
|
If
the Company issues common stock without consideration or for a consideration per share less than the then applicable Equivalent
Preference Amount (as defined below), then the Equivalent Preference Amount will immediately be reduced to the amount determined
by dividing (A) an amount equal to the sum of (1) the number of shares of common stock outstanding immediately prior to such
issuance multiplied by the Equivalent Preference Amount in effect immediately prior to such issuance and (2) the consideration,
if any, received by the Company upon such issuance, by (B) the total number of shares of common stock outstanding immediately
after such issuance. The “Equivalent Preference Amount” is the value that results when the liquidation preference
of one share of Series A Convertible Preferred Stock (which is $1.00) is multiplied by the conversion rate in effect at that
time; thus the conversion rate applicable after the adjustment in the Equivalent Preference Amount as described herein will
be the figure that results when the adjusted Equivalent Preference Amount is divided by the liquidation preference of one
share of Series A Convertible Preferred Stock.
|
For
each of the years ended December 31, 2020 and 2019, current tax provisions and current deferred tax provisions were recorded as
follows:
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
(14,000
|
)
|
|
|
(25,000
|
)
|
Foreign
|
|
|
5,000
|
|
|
|
2,000
|
|
|
|
|
(9,000
|
)
|
|
|
(23,000
|
)
|
Deferred Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(12,000
|
)
|
|
|
2,000
|
|
Foreign
|
|
|
27,000
|
|
|
|
(6,000
|
)
|
|
|
|
15,000
|
|
|
|
(4,000
|
)
|
Total Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(26,000
|
)
|
|
|
(23,000
|
)
|
Foreign
|
|
|
32,000
|
|
|
|
(4,000
|
)
|
|
|
$
|
6,000
|
|
|
$
|
(27,000
|
)
|
The
net deferred tax assets and liabilities have been reported in other liabilities in the consolidated balance sheets at December
31, 2020 and 2019 as follows:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
NOL carryforwards
|
|
$
|
1,873,000
|
|
|
$
|
14,730,000
|
|
UK NOL carryforwards
|
|
|
572,000
|
|
|
|
552,000
|
|
Allowance for doubtful accounts
|
|
|
193,000
|
|
|
|
92,000
|
|
Compensation and vacation accrual
|
|
|
-
|
|
|
|
57,000
|
|
Operating accruals
|
|
|
-
|
|
|
|
6,000
|
|
Research and experimentation, AMT and foreign tax credits
|
|
|
126,000
|
|
|
|
126,000
|
|
Texas margin tax credit
|
|
|
91,000
|
|
|
|
106,000
|
|
Fixed assets and intangibles
|
|
|
397,000
|
|
|
|
-
|
|
Lease liabilities
|
|
|
9,000
|
|
|
|
854,000
|
|
Other
|
|
|
704,000
|
|
|
|
846,000
|
|
Total gross deferred tax assets
|
|
|
3,965,000
|
|
|
|
17,369,000
|
|
Valuation allowance
|
|
|
(3,516,000
|
)
|
|
|
(16,218,000
|
)
|
Net deferred tax assets
|
|
|
449,000
|
|
|
|
1,151,000
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
|
354,000
|
|
|
|
497,000
|
|
Right of use assets
|
|
|
10,000
|
|
|
|
544,000
|
|
Fixed assets and intangibles
|
|
|
-
|
|
|
|
45,000
|
|
Foreign
|
|
|
47,000
|
|
|
|
47,000
|
|
Other
|
|
|
4,000
|
|
|
|
-
|
|
Total gross deferred liabilities
|
|
|
415,000
|
|
|
|
1,133,000
|
|
Net deferred taxes
|
|
$
|
34,000
|
|
|
$
|
18,000
|
|
The
reconciliation of computed expected income taxes to effective income taxes by applying the federal statutory rate of 21% is as
follows:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Tax at federal income tax rate
|
|
$
|
930,000
|
|
|
$
|
424,000
|
|
State provision
|
|
|
(26,000
|
)
|
|
|
(23,000
|
)
|
Foreign tax differential
|
|
|
35,000
|
|
|
|
(2,000
|
)
|
Change in valuation allowance
|
|
|
(939,000
|
)
|
|
|
(429,000
|
)
|
Permanent items
|
|
|
6,000
|
|
|
|
3,000
|
|
Total Provision
|
|
$
|
6,000
|
|
|
$
|
(27,000
|
)
|
The
net change in the total valuation allowance for the year ended December 31, 2020 was an increase of approximately $939,000. The
net change in the total valuation allowance for the year ended December 31, 2019 was an increase of approximately $429,000. 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, 2020, the Company has available net operating loss (“NOL”) carryforwards of approximately $5,310,000
for federal income tax purposes. The NOL carryforwards for state purposes are approximately $16,051,000. There can be no assurance
that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards due to continued
