PART
I
ITEM
1.
Business
About
Our Business and How We Talk About It
We
deliver interactive entertainment and innovative technology, including performance analytics and secure payment with Europay,
MasterCard® and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple, Android
and Samsung Pay. Our tablets and technology offer engaging solutions to establishments with guests who experience dwell time,
such as bars, restaurants, casinos and senior living centers. Casual dining venues subscribe to our customizable solution to differentiate
themselves via competitive fun by offering guests trivia, card, sports and arcade games, customized menus and self-service dining
features. Our platform improves operating efficiencies, creates connections among the players and venues, and amplifies guests’
positive experiences. We continue to support our legacy network product line, which we call our Classic platform.
We
generate revenue by charging subscription fees for our service to network subscribers, by leasing tablet platform equipment to
certain network subscribers, by selling tablet platform equipment, by hosting live trivia events, by selling advertising aired
on in-venue screens and as part of customized games, by licensing our content for use with third-party equipment, from providing
professional services (such as developing certain functionality within our platform for customers), and from pay-to-play arcade
games.
Since
2016, over 115 million games were played on our network annually, and as of December 31, 2018, approximately 56% of our network
subscriber venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Buffalo Wings &
Rings, Old Chicago, Native Grill & Wings, Houlihans, Beef O’Brady’s, Boston Pizza, and Arooga’s.
We
own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, and BEOND Powered by Buzztime trademarks
to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our
property. Other trademarks are the property of their respective owners.
Unless
otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us”
and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers”
or “customers” refer to venues that subscribe to our network service; (c) to “consumers” or “players”
refer to the individuals that engage in our games, events, and entertainment experiences available at our customers’ venues
and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant) of our customers at which
our games, events, and entertainment experiences are available to consumers.
Recent
Developments
Strategic
Process
On
December 7, 2018, we announced that our board of directors is exploring and evaluating strategic alternatives focused on maximizing
shareholder value, including, among other things, a potential acquisition of our company or our assets, and that we engaged a
financial advisor to assist in the process. The strategic process is ongoing. Our board of directors has not set a timetable for
the strategic process nor has it made any decisions relating to any strategic alternatives at this time, and no assurance can
be given as to the outcome of the process. We do not intend to disclose additional details regarding the strategic process unless
and until further disclosure is appropriate or necessary.
New
Term Loan
In
September 2018, we entered into a loan and security agreement with Avidbank that provides for a one-time $4,000,000 48-month term
loan, all of which we used to pay-off the $4,050,000 of principal we borrowed from East West Bank (“EWB”). We used
our cash on hand to pay the remaining $50,000 we borrowed from EWB plus accrued and unpaid interest. We granted and pledged to
Avidbank a first-priority security interest in all our existing and future personal property, and, subject to customary exceptions,
we are prohibited from borrowing additional indebtedness. In connection with entering into the loan and security agreement with
Avidbank, the amended and restated loan and security agreement we entered into with EWB on November 29, 2017, as amended on March
12, 2018, terminated on September 28, 2018.
For
additional information regarding our Avidbank credit facility, see “PART II—ITEM 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” below.
Our
Strategy
Below
is a discussion of our strategy and highlights of accomplishments and milestones achieved during 2018:
Grow
business beyond restaurant and bar industry
. One of our major initiatives has been and continues to be to expand our business
beyond the restaurant and bar industry through partnerships and product extensions. During the first quarter of 2018, we agreed
to sell our tablets to a third-party who will use our tablets and operating system to deliver their services in local jails. In
July 2018, we entered into a revenue share agreement with this partner, under which our partner will make our single player games
available for a fee to inmates. Earlier in 2017, we began a relationship with a third-party who is licensing our trivia content
for use in casino gaming machines and is leasing our tablets for use in retail settings to complete loyalty/reward program transactions.
Launch
expanded product offerings
. We continue to focus on developing new experiences and new products that we believe will help
differentiate our offerings from those of our competitors and will provide us the ability to scale our business beyond our traditional
entertainment offering.
New
SiteHub
. Our content is streamed to tablets within a venue from a personal computer within the venue. During 2018, we redesigned
that personal computer to make it substantially smaller, about the size of a deck of cards. Besides reducing labor-intensive installation
costs associated with our traditional computer, we expect to offer our redesigned personal computer, which we call SiteHub, to
customers at a lower cost compared to our traditional personal computer. We believe that if we can successfully commercially launch
SiteHub, it will lead to new opportunities, which could include the ability to display video, highlights, dynamic web content,
and app content, in addition to delivering our historical offerings within venues. We have been testing the first version of SiteHub
in-house and are preparing for a field test in certain venues in San Diego County during the second quarter of 2019.
Mobile
Offerings.
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Mobile
Live.
We are developing a mobile version of our live trivia product that allows customers and trivia hosts to start their
own trivia events. These events usually take place in a single venue and the experience is tied to that venue. Our mobile
live product is intended to improve the experience by replacing pen and paper, providing more impressions and registrations,
and allowing our customers to know who is participating in the event.
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Mobile
Trivia
. We are developing a version of our system that allows players to use their own mobile device to play our network
games inside our customers’ venues.
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When
these mobile offerings become available commercially, they will be our easiest to adopt, lowest cost of entry solutions, and may
serve as a test for a venue contemplating a more significant investment.
Single
Player Games
. During the second quarter of 2018, we released our first internally-built single player arcade game,
Buzztime
Soccer,
for our tablet platform, and we expect to release several more internally-built single player games in the coming
weeks. Previously, we purchased these games from third party aggregators, sometimes at significant cost.
Buffalo
Wild Wings
. In March 2017, Buffalo Wild Wings chose us to be its provider of digital menu, order, and payment functionality.
In November 2017, we expected to begin rolling out our improved tablet platform system at certain Buffalo Wild Wings locations
during the first quarter of 2018 and, after an initial set of locations was running smoothly, throughout the rest of the Buffalo
Wild Wings corporate and franchise locations with which we had partnered. Due to the acquisition of Buffalo Wild Wings by Arby’s
Restaurant Group, Inc. (which renamed itself Inspire Brands Inc.) in February 2018 and to the associated changes with Buffalo
Wild Wings’ operations, the rollout of our expanded functionality tablet platform system was put on hold to allow its new
ownership to assess all the programs at Buffalo Wild Wings. The order, payment and guest insights functionality available through
our improved tablet system was deployed in a pilot study at 31 Buffalo Wild Wings locations between April 2018 and September 2018.
In October 2018, Buffalo Wild Wings informed us that it determined not to rollout our order, payment and guest insights functionality
and that its relationship with us would continue in accordance with existing agreements we entered into in the ordinary course
of business, and which terminate in accordance with their terms in November 2019.
Advertising
Partnerships
. We believe that if we lower the price of our tablet platform, we can acquire more market share. One way to lower
the price is by subsidizing our costs through advertising. We are currently working 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.
Products
and Services
Our
principal product and service is our tablet platform. Built on an extended network platform, our interactive entertainment system
offers trivia, card, sports and arcade games, customized menus and self-service dining features, including dynamic menus, touchscreen
ordering and secure payment. Generally, as part of the subscription to our tablet platform, we provide the equipment for the platform
to network subscribers (including tablets, cases and charging trays for the tablets), though we also lease such equipment to certain
network subscribers. 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 equipment used in our tablet platform to customers who may not subscribe to our services
but who can use the equipment in their business for other purposes.
Our
primary network subscribers are bars and restaurants in North America, which we target directly through our internal sales organization.
In April 2016, we begun offering our tablet 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 tablet platform internally. We use an Android-based tablet
customized to our specifications by a single unaffiliated third-party manufacturer. Such third-party also manufacturers the cases
and charging trays for the tablets and sources the raw materials used to manufacture those cases and trays. See “ITEM 1A.,
Risk Factors—Risk Factors That May Affect Our Business—
A disruption in the supply of equipment could negatively
impact our subscriptions and revenue
, and —
Our business could be adversely impacted if the sole manufacturer of our
customized tablet and tablet equipment is not able to meet our manufacturing quality standards
,” below.
Competition
We
face direct competition in venues and face competition for total entertainment and marketing dollars in the marketplace from other
companies offering similar content and services. A relatively small number of direct competitors are active in the hospitality
marketing services and entertainment markets, including Ziosk and E la Carte, Inc. Competing forms of technology, entertainment,
and marketing available in hospitality venues include games, apps and other forms of entertainment offerings available directly
to consumers on their smart phones and tablets, on-table bar and restaurant entertainment systems, music and video-based systems,
live entertainment and games, cable, satellite and pay-per-view programming, coin-operated single-player games/amusements, and
traffic-building promotions like happy hour specials and buffets.
Buzztime
Significant Customer
Our
customers range from small independently operated bars and restaurants to bars and restaurants operated by national chains. This
results in diverse venue sizes and locations. As of December 31, 2018, 2,639 venues in the U.S. and Canada subscribed to our interactive
entertainment network, of which, approximately 46% were Buffalo Wild Wings corporate-owned restaurants and its franchisees. In
October 2018, Buffalo Wild Wings informed us that it determined not to rollout our order, payment and guest insights functionality
and that its relationship with us would continue in accordance with existing agreements we entered into in the ordinary course
of business, and which terminate in accordance with their terms in November 2019. See “ITEM 1A., Risk Factors—Risk
Factors That May Affect Our Business—
We receive a significant portion of our revenues from Buffalo Wild Wings corporate-owned
restaurants and its franchisees, and, absent an extension, our relationship will terminate in November 2019
.”
For
the years ended December 31, 2018 and 2017, revenue generated from Buffalo Wild Wings corporate-owned restaurants and its franchisees
was as follows:
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Year Ended
December 31,
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2018
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2017
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Buffalo Wild Wings revenue
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$
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10,180,000
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$
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8,678,000
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Percent of total revenue
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44
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%
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41
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%
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As
of December 31, 2018 and 2017, amounts included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and
its franchisees was as follows:
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As of
December 31,
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2018
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2017
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Buffalo Wild Wings accounts receivable
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$
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552,000
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$
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191,000
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Percent of total accounts receivable, net
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48
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%
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27
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%
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Backlog
We
generally do not have a significant backlog because we normally can deliver and install new systems at venues within the delivery
schedule requested by customers (generally within three to four weeks).
Licensing,
Trademarks, Copyrights and Patents
A
majority of the gaming content available on our platform is internally developed. The balance is licensed from third parties.
We also license third party content for our pay-to-play and free-to-consumer games lobby. The amounts paid for such third-party
licensed content was not material during either of the years ended December 31, 2018 or 2017.
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 tablet 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 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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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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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
Contracts
We
provide our content distribution services through our network to colleges, universities, and a few government agencies, typically
military base recreation units. However, the number of government customers is small compared to our overall customer base. We
provide our products and services to government agencies under contracts with substantially the same terms as are in place with
non-government customers.
Government
Regulations
The
cost of compliance with federal, state, and local laws has not had a material effect on our capital expenditures, earnings, or
competitive position to date. In December 2012, we received approval from the Federal Communications Commission, or the FCC, for
our 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 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 our company that we file electronically with the SEC.
Employees
As
of March 20, 2019, we had approximately 94 full-time employees and 287 part-time employees. We also utilize independent contractors
for specific projects. None of our employees are represented by a labor union, and we believe our employee relations are satisfactory.
Our
Corporate History
NTN
Buzztime, Inc. was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate name to NTN Communications,
Inc. in 1985. The name was changed to NTN Buzztime, Inc. in 2005 to better reflect the growing role of the Buzztime consumer brand.
ITEM
1A
.
Risk Factors
Our
business, financial condition and operating results can be affected by 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 actual financial condition and operating results to differ materially from historical
or anticipated future financial condition and operating results. Any of these factors, in whole or in part, could materially and
adversely affect our business, financial condition, operating results and stock price. We urge investors to carefully consider
the risk factors described below in evaluating the information in this report.
