UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2011
Commission File Number 1-11460
NTN Buzztime, Inc.
(Exact name of Registrant as specified in its charter)
| Delaware | 31-1103425 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
2231 Rutherford Road, Suite 200 Carlsbad, California | 92008 |
| (Address of Principal Executive Offices) | (Zip Code) |
(760) 438-7400
(Registrant’s telephone number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, $.005 par value | NYSE |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes¨Nox
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Indicate by check mark whether the Registrant submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceeding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company. Yes¨Nox
The aggregate market value of the common stock held by non-affiliates of the Registrant as of June 30, 2011,2013, computed by reference to the closing sale price of the common stock on the NYSE AmexMKT on June 30, 2011,28, 2013, was approximately $24.7$20.7 million. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 26, 2012,2014, the Registrant had 70,997,63478,722,665 shares of common stock outstanding.
Documents Incorporated by Reference.
Portions of the registrant’s definitive proxy statement relating to its 2014 annual meeting of stockholders are incorporated by reference into Part III of this report to the extent not set forth herein, is incorporated by reference to the Registrant’swhere indicated. Such proxy statement relatingwill be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to the annual meeting of stockholders expected to be held on or about June 8, 2012.
TABLE OF CONTENTS
Item | Page | |
| Part I | ||
| 1. | Business | 1 |
| 1A. | Risk Factors | 4 |
| 1B. | Unresolved Staff Comments | 10 |
| 2. | Properties | 11 |
| 3. | Legal Proceedings | 11 |
| 4. | Mine Safety Disclosures | 11 |
| Part II | ||
| 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 12 |
| 6. | Selected Financial Data | 12 |
| 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| 7A. | Quantitative and Qualitative Disclosures About Market Risk | 20 |
| 8. | Financial Statements and Supplementary Data | 20 |
| 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 20 |
| 9A. | Controls and Procedures | 20 |
| 9B. | Other Information | 21 |
| Part III | ||
| 10. | Directors, Executive Officers and Corporate Governance | 22 |
| 11. | Executive Compensation | 22 |
| 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 22 |
| 13. | Certain Relationships and Related Transactions, and Director Independence | 22 |
| 14. | Principal Accounting Fees and Services | 22 |
| Part IV | ||
| 15. | Exhibits, Financial Statement Schedules | 23 |
| Signatures | 26 | |
| Index to Financial Statements and Schedule | F-1 |
| i |
| Item | Page | |
| Part I | ||
| 1. | Business | 1 |
| 1A. | Risk Factors | 8 |
| 1B. | Unresolved Staff Comments | 14 |
| 2. | Properties | 14 |
| 3. | Legal Proceedings | 14 |
| 4. | Mine Safety Disclosures | 14 |
| Part II | ||
| 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 15 |
| 6. | Selected Financial Data | 15 |
| 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| 7A. | Quantitative and Qualitative Disclosures About Market Risk | 23 |
| 8. | Financial Statements and Supplementary Data | 23 |
| 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 23 |
| 9A. | Controls and Procedures | 23 |
| 9B. | Other Information | 23 |
| Part III | ||
| 10. | Directors, Executive Officers and Corporate Governance | 24 |
| 11. | Executive Compensation | 26 |
| 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 26 |
| 13. | Certain Relationships and Related Transactions, and Director Independence | 26 |
| 14. | Principal Accounting Fees and Services | 26 |
| Part IV | ||
| 15. | Exhibits, Financial Statement Schedules | 27 |
| Signatures | 30 | |
| Index to Financial Statements and Schedule | 31 |
This Annual Report on Form 10-K contains forward-looking statements that involve a high degree of risk and uncertainty. Such statements include, but are not limited to, statements containing the words “believes,” “anticipates,” “expects,” “estimates” and words of similar import. Our actual results could differ materially from any forward-looking statements, which reflect management’s opinions only as of the date of this report, as a result of risks and uncertainties that exist in our operations, development efforts and business environment. Except as required by law, we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. You should carefully review the “Risks and“Risk Factors” section below and the risk factors in other documents that we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q.
PART I
ITEM 1.
BusinessUnless otherwise indicated, references herein to “Buzztime,” “NTN,” “we,” “us” and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries. NTN Buzztime, Inc. was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate name to NTN Communications, Inc. in 1985. We changed our name to NTN Buzztime, Inc. in 2005 to better reflect the growing role of the Buzztime consumer brand.
We own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, BEOND Powered by Buzztime and Play Along TV trademarks to be among our most valuable assets.
Overview
We provide an entertainment and marketing services through interactive game contentplatform for hospitality venues that offer the games, freeevents, and entertainment experiences to their customers. Founded in 1984, our company has evolved from a developer and distributor of content to anconsumers. Our interactive entertainment network providing media, advertisinghelps our network subscribers to acquire, engage and consumer marketing services.retain their consumers. Built on an extended network platform, this entertainment system not only allowshas historically allowed multiple players to interact at the venue, but also enables competition between different venues.venues, referred to as massively multiplayer gaming. We have been embarking on a complete change of our network architecture, technology platform and player engagement paradigms, which we currently refer to as Buzztime Entertainment On Demand, or BEOND (formerly referred to as “Next-Gen”). We continue to support our legacy network product line, which we refer to as Classic.
We currently generate revenuesrevenue by charging subscription fees for our service to our Network Subscribersnetwork subscribers, leasing equipment (including tablets used in our BEOND line and alsothe cases and charging trays for such tablets) to certain network subscribers, hosting live trivia events, and from the sale ofselling advertising aired on in-venue screens and as well as in conjunction withpart of customized games. OurBeginning in 2014, we expect to generate revenue directly from the consumers of our network subscribers by offering premium products via our BEOND platform in addition to offering the games are currently available in over 3,900 locationsthat we have historically provided to these consumers for free.
Currently, approximately 3,200 venues in the U.S. and Canada subscribe to our interactive entertainment network,where they are shownwe estimate it is available on approximately 20,00010,000 to 15,000 screens daily. We currently have over 2.4four million registered usersplayer registrations, and over 5250 million of our games are played each year. Additionally, our mobile application has been installed on over one million consumer mobile devices. Approximately 34%42% of our Network Subscribernetwork subscriber venues are related to national and regional restaurants and include well-known names such as Buffalo Wild Wings, Old Chicago, Beef O’Brady’s, Black Angus, Hooters,Boston Pizza, Buffalo Wings & Rings, Houlihan’s, Native New Yorker and Old Chicago.