operating losses. Further, the Company performed an analysis as of December 31, 2020 to determine limitations on its ability to
utilize NOL carryforwards under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”) resulting from
any changes in ownership. This analysis indicates that an ownership change occurred on June 9, 2020 that would limit the use of
approximately $61,965,000 of NOLs. Under IRC Section 382 and similar state provisions, ownership changes will limit the annual
utilization of net operating loss carryforwards existing prior to a change in control that are available to offset future taxable
income. Such limitations have reduced the gross deferred tax assets disclosed in the table above related to the NOL carryforwards
by an estimated $11,021,000. The Company discloses the NOL carryforwards at their 382 limitation amount in the table above as
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 that it would
be able to generate future taxable income to realize these assets.
The
Merger described in Note 3 above will likely result in an ownership change for purposes of Section 382, but no formal analysis
is expected to be undertaken in this regard.
In
addition, the Company has approximately $114,000 of state tax credit tax carryforwards that expire in the years 2021 through 2027.
The
deferred tax assets as of December 31, 2020 include a deferred tax asset of $439,000 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 2016. 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.
Term
Loan
Under
a loan and security agreement the Company entered into with Avidbank in September 2018, or the Original LSA, the Company borrowed
$4,000,000 in the form of a 48-month term loan, all of which it used to pay-off the $4,050,000 of principal borrowed from its
then-existing lender. In February 2020, the Company made a pre-payment on the term loan of approximately $150,000 following the
sale in January 2020 of all its assets used to conduct live-hosted trivia events. In March 2020, the Company entered into an amendment
to the Original LSA. In connection with entering into the amendment, the Company made a $433,000 payment on the term loan, which
included the $83,333 monthly principal payment for March 2020 plus accrued interest and a $350,000 principal prepayment. All amounts
owing under the term loan were paid on December 31, 2020, when the term loan matured, and Avidbank released its security interest
in all of the Company’s existing personal property.
The
Company incurred approximately $26,000 of debt issuance costs related to the Original LSA and the amendment to the LSA. The debt
issuance costs were amortized to interest expense using the effective interest rate method over the life of the loan and were
fully amortized as of December 31, 2020.
Paycheck
Protection Program Loan
On
April 18, 2020, the Company issued a note in the principal amount of approximately $1,625,000 evidencing a loan the Company received
under the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act administered
by the U.S. Small Business Administration (the “CARES Act”). The PPP Loan bears interest at a rate of 1.0% per annum.
Under
the terms of the Paycheck Protection Program, certain amounts of the PPP Loan may be forgiven if they are used for qualifying
expenses as described in the CARES Act. In October 2020, the Company submitted its loan forgiveness application for the PPP Loan,
and in November 2020, the lender informed the Company that the U.S Small Business Administration approved the forgiveness of approximately
$1,093,000 of the $1,625,000 loan, leaving a principal balance of approximately $532,000. The unforgiven principal balance, plus
accrued and unpaid interest, is due at the closing of the Asset Sale, if the Asset Sale occurs, or at the closing of the Merger,
if the Merger occurs. If neither the Asset Sale nor the Merger occurs, the unforgiven principal balance, plus accrued and unpaid
interest, is due at maturity, April 18, 2022. The Company began making monthly interest only payments on November 18, 2020. The
Company may prepay the PPP Loan at any time with no prepayment penalties. As of December 31, 2020, the outstanding principal balance
of the PPP Loan was approximately $532,000. (See Note 3 for more information on the Asset Sale and the Merger.)