Risk
Factors That May Affect Our Business
We
receive a significant portion of our revenues from Buffalo Wild Wings corporate-owned restaurants and its franchisees, and, absent
an extension, our relationship will terminate in November 2019.
For
the year ended December 31, 2018, Buffalo Wild Wings corporate-owned restaurants and its franchisees accounted for approximately
44%, or $10,180,000, of our total revenue. As of that date, approximately $552,000 was included in accounts receivable. In October
2018, Buffalo Wild Wings informed us that it determined not to rollout our order, payment and guest insights functionality and
that its relationship with us would continue in accordance with existing agreements we entered into in the ordinary course of
business, and which terminate in accordance with their terms in November 2019. If we do not extend the Buffalo Wild Wings relationship
beyond November 2019 or add network subscribers to sufficiently offset the subscription revenue we receive and have received in
recent years from Buffalo Wild Wings corporate-owned restaurants and its franchisees, we expect our subscription revenue to materially
decrease beginning in the first quarter of 2020, which could materially and adversely affect our operating results and cash flows.
In addition, the inability to demonstrate Buffalo Wild Wings as a strategic user of our expanded functionality tablet platform
system could negatively impact achievement of our chain customer site growth goals. Likewise, if any other customer who may in
the future represent a significant portion of our revenue were to breach or terminate their subscriptions or otherwise decrease
the amount of business they transact with us, we could lose a significant portion of our revenues and cash flow.
Our
cash flow may not cover our capital needs and we may need to raise additional funds in the future. Such funds may not be available
when needed, on acceptable terms or at all and, if available, may dilute current stockholders.
As
of December 31, 2018, we had cash, cash equivalents and restricted cash of $2,786,000. We have borrowed substantially all amounts
available to us under existing credit facilities and, subject to limited exceptions, our loan and security agreement with Avidbank
prohibits us from borrowing additional amounts from other lenders. As of December 31, 2018, $3,750,000 was outstanding under that
loan agreement, of which $1,000,000 was recorded in current portion of long-term debt and $2,750,000 was recorded in long-term
debt on our balance sheet, which is gross of any unamortized debt issuance costs that are recorded as a reduction of long-term
debt. The loan matures on September 30, 2022. We must make monthly principal payments of approximately $83,000 plus accrued and
unpaid interest on the last business day of each month commencing on October 31, 2018 and through maturity.
Our
ability to meet our debt service obligations and to fund working capital, capital expenditures and investments in our business,
will depend upon our future performance, which will depend on many factors, including:
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our
ability to generate cash from operating activities;
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acceptance
of, and demand for, our interactive games and entertainment;
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the
costs of continuing to develop and implement our tablet platform and product line;
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the
costs of developing new entertainment content, products, or technology or expanding our offering to new media platforms such
as the internet and mobile phones;
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the
extent to which we invest in creating new entertainment content and new technology; and
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the
number and timing of acquisitions and other strategic transactions, if any.
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In
addition, to fully execute on our long-term strategic initiatives discussed above under the section entitled “ITEM 1. Business—Our
Strategy,” we believe we will likely require additional funding in the future.
We
cannot ensure that we will generate cash flow from operations in an amount sufficient to enable us to meet our debt service obligations
or to fund our working capital needs, capital expenditures and investments in our business. Avidbank has a first-priority security
interest in all our existing and future personal property. If we default on our monthly payment obligations to Avidbank, and our
debt obligations become immediately due and payable in full, Avidbank may dispose of our personal property to satisfy our payment
obligations. If we need to raise additional funds in the future, such funds may not be available when needed, on acceptable terms,
or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience
dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders.
If we cannot raise funds on acceptable terms, or at all, we may not be able to continue to develop and implement our platform
and product line, develop or enhance our other products and services, successfully execute our business plan or any or all of
our strategic initiatives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer
requirements.
We have experienced significant losses,
and we may incur significant losses in the future.
We have a history of
significant losses, including net losses of $259,000 and $1,077,000 for the years ended December 31, 2018 and 2017, respectively,
and have an accumulated deficit of $129,394,000 as of December 31, 2018. We may also incur future operating and net losses, due
in part to expenditures required to continue to implement our business strategies, including the continued development and implementation
of our technology platform and product line. Despite significant expenditures, 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 Our Common Stock—If we are again determined to
be non-compliant with any of the NYSE American continued listing standards within twelve months of December 14, 2018, depending
on the nature of such non-compliance, NYSE Regulation may truncate the compliance procedures available to us or immediately initiate
delisting proceedings,” below.
We may not compete effectively within
the highly competitive and evolving interactive games, entertainment and marketing services industries.
We face intense competition
in the markets in which we operate. We face significant competition for entertainment and marketing services in hospitality venues
from other companies offering similar content and services. Our services also compete with games, apps and other forms of entertainment
offerings available directly to consumers on their smart phones and tablets. See “ITEM 1. Business—Competition,”
above. Some of our current and potential competitors enjoy substantial competitive advantages, including greater financial resources
for competitive activities, such as content development and programming, research and development, strategic acquisitions, alliances,
joint ventures, and sales and marketing. As a result, our current and potential competitors may respond more quickly and effectively
than we can to new or changing opportunities, technologies, standards, or consumer preferences.
The increased availability
of the internet and wireless networks provides consumers with an increasing number of alternatives to our entertainment offerings.
With this increasing competition and the rapid pace of change in product and service offerings, we must be able to compete in
terms of technology, content, and management strategy. If we fail to provide competitive, engaging, quality services and products,
we will lose revenues to competing companies and technologies. Increased competition may also result in price reductions, fewer
customer orders, reduced gross margins, longer sales cycles, reduced revenues, and loss of market share.
New products and rapid technological
change, especially in the mobile and wireless markets, may render our operations obsolete or noncompetitive.
The emergence of new
entertainment products and technologies, changes in consumer preferences, the adoption of new industry standards, and other factors
may limit the life cycle and market penetration of our technologies, products, and services. In particular, the mobile and wireless
device, content, applications, social media, and entertainment markets are highly competitive and rapidly changing. Accordingly,
our future performance will depend on our ability to:
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identify emerging technological trends and industry standards
in our market;
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identify changing consumer needs, desires, or tastes;
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develop and maintain competitive technology, including new
hardware and content products and service offerings;
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improve the performance, features, and reliability of our
existing products and services, particularly in response to changes in consumer preferences, technological changes, and competitive
offerings; and
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bring technology that is appealing to consumers to the market
quickly at cost-effective prices.
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If we do not compete
successfully in developing new products and keep pace with rapid technological change, we will be unable to achieve profitability
or sustain a meaningful market position.
We may not succeed
in developing and marketing new products and services that respond to technological and competitive developments, changing customer
needs, and consumer preferences. We may have to incur substantial costs to modify or adapt our products or services to respond
to these developments, customer needs, and changing preferences. We must be able to incorporate new technologies into the products
we design and develop to address the increasingly complex and varied needs of our customer base. Any significant delay or failure
in developing new or enhanced technology, including new product and service offerings, could result in a loss of actual or potential
market share and a decrease in revenues.
If we fail to comply with our financial
covenants to Avidbank, it may declare a default, which could lead to all payment obligations becoming immediately due and payable
and have a material adverse effect on our financial condition and business.
We must comply with
financial covenants our loan and security agreement with Avidbank: our EBITDA must be at least $1,000,000 for the trailing six-month
period as of the last day of each fiscal quarter, and the aggregate amount of unrestricted cash we have in deposit accounts or
securities accounts maintained with Avidbank must be not less than $2,000,000 at all times. See “PART II—ITEM 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” below.
As of December 31,
2018, we were in compliance with these covenants. However, there can be no assurance we will be in compliance with these covenants
in the future, including due to events or conditions outside of our control. For example, fluctuations in our operating results,
such as what may result if we don’t extend the Buffalo Wild Wings relationship beyond November 2019 or add network subscribers
to sufficiently offset the subscription revenue we receive and have received in recent years from Buffalo Wild Wings corporate-owned
restaurants and its franchisees, could result in violation of the adjusted EBITDA covenant. See “
We receive a significant
portion of our revenues from Buffalo Wild Wings corporate-owned restaurants and its franchisees, and, absent an extension, our
relationship will terminate in November 2019
,” above.
If we fail to comply
with our covenants, Avidbank may declare a default, which could lead to all payment obligations becoming immediately due and payable
and have a material adverse effect on our financial condition and business. Avidbank has a first-priority security interest in
all our existing and future personal property. Accordingly, in an event of a default, Avidbank could dispose of such property
to satisfy our payment obligations.
We
cannot assure you that our exploration of strategic alternatives will result in us pursuing a transaction or that any such transaction
would be successfully completed, and there may be negative impacts on our business and stock price as a result of the process
of exploring strategic alternatives.
On
December 7, 2018, we announced that our board of directors is exploring and evaluating strategic alternatives focused on maximizing
shareholder value, and that we engaged a financial advisor to assist in the process. The strategic process is ongoing. Our board
of directors has not set a timetable for the strategic process nor has it made any decisions relating to any strategic alternatives
at this time. These alternatives could include, among other things, a potential acquisition of our company or our assets, a transaction
with a strategic partner involving one or more of our assets, or continuing to execute on our business plan. No assurance can
be given as to the outcome of the process, including whether the process will result in a transaction or that any transaction
that is agreed to will be completed. Whether the process will result in a transaction, and our ability to complete a transaction,
if our board of directors decides to pursue one, will depend on numerous factors, some of which are beyond our control, including
the interest of potential acquirers or strategic partners in a potential transaction with our company, the value potential acquirers
or strategic partners attribute to our business and its prospects, including in light of the potential end of our relationship
with Buffalo Wild Wings corporate-owned restaurants and its franchisees, market conditions, and industry trends. Our stock price
may be adversely affected if the process does not result in a transaction or if a transaction is not completed. Even if a transaction
is completed, there can be no assurance that it will be successful or have a positive effect on shareholder value. Our board
of directors may also determine that no transaction is in the best interest of our stockholders.
In
addition, our financial results and operations may be adversely affected by the strategic process and by the uncertainty regarding
its outcome. We have diverted the attention of management and our board of directors from our business operations to the process
and have applied capital resources to the process that otherwise could have been used in our business operations, and we will
continue to do so until the process is completed. We could incur substantial expenses associated with identifying and evaluating
potential strategic alternatives, including those related to employee retention payments, equity compensation, severance pay and
legal, accounting and financial advisory fees. In addition, the process could lead us to lose or fail to attract, retain and motivate
key employees, and to lose or fail to attract customers or business partners, and could expose us to litigation in connection
with the process or any resulting transaction. The public announcement of a strategic alternative may also yield a negative impact
on operating results if prospective or existing service providers are reluctant to commit to new or renewal contracts or if existing
customers decide to move their business to a competitor.
Further,
we do not intend to disclose developments or provide updates on the progress or status of the strategic process until our board
of directors deems further disclosure is appropriate or required. Accordingly, speculation regarding any developments related
to the review of strategic alternatives and perceived uncertainties related to the future of our company could cause our stock
price to fluctuate significantly.
A
disruption in the supply of equipment could negatively impact our subscriptions and revenue.
During
the fourth quarter of 2016, we began having an unaffiliated third party manufacture an Android-based tablet customized to our
specifications. This third-party manufacturer also manufactures our tablet equipment—tablet charging trays and tablet cases.
We have no alternative manufacturing source for our customized tablet or tablet equipment or alternatives for the tablet equipment.
If
our sole manufacturer is delayed in delivering tablets to us, becomes unavailable, has product quality issues, or shortages occur,
besides not realizing the benefits of having a tablet manufactured to our specifications, we would need to return to the historical
third-party tablets or find an alternative device. Similarly, if our sole manufacturer is delayed in delivering the tablet equipment
to us, becomes unavailable, has product quality issues, or shortages occur, we may not timely obtain replacement tablet equipment.
Delays, unavailability of the tablet or tablet equipment, product quality issues and shortages could damage our reputation and
customer loyalty, cause subscription cancellations, increase our expense and reduce our revenue. See also “
Our business
could be adversely impacted if the sole manufacturer of our customized tablet and tablet equipment is not able to meet our manufacturing
quality standards
,” below.