Recent Developments
In November 2013, we completed a private placement of units (consisting of shares of common stock and warrants to purchase shares of common stock) to accredited investors. The purchase price of each unit was $0.40 for gross proceeds of $2,400,000. In the aggregate, we issued 6,000,000 shares of common stock and warrants to purchase 3,600,000 shares. The warrants have an exercise price of $0.40 per share and are exercisable beginning on the six-month anniversary of the issuance date and expire on the five-year anniversary of the issuance date.
In December 2012, we launched the first iteration of our BEOND platform and product line in a pilot program for Buffalo Wild Wings, one of our national chain clients, and we began its commercial deployment in October 2011, we acquired substantially2013 by entering into a multi-year agreement with Buffalo Wild Wings to install the BEOND platform in all of its locations. As of March 21, 2014, we have over 400 network subscriber locations operating our BEOND platform and product line. The BEOND platform and product line incorporates a series of application platform interfaces, or APIs, and mobile applications made available both on our proprietary Buzztime playmakers and on consumer mobile devices. This platform and product line enables the assetsconsumers of our BEOND network subscribers to interact with a series of networked multiplayer games, single player arcade games, and synchronized programming.
The current iteration of BEOND consists primarily of a 7” Android tablet playmaker device, which we have customized and ruggedized and to which we added a video game arcade. The current iteration of BEOND does not contain all the Stump! Trivia hosted live trivia business. We also hired the founders of that business as our employees. Stump! Trivia currently conducts nearly 300 events per week, or over 14,000 annually, primarily in the Northeastern region of the U.S. We plan to expand this business into other regions of the U.S. We generated $357,000 in revenue related to the Stump! Trivia business in the fourth quarter of 2011 and we expect these revenues to grow.
Customizations of the BEOND platform are available for select subscribers, and Buzztime Mobile products. We have expanded Buzztime Facebooksystems integration work might consist of venue-specific development to include elements of loyalty and a Facebook-specific badging program; we plan to introduce multi-player tournament environments and direct head-to-head challenges. Buzztime Social Sign On currently allows for the sharing of current score information based on the player's location; a Buzztime location is currently tweeted every 60 seconds. We intend to expand this product to include achievements, levels, and potentially deals and locations. We also plan to develop a new Mobile product with expanded functionality that extends beyond the mobile playmaker (the ability to use your smartphone as a controller for our network), and to include BuzzWallet (an expanded player profile that will be used to store and display your badges, coupons, offers, and points) and BuzzLite (a stand-alone trivia game).
The new Playmaker will beBEOND tablet playmakers are designed to be managed entirely through software and to have the potential to be operatedoperate on a variety of customer location networks. It is also expected to contain a versatile platform that will support video playback, social networking features and the potential for integration with third party developers.
We expect the unit'sBEOND tablet’s versatility to provide additional value for us and our Network Subscribers since itnetwork subscribers.
Our Strategy
We have historically operated under a recurring subscription-based model, whereby our primary source of revenue was related to monthly subscription fees from network subscribers. Although we expect that subscription revenues will allow players to interact with eachremain our primary source of revenue, we believe there are other directlytransactional consumer revenue streams that could grow as a result of our investment in the BEOND platform, such as arcade, music, and will enable us to deliver more personalizedvirtual currency. We also generate revenue from advertising messages. We believesales and equipment leases for our network equipment. Our strategy for achieving revenue growth from these various sources includes the delivery of personalized advertising messages could lead to partnership programs, sponsorships of specific network-based events and increased national account co-branding opportunities.
| · | Consumer focus - grow players, game play, and premium engagement. We are intent upon building our consumer audience, engaging them more with improved entertainment experiences, and providing premium entertainment experiences that we |
| · | Deliver great gaming events that create compelling entertainment experiences. We intend to |
| · | Customer service and retention. The strategy we |
Geographic Areas
The following table presents the geographic breakdown of our revenue for the last two fiscal years.
Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| United States | 92 | % | 90 | % | ||||
| Canada | 8 | % | 10 | % | ||||
| Total | 100 | % | 100 | % | ||||
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| United States | 95% | 94% | ||||||
| Canada | 5% | 6% | ||||||
| Total | 100% | 100% | ||||||
The following table presents the geographic breakdown of our long-term tangible assets for our last two fiscal years.
Year Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| United States | 99 | % | 97 | % | ||||
| Canada | 1 | % | 3 | % | ||||
| Total | 100 | % | 100 | % | ||||
| Year Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| United States | 99% | 100% | ||||||
| Canada | 1% | 0% | ||||||
| Total | 100% | 100% | ||||||
Competition
We face direct competition in hospitality 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 barhospitality marketing services and restaurant games market,entertainment markets, including Touchtunes Interactive Networks, The Answer Is . . . Productions Inc., E la Carte, Inc., Ziosk, AMI Rowe, and Livewire/Incredible Technologies, Inc. Competing forms of technology, entertainment, and entertainmentmarketing provided in publichospitality venues include mobile device games and entertainment, such as mobile phone and table applications, on-table bar and restaurant entertainment systems, music and video-based systems, live entertainment and games, cable 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 are diverse and vary in venue size as well asand location. For the years ended December 31, 20112013 and 2010,2012, we generated approximately 21%$7,648,000 and 19%,$5,585,000, respectively, of revenue from a single national chain, Buffalo Wild Wings, together with its franchisees. As of December 31, 20112013 and 2010,2012, approximately $95,000$259,000 and $100,000,$123,000, respectively, was included in accounts receivable from this customer.
Buzztime Network Backlog
We historically have not had a significant backlog at any time because we normally can deliver and install new systems at hospitality locations within the delivery schedule requested by customers (generally within three to four weeks).
Licensing, Trademarks, Copyrights and Patents
Our intellectual property assets, including patents, trademarks, and copyrights, are important to our business and, accordingly, we have programs in place designed to protect these assets.
We keep confidential as trade secrets our technology, know-how and software. TheSome of the hardware usedwe use in our operations is customized, and all of it is purchased from outside vendors. We enter into agreements with third parties with whom we conduct business, which contain provisions designed to protect our intellectual property and to limit access to, and disclosure of, our proprietary information. We also enter into confidentiality and invention assignment agreements with our employees and contractors, and non-disclosure agreements with third parties with whom we conduct business in order to limit access to, and disclosure of, our proprietary information. contractors.
We have either received, or have applied for, trademark protection for the names of our key proprietary programming, products, and services to the extent that trademark protection is available for them. Our intellectual property assets, especially trademarks and copyright,We are importantexpanding our efforts to our business and, accordingly, we have launched a program directed to the protection of our intellectual property assets.
Government Contracts
We provide our content distribution services through the Buzztime Networknetwork to colleges, universities, and a small number of government agencies, typically military base recreation units. However, the number of government customers is small compared to our overall customer base. We provide our products and services to government agencies under contracts with substantially the same terms and conditions as are in place with non-government customers.