Bridge
Loans
In
connection with entering into the APA, the Company issued to Fertilemind an unsecured promissory note (the “First Note”)
in the principal amount of $1,000,000, evidencing a $1,000,000 loan received from Fertilemind on behalf of eGames.com. As described
below, until December 1, 2020, the principal amount of the First Note accrued interest at the rate of 8% per annum (increasing
to 15% per annum upon the occurrence of an event of default), compounded annually. On November 19, 2020, eGames.com agreed to
loan, or cause Fertilemind, on behalf of eGames.com, to loan an additional $500,000 to the Company on December 1, 2020. Upon receipt
of such $500,000 loan, on December 1, 2020, the Company issued a second unsecured promissory note (the “Second Note”)
evidencing such loan. In connection with borrowing the additional $500,000 loan, the interest rate of the First Note increased
from 8% to 10% beginning on December 1, 2020. On January 12, 2021, eGames.com agreed to loan, or cause Fertilemind, on behalf
of eGames.com, to loan an additional $200,000 to the Company on January 12, 2021. Upon receipt of such $200,000 loan, on January
12, 2021, the Company issued a third unsecured promissory note (the “Third Note,” and together with the First Note
and the Second Note, the “Bridge Notes”) evidencing such loan. The principal amount of the Second Note and the Third
Note accrues interest at the rate of 10% per annum (increasing to 15% per annum upon the occurrence of an event of default), compounded
annually. The principal amount of the Bridge Notes and accrued interest thereon is due and payable upon the earlier of (i) the
termination of the APA, (ii) the closing of a Business Combination (as defined in the Bridge Notes), and (iii) April 30, 2021.
Upon the closing of the Asset Sale, the outstanding principal amount of the Bridge Notes and all accrued and unpaid interest thereon
will be applied against the purchase price under the APA, and the Bridge Notes will be extinguished. The Company may use the proceeds
under the Bridge Notes for, among other things, the payment of obligations related to the transactions contemplated by the APA
and the Merger and other general working capital purposes. As of December 31, 2020, the outstanding principal balance of the First
Note and Second Note was $1,500,000 in the aggregate, and combined with the Third Note in January 2021, the outstanding principal
balance of the Bridge Notes is currently $1,700,000. As of December 31, 2020, the Company recorded approximately $29,000 of accrued
and unpaid interest related to the First Note and Second Note.
The
Bridge Notes include customary events of default, including if any portion of either of the Bridge Notes is not paid when due;
if the Company defaults in the performance of any other material term, agreement, covenant or condition of either of the Bridge
Notes, subject to a cure period; if any final judgment for the payment of money is rendered against the Company and it does not
discharge the same or cause it to be discharged or vacated within 90 days; if the Company makes an assignment for the benefit
of creditors, if the Company generally does not pay its debts as they become due; if a receiver, liquidator or trustee is appointed
for the Company, or if it is adjudicated bankrupt or insolvent. In the event of an event of default, the Bridge Notes will accelerate
and become immediately due and payable at the option of the holder.
Interest
expense related to total long-term debt for the years ended December 31, 2020 and 2019 was $118,000 and $236,000, respectively.
As
Lessee
The
Company has an operating lease for its warehouse facility in Ohio. The warehouse lease requires the Company to pay utilities,
insurance, taxes and other operating expenses. The Company terminated its lease for its corporate headquarters as of June 30,
2020, which is discussed further below. The Company also has property held under finance leases that expire at various dates through
2021. The Company’s leases do not contain any residual value guarantees or material restrictive covenants.
Upon
adoption of ASC No. 842, Leases (“ASC No. 842”), the Company recognized on its consolidated balance sheet as
of January 1, 2019 an initial measurement of approximately $3,458,000 of operating lease liabilities and approximately $2,336,000
of corresponding operating right-of use assets, net of tenant improvement allowances, the amounts of which were primarily related
to the Company’s corporate headquarters. The initial measurement of the finance leases under ASC No. 842 did not have a
material change from the balances of the finance lease liabilities and assets recorded prior to the adoption of ASC No. 842. There
was also no cumulative effect adjustment to accumulated deficit as a result of the transition to ASC No. 842. The Company recorded
the initial recognition of the operating leases as a supplemental noncash financing activity on the accompanying consolidated
statement of cash flows. The adoption of ASC No. 842 did not have a material impact on the Company’s consolidated statement
of operations.