If
our sole manufacturer and/or suppliers were to go out of business or otherwise become unable to meet our needs for reliable equipment,
locating and qualifying alternate sources could take months, during which time our production could be delayed, and may, in some
cases, require us to redesign our products and systems. Such delays and potentially costly re-sourcing and redesign could have
a material adverse effect on our business, operating results, and financial condition.
Our
business could be adversely impacted if the sole manufacturer of our customized tablet and tablet equipment cannot meet our manufacturing
quality standards.
As
discussed above, one unaffiliated third-party manufactures our customized tablet and tablet equipment. Continued improvement in
supply-chain management and in manufacturing of our customized tablet and tablet equipment and manufacturing quality and product
testing are important to our business. Flaws in the design and manufacturing of our customized tablet or tablet equipment or both
(by us or our supplier) could result in substantial delays in shipment and in substantial repair, replacement or service costs,
could damage our reputation and customer loyalty, could cause subscription cancellations, and could increase our expense and reduce
our revenue. Costs associated with tablet or tablet equipment defects due to, for example, problems in our design and manufacturing
processes, could include: (a) writing off the value of inventory; (b) disposing of items that cannot be fixed; (c) recalling items
that have been shipped; and (d) providing replacements or modifications. These costs could be significant and may increase expenses
and lower gross margin. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test
and manufacturing processes for our tablet and related equipment will be sufficient to permit us to avoid quality issues. Significant
quality issues could have a material adverse effect on our business, results of operations or financial condition.
If
we do not adequately protect our proprietary rights and intellectual property or we are subjected to intellectual property claims
by others, our business could be seriously damaged.
We
rely on a combination of trademarks, copyrights, patents, and trade secret laws to protect our proprietary rights in our products.
We have a 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 that are
similar or identical to ours. Such third-party patent applications might have priority over our patent applications. To determine
the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark
Office. Such interference proceedings could result in substantial cost to us.
We
believe that the success of our business also depends on such factors as the technical expertise and innovative capabilities of
our employees. It is our policy that all employees and consultants sign non-disclosure agreements and assignment of invention
agreements. Our competitors, former employees, and consultants may, however, misappropriate our technology or independently develop
technologies that are as good as or better than ours. Our competitors may also challenge or circumvent our proprietary rights.
If we have to initiate or defend against an infringement claim to protect our proprietary rights, the litigation over any such
claim, with or without merit, could be time-consuming and costly to us, adversely affecting our financial condition.
From
time to time, we hire or retain employees or consultants who may have worked for other companies developing products similar to
those that we offer. These other companies may claim that our products are based on their products and that we have misappropriated
their intellectual property. Any such claim, with or without merit, could be time-consuming and costly to us, adversely affecting
our financial condition.
We
may be liable for the content and services we make available on our Buzztime network and the internet.
We
make content and entertainment services available on our Buzztime network and the internet which includes games and game content,
software, and a variety of other entertainment content. The availability of this content and services and our branding could result
in claims against us based on a variety of theories, including defamation, obscenity, negligence, or copyright or trademark infringement.
We could also be exposed to liability for third-party content accessed through the links from our websites to other websites.
Federal laws may limit, but not eliminate, our liability for linking to third-party websites that include materials that infringe
copyrights or other rights, so long as we comply with certain statutory requirements. We may incur costs to defend against claims
related to either our own content or that of third parties, and our financial condition could be materially adversely affected
if we are found liable for information that we make available. Implementing measures to reduce our exposure may require us to
spend substantial resources and may limit the attractiveness of our services to users which would impair our profitability and
harm our business operations.
We
may not grow our subscription revenue and successfully implement our other business strategies.
Our
success depends on our ability to increase market awareness and encourage the adoption of the Buzztime brand and our Buzztime
network among hospitality venues such as restaurants, sports bars, taverns and pubs, and within the interactive game player community.
Our success also depends on our ability to improve customer retention. We may not be able to leverage our resources to expand
awareness of and demand for our Buzztime network. In addition, our efforts to improve our game platform and content may not succeed
in generating additional demand for our products or in strengthening the loyalty and retention of our existing customers. The
degree of market adoption of our Buzztime network will depend on many factors, including consumer preferences, the availability
and quality of competing products and services, and our ability to leverage our brand.
Our
success also depends on our ability to implement our other business strategies, which include developing our tablet platform that
allows for consumer play across the digital platform, developing more premium content that allow us to grow the revenue stream
directly from consumers, developing dynamic menuing and point-of-sale, or POS, integration competency, and growing our marketing
services and sponsorship revenues. Implementing these strategies will require us to dedicate significant resources to, among other
things, fully developing and implementing our tablet platform and product line, expanding our other product offerings, customizing
our products and services to meet the unique needs of select accounts, and expanding and improving our marketing services and
promotional efforts. We may not successfully implement these strategies as planned.
Our
products and services are subject to government regulations that may restrict our operations or cause demand for our products
to decline significantly.
In
addition to laws and regulations applicable to businesses generally, we are also subject to laws and regulations that apply specifically
to the interactive entertainment and product marketing industries. In addition, we operate games of chance and 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 “ITEM 1. BUSINESS—Government Regulations.”
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 continuous operation of our information technology and communications systems, and those of a variety of third parties,
to communicate with and to distribute our services to the locations of our network subscribers. We currently transmit our data
to our customers via broadband internet connections including telephone and cable TV networks. Both our communications systems
and those of third parties on which we rely are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods,
storms, fires, power loss, telecommunications and other network failures, equipment failures, computer viruses, computer denial
of service or other attacks, and other causes. These systems are also subject to break-ins, sabotage, vandalism, and to other
disruptions, for example if we or the operators of these systems and system facilities have financial difficulties. Some of our
systems are not fully redundant, and our system protections and disaster recovery plans cannot prevent all outages, errors, or
data losses. In addition, our services and systems are highly technical and complex and may contain errors or other vulnerabilities.
Any errors or vulnerabilities in our products and services, damage to or failure of our systems, any natural or man-made disaster,
or other unanticipated problems at our facilities or those of a third party, could result in lengthy interruptions in our service
to our customers, which could reduce our revenues and cash flow, and damage our brand. Any interruption in communications or failure
of proper hardware or software function at our or our customers’ venues could also decrease customer loyalty and satisfaction
and result in a cancellation of our services.
Our
success depends on our ability to recruit and retain skilled professionals.
Our
business requires experienced programmers, creative designers, application developers, and sales and marketing personnel. Our
success will depend on identifying, hiring, training, and retaining such experienced and knowledgeable professionals. We must
recruit and retain talented professionals for our business to grow. There is significant competition for the individuals with
the skills required to develop the products and perform the services we offer. We may not attract enough qualified individuals
to sustain and grow our business, and we may not succeed in motivating and retaining the individuals we do attract. If we cannot
attract, motivate, and retain qualified technical and sales and marketing professionals, our business, financial condition, and
results of operations will suffer.
We
have incurred significant net operating loss carryforwards that we will likely be unable to use.
At December 31, 2018,
we had net operating loss (“NOL”) carryforwards of approximately $66,572,000 available for federal income
tax purposes, which will continue expiring in 2019, and of approximately $36,044,000 available for state income tax purposes,
which will continue expiring in 2019. We believe that our ability to utilize our NOL carryforwards may be substantially restricted
by the passage of time and the limitations of Section 382 of the Internal Revenue Code, which apply when there are certain changes
in ownership of a corporation. To the extent we begin to realize significant taxable income, these Section 382 limitations may
result in our incurring federal income tax liability notwithstanding the existence of otherwise available NOL carryforwards. We
performed a Section 382 analysis through December 31, 2018 to determine the impact of any changes in ownership. This analysis
indicates that no ownership change occurred that would limit the use of the NOLs. We established a full valuation allowance for
substantially all of our deferred tax assets, including the NOL carryforwards, since we do not believe we are likely to generate
future taxable income to realize these assets.
We
are subject to cybersecurity risks and incidents.
Our
business involves transmitting payment information of our customers and certain personal information of consumers (such as their
name, date of birth, and email address). In the future, we may store and transmit additional personal information of consumers,
particularly as the services of the tablet platform become more advanced to include POS integration. While we have implemented
measures designed to prevent security breaches and cyber incidents, any failure of these measures and/or any material security
breaches, theft, misplaced or lost data, programming errors, employee errors and/or malfeasance could lead to the compromise of
sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized
access, use, disclosure, modification or destruction of information, system downtimes, and operational disruptions. In addition,
a cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness, remediation
or increased protection costs, litigation or regulatory action.
We
could become subject to additional regulations and compliance requirements as we introduce features in direct payments from consumers.
In
preparation for expanding features and functionality to our tablet platform that involve us accepting credit card and other forms
of payments directly from consumers, we certified our compliance with Payment Card Industry (“PCI”) Data Security
Standard v3.1 as a service provider, and will have to do so annually. Compliance with additional regulations and requirements
may be difficult for us; thereby limiting our ability to grow the amount of revenue we receive directly from consumers. In addition
to these additional regulations and requirements, if we fail to comply with the rules or requirements of any provider of a payment
method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods we accept,
or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction
fees and may lose, or face restrictions placed upon, our ability to accept credit card and debit card payments from consumers.
Risks
Relating to the Market for Our Common Stock
If
we are again determined to be non-compliant with any of the NYSE American continued listing standards within twelve months of
December 14, 2018, depending on the nature of such non-compliance, NYSE Regulation may truncate the compliance procedures available
to us or immediately initiate delisting proceedings.
On
December 14, 2018, as previously reported, we received a letter from NYSE Regulation Inc. notifying us that we have regained compliance
with Section 1003(a)(iii) of the NYSE American Company Guide. As previously reported, NYSE Regulation previously notified us that
we were not in compliance with Section 1003(a)(iii) because we reported stockholders’ equity of less than $6 million as
of December 31, 2017 and had net losses in five of our most recent fiscal years ended December 31, 2017.
In
accordance with Section 1009(h) of the Company Guide, if we are again determined to be below any of the NYSE American continued
listing standards within twelve months of December 14, 2018, NYSE Regulation will examine the relationship between the two incidents
of noncompliance and re-evaluate our method of financial recovery from the first incident. NYSE Regulation will then take appropriate
action, which, depending on the circumstances, may include truncating the compliance procedures described in Section 1009 of the
Company Guide or immediately initiating delisting proceedings.
We
can give no assurances we can maintain the listing of our common stock on the NYSE American. Our common stock could be delisted
because we fall below compliance with any NYSE American listing standards. In addition, we may determine to pursue business opportunities
or grow our business at levels or on timelines that reduces our stockholders’ equity below the level required to maintain
compliance with NYSE 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 losing institutional investor interest and
fewer financing opportunities for us; and/or result in potential breaches of representations or covenants of our warrants or other
agreements pursuant to which we made representations or covenants relating to our compliance with applicable listing requirements.
Claims related to any such breaches, with or without merit, could result in costly litigation, significant liabilities and diversion
of our management’s time and attention and could have a material adverse effect on our financial condition, business and
results of operations. In addition, the delisting of our common stock for whatever reason may materially impair our stockholders’
ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency
of the trading market for, our common stock.
If
our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to
trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.
If
our common stock were delisted or suspended from trading on the NYSE American, it may be subject to the so-called “penny
stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has
a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities
exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice
requirements on broker-dealers, subject to certain exceptions. If our common stock were delisted and determined to be a “penny
stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult
to acquire or dispose of our common stock.
The
market price of our common stock historically has been and likely will continue to be highly volatile and our common stock is
thinly traded.