Government Regulations
The cost of compliance with federal, state, and local laws has not had a material effect on our capital expenditures, earnings, or competitive position to date. In June 1998, we received approval from the Federal Communications Commission (the “FCC”) for our 900 MHz Playmakers.classic playmakers, and in December 2012, we received approval from the FCC for our BEOND tablet playmaker charging trays. The 900 MHz Playmaker is an integral component of our network.BEOND tablets we currently use have been certified by its manufacturer. The multi-player card games offered on the Buzztime Networknetwork may be restricted in some jurisdictions; the laws and regulations governing distribution of card games vary in different jurisdictions.
We are subject not only to regulations applicable to businesses generally, but also to laws and regulations that apply directly to the industry of interactive televisionentertainment and marketing products. Although there are currently few such laws and regulations, state and federal governments may adopt laws and regulations that address issues such as:
| · | user privacy; | |
| · | copyrights; | |
| · | gaming, lottery and alcohol beverage control regulations; | |
| · | consumer protection; | |
| · | the media distribution of specific material or content; and | |
| · | the characteristics and quality of interactive television products and services. |
In addition, we operate games of chance and, in some instances, award prizes. These games are regulated in many jurisdictions. The selection of prizewinners is sometimes based on chance, although none of our chance games requirerequires or is intended to involve payments, betting or any formother exchange of monetary payment.value. We also operate interactive card games, such as Texas Hold’em poker and Blackjack. These card games are restricted in several jurisdictions. The laws and regulations that govern these games, however, vary in different jurisdictions and are subject to legislative and regulatory change in all of the jurisdictions in which we offer our games, as well as law enforcement discretion. We may find it necessary to eliminate, modify, or cancel certain components of our products in certain states or jurisdictions based on changes in law, regulations, or 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
We maintain an interneta website atwww.buzztime.com. We make available free of charge on our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filedand proxy statements and other information we file or furnishedfurnish pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Materials we file with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an interneta website atwww.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 26, 2012,2014, we employed approximately 147124 people on a full-time basis and 176235 people on a part-time basis. We also utilize independent contractors for specific projects and hire as many as 65 seasonal employees as needed to produce our play-along sports games during various professional and collegiate sports seasons. None of our employees are represented by a labor union, and we believe our employee relations are satisfactory.
ITEM 1A. Risk Factors
Risk Factors That May Affect Our Business
Our financial position, results of operations, and cash flows are subject to various risks, many of which are not exclusively within our control. These risks may cause actual performance to differ materially from historical or projected future performance. We urge investors to carefully consider the risk factors described below in evaluating the information contained in this report:
We may not be able to compete effectively within the highly competitive interactive games, entertainment and entertainmentmarketing services industries.
We face intense competition in the markets in which we operate. First, our Buzztime Network facesWe face significant competition for total revenues in the overall market for entertainment and marketing services in hospitality venues from other companies offering similar content and services. OurWe believe our direct competitors in the hospitality games marketthese markets comprise a small number of significant competitors including Touchtunes Interactive Networks, The Answer Is . . ... Productions Inc., E la Carte, Inc., Ziosk, AMI Rowe and Livewire/Incredible Technologies, Inc. Additionally, we
We also compete with a variety of other forms of technology and entertainment for total entertainment and marketing dollars in the marketplace. These other forms of entertainment include mobile device games and entertainment, such as mobile phone and tabletablet applications, on-table bar and restaurant entertainment systems, music and video-based systems, live entertainment and games, cable and pay-per-view programming, coin-operated single-player games/amusements, and traffic-building promotions like happy hour specials and buffets.
Our network programming competes generally with broadcast television, direct satellite programming, pay-per-view, other content offered on cable television, and other forms of entertainment. entertainment and marketing.
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, theseour current and potential competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or consumer preferences.
We also compete with providers of other content and services available to consumers through online services and a variety of mobile and on-table devices and systems. The expanded use of online and wireless networks and of the internet provides computer users and site owners with an increasing number of alternatives to video games and entertainment software. With this increasing competition and the rapid pace of change in product and service offerings in the interactive entertainment industry, 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 in the entertainment industry. Increased competition may also result in price reductions, fewer customer orders, reduced gross margins, longer sales cycles, reduced revenues, and loss of market share.
New products and rapid technological change, especially in the mobile and wireless markets, may render our operations obsolete or noncompetitive.
The emergence of new entertainment products and technologies, changes in consumer preferences, the adoption of new industry standards, and other factors may limit the life cycle and market penetration of our technologies, products, and services. In particular, the mobile and wireless device, content, applications, social media, and entertainment markets are highly competitive and rapidly changing. Accordingly, our future performance will depend on our ability to:
| identify emerging technological trends and industry standards in our market; |
| identify changing consumer needs, desires, or tastes; |
| develop and maintain competitive technology, including new hardware and content products and service offerings; |
| improve the performance, features, and reliability of our existing products and services, particularly in response to changes in consumer preferences, technological changes, and competitive offerings; and |
| bring technology to the market quickly at cost-effective prices. |
If we do not compete successfully in the development ofdeveloping new products and keep pace with rapid technological change, we will be unable to achieve profitability or sustain a meaningful market position. The interactive entertainment and game and out-of-home digital advertising industries are highly competitive and subject to rapid technological changes. We are aware of other companies that are introducing interactive game products on various platforms, including mobile devices and interactive television, which allow players to compete across the nation. Some of these companies may have substantially greater financial and organizational resources than we do, which could allow them to identify or better exploit emerging trends and market opportunities. In addition, changes in customer tastes may render our Buzztime Network and its content obsolete or noncompetitive.
We may not be successful in developing and marketing new products and services that respond to technological and competitive developments, and changing customer needs.needs, and consumer preferences. We may have to incur substantial costs to modify or adapt our products or services to respond to these developments.developments, customer needs, and changing preferences. We must be able to incorporate new technologies into the products we design and develop in order to address the increasingly complex and varied needs of our customer base. Any significant delay or failure in developing new or enhanced technology, including new product and service offerings, could result in a loss of actual or potential market share and a decrease in revenues.
We receive a significant portion of our revenues from a single customer, and any decrease in the amount of business from that customer could materially and adversely affect our cash flow and revenue.
For the year ended December 31, 2013, Buffalo Wild Wings together with its franchisees accounted for approximately 32%, or $7,648,000, of our total revenue. As of that date, approximately $259,000 was included in accounts receivable. If Buffalo Wild Wings, a significant number of its franchisees, or any other customer who may not be able to significantly grow our out-of-home Buzztime Network revenue and implement our other business strategies.