Corporate
Headquarters Lease Termination
As
part of the Company’s on-going efforts to implement measures designed to reduce operating expenses and preserve capital
as it continued to seek to mitigate the substantial negative impact of the COVID-19 pandemic on the Company’s business,
on June 25, 2020, the Company entered into a Lease Termination, Surrender and Buy-Out Agreement (the “Lease Termination
Agreement”) with Burke Aston Partners, LLC (the “Lessor”) to terminate, effective June 30, 2020, the lease dated
July 26, 2018 for the Company’s corporate headquarters. Absent the Lease Termination Agreement, the lease would have expired
in accordance with its terms in April 2026. Since January 1, 2020, the Company reduced its headcount from 74 to 22 employees,
all of whom are currently working remotely, and the Company did not currently need a corporate headquarters of the size subject
to that lease.
Pursuant
to the Lease Termination Agreement, in exchange for allowing the Company to terminate the lease early, the Company agreed to (i)
allow the Lessor to keep its security deposits of approximately $260,000, which includes $200,000 of restricted cash under a letter
of credit, (ii) pay the Lessor approximately $121,000 for past due rent, and (iii) pay the Lessor $80,000 if the Company sells
all or any material part of its assets or all or any material part of its equity interests and $5,000 if the Lessor needs to dispose
of furniture that remained in the office space. In July 2020, the Lessor informed the Company that it needed to dispose of the
remaining furniture, and the Company paid the Lessor $5,000 to do so.
As
a result of the lease termination, the Company recorded a gain on the termination of the lease of approximately $9,000 during
the three months ended June 30, 2020, which includes writing off the remaining balances of the right-of-use asset of approximately
$1,913,000 and the corresponding lease liability of approximately $3,135,000, applying the principal portion of past due rents
to be paid in July 2020 of approximately $64,000, writing off of the unamortized tenant improvement allowance of approximately
$890,000, and applying the security deposit of approximately $260,000.
Additionally,
as part of the lease termination and vacating the facility, the Company recorded a loss on the disposal of fixed assets of approximately
$282,000 during the three months ended June 30, 2020, which includes approximately $197,000 in furniture and fixtures and the
Company’s vehicle, and $85,000 in other leasehold improvement assets.
The
tables below show the initial measurement of the operating lease right-of-use assets and liabilities as of January 1, 2020 and
the balances as of December 31, 2020, including the changes during the year.
|
|
Operating lease right-of-use
assets
|
|
Operating lease right-of use assets at January 1, 2020
|
|
$
|
2,101,000
|
|
Amortization of operating lease right-of-use assets
|
|
|
(173,000
|
)
|
Addition of operating lease right-of -use asset
|
|
|
71,000
|
|
Write-off of right-of-use asset due to headquarters lease termination
|
|
|
(1,913,000
|
)
|
Write-off of right-of-use asset related to other lease terminations
|
|
|
(50,000
|
)
|
Operating lease right-of-use assets at December 31, 2020
|
|
$
|
36,000
|
|
|
|
Operating lease
liabilities
|
|
Operating lease liabilities at January 1, 2020
|
|
$
|
3,300,000
|
|
Principal payments on operating lease liabilities
|
|
|
(165,000
|
)
|
Addition of operating lease liability
|
|
|
71,000
|
|
Write-off of lease liability related to headquarters lease termination
|
|
|
(3,135,000
|
)
|
Write-off of lease liability related to other lease terminations
|
|
|
(35,000
|
)
|
Operating lease liabilities at December 31, 2020
|
|
|
36,000
|
|
Less non-current portion
|
|
|
-
|
|
Current portion at December 31, 2020
|
|
$
|
36,000
|
|
As
of December 31, 2020, the Company’s operating lease has a weighted-average remaining lease term of 0.8 years and a weighted-average
discount rate of 5.0%. The maturity of the operating lease liability is as follows:
|
|
As of
|
|
|
|
December 31, 2020
|
|
2021
|
|
$
|
37,000
|
|
Total operating lease payments
|
|
|
37,000
|
|
Less imputed interest
|
|
|
(1,000
|
)
|
Present value of operating lease liabilities
|
|
$
|
36,000
|
|
Total
lease expense was approximately $294,000 and $542,000 for the twelve months ended December 31, 2020 and 2019, respectively. Lease
expense was recorded in selling, general and administrative expenses.