The
market price for our common stock historically has been highly volatile, and the market for our common stock has from time to
time experienced significant price and volume fluctuations, based both on our operating performance and for reasons that appear
to us unrelated to our operating performance. Our stock is also thinly traded, which can affect market volatility, which could
significantly affect the market price of our common stock without regard to our operating performance. In addition, the market
price of our common stock may fluctuate significantly in response to 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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announcement of
non-compliance with any of the NYSE American continued listing standards;
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commencement of
delisting proceedings by NYSE Regulation; and
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additions or departures
of key personnel.
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The
realization of any of the foregoing could have a dramatic and adverse impact on the market price of our common stock.
Future
sales of substantial amounts of our common stock in the public market or the anticipation of such sales could have a material
adverse effect on then-prevailing market prices.
As
of December 31, 2018, there were approximately (1) 147,000 shares of common stock reserved for issuance upon the exercise of outstanding
stock options at exercise prices ranging from $4.30 to $30.50 per share, (2) 61,000 shares of common stock reserved for issuance
upon the settlement of outstanding restricted stock units, and (3) 156,000 shares of our Series A Preferred Stock outstanding
which, based on their current conversion price, would convert into approximately 12,000 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 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 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. We have a shelf registration
statement on file under which we could currently sell up to approximately $21.6 million worth of securities. See also “
Our
ability to raise capital may be limited by applicable laws and regulations
,” below. Raising capital through the issuance
of common stock (or securities convertible into or exchangeable or exercisable for shares of our common stock) may depress the
market price of our stock and may substantially dilute our existing stockholders. In addition, our board of directors may issue
preferred stock with rights, preferences and privileges 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. The offerings we completed in April 2014,
November 2016, March 2017, April 2017 and June 2018 were equity offerings conducted under the “shelf” registration
statement on Form S-3. Using a shelf registration statement on Form S-3 to raise additional capital generally takes less time
and is less expensive than other means, such as conducting an offering under a Form S-1 registration statement. However, our ability
to raise capital using a shelf registration statement may be limited by, among other things, 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 20, 2019, the highest closing price of our common stock within the past 60 days, our public float
is approximately $7.8 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 $1.0
million if we seek to use our shelf registration statement on or before June 29, 2019, and we will only be able to sell up
to approximately $2.6 million if we seek to use our shelf registration statement after June 29, 2019, in each case, assuming we
sell no securities using our shelf registration statement before then. If our ability to use our 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 risk factor “Although
we have regained compliance with the continued listing standards of the NYSE American with which we were previously not compliant,
if we are again determined to be non-compliant with any of its continued listing standards within twelve months of December 14,
2018, depending on the nature of such non-compliance, NYSE Regulation may truncate the compliance procedures available to us or
immediately initiate delisting proceedings” above.
Our
ability to timely raise sufficient additional capital also may be limited by the NYSE American’s stockholder approval requirements
for transactions involving the issuance of our common stock or securities convertible into our common stock. For instance, the
NYSE American requires that we obtain stockholder approval of any transaction involving the sale, issuance or potential issuance
by us of our common stock (or securities convertible into our common stock) at a price less than the greater of book or market
value, which (together with sales by our officers, directors and principal stockholders) equals 20% or more of our then outstanding
common stock, unless the transaction is considered a “public offering” by the NYSE American staff. In addition, certain
prior sales by us may be aggregated with any offering we may propose in the future, further limiting the amount we could raise
in any future offering 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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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.
ITEM 1B.
Unresolved Staff Comments
We
do not have any unresolved comments issued by the SEC Staff.
ITEM 2.
Properties
We
lease approximately 16,000 square feet of office space in Carlsbad, California. The term of the lease is from December 2018 through
April 2026, and we have the option to renew the lease for an additional five-year extension. We also lease approximately 7,500
square feet of warehouse space in Hilliard, Ohio. The term of this lease is from May 2013 through April 2019, and we anticipate
extending this lease through April 2020. The facilities we lease are suitable for our current needs and are considered adequate
to support expected growth.
ITEM 3.
Legal Proceedings
From
time to time, we become subject to legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course
of business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business
operations. Moreover, the results of legal proceedings are difficult to predict. An unfavorable resolution of one or more legal
proceedings could materially adversely affect our business, results of operations, or financial condition. In addition, defending
any claim requires resources, including cash to pay legal fees and expenses, and our limited financial resources could severely
impact our ability to defend any such claim.
Also
from time to time, state and provincial tax agencies have made, and we anticipate will make, inquiries as to whether our service
offerings are subject to taxation in their jurisdictions. Many states have expanded their interpretation of their sales and use
tax statutes, which generally had the effect of increasing the scope of activities that may be subject to such statutes. We evaluate
inquiries from state and provincial tax agencies on a case-by-case basis and have favorably resolved the majority of these inquiries
in the past, though we can give no assurances as to our ability to favorably resolve such inquiries in the future. Any such inquiry
could, if not resolved favorably to us, materially adversely affect our business, results of operations, or financial condition.
ITEM 4.
Mine Safety Disclosures
Not
Applicable.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2018 and 2017
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, including performance analytics and secure payment with
Europay, MasterCard® and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple,
Android and Samsung Pay. The Company’s tablets and technology offer engaging solutions to establishments with guests who
experience dwell time, such as in bars, restaurants, casinos and senior living centers. Casual dining venues subscribe to the
Company’s customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports
and arcade games, customized menus and self-service dining features. The Company’s platform improves operating efficiencies,
creates connections among the players and venues, and amplifies guests’ positive experiences. The Company also continues
to support its legacy network product line, which it calls its Classic platform.
The
Company generates revenue by charging subscription fees for its service to network subscribers, by leasing tablet platform equipment
to certain network subscribers, by selling tablet platform equipment, by hosting live trivia events, by selling advertising aired
on in-venue screens and as part of customized games, by licensing its content for use with third-party equipment, from providing
professional services (such as developing certain functionality within the Company’s platform for customers), and from pay-to-play
arcade games.
At
December 31, 2018, 2,639 venues in the U.S. and Canada subscribed to the Company’s interactive entertainment network, of
which approximately 84% were using the tablet platform.
Basis
of Accounting Presentation
The
consolidated financial statements include the accounts of NTN Buzztime, Inc. and its wholly-owned subsidiaries: IWN, Inc., IWN,
L.P., Buzztime Entertainment, Inc., NTN Wireless Communications, Inc., NTN Software Solutions, Inc., NTN Canada, Inc., and NTN
Buzztime, Ltd., all of which, other than NTN Canada, Inc., are dormant subsidiaries. Unless otherwise indicated, references to
the Company include its consolidated subsidiaries.
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.
2.
Summary of Significant Accounting Policies and Estimates
Consolidation
—The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
—Preparing the Company’s consolidated financial statements requires it to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to deferred costs and revenues;
depreciation of fixed assets; allowance for doubtful accounts; site equipment to be installed; stock-based compensation assumptions;
impairment of fixed assets, software development costs, intangible assets and goodwill; contingencies, including the reserve for
sales tax inquiries; and the provision for income taxes, including the valuation allowance. The Company bases its estimates on
a combination of historical experience and various other assumptions that it believes are reasonable under the circumstances.
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.
Capital
Resources
— In September 2018, the Company entered into a loan and security agreement with Avidbank that provides for
a one-time $4,000,000 48-month term loan, all of which the Company used to pay off the $4,050,000 of principal borrowed from East
West Bank. The Company is required to make principal and interest payments on the loan on the last business day of each month
commencing on October 31, 2018 and through its maturity date, September 28, 2022. As of December 31, 2018, $3,750,000 was outstanding
under the Avidbank term loan, with $1,000,000 recorded in current portion of long-term debt and the remaining $2,750,000 recorded
as long-term debt on the Company’s balance sheet. The Company recorded debt issuance costs of $23,000, which includes a
$20,000 facility fee. The debt issuance costs are being amortized to interest expense using the effective interest rate method
over the life of the loan. The unamortized balance of the debt issuance costs as of December 31, 2018 was $21,000 and is recorded
as a reduction of long term debt. The Company has no more borrowing availability under this credit facility.
The
Company had another financing arrangement with an equipment lender under which the Company used funds to finance the purchase
of certain capital equipment. Through December 31, 2018, the Company borrowed $9,690,000, and as of December 31, 2018, there were
no remaining amounts outstanding. The Company does not expect the lender to lend any additional funds under this financing arrangement.
In
connection with preparing the financial statement as of and for the year ended December 31, 2018, the Company evaluated whether
there are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial
doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.
As a result of such evaluation, the Company believes it will have sufficient cash to meet its operating cash requirements and
to fulfill its debt obligations for at least the next twelve months from the issuance date of these financial statements. In order
to increase the likelihood that the Company will be able to successfully execute its operating and strategic plan and to position
the Company to better take advantage of market opportunities for growth, the Company is continuing to evaluate additional financing
alternatives, including additional equity financings and alternative sources of debt. If the Company’s cash and cash equivalents
are not sufficient to meet future cash requirements, the Company may be required to reduce planned capital expenses, reduce operational
cash uses or raise capital on terms that are not as favorable to the Company as they otherwise might be. Any actions the Company
may undertake to reduce planned capital purchases or reduce expenses may be insufficient to cover shortfalls in available funds.
If the Company requires additional capital, it may be unable to secure additional financing on terms that are acceptable to the
Company, or at all.
Allowance
for Doubtful Accounts
—The Company maintains allowances for doubtful accounts for estimated losses resulting from nonpayment
by its customers. The Company reserves for all accounts that have been suspended or terminated from its Buzztime network services
and for customers with balances that are greater than a predetermined number of days past due. The Company analyzes historical
collection trends, customer concentrations and creditworthiness, economic trends and anticipated changes in customer payment patterns
when evaluating the adequacy of its allowance for doubtful accounts for specific and general risks. Additional reserves may also
be established if specific customers’ balances are identified as potentially uncollectible. If the financial condition of
its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be
required.
Site
Equipment to be Installed
— Site equipment to be installed consist of fixed assets related to the Company’s tablet
platform that have not yet been placed in service and are stated at cost. These assets remain in site equipment to be installed
until it is installed at the Company’s customer sites. For tablet platform customers that are under sales-type lease arrangements,
the cost of the equipment is recognized in direct costs upon installation. For all other tablet platform customers, the cost of
the equipment is reclassified to fixed assets upon installation and depreciated over its 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. The Company determined that there were no indications
of impairment for either of the years ended December 31, 2018 and 2017.
Fixed
Assets
— Fixed assets are recorded at cost. Equipment under capital leases is recorded at the present value of future
minimum lease payments. The Company evaluates the recoverability of our 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. The Company determined that there were no indications of impairment for either of the years ended December
31, 2018 and 2017.
Depreciation
of fixed assets is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold
improvements and fixed assets under capital leases is computed using the straight-line method over the shorter of the estimated
useful lives of the assets or the lease period.
The
Company incurs a relatively significant level of depreciation expense in relation to its operating income. The amount of depreciation
expense in any fiscal year is largely related to the equipment located at the Company’s customers’ sites that are
not under sales-type lease arrangements. Such equipment includes the Classic Playmaker, tablet, other associated electronics and
the computers located at customer’s sites (collectively, “Site Equipment”). The components within Site Equipment
are depreciated over one to three years based on the shorter of the contractual capital lease period or the estimated useful life,
which considers anticipated technology changes. Machinery and equipment is depreciated over three to five years, furniture and
fixtures is depreciated over five to seven years and the vehicle is depreciated over 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. The Company reviewed the estimated useful lives
for each of its asset groups as of December 31, 2018 and determined that the useful life of certain tablets and tablet cases decreased
from two and three years to one year. The Company based this determination on its expectation of the usefulness of these assets
in the marketplace. As a result, the Company expects depreciation expense for assets currently depreciating to increase by approximately
$160,000 during the year ended December 31, 2019.
Goodwill
and Other Intangible Assets
—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 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. (See
Recent Accounting Pronouncements
for
more information on the early adoption of Accounting Standards Update (“ASU”) 2017-04,
Intangibles – Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill Impairment.)