A disruption in the supply of equipment could negatively impact our subscriptions and revenue.
The tablet used in our BEOND product line is manufactured by one unaffiliated third party, and we do not currently have an alternative device to this tablet. We purchase the tablet from unaffiliated third parties, and we purchase the cases and charging trays for such tablets from an unaffiliated manufacturer located in China. We currently purchase our Classic playmakers from an unaffiliated manufacturer located in Taiwan. We currently do not have an alternative source of supply for any of this equipment. If these sole manufacturers and/or suppliers are delayed, become unavailable, have product quality issues, or shortages occur, we may be unable to timely obtain replacement equipment, which, in turn could hurt our customer loyalty, cause subscription cancellations, and advertising revenue,reduce our revenue. If our manufacturers and/or suppliers were to go out of business or otherwise become unable to meet our needs for at leastreliable equipment, the next several years fromprocess of locating and qualifying alternate sources could take months, during which time our out-of-home Buzztime Networkproduction could be delayed, and Stump! Trivia events. Accordingly,may, in some cases, require us to redesign our success dependsproducts 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.
If we do not adequately protect our proprietary rights and intellectual property or we are subjected to intellectual property claims by others, our business could be seriously damaged.
We rely on a combination of trademarks, copyrights, patents, and trade secret laws to protect our proprietary rights in our products. We have a small number of patents and patent applications pending in jurisdictions related to our business activities. Our pending patent applications and any future applications might not be approved. Moreover, our patents might not provide us with competitive advantages. Third parties might challenge our patents or trademarks or attempt to use infringing technologies or brands which could harm our ability to compete and reduce our revenues, as well as create significant litigation expense. In addition, patents and trademarks held by third parties might have an adverse effect on our ability to increase market awarenessdo business and encouragecould likewise result in significant litigation expense. Furthermore, third parties might independently develop similar products, duplicate our products or, to the adoptionextent 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 Buzztime brandUnited States Patent and Trademark Office. Such interference proceedings could result in substantial cost to us.
We believe that the success of our game service among establishments such as restaurants, sports bars, taverns and pubs, and within the interactive game player community. Our successbusiness also depends on our ability to improve customer retention. We may not be able to leverage our resources to expand awareness ofsuch factors as the technical expertise and demand for our game service. In addition, our efforts to improve our game platform and content may not succeed in generating additional demand for our products within the player community or strengthening the loyalty and retentioninnovative capabilities of our existing customers. The degreeemployees. It is our policy that all employees and consultants sign non-disclosure agreements and assignment of market adoption of Buzztime will depend on many factors, including consumer preferences, the availabilityinvention agreements. Our competitors, former employees, and quality of competing products and services, andconsultants may, however, misappropriate our ability to leveragetechnology or independently develop technologies that are as good as or better than ours. Our competitors may also challenge or circumvent our brand.
From time to time, state tax authoritieswe hire or retain employees or consultants who may have madeworked 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 other states will make inquiries as to whether or not a portion of our services might require the collection of sales and use taxes from customers in those states. In the current difficult economic climate, many states are expanding their interpretation of their sales and use tax statutes to derive additional revenue. While in the past the sales and use tax assessmentsthat we have paid have not been significantmisappropriated their intellectual property. Any such claim could cause us to incur substantial costs, which in turn could materially adversely affect our operations, it is likely that such expenses will increase in the future.
We may be liable for the content and services we make available on our Buzztime Networknetwork and the internet.
We make content and entertainment services available on our Buzztime Networknetwork and the internet.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 effectedaffected if we are found liable for information that we make available. Implementing measures to reduce our exposure may require us to spend substantial resources and may limit the attractiveness of our services to users which would impair our profitability and harm our business operations.
Our cash flow may not cover current capital needs and we may need to raise additional funds in the future. Such funds may not be available on favorable terms or at all and, if available, may dilute current stockholders.
Our capital requirements will depend on many factors, including:
| · | our ability to generate cash from operating activities; |
| · | acceptance of, and demand for, our interactive games and entertainment; |
| · | the costs of developing and implementing our BEOND technology platform and product line; |
| · | 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; |
| · | the extent to which we invest in the creation of new entertainment content and new technology; and |
| · | the number and timing of acquisitions and other strategic transactions, if any. |
In addition, in order to fully execute on our strategic initiatives discussed above under the section entitled “Our Strategy,” we believe we will likely require additional funding.
If we doneed to raise additional funds in the future, such funds may not adequately protectbe available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our proprietaryexisting stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and intellectual property,privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, or at all, we are subjectedmay not be able to intellectual property claims by others,continue to develop and implement our BEOND technology platform and product line, develop or enhance our other products and services, successfully execute our business plan or any or all of our strategic initiatives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.
We have experienced significant losses, and we may incur significant losses in the future.
We have a history of significant losses, including net losses of $1,053,000 and $995,000 for the years ended December 31, 2013 and 2012, respectively, and an accumulated deficit of $112,799,000 as of December 31, 2013. We may also incur future operating and net losses, due in part to expenditures required to continue to implement our business strategies, including the continued development and implementation of our BEOND technology platform and product line. Despite significant expenditures, we may not be able to achieve or maintain profitability. Moreover, even if we do achieve profitability, the level of any profitability cannot be predicted and may vary significantly from quarter to quarter and year to year.
We may not be able to significantly grow our subscription revenue and implement our other business strategies.
Our success depends on our ability to increase market awareness and encourage the adoption of the Buzztime brand and our Buzztime network among hospitality venues such as restaurants, sports bars, taverns and pubs, and within the interactive game player community. Our success also depends on our ability to improve customer retention. We may not be able to leverage our resources to expand awareness of and demand for our Buzztime network. In addition, our efforts to improve our game platform and content may not succeed in generating additional demand for our products or in strengthening the loyalty and retention of our existing customers. The degree of market adoption of our Buzztime network will depend on many factors, including consumer preferences, the availability and quality of competing products and services, and our ability to leverage our brand.
Our success also depends on our ability to implement our other business strategies, which include developing our BEOND platform that allows for consumer play across the digital platform, developing our premium entertainment services and payment capabilities that allow us to monetize the consumer, developing dynamic menuing and POS integration competency, and growing our marketing services and sponsorship revenues. Implementing these strategies will require us to dedicate significant resources to, among other things, fully developing and implementing our BEOND technology platform and product line, expanding our other product offerings, customizing our products and services to meet the unique needs of select accounts, and expanding and improving our marketing services and promotional efforts. We may be unable to implement these strategies as currently planned.
Our products and services are subject to government regulations that may restrict our operations or cause demand for our products to decline significantly.