The
tables below show the beginning balances of the finance lease right-of-use assets and liabilities as of January 1, 2020 and the
ending balances as of December 31, 2020, including the changes during the periods. The Company’s finance lease right-of-use
assets are included in “Fixed assets, net” on the accompanying consolidated balance sheet.
|
|
Finance lease right-of-use
assets
|
|
Initial measurement at January 1, 2020
|
|
$
|
41,000
|
|
Less depreciation of Finance lease right-of-use assets
|
|
|
(21,000
|
)
|
Finance lease right-of-use assets at December 31, 2020
|
|
$
|
20,000
|
|
|
|
Finace lease
liabilities
|
|
Initial measurement at January 1, 2020
|
|
$
|
41,000
|
|
Less principal payments on Finance lease liabilities
|
|
|
(19,000
|
)
|
Finance lease liabilities as of December 31, 2020
|
|
|
22,000
|
|
Less non-current portion
|
|
|
-
|
|
Current portion at December 31, 2020
|
|
$
|
22,000
|
|
As
of December 31, 2020, the Company’s finance leases have a weighted-average remaining lease term of 0.9 years and a weighted-average
discount rate of 5.52%. The maturities of the finance lease liabilities are as follows:
|
|
As of
|
|
|
|
December 31, 2020
|
|
2021
|
|
|
22,000
|
|
Total Finance lease payments
|
|
|
22,000
|
|
Less imputed interest
|
|
|
-
|
|
Present value of Finance lease liabilities
|
|
$
|
22,000
|
|
For
the years ended December 31, 2020 and 2019, total lease costs under finance leases were approximately $21,000 and $48,000, respectively.
As
Lessor
ASC
No. 842 did not make fundamental changes to lease accounting guidance for lessors. Therefore there was no financial statement
impact due to the adoption of ASC No. 842. As a lessor, the Company has two types of customer contracts that involve leases: right-to-use
operating leases and sales-type leases.
Right-to-use
operating leases. Certain customers enter into contracts to obtain subscription services from the Company, which includes
the Company’s content (nonlease component) and equipment installed in the customer locations so the customer can access
the content (lease component). The timing and pattern of the transfer of both the subscription services and the equipment are
the same, that is, the Company’s subscription services are made available to its customer at the same time as the equipment
is installed. Additionally, the Company has determined that the lease component of these customer contracts is an operating lease.
Accordingly, the Company has concluded that these contracts qualify for the practical expedient permitted under ASC No. 842 to
not separate the nonlease component from the related lease component. Instead, the Company treats the combined component as a
single performance obligation under Topic 606, Revenue from Contracts with Customers, as the Company has concluded that
the nonlease component (subscription services) is the predominant component of the combined component.