The
Company has goodwill resulting from the excess of costs over the fair value of assets it acquired in 2003 related to its Canadian
business (the “Reporting Unit”). During the year ended December 31, 2018, the Company determined that because of declines
in revenue of the Reporting Unit, the decline in the Company’s stock price and other general market conditions, it was more
likely than not that there were indications of impairment. Therefore, the Company performed the step one impairment test of its
goodwill. The Company used three methods of determining the fair value of the Reporting Unit: the public company
market method, the transaction market method and the income method. Each method was equally weighted to calculate
the total fair value, and then the Company compared this fair value to the carrying value of the Reporting Unit,
which resulted in the carrying value exceeding the fair value. Accordingly, the Company recognized a goodwill impairment loss
of approximately $261,000 during the year ended December 31, 2018. There was no goodwill impairment recorded for the year ended
December 31, 2017.
ASC
No. 350 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance with ASC No. 360,
Property, Plant and Equipment
.
In accordance with ASC No. 360, the Company assesses potential impairments of its long-lived assets whenever events or changes
in circumstances indicate the asset’s carrying value may not be recoverable. An impairment loss would be recognized when
the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of
a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from
the use and eventual disposition of the asset or asset group. The Company performed its annual review as of December 31, 2018
and 2017 of its other intangible assets and determined that there were no indications of impairment for either of those periods.
Revenue
Recognition
— On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue
from Contracts with Customers (Topic 606)
and its amendments.
The Company adopted the new standard
using the full retrospective approach.
Topic
606 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides
a five-step analysis in determining when and how revenue is recognized:
|
1.
|
Identify
the contract(s) with customers
|
|
2.
|
Identify
the performance obligations
|
|
3.
|
Determine
the transaction price
|
|
4.
|
Allocate
the transaction price to the performance obligations
|
|
5.
|
Recognize
revenue when the performance obligations have been satisfied
|
Topic
606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration a company expects to receive in exchange for those goods or services.
The
Company completed the process of evaluating the effect of adopting this update and has determined that the timing and amount of
revenue recognized based on Topic 606 is consistent with the Company’s revenue recognition policy under previous guidance,
and accordingly, there was no transition adoption adjustment necessary upon the adoption of the Topic 606 guidance.
The
Company generates revenue by charging subscription fees for its service to network subscribers, by leasing equipment to certain
network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and
as part of customized games, by licensing its content for use with third-party equipment, from providing professional services
(such as developing certain functionality within the Company’s platform for customers), and from pay-to-play arcade player
games.
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 stand-alone selling prices. All revenues are recognized net of sales tax collected from the customer.
The
Company disaggregates revenue by material revenue stream as depicted on its statement of operations. See below for a geographic
breakdown of revenue. See
Significant Customer
in Note 7 for revenue generated by the Company’s largest customer.
The
following describes how the Company recognizes revenue under Topic 606.
Subscription
Revenue
- The Company recognizes its recurring subscription fees over time as customers receive and consume the benefits of
such services, which includes the Company’s content, the Company’s equipment to access the 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 for up to one year of subscription 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 subscription 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 would recognize any such revenue at the
point in time the Company performs such services.
Costs
associated with installing the equipment are considered direct costs. Costs associated with sales commissions are considered incremental
costs for fulfilling 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 costs that are of an amount that is less than or equal to the deferred 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 year because the Company can still recover that excess cost in the initial term of
the contract.
Sales-type
Lease Revenue
– For certain customers that lease equipment under sale-type lease arrangements, the Company recognizes
revenue in accordance with Accounting Standards Codification (“ASC”) No. 840,
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.
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.
Live
Hosted Trivia Revenue
– The Company recognizes its live-hosted trivia revenue at a point in time, which is when the
event takes place. Some customers host their own trivia events and the Company provides the game materials. In these cases, the
Company recognizes the revenue at the point in time the Company sends the game materials to the customer. The Company recognizes
related costs at the same point in time the revenue is recognized. Generally, there is no unbilled revenue or deferred revenue
associated with live hosted trivia events.
Advertising
Revenue
– The Company recognizes advertising revenue over the time the advertising campaign airs in its customers locations.
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 or
deferred revenue associated with the Company’s advertising activities.
Pay-to-Play
Revenue
– The Company recognizes revenue generated from its customers’ patrons who access the Company’s
premium games on the tablets. This revenue is recognized at a point in time based on usage-based royalty revenue guidance. The
Company generally shares the revenue with the customer whose patrons generated the revenue. In cases where the Company determines
that it is the principal and the customer is the agent, the Company recognizes this revenue on a gross basis, with the amount
of revenue shared with the customer as a direct expense. In cases where the Company determines it is the agent and the
principal is the customer, the Company recognizes the revenue on a net basis. Costs associated with procuring the game license
or developing the games are recognized over the life of the license or expected life of the developed game. Generally, there is
no unbilled revenue or deferred revenue associated with the Company’s pay-to-play games.
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.
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.
Geographic
Breakdown of Revenue
– Geographic breakdown of the Company’s revenue for the last two fiscal years were as
follows:
|
|
For
the years ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
United
States
|
|
$
|
22,653,000
|
|
|
$
|
20,570,000
|
|
Canada
|
|
|
682,000
|
|
|
|
704,000
|
|
Total
revenue
|
|
$
|
23,335,000
|
|
|
$
|
21,274,000
|
|
Contract
Assets and Liabilities
–
The
Company enters into contracts and may recognized 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 December 31, 2018 and 2017, including the change
between the periods.
|
|
Deferred
Revenue
|
|
Balance
at January 1, 2018
|
|
$
|
3,627,000
|
|
New performance obligations
|
|
|
1,921,000
|
|
Recognition
of revenue as a result of satisfying performance obligations
|
|
|
(4,147,000
|
)
|
Balance
at December 31, 2018
|
|
|
1,401,000
|
|
Less
non-current portion
|
|
|
(30,000
|
)
|
Current portion
at December 31, 2018
|
|
$
|
1,371,000
|
|
The
Company does not generally recognize revenue in advance of when the contract gives the Company the right to invoice a customer,
and therefore the Company did not recognize any related contract assets as of December 31, 2018.
Research
and Development
— Research and development costs, which include the cost of equipment the Company is evaluating
for future integration or use in its tablet platform, are expensed as incurred. For the years ended December 31, 2018 and
2017, research and developments costs totaled $72,000 and $139,000, 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. Amortization of costs related to interactive programs is recognized on a straight-line basis over the programs’
estimated useful lives, generally two to three years. Amortization expense relating to capitalized software development costs
totaled $382,000 and $230,000 for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017,
approximately $1,296,000 and $784,000, 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, 2018 and 2017, 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, the Company recognized an impairment of $23,000 and $5,000 for the years
ended December 31, 2018 and 2017, respectively, which was recorded in selling, general and administrative expenses on the Company’s
consolidated statements of operations.
Advertising
Costs –
There were no marketing-related advertising costs for the either of the years ended December 31, 2018 or 2017.
Shipping
and Handling Costs
—Shipping and handling costs are included in direct operating costs in the accompanying consolidated
statements of operations and are expensed as incurred.
Stock-Based
Compensation
— The Company estimates the fair value of its stock options using a Black-Scholes option pricing model,
consistent with the provisions of ASC No. 718
, Compensation – Stock Compensation
and ASC No. 505-50,
Equity –
Equity-Based Payments to Non-Employees.
The fair value of stock options granted is recognized to expense over the requisite
service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line
single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair
value on the grant date and is periodically re-measured as the underlying awards vest. Stock-based compensation expense is reported
as selling, general and administrative based upon the departments to which substantially all of the associated employees report.
Income
Taxes
—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC
No. 740,
Income Taxes,
defines the threshold for recognizing the benefits of tax return positions in the financial statements
as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not”
criterion are measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.
The Company reviewed its tax positions and determined that an adjustment to the tax provision is not considered necessary nor
is a reserve for income taxes required.
Earnings
Per Share
—Basic and diluted loss per common share have been computed by dividing the losses applicable to common stock
by the weighted average number of common shares outstanding. The Company’s basic and fully diluted earnings per share (“EPS”)
calculation are the same since the increased number of shares that would be included in the diluted calculation from assumed exercise
of common stock equivalents would be anti-dilutive to the net loss in each of the years shown in the consolidated financial statements.
Segment
Reporting
—In accordance with ASC No. 280,
Segment Reporting
, the Company has determined that it operates as one
operating segment. Decisions regarding the Company’s overall operating performance and allocation of its resources are assessed
on a consolidated basis.
Recent
Accounting Pronouncements
In
November 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2018-18,
Collaborative Arrangements
(Topic 821)
. This ASU requires certain transactions between participants in a collaborative arrangement to be accounted for
as revenue under the new revenue standard when the participant is a customer. The standard is effective for fiscal years beginning
after December 15, 2019 (which will be January 1, 2020 for the Company). The Company does not expect that the adoption of this
standard will have a material impact on its consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
. This ASU aligns
the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal
years beginning after December 15, 2019 (which will be January 1, 2020 for the Company) and can be applied either retrospectively
or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted at any time. The
Company does not expect that the adoption of this ASU will have a significant impact on its consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure
Requirements for Fair Value Measurement
. This ASU modifies certain disclosure requirements on fair value measurements. The
standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for the Company). The
Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.
In
June 2018, the FASB issued ASU No. 2018-07 (Topic 718),
Improvements to Nonemployee Share-Based Payment Accounting.
This
ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees
and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with
the accounting for employee share-based compensation. The standard is effective for fiscal years beginning after December 15,
2018 (which was January 1, 2019 for the Company), including interim reporting periods within that fiscal year. Early adoption
is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company does not expect that the adoption
of this standard will have a significant impact on its consolidated financial statements.
In
March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118
. This standard incorporates SEC Staff Accounting Bulletin No. 118 (“SAB 118”),
which addresses the accounting implications of the major tax reform legislation, Public Law No. 115-97, commonly referred to as
the Tax Cuts and Jobs Act (the “2017 Tax Act”), enacted on December 22, 2017. SAB 118 allows a company to record provisional
amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. The adoption
of this standard did not a material impact on its consolidated financial statements.
In
January 2017, the FASB issued ASU No 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment.
This standard eliminates the second step of the two-step impairment test and only requires a one-step
quantitative impairment test, whereby the goodwill impairment loss is measured as the excess of a reporting unit’s carrying
amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). . An entity still has the option
to perform the qualitative assessment for an entity to determine if the quantitative impairment test is necessary. This standard
is effective on a prospective basis for fiscal years beginning after December 15, 2019, but can be adopted early for interim or
annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU No. 2017-04 during
the year ended December 31, 2018 when it completed the step-one impairment test on its goodwill related to its Canadian business, resulting in a goodwill impairment loss of $261,000.
The Company determined that adopting ASU No. 2017-04 early
was preferable because it eliminated the second step of the two-step impairment test.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842);
in July 2018, the FASB issued ASU No. 2018-11,
Leases
(Topic 842): Targeted Improvements
; and in December 2018, the FASB issued ASU No. 2018-20,
Leases (Topic 842) – Narrow-Scope
Improvements for Lessors
, (collectively “Topic 842”). Topic 842 primarily requires lessees to recognize at the
lease commencement date a lease liability, which is the lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or
control the use of, a specified asset for the lease term. Topic 842 is effective for fiscal periods beginning after December 15,
2018 (which was January 1, 2019 for the Company), including interim periods within those fiscal years. Lessees and lessors must
either (i) apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements or (ii) recognize a cumulative-effect adjustment to the
opening balance of retained earnings in the period of adoption. Applying a full retrospective transition approach is not allowed.
The Company has elected to use the cumulative-effect transition method upon adoption.