We are subject not only to laws and regulations applicable to businesses generally, but also to laws and regulations that apply specifically to the interactive television products and game industries. In the area of interactive television products, state and federal governments may adopt a number of laws and regulations governing any of the following areas:
| · | gaming, lottery, and alcohol beverage control regulations; |
| · | user privacy; |
| · | copyrights; |
| · | consumer protection; |
| · | media distribution of specific material or content; and |
| · | the characteristics and quality of interactive television products and services. |
In addition, we operate games of chance and, in some instances, award prizes. These games are regulated in many jurisdictions. The selection of prizewinners is sometimes based on chance, although none of our games of chance require or are intended to involve payments, betting or any other exchange of actual value. We also operate interactive card games, such as Texas Hold'em poker and Blackjack. These card games are restricted in several jurisdictions. The laws and regulations that govern these games vary from jurisdiction to jurisdiction, and these games are subject to legislative and regulatory changes and to law enforcement discretion in all of the jurisdictions in which we offer our games. We may find it necessary to eliminate, modify, suspend, or cancel certain features of our products (including the games we offer) in certain jurisdictions based on changes in law, regulations, or law enforcement discretion, which could be seriously damaged.result in additional development costs and/or the loss of customers and revenue.
| 7 |
Communication or other system failures could result in the cancellation of subscribers and a decrease in our revenues.
We rely on continuous operation of our information technology and communications systems, and those of a combinationvariety of trademarks, copyrights, patentsthird parties, to communicate with and trade secret laws to protectdistribute our proprietary rightsservices to the locations of our Buzztime network subscribers. We currently transmit our data to our subscribers 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. We believe that the successproducts and services, damage to or failure of our systems, any natural or man-made disaster, a decision to close a facility we are using without adequate notice for financial or other reasons, or other unanticipated problems at our facilities or those of a third party, could result in lengthy interruptions in our service to one or more of our subscribers, 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 subscribers' locations could also decrease customer loyalty and satisfaction and result in a cancellation of our services.
Our management turnover creates uncertainties.
We have experienced significant changes in our senior management team over the past several years. Jeff Berg, our Chairman of the Board, has served as our Interim Chief Executive Officer since June 2012. Before his appointment, we had four different individuals and an interim committee serve as our chief executive officer or perform the functions of a chief executive between November 2008 and June 2012, two of whom served for 13 months or less. Because of our recent financial and stock performance, geographic location, and other business alsofactors in a relatively small industry, we face substantial challenges in attracting and retaining experienced senior executives. Changes in senior management are inherently disruptive, and efforts to implement any new strategic or operating goals may not succeed in the absence of a long-term management team. Changes to strategic or operating goals with the appointment of new executives may themselves prove to be disruptive. Periods of transition in senior management leadership are often difficult as the new executives gain detailed knowledge of our operations and due to cultural differences and friction that may result from changes in strategy and style. Without consistent and experienced leadership, customers, employees, creditors, stockholders, and others may lose confidence in us.
Our success depends on our ability to recruit and retain skilled professionals for our business.
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 factors asexperienced and knowledgeable professionals. We must recruit and retain talented professionals in order for our business to grow. There is significant competition for the technical expertiseindividuals with the skills required to develop the products and innovative capabilitiesperform the services we offer. We may be unable to attract a sufficient number of qualified individuals in the future to sustain and grow our employees. It is our policy that all employeesbusiness, and consultants sign non-disclosure agreementswe may not be successful in motivating and assignment of invention agreements. Our competitors and former employees and consultants may, however, misappropriate our technology or independently develop technologies thatretaining the individuals we are as good as, or better than ours. Our competitors may also challenge or circumvent our proprietary rights.able to attract. If we have to initiate or defend against an infringement claim to protectcannot attract, motivate, and retain qualified technical and sales and marketing professionals, our proprietary rights, the litigation over such claims could be time-consumingbusiness, financial condition, and costly to us, adversely affecting our financial condition.
We may face exposure on sales and use taxes in various states.
From time to time, we hirestate tax authorities have made and other states will make inquiries as to whether or retain employees or external consultants who may have worked for other companies developing products similarnot a portion of our services might require the collection of sales and use taxes from customers in those states. Many states are expanding their interpretation of their sales and use tax statutes to those that we offer. These other employers may claim that our products are based on their productssubject more activities to tax. While in the past, the sales and thatuse tax assessments we have misappropriated their intellectual property. Any such litigation could prevent us from exploiting our proprietary portfolio and cause us to incur substantial costs, which in turn could materially adversely affect our business. Wepaid have not had a small number of patent applications pending in the United States and Canada related to our interactive, network-based game technologies. 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 expenses. 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 expenses. Furthermore, third parties might independently develop similar products, duplicate our products or, to the extent patents are issued to us, design around those patents. Othersoperations, such assessments may have filed and,increase in the future may file, patent applications that are similar or identical to ours. Such third-party patent applications might have priority overand could adversely affect 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 have incurred significant net operating loss carryforwards that likely we may not fullywill be unable to use.
As of December 31, 2011,2013, we had federal income tax net operating loss, or NOL, carryforwards of approximately $53.1$55.6 million, which will continue expiringbegin to expire in 2012.2017. As of December 31, 2011,2013, we had state income tax NOL carryforwards of approximately $20.0$21.4 million, portions of which will expire in 2014 and continue expiring in 2012.thereafter. We believe that our ability to utilize our NOL carryforwards may be substantially restricted by the passage of time and the limitations of Section 382 of the Internal Revenue Code, which apply when there are certain changes in ownership of a corporation. To the extent we begin to realize significant taxable income, these Section 382 limitations may result in our incurring federal income tax liability notwithstanding the existence of otherwise available NOL carryforwards. We have established a full valuation allowance for substantially all of our deferred tax assets, including the NOL carryforwards, since we do not believe we are likely to generate future taxable income to realize these assets.
Foreign currency exchange rate fluctuations, trade barriers and other risks associated with operating our business in foreign countries could harm our business.
We operate the Buzztime Networknetwork in the U.S. and in Canada. Since service fees and operating expenses from our Canadian subsidiary are recognized in its local currency, our financial position and results of operations could be significantly affected by large fluctuations in foreign currency exchange rates or by weak economic conditions in Canada. To the extent we attempt to expand our sales efforts in other international markets, we may also face difficulties in staffing and managing foreign operations, longer payment cycles, and problems with collecting accounts receivable, and increased risks of piracy, and limits on our ability to enforce our intellectual property rights. If we are unable to adequately address the risks of doing business abroad, our business, financial condition, and results of operations may be harmed.
We and our third parties manage secure data and are subject to cybersecurity risks and incidents.