Sales-type
leases. As with the contracts under right-of-use operating leases, certain customers enter into contracts to obtain subscription
services from the Company, which includes the Company’s content (nonlease component) and equipment installed in the customer
locations so the customer can access the content (lease component). Generally, the equipment lease term is for three years and
the customer prepays its lease in full. After the lease term, the lessee may purchase the equipment for a nominal fee or lease
new equipment. Although the timing and pattern of the transfer of both the subscription services and the equipment may be the
same, the provisions of the contract related to the equipment results in a sales-type lease, and therefore, the Company cannot
treat both the nonlease component and the lease component as a combined component. Accordingly, the nonlease component is accounted
for under Topic 606 and the sales-type lease is accounted for under Topic 842 and separately disaggregated on the Company’s
statement of operations. Since November 2019, the Company no longer has contracts under sales-type lease arrangements and does
not expect to enter into contracts with sales-type lease arrangements in the future.
17.
|
Commitments
and Contingencies
|
Litigation
From
time to time, the Company is subject to legal proceedings in the ordinary course of business. While management presently believes
that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm its financial position,
cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable
rulings or outcomes could occur that have, individually or in the aggregate, a material adverse effect on the Company’s
business, financial condition or operating results. The Company is not currently subject to any pending material legal proceedings
except as described below.
The
Company and its directors were named as defendants in ten substantially similar actions brought by purported stockholders of the
Company arising out of the Merger: Henson v. NTN Buzztime, Inc., No. 1:20-cv-08663-LGS (S.D.N.Y. filed Oct. 16, 2020);
Monsour v. NTN Buzztime, Inc., No. 1:20-cv-08755-LGS (S.D.N.Y. filed Oct. 20, 2020); Amanfo v. NTN Buzztime, Inc.,
No. 1:20-cv-08747-LGS (S.D.N.Y. filed Oct. 20, 2020); Carlson v. NTN Buzztime, Inc., No. 1:21-cv-00047-LGS (S.D.N.Y. filed
Jan. 4, 2021); Finger v. NTN Buzztime, Inc., No. 1:21-cv-00728-LGS (S.D.N.Y. filed Jan. 26, 2021); Falikman v. NTN Buzztime,
Inc., No. 1:20-cv-05106-EK-SJB (E.D.N.Y. filed Oct. 23, 2020); Haas v. NTN Buzztime, Inc., No. 3:20-cv-02123-BAS-JLB
(S.D. Cal. Oct. 29, 2020); Gallo v. NTN Buzztime, Inc., No. 3:21-cv-00157-WQH-AGS (S.D. Cal. filed Jan. 28, 2021); Chinta
v. NTN Buzztime, Inc., No. 1:20-cv-01401-CFC (D. Del. filed Oct. 16, 2020); and Nicosia v. NTN Buzztime, Inc., No.
1:21-cv-00125-CFC (D. Del. filed Jan. 30, 2021 ) (collectively, the “Stockholder Actions”). Brooklyn also was named
as a defendant in two of the actions (Chinta and Nicosia). The Stockholder Actions assert claims asserting violations of
Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder. Henson and Monsour
assert additional claims for breach of fiduciary duty. The complaints allege that defendants failed to disclose allegedly
material information in the Form S-4 Registration Statement filed with the SEC on October 2, 2020, including (1) certain details
regarding any projections or forecasts the Company or Brooklyn may have made, and the analyses performed by the Company’s
financial advisor, Newbridge Securities Corporation; (2) conflicts concerning the sales process; and (3) disclosures regarding
whether or not the Company entered into any confidentiality agreements with standstill and/or “don’t ask, don’t
waive” provisions. The complaints allege that these purported failures to disclose rendered the Form S-4 false and misleading.
The complaints request a preliminary and permanent injunction of the Merger; rescission of the Merger if executed and/or rescissory
damages in unspecified amounts; direction to the individual directors to disseminate a compliant Registration Statement; an accounting
by the Company for all alleged damages suffered; a declaration that certain federal securities laws have been violated; and costs,
including attorneys’ and expert fees and expenses. Process was served in Henson, Chinta, Amanfo, Falikman,
Carlson and Gallo, but not in any of the other Stockholder Actions. Although plaintiffs request injunctive relief
in their complaints, they have not filed motions for such relief.