Topic
842 also allows lessees and lessors to elect certain practical expedients. The Company expects to elect the following practical
expedients:
|
●
|
Transitional
practical expedients, which must be elected as a package and applied consistently to
all of the Company’s leases:
|
|
○
|
The
Company need not reassess whether any expired or existing contracts are or contain leases.
|
|
○
|
The
Company need not reassess the lease classification for any expired or existing leases
(that is, all existing leases that were classified as operating leases in accordance
with the previous guidance will be classified as operating leases, and all existing leases
that were classified as capital leases in accordance with the previous guidance will
be classified as finance leases).
|
|
○
|
The
Company need not reassess initial direct costs for any existing leases.
|
|
●
|
Hindsight
practical expedient. The Company expects to elect the hindsight practical expedient in
determining the lease term (that is, when considering lessee options to extend or terminate
the lease and to purchase the underlying asset) and in assessing impairment of the Company’s
right-of-use assets. The Company may elect this practical expedient separately or with
the “practical expedient package,” and the Company must apply it consistently
to all of its leases.
|
Upon
adoption of Topic 842, the Company expects to recognize on its consolidated balance sheet as of January 1, 2019 approximately
$3.5 million of operating lease liabilities, and approximately $2.3 million of corresponding operating right-of use assets, net
of tenant improvement allowances. The Company will also show the initial recognition of the leases as a supplemental noncash financing
activity on the statement of cash flows and the amortization of the noncash lease expense in operating activities . The Company
does not anticipate that the adoption of Topic 842 will have a material impact on its consolidated statement of operations.
3.
Fixed Assets
Fixed
assets are recorded at cost and consist of the following at December 31, 2018 and 2017:
|
|
As
of
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Site equipment
|
|
$
|
11,566,000
|
|
|
$
|
10,419,000
|
|
Machinery and equipment
|
|
|
1,887,000
|
|
|
|
2,678,000
|
|
Furniture and fixtures
|
|
|
461,000
|
|
|
|
279,000
|
|
Leasehold improvements
|
|
|
1,240,000
|
|
|
|
610,000
|
|
Vehicle
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
|
15,169,000
|
|
|
|
14,001,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
(10,502,000
|
)
|
|
|
(10,323,000
|
)
|
Total
|
|
$
|
4,667,000
|
|
|
$
|
3,678,000
|
|
Depreciation
expense totaled $2,382,000 and $2,058,000 for the years ended December 31, 2018 and 2017, 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,
|
|
|
|
2018
|
|
|
2017
|
|
United
States
|
|
$
|
4,526,000
|
|
|
$
|
3,406,000
|
|
Canada
|
|
|
141,000
|
|
|
|
272,000
|
|
Total
assets
|
|
$
|
4,667,000
|
|
|
$
|
3,678,000
|
|
4.
Goodwill and Other Intangible Assets
The
Company’s goodwill balance of $667,000 and $1,004,000 as of December 31, 2018 and 2017, respectively, relates to the excess
of costs over the fair value of assets the Company acquired in 2003 related to its Canadian business (the “Reporting Unit”).
During the year ended December 31, 2018, the Company determined that because of declines in revenue of the Reporting Unit, the
decline in the Company’s stock price and other general market conditions, it was more likely than not that there were indications
of impairment. Therefore, the Company performed the step one impairment test of its goodwill. The Company used three methods to
determine the fair value of the Reporting Unit: the public company market method, the transaction market
method and the income method. Each method was equally weighted to calculate the total fair value, and then the Company
compared this fair value to the carrying value of the Reporting Unit, which resulted in the carrying value exceeding
the fair value. Accordingly, the Company recognized a goodwill impairment loss of $261,000. There was no goodwill impairment
recorded for the year ended December 31, 2017. 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 years ended December 31, 2018 and 2017:
|
|
For
the year ended
|
|
|
For
the year ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Gross
Carrying Value
|
|
|
Impairment
Losses
for the period
|
|
|
Accumulated
Impairment Losses
|
|
|
Effects
of
Foreign Currency
|
|
|
Net
Carrying Value
|
|
|
Gross
Carrying Value
|
|
|
Impairment
Losses
for the period
|
|
|
Accumulated
Impairment Losses
|
|
|
Effects
of
Foreign Currency
|
|
|
Net
Carrying Value
|
|
Goodwill
|
|
$
|
1,004,000
|
|
|
$
|
(261,000
|
)
|
|
$
|
(261,000
|
)
|
|
$
|
(76,000
|
)
|
|
$
|
667,000
|
|
|
$
|
937,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
67,000
|
|
|
$
|
1,004,000
|
|
The
Company performed its annual review of its other intangible assets as of December 31, 2018 and 2017 and determined that there
were no indications of impairment for either of the years ended on those dates.
As
of December 31, 2017, all intangible assets were fully amortized with no remaining useful lives. Amortization expense relating
to all intangible assets totaled $29,000 for the year ended December 31, 2017. There was no amortization expense for the year
ended December 31, 2018.
5.
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.
ASC
No. 820,
Fair Value Measurements and Disclosures,
applies to certain assets and liabilities that are being measured and
reported on a fair value basis. Broadly, the ASC No. 820 framework requires fair value to be determined based on the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants. ASC No. 820 also establishes a fair value
hierarchy for ranking the quality and reliability of the information used to determine fair values. This hierarchy is as follows:
Level
1: Quoted market prices in active markets for identical assets or liabilities.
Level
2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level
3: Unobservable inputs that are not corroborated by market data.
Assets
and Liabilities that are Measured at Fair Value on a Recurring Basis:
The
Company does not have assets or liabilities that are measured at fair value on a recurring basis.
Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring Basis:
Certain
assets are measured at fair value on a non-recurring basis and are subject to fair value adjustments only in certain circumstances.
Included in this category are goodwill written down to fair value when determined to be impaired, acquired assets and long-lived
assets including capitalized software that are written down to fair value when they are held for sale or determined to be impaired.
The valuation methods for goodwill, assets and liabilities resulting from acquisitions, and long-lived assets involve assumptions
concerning interest and discount rates, growth projections, and/or other assumptions of future business conditions. As all of
the assumptions employed to measure these assets and liabilities on a nonrecurring basis are based on management’s judgment
using internal and external data, these fair value determinations are classified in Level 3 of the valuation hierarchy.
There
were no transfers between fair value measurement levels during the year ended December 31, 2018.
6.
Accrued Compensation
Accrued
compensation consisted of the following at December 31, 2018 and 2017:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued vacation
|
|
$
|
267,000
|
|
|
$
|
290,000
|
|
Accrued salaries
|
|
|
251,000
|
|
|
|
278,000
|
|
Accrued bonuses
|
|
|
32,000
|
|
|
|
61,000
|
|
Accrued commissions
|
|
|
22,000
|
|
|
|
17,000
|
|
Total accrued compensation
|
|
$
|
572,000
|
|
|
$
|
646,000
|
|
7.
Concentrations of Risk
Credit
Risk
At
times, the Company’s cash balances held in financial institutions are in excess of federally insured limits. The Company
performs periodic evaluations of the relative credit standing of financial institutions and seeks to limit the amount of risk
by selecting financial institutions with a strong credit standing. The Company believes it is not exposed to any significant credit
risk with respect to its cash and cash equivalents.
The
Buzztime network provides services to group viewing locations, generally restaurants, sports bars and lounges throughout North
America. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising
the Company’s customer base, and their dispersion across many different geographic locations. The Company performs credit
evaluations of new customers and generally requires no collateral. The Company maintains an allowance for doubtful accounts to
provide for credit losses.
Significant
Customer
For
the years ended December 31, 2018 and 2017, the Company generated approximately $10,180,000 and $8,678,000, respectively, of total
revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees, which represented approximately 44% and 41% of
total revenue in each of those years, respectively. As of December 31, 2018 and 2017, approximately $552,000 and $191,000, respectively,
was included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and its franchisees.
Sole
Equipment Supplier
The
Company currently purchases the tablets, cases and charging trays used in its tablet platform from one unaffiliated third-party
manufacturer. The Company currently does not have an alternative manufacturer for its tablets or an alternative manufacturer or
device for the tablet cases or tablet charging trays. The Company no longer purchases playmakers for its Classic platform.
As
of December 31, 2018 and 2017, approximately $15,000 and $2,000, respectively, was included in accounts payable or accrued expenses
for the tablet equipment purchased from its sole supplier.
8.
Basic and Diluted Earnings Per Common Share
Basic
earnings per share excludes the dilutive effects of options, warrants and other convertible securities. Diluted earnings per share
reflects the potential dilutions of securities that could share in the Company’s earnings. Options, warrants and convertible
preferred stock representing approximately 219,000 and 239,000 shares of common stock were excluded from the computations
of diluted net loss per common share for the years ended December 31, 2018 and 2017, respectively, as their effect was anti-dilutive.
When
computing basic and diluted earnings per common shareholder, the Company is required to reduce net income or increase net loss
by dividend amounts paid to the holders of its Series A Preferred stock. Historically, the Company has not made
this adjustment on its consolidated statement of operations. However, the Company has made such adjustments in the presentation
of its accompanying statements of operations for the years ended December 31, 2018 and 2017. This presentation adjustment resulted
in a change in basic and diluted earnings per common shareholder for the year ended December 31, 2017 from $0.44 as previously
reported to $0.45. The Series A preferred stock dividend was correctly reported in the Company’s balance sheet, statement
of shareholders’ equity, and statement of cash flows for the year ended December 31, 2017. The Company determined that the
change to the statement of operations for the year ended December 31, 2017 was immaterial. See
Cumulative Convertible Preferred
Stock
in Note 9 for more information on the preferred stockholder dividend.
9.
Shareholders’ Equity
Registered
Direct Offerings
In
March 2017, the Company sold approximately 200,000 shares of its common stock at a purchase price of $7.85 per share and received
net proceeds of approximately $1,554,000, after deducting estimated offering expenses.
In
April 2017, the Company sold approximately 30,000 shares of its common stock at a purchase price of $7.78 per share and received
net proceeds of approximately $219,000, after deducting estimated offering expenses.
In
June 2018, the Company sold approximately 346,000 shares of its common stock at a purchase price of $4.50 per share and received
net proceeds of approximately $1,375,000, after deducting estimated offering expenses.
The
Company used the net proceeds from the offerings for general corporate purposes, which included working capital, general and administrative
expenses, capital expenditures and implementation of its strategic priorities.
Equity
Incentive Plans
2004
Performance Incentive Plan
In
September 2004 at a Special Meeting of Stockholders, the Company’s stockholders approved the 2004 Performance Incentive
Plan (the “2004 Plan”). The 2004 Plan provided for the issuance of up to 50,000 shares of NTN common stock. In addition,
all shares that remained unissued under the 1995 Employee Stock Option Plan (the “1995 Plan”) on the effective date
of the 2004 Plan, and all shares issuable upon exercise of options granted pursuant to the 1995 Plan that expire or become unexercisable
for any reason without having been exercised in full, were available for issuance under the 2004 Plan. Options under both the
1995 Plan and the 2004 Plan have a term of up to ten years, and are exercisable at a price per share not less than the fair market
value on the date of grant. In September 2009, the 2004 Plan expired and all unexercised awards granted under that plan expired
as of December 31, 2018, in accordance with that plan’s terms.
2010
Amended Performance Incentive Plan
In
June 2010, the Company’s stockholders approved the 2010 Performance Incentive Plan (the “2010 Plan”). The 2010
Plan provided for the issuance of up to 120,000 shares of the Company’s common stock. At the Company’s 2015 Annual
Meeting of Stockholders, the Company’s stockholders approved the Amended 2010 Performance Plan (the “Amended 2010
Plan”), which, among other things, amended the 2010 Plan to increase the authorized shares to be issued thereunder from
120,000 to 240,000. The Amended 2010 Plan expires in February 2020. Under the Amended 2010 Plan, options to the purchase the Company’s
common stock or other instruments such as restricted stock units may be granted to officers, directors, employees and consultants.