Our business involves storing and transmitting our network subscribers’ payment information as well as certain personal information of the consumers of our network subscribers (such as name, date of birth, and email address). In the future, we may store and transmit additional personal information of the consumers of our network subscribers, particularly as the services of the BEOND platform become more advanced to include POS integration. Protecting this secure data is vitally important to us. While we have implemented measures to prevent security breaches and cyber incidents, any failure of these measures and any failure of third parties that assist us in managing our secure data could materially adversely affect our business, financial condition, and results of operations.
Risks Relating to the Market for Our Common Stock
Our common stock could be delisted or suspended from trading on the NYSE AmexMKT if we fail to maintain compliance with continued listing criteria.
The NYSE AmexMKT will normally consider suspending dealings in, or delisting, securities selling for a substantial period of time at a low price per share if the issuer fails to effect a reverse split of such stock within a reasonable time after being notified that NYSE AmexMKT deems such action to be appropriate under the circumstances. While the NYSE AmexMKT does not provide bright line minimum share price standards for continued listing, we believe that a price less than $1.00 per share for a substantial period of time may be investigated. Our common stock has traded at below $1.00 per share since July 2007.
In addition, the NYSE AmexMKT will normally consider suspending dealings in, or delisting, securities of an issuer which has stockholders' equity of less than $6,000,000 if such issuer has sustained losses from continuing operations and/or net losses in its five most recent fiscal years. OurAlthough our stockholders' equity decreasedincreased from $9.5$7.9 million as of December 31, 20102012 to $6.4$9.2 million as of December 31, 2011, and2013, we had losses from continuing operations and/or net losses in each of our five most recent fiscal years.
If we are unable to comply with the NYSE AmexMKT continued listing requirements, including its trading price requirements, our common stock may be suspended from trading on and/or delisted from the NYSE Amex.MKT. Alternatively, in order to avoid delisting by NYSE Amex for having a low trading price for a substantial period, we may be required to effect a reverse split of our common stock. The delisting of our common stock from NYSE Amex 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. In addition, the delisting of our common stock could significantly impair our ability to raise capital.
Future sales of substantial amounts of our common stock in the public market or the anticipation of such sales could have a material adverse effect on then-prevailing market prices.
In a private placement we completed in November 2013, we issued 6,000,000 shares of our common stock and warrants to purchase 3,600,000 shares of our common stock at an exercise price of $0.40 per share. A registration statement registering the resale of the shares of our common stock issued and issuable upon exercise of the warrants we issued in such financing is currently effective, and we are obligated to use commercially reasonable efforts to maintain such registration statement continuously effective until all such registered shares have been sold.
In addition, since 2009, in connection with acquisitions, we issued (directly or upon the exercise of warrants issued in connection with such acquisitions) an aggregate of approximately 2,798,000 shares of our common stock. As of December 31, 2013, there were outstanding warrants to purchase an aggregate of 6,600,000 shares of common stock at exercise prices ranging from $0.40 to $1.50 per share (including the warrants to purchase 3,600,000 shares we issued in our November 2013 private placement). In addition, as of December 31, 2013, there were 156,000 shares of our Series A Preferred Stock outstanding. The holders of such shares may elect to convert them into shares of our common stock at any time. Based on the current conversion price, we would issue approximately 485,000 shares of our common stock if all of the outstanding shares of our Series A Preferred Stock were so converted. Generally, all of the shares of common stock we issued in connection with the acquisitions, the shares we may issue upon exercise of warrants and the shares of common stock we may issue upon conversion of the Series A Preferred Stock may be sold under Rule 144 of the Securities Act of 1933, subject to any applicable holding period with respect to the shares issued upon exercise of warrants the exercise price of which is paid with cash.
As of December 31, 2013, there were also approximately 2,664,000 shares of common stock reserved for issuance upon the exercise of outstanding stock options at exercise prices ranging from $0.14 to $3.33 per share, and 187,000 shares of common stock reserved for issuance upon the settlement of outstanding restricted stock units. A registration statement registering such shares of common stock is currently effective.
Accordingly, a significant number of such shares of our common stock could be sold at any time. Depending upon market liquidity at the time our common stock is resold by the holders thereof, such resales could cause the trading price of our common stock to decline. In addition, the sale of a substantial number of shares of our common stock, or anticipation of such sales, could make it more difficult for us to obtain future financing. To the extent the trading price of our common stock at the time of exercise of any of our outstanding options or warrants exceeds their exercise price, such exercise will have a dilutive effect on our stockholders.
Raising additional capital may cause dilution to our existing stockholders and may restrict our operations.
We may raise additional capital at any time and may do so through one or more financing alternatives, including public or private sales of equity or debt securities directly to investors or through underwriters or placement agents. We currently have a shelf registration statement on file under which we could sell up to $25 million worth of securities. Raising capital through the issuance of common stock (or securities convertible into or exchangeable or exercisable for shares of our common stock) may depress the market price of our stock and may substantially dilute our existing stockholders. In addition, our board of directors may issue preferred stock with rights, preferences and privileges that are senior to those of the holders of our common stock. Debt financings could involve covenants that restrict our operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens or make investments and may, among other things, preclude us from making distributions to stockholders (either by paying dividends or redeeming stock) and taking other actions beneficial to our stockholders. In addition, investors could impose more one-sided investment terms and conditions on companies that have or are perceived to have limited remaining funds or limited ability to raise additional funds. The lower our cash balance, the more difficult it is likely to be for us to raise additional capital on commercially reasonable terms, or at all.
Our charter contains provisions that may hinder or prevent a change in control of our company, which could result in our inability to approve a change in control and potentially receive a premium over the current market value of your stock.
Certain provisions of our certificate of incorporation could make it more difficult for a third party to acquire control of us, even if such a change in control would benefit our stockholders, or to make changes in our board of directors. For example, our certificate of incorporation (i) prohibits stockholders from filling vacancies on our board of directors, calling special stockholder meetings, or taking action by written consent, and (ii) requires a supermajority vote of at least 80% of the total voting power of our outstanding shares, voting together as a single class, to remove our directors from office or to amend provisions relating to stockholders taking action by written consent or calling special stockholder meetings.
Additionally, our certificate of incorporation and restated bylaws contain provisions that could delay or prevent a change of control of our company. Some of these provisions:
| 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; |
| prohibit our stockholders from making certain changes to our bylaws except with 66 2/3% stockholder approval; and |
| require advance written notice of stockholder proposals and director nominations. |
These provisions could discourage third parties from taking control of our company. Such provisions may also impede a transaction in which you could receive a premium over then current market prices and your ability to approve a transaction that you consider in your best interest.
In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including delaying or impeding a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.
ITEM 1B.Unresolved
Staff CommentsWe do not have any unresolved comments issued by the SEC Staff.