The
Company and its directors deny any wrongdoing or liability with respect to the allegations and claims asserted, or which could
have been asserted, in the Stockholder Actions, as the Company believes the disclosures set forth in the Form S-4 complied fully
with applicable law. Nevertheless, in order to avoid nuisance, potential expense and delay, and to provide additional information
to the Company’s stockholders, the Company determined to voluntarily supplement the Form S-4 with further disclosures (the
“Supplemental Disclosures”) on Form 8-K, filed on February 26, 2021. These Supplemental Disclosures discussed, inter
alia, (1) certain details regarding any projections or forecasts the Company or Brooklyn may have made, and the analyses performed
by the Company’s financial advisor, Newbridge Securities Corporation; and (2) information regarding whether or not the Company
entered into any confidentiality agreements with standstill and/or “don’t ask, don’t waive” provisions.
The Company believes that as a consequence of the issuance of the Supplemental Disclosures all claims asserted in the Stockholder
Actions have been rendered moot, and have requested that all plaintiffs in the Stockholder Actions dismiss their claims voluntarily
(or immediately inform the Company if they are not willing to do so). Since the issuance of the Supplemental Disclosures, the
plaintiffs in Henson, Chinta, Monsour, Amanfo, Carlson and Nicosia have voluntarily
dismissed their cases. The Company expects the plaintiffs in the other Stockholder Actions to do the same. On March 2, 2021, the
court in Haas issued an order to show cause why the case should not be dismissed for failure to prosecute. Plaintiffs in
the Stockholder Actions reserve the right to seek payment by the Company to their attorneys of a “mootness fee” in
an amount yet to be determined in connection with the issuance of the Supplemental Disclosures.
On March 5, 2021, the
Company and its directors were named as defendants in a putative class action brought by a purported stockholder in the Court
of Chancery of the State of Delaware, entitled Carlson v. NTN Buzztime, Inc., Case No. 2021-0193- (Del. Ch. filed Mar.
5, 2021). The action asserts claims for violations of Section 211(c) of the Delaware General Corporation Law and the Company’s
bylaws (and a concomitant breach of fiduciary duty), alleging that the Company failed to conduct an annual meeting of stockholders
within thirteen months of the previous annual meeting of stockholders, which took place on June 7, 2019. Plaintiff is requesting
certification of a class, declaratory relief, injunctive relief to compel an annual meeting of stockholders, and fees and costs.
The complaint does not yet appear to have been served upon any of the defendants. The Company expects this action will be
rendered moot upon the Company’s holding of its special meeting of stockholders on March 15, 2021.
18.
|
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 on the balance sheet of its subsidiary, NTN Canada Inc., 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, 2020 and 2019, $245,000 and $268,000, respectively, of accumulated foreign currency translation adjustments were
recorded in accumulated other comprehensive income.
19.
|
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.
Third
Bridge Loan
As
discussed in Note 3 and Note 15, in addition to the First Note and Second Note the Company issued in exchange for the $1,000,000
bridge loan and the $500,000 bridge loan Fertilemind, on behalf of eGames.com, gave to the Company on September 18, 2020 and December
1, 2021, respectively, on January 12, 2021, eGames.com agreed to loan, or cause Fertilemind, on behalf of eGames.com, to loan
an additional $200,000 to the Company on January 12, 2021. Upon receipt of such $200,000 loan, on January 12, 2021, the Company
issued a third unsecured promissory note (the “Third Note,” and together with the First Note and the Second Note,
the “Bridge Notes”) evidencing such loan. The principal amount of the Third Note accrues interest at the rate of 10%
per annum (increasing to 15% per annum upon the occurrence of an event of default), compounded annually. The principal amount
of the Bridge Notes and accrued interest thereon is due and payable upon the earlier of (i) the termination of the APA, (ii) the
closing of a Business Combination (as defined in the Bridge Notes), and (iii) April 30, 2021. Upon the closing of the Asset Sale,
the outstanding principal amount of the Bridge Notes and all accrued and unpaid interest thereon will be applied against the purchase
price under the APA, and the Bridge Notes will be extinguished. The Company may use the proceeds under the Bridge Notes for, among
other things, the payment of obligations related to the transactions contemplated by the APA and the Merger and other general
working capital purposes.