The Company’s Board of Directors designated its Nominating and Corporate Governance/Compensation Committee as the Amended
2010 Plan Committee. Stock options granted under the Amended 2010 Plan may either be incentive stock options or nonqualified stock
options. A stock option granted under the Amended 2010 Plan generally cannot be exercised until it becomes vested. The Amended
2010 Plan Committee establishes the vesting schedule of each stock option at the time of grant. At its discretion, the Amended
2010 Plan Committee can accelerate the vesting, extend the post-termination exercise term or waive restrictions of any stock options
or other awards under the Amended 2010 Plan. Options under the Amended 2010 Plan have a term of up to ten years, and are exercisable
at a price per share not less than the fair market value on the date of grant. As of December 31, 2018, there were options to
purchase approximately 62,000 shares of the Company’s common stock outstanding under the Amended 2010 Plan. As of December
31, 2018, there were approximately 47,000 share-based awards available to be granted under the Amended 2010 Plan.
2014
Inducement Plan
In
August 2014, the Nominating and Corporate Governance/Compensation Committee of the Company’s Board of Directors (the “Committee”)
approved the 2014 Inducement Plan (the “2014 Plan”) in reliance on Section 771(a) of the NYSE American Company Guide
as an inducement material to Ram Krishnan entering into employment with the Company as its Chief Executive Officer. The 2014 Plan
provides for the issuance of up to 85,000 shares of the Company’s common stock, of which, an option to purchase 70,000 shares
of common stock was issued to Mr. Krishnan in September 2014. In accordance with the terms of his employment agreement, in April
2015, Mr. Krishnan was granted another performance-based option to purchase 15,000 shares of common stock. Options under the 2014
Plan have a term of up to ten years and are exercisable at a price per share not less than the fair market value on the date of
grant. Both of the option grants described above will, subject to Mr. Krishnan’s continued employment through the applicable
vesting date and, with respect to the performance-based option granted in April 2015, subject to meeting performance goals, vest
as to 25% of the total number of shares subject to the option on the first anniversary of the grant date and the remaining 75%
of the total number of shares subject to the option will vest in 36 substantially equal monthly installments thereafter. There
are no share-based awards available to be granted under the 2014 Plan. The 2014 Plan expires in September 2024.
Stock-Based
Compensation Valuation Assumptions
The
Company records stock-based compensation in accordance with ASC No. 718
, Compensation – Stock Compensation
and ASC
No. 505-50,
Equity – Equity-Based Payments to Non-Employees.
The Company estimates the fair value of stock options
using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite
service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line
single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair
value on the grant date and is periodically re-measured as the underlying awards vest.
The
Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term
of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise
patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate,
the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend
yield assumption is based on the Company’s history and expectation of dividend payouts.
The
following weighted-average assumptions were used for grants issued during 2018 and 2017 under the ASC No. 718 requirements:
|
|
2018
|
|
|
2017
|
|
Weighted average risk-free rate
|
|
|
2.87
|
%
|
|
|
1.97
|
%
|
Weighted average volatility
|
|
|
113.20
|
%
|
|
|
113.57
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected term
|
|
|
7.06 years
|
|
|
|
7.19 years
|
|
The
Company estimates forfeitures, based on historical activity, at the time of grant and revised if necessary in subsequent periods
if actual forfeiture rates differ from those estimates. Stock-based compensation expense for employees during the years ended
December 31, 2018 and 2017 was $443,000 and $457,000, 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, 2018 and 2017:
|
|
Outstanding
Options
|
|
|
Weighted
Average Exercise
Price per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate Intrinsic
Value
|
|
Outstanding January 1, 2017
|
|
|
165,000
|
|
|
$
|
17.78
|
|
|
|
8.67
|
|
|
$
|
36,000
|
|
Granted
|
|
|
8,000
|
|
|
|
6.66
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(8,000
|
)
|
|
|
16.76
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(9,000
|
)
|
|
|
9.87
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
156,000
|
|
|
|
17.74
|
|
|
|
7.12
|
|
|
|
-
|
|
Granted
|
|
|
2,000
|
|
|
|
4.44
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(6,000
|
)
|
|
|
10.42
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(4,000
|
)
|
|
|
6.38
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(1,000
|
)
|
|
|
16.00
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2018
|
|
|
147,000
|
|
|
$
|
18.20
|
|
|
|
6.08
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable at December 31, 2018
|
|
|
137,000
|
|
|
$
|
18.81
|
|
|
|
5.99
|
|
|
$
|
-
|
|
No
options were exercised during the years ended December 31, 2018 or 2017. The per share weighted average grant-date fair value
of stock options granted during the years ended December 31, 2018 and 2017 was $3.90 and $5.87, respectively.
As
of December 31, 2018, the unamortized stock based compensation expense related to outstanding unvested options was approximately
$61,000 with a weighted average remaining requisite service period of 1.02 years. The Company expects to amortize this expense
over the remaining requisite service period of these stock options. A deferred tax asset generally would be recorded related to
the expected future tax benefit from the exercise of the non-qualified stock options. However, due to a history of net operating
losses (“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 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 by the award recipient through
the respective vesting date. Because restricted stock units 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 year ended December 31, 2018, the Company granted approximately 74,000 restricted stock
units with a weighted average grant date fair value of $5.13 per restricted stock unit, all of which vest as to 16.67% of the
total underlying shares on the six month anniversary of the grant date and as to the balance of the total underlying shares in
30 substantially equal monthly installments, beginning on the seven month anniversary of the grant date, subject to accelerated
vesting in the event of a change in control. Of the 74,000 restricted stock units, 25,000 and 15,000 were granted to the Company’s
Chief Executive Officer and Chief Financial Officer, respectively. The Company did not grant restricted stock units during the
year ended December 31, 2017.
The
following table summarizes restricted stock unit activity for the year ended December 31, 2018:
|
|
Outstanding
Restricted Stock Units
|
|
|
Weighted
Average Fair Value per Share
|
|
January 1, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
74,000
|
|
|
|
5.13
|
|
Released
|
|
|
(13,000
|
)
|
|
|
6.04
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
December 31, 2018
|
|
|
61,000
|
|
|
$
|
4.94
|
|
|
|
|
|
|
|
|
|
|
Balance exercisable at December 31, 2018
|
|
|
51,000
|
|
|
|
|
|
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 year ended December 31, 2018, approximately 13,000 restricted stock
units vested and were settled, and as a result of employees electing to satisfy applicable withholding taxes by having the Company
withhold shares, approximately 9,000 shares of common stock were issued.
Warrant
Activity
The
following summarizes warrant activities for the years ended December 31, 2018 and 2017:
|
|
Outstanding
Warrants
|
|
|
Weighted
Average Exercise
Price per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Outstanding January 1, 2017
|
|
|
132,000
|
|
|
$
|
33.64
|
|
|
|
2.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(60,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
72,000
|
|
|
$
|
20.00
|
|
|
|
0.87
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(72,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance exercisable at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
During
2013, the Company issued warrants to purchase an aggregate of 72,000 shares of common stock in connection with a private placement.
The fair value of the warrants was approximately $1,379,000 in aggregate and was determined using the Black-Scholes model using
the following weighted-average assumptions: risk-free interest rates of 1.06%; dividend yield of 0%; expected volatility of 80.25%;
and a term of 5 years. The Company concluded that these warrants qualify as equity instruments and not liabilities. None of
these warrants were exercised, and as of December 31, 2018, all outstanding warrants expired.
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, 2018 and 2017.
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, 2018 and 2017.
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, 2018, the conversion rate was 13.439 and, based on that conversion rate, all outstanding shares of Series
A Preferred Stock would have converted into approximately 12,000 shares of common stock. The conversion rate is subject to
adjustment in certain events and is established at the time of conversion. There were no conversions during either of the years
ended December 31, 2018 and 2017. There is no mandatory conversion term, date or any redemption features associated with the Series
A Preferred Stock.
10.
Income Taxes
For
each of the years ended December 31, 2018 and 2017, current tax provisions and current deferred tax provisions were recorded as
follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
21,000
|
|
|
$
|
-
|
|
State
|
|
|
(21,000
|
)
|
|
|
(27,000
|
)
|
Foreign
|
|
|
(5,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
(5,000
|
)
|
|
|
(32,000
|
)
|
Deferred Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
6,000
|
|
|
|
(24,000
|
)
|
Foreign
|
|
|
63,000
|
|
|
|
(10,000
|
)
|
|
|
|
69,000
|
|
|
|
(34,000
|
)
|
Total Tax Provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
21,000
|
|
|
|
-
|
|
State
|
|
|
(15,000
|
)
|
|
|
(51,000
|
)
|
Foreign
|
|
|
58,000
|
|
|
|
(15,000
|
)
|
|
|
$
|
64,000
|
|
|
$
|
(66,000
|
)
|
The
net deferred tax assets and liabilities have been reported in other liabilities in the consolidated balance sheets at December
31, 2018 and 2017 as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
NOL carryforwards
|
|
$
|
15,756,000
|
|
|
$
|
15,337,000
|
|
UK NOL carryforwards
|
|
|
534,000
|
|
|
|
567,000
|
|
Allowance for doubtful accounts
|
|
|
97,000
|
|
|
|
119,000
|
|
Compensation and vacation accrual
|
|
|
58,000
|
|
|
|
64,000
|
|
Operating accruals
|
|
|
285,000
|
|
|
|
47,000
|
|
Research and experimentation, AMT and foreign tax credits
|
|
|
126,000
|
|
|
|
148,000
|
|
Texas margin tax credit
|
|
|
120,000
|
|
|
|
136,000
|
|
Other
|
|
|
850,000
|
|
|
|
514,000
|
|
Total gross deferred tax assets
|
|
|
17,826,000
|
|
|
|
16,932,000
|
|
Valuation allowance
|
|
|
(17,149,000
|
)
|
|
|
(16,340,000
|
)
|
Net deferred tax assets
|
|
|
677,000
|
|
|
|
592,000
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
|
523,000
|
|
|
|
375,000
|
|
Fixed assets and intangibles
|
|
|
86,000
|
|
|
|
220,000
|
|
Foreign
|
|
|
45,000
|
|
|
|
49,000
|
|
Total gross deferred liabilities
|
|
|
654,000
|
|
|
|
644,000
|
|
Net deferred taxes
|
|
$
|
23,000
|
|
|
$
|
(52,000
|
)
|
The
reconciliation of computed expected income taxes to effective income taxes by applying the federal statutory rate of 21% is as
follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Tax at federal income tax rate
|
|
$
|
68,000
|
|
|
$
|
316,000
|
|
State provision
|
|
|
(15,000
|
)
|
|
|
(51,000
|
)
|
Foreign tax differential
|
|
|
13,000
|
|
|
|
3,000
|
|
Change in valuation allowance
|
|
|
(20,000
|
)
|
|
|
8,898,000
|
|
Impact related to tax reform
|
|
|
-
|
|
|
|
(8,791,000
|
)
|
Permanent items
|
|
|
(3,000
|
)
|
|
|
(441,000
|
)
|
Other
|
|
|
21,000
|
|
|
|
-
|
|
Total Provision
|
|
$
|
64,000
|
|
|
$
|
(66,000
|
)
|
On
December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law and resulted in significant
changes to the U.S. corporate income tax regulations, including a reduction in the corporate tax rates, changes to NOL carryforwards
and carrybacks, and a repeal of the corporate alternative minimum tax. The 2017 Tax Act reduced the U.S. corporate tax rate from
35% to 21%. As a result of the 2017 Tax Act, the Company was required to revalue deferred tax assets and liability at the enacted
rate in 2017. This revaluation resulted in an expense of $8,791,000 recorded in continuing operations and a corresponding reduction
in the valuation allowance. The 2017 Tax Act requires the Company to pay tax on the unremitted earnings of its foreign subsidiaries
though December 31, 2017. The Company determined that the previously unremitted earnings and profits of all its foreign subsidiaries
has no impact on its consolidated financial statements.