ITEM 2.
PropertiesWe lease approximately 28,000 square feet of office space at 2231 Rutherford Road,in Carlsbad, California. The term of the lease is from June 2011 through November 2018, and we are entitled 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 facilityterm of this lease is from May 2013 through April 2017. The facilities that we lease isare suitable for our current needs and isare considered adequate to support expected growth.
ITEM 3.
Legal ProceedingsFrom 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 of these lawsuitslegal proceedings could materially adversely affect our business, results of operations, or financial condition. The needIn addition, defending any claim requires resources, including cash to defend any such claims could require payments ofpay legal fees and expenses, and our limited financial resources could severely impact our ability to defend any such claims.
Also from time to time, state and provincial tax agencies have made, and we anticipate will make in the future, inquiries as to tax consequences ofwhether our service offerings.offerings are subject to taxation in their jurisdictions. Many states have expanded their interpretation of their sales and use tax statuesstatutes, which generally had the effect of increasing the scope of activities that may be subject to derive additional revenue.such statutes. We evaluate such inquiries from state and provincial tax agencies on a case-by-case basis and have favorably resolved the majority of these tax issuesinquiries in the past. However, anypast, 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, result in a material adverse consequence.
We are currently involved in ongoing sales tax inquiries including certain formal assessments of $641,000, with certain states and provinces. As a result of those inquiries, we recorded a total net liability of $604,000$27,000 and $746,000$70,000 as of December 31, 20112013 and 2010, respectively.2012, respectively, with respect to tax assessments to which we may be subject as a result of such inquiries. Based on the guidance set forth by ASCthe Financial Accounting Standards Board (“FASB) Accounting Standards Codification (“ASC”) No. 450,Contingencies, we deemed the likelihood that we will be required to pay all or part of these assessments with other states as reasonably possible.
ITEM 4.
Mine Safety DisclosuresNot Applicable
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PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is listed on the NYSE AmexMKT under the symbol “NTN.” Set forth below are the high and low sales prices for the common stock for the two most recent fiscal years:
| High | Low | |||||||
| Year Ended December 31, 2011 | ||||||||
| First Quarter | $ | 0.52 | $ | 0.38 | ||||
| Second Quarter | $ | 0.52 | $ | 0.42 | ||||
| Third Quarter | $ | 0.45 | $ | 0.38 | ||||
| Fourth Quarter | $ | 0.42 | $ | 0.25 | ||||
| High | Low | |||||||
| Year Ended December 31, 2010 | ||||||||
| First Quarter | $ | 0.56 | $ | 0.26 | ||||
| Second Quarter | $ | 0.74 | $ | 0.43 | ||||
| Third Quarter | $ | 0.55 | $ | 0.33 | ||||
| Fourth Quarter | $ | 0.46 | $ | 0.31 | ||||
| High | Low | |||||||
| Year Ended December 31, 2013 | ||||||||
| First Quarter | $ | 0.28 | $ | 0.19 | ||||
| Second Quarter | $ | 0.43 | $ | 0.24 | ||||
| Third Quarter | $ | 0.49 | $ | 0.33 | ||||
| Fourth Quarter | $ | 0.84 | $ | 0.36 | ||||
| High | Low | |||||||
| Year Ended December 31, 2012 | ||||||||
| First Quarter | $ | 0.28 | $ | 0.20 | ||||
| Second Quarter | $ | 0.25 | $ | 0.13 | ||||
| Third Quarter | $ | 0.23 | $ | 0.13 | ||||
| Fourth Quarter | $ | 0.23 | $ | 0.18 | ||||
On March 26, 2012,2014, the closing price for our common stock as reported on the NYSE AmexMKT was $0.25$0.72 and there were approximately 1,085904 holders of record.
To date, we have not declared or paid any cash dividends with respect to our common stock, and the current policy of our Board of Directors is to retain earnings, if any, after payment of dividends on the outstanding preferred stock to provide for our growth. Consequently, no cash dividends are expected to be paid on our common stock in the foreseeable future.
We have 161,000156,000 shares of Series A Preferred Stock issued and outstanding. The Series A Preferred Stock provides for a cumulative annual dividend of 10 cents per share, payable in semi-annual installments in June and December. Dividends may be paid in cash or within shares of our common stock. In 20112013, we issued approximately 37,00035,000 shares of our common stock for payment of these dividends.
ITEM 6.
Selected Financial DataUnder SEC rules and regulations, as a smaller reporting company, we are not required to provide the information otherwise required by this item.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of OperationsThis report (including, but not limited to, the following discussion of our financial condition and results of operations)Annual Report on Form 10-K and the documents incorporated herein by reference contain “forward-looking”forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect future events, results, performance, prospects and opportunities, including statements related to our strategic plans and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry trends and our financial position. Forward-looking statements are based on information currently available to us, on our current expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions of management. Words such as “believes,“expects,” “anticipates,” “estimates,“could,” “expects,“targets,” “projections,“projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “potential,“will,” “plan,“would,” “continue”variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements but are not the exclusive meanswhich refer to projections of identifying forward-looking statements in this report. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including but not limited to statements regarding our future financial performance, or position,our anticipated growth and trends in our business, strategy, plansand other characterizations of future events or expectations,circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and our objectives for future operations, including relating to our products and services. Forward-looking statements contained herein are inherently subject to risks and uncertainties and ouruncertainties. Therefore, actual results may differ materially and outcomes may be materially differentadversely from those expressed or implied by thein any forward-looking statements. Our actual resultsFactors that might cause or contribute to such differences include (1) our ability to compete effectively within the highly competitive interactive games, entertainment and outcomes may differ materially from those projectedmarketing services industries, (2) the impact of new products and technological change, especially in the forward-looking statements duemobile and wireless markets, on our operations and competitiveness, (3) our relationship with Buffalo Wild Wings, who together with its franchisees accounted for a significant portion of our revenues, (4) our ability to maintain an adequate supply of the tablet and related equipment used in our BEOND product line, (5) our ability to adequately protect our proprietary rights and intellectual property, (6) our ability to raise additional funds in the future, if necessary, on favorable terms, (7) our ability to significantly grow our subscription revenue and implement our other business strategies, and (8) the other risks and uncertainties that existdescribed in our operations, development efforts and business environment, including those set forth under the Section entitledPart I, Item 1A “Risk Factors” of this report and described in Item 1A, and other documents we file from time to time with the Securities and Exchange Commission. We cannot guarantee future results, levels of activity, performance or achievements.Commission, including our Quarterly Reports on Form 10-Q. Readers are urged not to place undue reliance on thesethe forward-looking statements contained in this report or incorporated by reference herein, which speak only as of the date of this report.Exceptreport. Except as required by law, we do not undertake any obligation to revise or update any such forward-looking statement to reflect future events or circumstances.