The
net change in the total valuation allowance for the year ended December 31, 2018 was an increase of $20,000. The net change in
the total valuation allowance for the year ended December 31, 2017 was a decrease of $8,898,000. In assessing the realizability
of deferred tax assets, the Company 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. The Company 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, the Company 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, 2018, the Company had NOL carryforwards of approximately $66,572,000 for federal income tax purposes, which will
start expiring in 2019, and approximately $36,044,000 for state income tax purposes, which will start expiring in 2019. 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 NOL carryforwards
due to continued operating losses. Under Internal Revenue Code (“IRC”) Section 382 and similar state provisions, ownership
changes may limit the annual utilization of NOL carryforwards existing prior to a change in control that are available to offset
future taxable income. Such limitations would reduce, potentially significantly, the gross deferred tax assets disclosed in the
table above related to the NOL carryforwards. The Company performed a Section 382 analysis as of December 31, 2018 to determine
the impact of any changes in ownership. Based on this analysis, no ownership change occurred that would limit the use of the NOLs.
The Company
continues to disclose the NOL carryforwards at their
original amount in the table above as no potential limitation has been quantified. The Company also established a full valuation
allowance for substantially all deferred tax assets, including the NOL carryforwards, since the Company could not conclude that
it was more likely than not able to generate future taxable income to realize these assets. In addition, the Company has approximately
$152,000 of state tax credit tax carryforwards that expire in the years 2019 through 2026.
The
deferred tax assets as of December 31, 2018 include a deferred tax asset of $442,000 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 2014. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where NOLs
were generated and carried forward, and make adjustments up to the amount of the carryforwards. The Company is not currently under
examination by the IRS or state taxing authorities.
11.
Long-term Debt
Term
Loan
On
September 28, 2018, the Company entered into a loan and security agreement with Avidbank. The following is a summary of the material
terms of that agreement:
|
●
|
Avidbank
loaned the Company $4,000,000 as a one-time 48-month term loan, all of which the Company
used to pay-off the $4,050,000 of principal it borrowed from East West Bank (“EWB”).
The Company used its cash on hand to pay the remaining $50,000 it borrowed from EWB plus
accrued and unpaid interest.
|
|
|
|
|
●
|
The
Company must make monthly principal payments of approximately $83,000 plus accrued and
unpaid interest on the last business day of each month commencing on October 31, 2018
and through the loan’s maturing date, September 30, 2022.
|
|
|
|
|
●
|
Other
than during the continuance of an event of default, the loan bears interest at a variable
rate per annum equal to the prime rate as set forth in
The Wall Street Journal
plus 1.75%.
|
|
|
|
|
●
|
The
Company granted and pledged to Avidbank a first-priority security interest in all its
existing and future personal property.
|
|
|
|
|
●
|
The
Company must comply with these financial covenants:
|
|
○
|
EBITDA
(as defined below) must be at least $1,000,000 for the trailing six month period as of
the last day of each fiscal quarter. “EBITDA” means (a) net profit (or loss),
after provision for taxes, plus (b) interest expense, plus (c) to the extent deducted
in the calculation of net profit (or loss), depreciation expense and amortization expense,
plus (d) income tax expense, plus (e) to the extent approved by Avidbank, other noncash
expenses and charges, other onetime charges, and any losses arising from the sale, exchange,
transfer or other disposition of assets not in the ordinary course of business.
|
|
|
|
|
○
|
The
aggregate amount of unrestricted cash the Company has in deposit accounts or securities
accounts maintained with Avidbank must be not less than $2,000,000 at all times.
|
|
●
|
Subject
to customary exceptions, the Company is prohibited from borrowing additional indebtedness.
|
|
|
|
|
●
|
The
Company paid $20,000 to Avidbank as a facility fee upon entering into the loan and security
agreement.
|
|
|
|
|
●
|
If
the Company prepays the loan before September 28, 2019, it must pay a prepayment fee
of 1.75% of the principal amount repaid, and if the Company prepays the loan on or after
such date but before September 28, 2020, it must pay a prepayment fee of 1.00% of the
principal amount prepaid. There is no prepayment fee if the Company prepays the loan
on or after September 28, 2020.
|
As
of December 31, 2018, the Company was in compliance with both financial covenants described above.
The
loan and security agreement includes customary representations, warranties and covenants (affirmative and negative), including
restrictive covenants that, subject to specified exceptions, limit the Company’s ability to: dispose of its business or
property; merge or consolidate with or into any other business organization; incur or prepay additional indebtedness; create or
incur any liens on its property; declare or pay any dividend or make a distribution on any class of the Company’s stock;
or enter specified material transactions with its affiliates.
The
loan and security agreement also includes customary events of default, including: payment defaults; breaches of covenants following
any applicable cure period; material breaches of representations or warranties; the occurrence of a material adverse effect; events
relating to bankruptcy or insolvency; and the occurrence of an unsatisfied material judgment against the Company. Upon the occurrence
of an event of default, Avidbank may declare all outstanding obligations immediately due and payable, do such acts as it considers
necessary or reasonable to protect its security interest in the collateral, and take such other actions as are set forth in the
loan and security agreement.
As
of December 31, 2018, $3,750,000 of the term loan was outstanding, with $1,000,000 recorded in current portion of long-term debt
and the remaining $2,750,000 recorded as long-term debt on the Company’s balance sheet. The Company recorded debt issuance
costs of $23,000, which includes the $20,000 facility fee. The debt issuance costs will be amortized to interest expense beginning
in October 2018 using the effective interest rate method over the life of the loan. The unamortized balance of the debt issuance
costs as of December 31, 2018 was $21,000 and is recorded as a reduction of long term debt.
In
connection with entering into the loan and security agreement with Avidbank, the amended and restated loan and security agreement
the Company entered into with EWB on November 29, 2017, as amended on March 12, 2018, terminated on September 28, 2018.
Equipment
Notes Payable
In
May 2013, the Company entered into a financing arrangement with a lender under which the Company borrowed funds to purchase certain
equipment. Initially, the maximum amount the Company could borrow under this financing arrangement was $500,000. Over time, the
lender increased that maximum amount, and as of December 31, 2018, the maximum amount was $9,690,000, all of which has been borrowed.
In April 2015, the Company used approximately $3,381,000 of the proceeds borrowed under a prior credit facility with EWB to pay
down a portion of the principal amount the Company had borrowed under this financing arrangement, accrued interest and a prepayment
fee.
The
Company was able to borrow up to the maximum amount available under this financing arrangement in tranches as needed. Each tranche
borrowed through August 2015 incurred interest at 8.32% per annum; the interest for tranches borrowed thereafter was reduced to
rates between 7.32% to 8.05% per annum. With respect to the first $1,000,000 in the aggregate borrowed, principal and interest
payments are due in 36 equal monthly installments. With respect to amounts borrowed in excess of the first $1,000,000 in the aggregate,
the first monthly payment will be equal to 24% of the principal amount outstanding, and the remaining principal and interest due
is payable in 35 equal monthly installments. The Company granted the lender a first security interest in the equipment purchased
with the funds borrowed.
As
of December 31, 2018, there were no remaining amounts outstanding under this financing arrangement. The Company will not have
access to any additional funds under this financing arrangement.
Long-Term
Debt Principal Payments
Future
minimum principal payments under long-term debt as of December 31, 2018 are as follows:
Years Ending December 31,
|
|
Principal
Payments
|
|
2019
|
|
$
|
1,000,000
|
|
2020
|
|
|
1,000,000
|
|
2021
|
|
|
1,000,000
|
|
2022
|
|
|
750,000
|
|
Total
|
|
$
|
3,750,000
|
|
Interest
expense related to long-term debt for the years ended December 31, 2018 and 2017 was $296,000 and $425,000, respectively.
12.
Commitments
Operating
Leases
The
Company leases office and production facilities and equipment under agreements that expire at various dates through 2026. Certain
leases contain renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance,
taxes and other operating expenses.
In
August 2018, the Company entered into an agreement to lease approximately 16,000 square feet of office space in Carlsbad, California
(the “Carlsbad Lease”). The Company relocated its corporate headquarters to this new location. The term of the Carlsbad
Lease is from December 2018 through April 2026. The Company has a one-time option to renew the lease for an additional five-year
extension. Base rent is abated by 50% for months two through nine of the term. Base rent escalates annually beginning in December
2019 by approximately 3.5% per year. The Company will pay its share of the lessor’s operating expenses, which includes utilities,
insurance, taxes, and other operating expenses.
As
required in the Carlsbad Lease, the Company’s bank, Avidbank, issued a letter of credit to the lessor in the amount of $250,000
as security, which amount will reduce by $50,000 each year beginning December 1, 2019, 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
will reduce in alignment with the amount required under the letter of credit each year. The Company recorded the $250,000 deposit
as restricted cash on its balance sheet, with $50,000 being recorded in short-term restricted cash and the balance being recorded
in long-term restricted cash. The amount deposited in such account will not count toward the covenant under the Avidbank loan
and security agreement that requires the Company to have an aggregate amount of unrestricted cash in deposit accounts or securities
accounts maintained with Avidbank of not less than $2,000,000 at all times.
For
the years ended December 31, 2018 and 2017, total lease expense under operating leases was $528,000 and $510,000, respectively.
As
of December 31, 2018, future minimum lease payments under operating leases are as follows:
Years Ending December 31,
|
|
Lease
Payment
|
|
2019
|
|
$
|
425,000
|
|
2020
|
|
|
615,000
|
|
2021
|
|
|
620,000
|
|
2022
|
|
|
634,000
|
|
2023
|
|
|
655,000
|
|
Thereafter
|
|
|
1,601,000
|
|
Total
|
|
$
|
4,550,000
|
|
As
a result of Topic 842, which the Company adopted on January 1, 2019, the Company is required to recognize a lease liability, which
is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. Accordingly, on the January 1, 2019 transition date to Topic 842, the Company expects to recognize on its consolidated balance
sheet approximately $3.5 million of operating lease liabilities, and approximately $2.3 million of corresponding operating right-of
use assets, net of tenant improvement allowances. See “Recent Accounting Pronouncements” in Note 2 for further details
on Topic 842.
Capital
Leases
As
of December 31, 2018 and 2017, property held under current capital leases was as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Office equipment
|
|
$
|
357,000
|
|
|
$
|
362,000
|
|
Site equipment
|
|
|
-
|
|
|
|
250,000
|
|
Accumulated depreciation
|
|
|
(276,000
|
)
|
|
|
(322,000
|
)
|
Total
|
|
$
|
81,000
|
|
|
$
|
290,000
|
|
Total
depreciation expense under capital leases was $81,000 and $95,000 for the years ended December 31, 2018 and 2017, respectively.
As
of December 31, 2018, future minimum principal payments under capital leases are as follows:
Years Ending December 31,
|
|
Principal
Payment
|
|
2019
|
|
$
|
45,000
|
|
2020
|
|
|
21,000
|
|
2021
|
|
|
20,000
|
|
Total
|
|
$
|
86,000
|
|
The
adoption of Topic 842 did not have a material impact on the balances of the Company’s capital lease liabilities or the associated
assets on the transition date of January 1, 2019. See “Recent Accounting Pronouncements” in Note 2 for further details
on Topic 842.
13.
Contingencies
Litigation
The
Company is subject to litigation from time to time in the ordinary course of its business. There can be no assurance that any
claims will be decided in the Company’s favor and the Company is not insured against all claims made. During the pendency
of such claims, the Company will continue to incur the costs of its legal defense. Currently, there is no material litigation
pending or threatened against the Company.
Sales
and Use Tax
From
time to time, state tax authorities will make inquiries as to whether or not a portion of the Company’s services require
the collection of sales and use taxes from customers in those states. Many states have expanded their interpretation of their
sales and use tax statutes to subject more activities to tax. The Company evaluates such inquiries on a case-by-case basis and
has favorably resolved the majority of these tax issues in the past without any material adverse consequences. There were no liabilities
recorded in either of the years ended December 31, 2018 or 2017.
14.
Accumulated Other Comprehensive Income
Accumulated
other comprehensive income includes the accumulated gains or losses from foreign currency translation adjustments. The Company
translated the assets and liabilities 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, 2018 and 2017, $200,000 and $345,000, respectively, of accumulated foreign currency translation adjustments
were recorded in accumulated other comprehensive income, respectively.
15.
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.