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this report.
Overview
We provide an entertainment and marketing services through interactive game contentplatform for hospitality venues that offer the games, freeevents, and entertainment experiences to their customers. Founded in 1984, our company has evolved from a developer and distributor of content to anconsumers. Our interactive entertainment network providing media, advertisinghelps our network subscribers to acquire, engage and consumer marketing services.retain their consumers. Built on an extended network platform, this entertainment system not only allowshas historically allowed multiple players to interact at the venue, but also enables competition between different venues.venues, referred to as massively multiplayer gaming. We have been embarking on a complete change of our network architecture, technology platform and player engagement paradigms, which we currently refer to as Buzztime Entertainment On Demand, or BEOND (formerly referred to as “Next-Gen”). We continue to support our legacy network product line, which we refer to as Classic.
We currently generate revenuesrevenue by charging subscription fees for our service to our Network Subscribersnetwork subscribers, leasing equipment (including tablets used in our BEOND line and alsothe cases and charging trays for such tablets) to certain network subscribers, hosting live trivia events, and from the sale ofselling advertising aired on in-venue screens as well as in conjunction withand part of customized games. OurBeginning in 2014, we expect to generate revenue directly from the consumers of our network subscribers by offering premium products via our BEOND platform in addition to offering the games are currently available in over 3,900 locationsthat we have historically provided to these consumers for free.
Currently, approximately 3,200 venues in the U.S. and Canada subscribe to our interactive entertainment network,, where they are shownwe estimate it is available on approximately 20,00010,000-15,000 screens daily. We currently have over 2.4four million registered usersplayer registrations, and over 5250 million of our games are played each year. Additionally, our mobile application has been installed on over one million consumer mobile devices. Approximately 34%42% of our Network Subscribernetwork subscriber venues are related to national and regional restaurants and include well-known names such as Buffalo Wild Wings, Old Chicago, Beef O’Brady’s, Black Angus, Hooters,Boston Pizza, Buffalo Wings & Rings, Houlihan’s, Native New Yorker and Old Chicago.
Results of Operations
Year Ended December 31, 20112013 compared to the Year Ended December 31, 2010
We generated a net loss of $3,419,000$1,053,000 for the year ended December 31, 2011,2013, compared to net loss of $400,000$995,000 for the year ended December 31, 2010.
Revenue
We recognize revenue from recurring service fees earned from our Buzztime network subscribers, Stump! Trivia events, advertising revenues, leased equipment and distribution and licensing fees from our Buzztime-branded content delivered primarily through our interactive consumer platforms.
Revenue decreased $1,439,000,$315,000, or 6%1%, to $23,870,000$23,749,000 for the year ended December 31, 20112013 from $25,309,000$24,064,000 for the year ended December 31, 2010. This decrease was2012 due primarily due to a decrease inof $2,221,000 of subscription revenue related toresulting from lower average site count of our Buzztime network subscribers and lower average revenue generated per site, as well as a decrease inoffset by increased equipment lease revenue under sales-type lease arrangements of $1,694,000 and increased advertising and other miscellaneous revenue of $553,000. These decreases were offset by revenue of $357,000 generated by the Stump! Trivia business that we acquired in October 2011.$199,000. Comparative ending site count information for the Buzztime Networknetwork is as follows:
Network Subscribers as of December 31, | ||||||||
| 2011 | 2010 | |||||||
| United States | 3,692 | 3,659 | ||||||
| Canada | 240 | 266 | ||||||
| Total | 3,932 | 3,925 | ||||||
| Network Subscribers as of December 31, | ||||||||
| 2013 | 2012 | |||||||
| United States | 3,015 | 3,416 | ||||||
| Canada | 189 | 222 | ||||||
| Total | 3,204 | 3,638 | ||||||
Geographic breakdown of our ending site count for the Buzztime network is as follows:
| Network Subscriber Activity as of December 31, | ||||||||
| 2013 | 2012 | |||||||
| Site Count - Beginning of Period | 3,638 | 3,932 | ||||||
| Installations | 395 | 602 | ||||||
| Terminations | (829 | ) | (896 | ) | ||||
| Site Count - End of Period | 3,204 | 3,638 | ||||||
| Churn Percentage | 24.2% | 23.7% | ||||||
Direct Costs and Gross Margin
The following table compares the direct costs and gross margin for the years ended December 31, 20112013 and 2010:
For the years ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Revenues | $ | 23,870,000 | $ | 25,309,000 | ||||
| Direct Costs | 5,807,000 | 6,063,000 | ||||||
| Gross Margin | $ | 18,063,000 | $ | 19,246,000 | ||||
| Gross Margin Percentage | 76 | % | 76 | % | ||||
| For the years ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Revenues | $ | 23,749,000 | $ | 24,064,000 | ||||
| Direct Costs | 7,686,000 | 6,157,000 | ||||||
| Gross Margin | $ | 16,063,000 | $ | 17,907,000 | ||||
| Gross Margin Percentage | 68% | 74% | ||||||
Gross margin as a percentage of revenue remained at 76%decreased to 68% for the year ended December 31, 20112013 compared to 74% in the prior year. Direct costs decreased $256,000,increased $1,529,000, or 4%25%, to $5,807,000$7,686,000 for the year ended December 31, 20112013 as compared to $6,063,000 for the prior year period. The decrease in direct costs was primarily attributable to a decrease in service provider fees of $333,000 primarily due to fewer service calls during the year ended December 31, 2011 compared to 2010 as well as less depreciation and amortization expense of $169,000 due to assets becoming fully depreciated. This decrease was offset by increased expenses of $246,000 related to Stump! Trivia and other net direct costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $1,799,000, or 10%, to $16,449,000 for the year ended December 31, 2013 from $18,248,000 for the prior year period. The decrease was due to increaseddecreased payroll and related expense of $1,054,000$1,528,000 primarily due to increased headcount, merit increases, increaseda decrease in employee salary expense, decreased incentive compensation increasedand decreased severance expense, and increased recruiting and relocationdecreased marketing expenses of $325,000, decreased travel expense for executive officers. Professionalof $307,000, decreased service fees and consulting expenses increased $203,000of $221,000 primarily due to legal fees associated withshifting the Stump! Trivia asset acquisition as well as increased consulting expenses relatedexpense of managing our warehouse from a third party to software development and programming. Marketing expenses also increased by approximately $186,000hiring employees to support lead generation, new program launches and other promotional activities. We recognized expenses of $144,000 related to our new playmaker development and approximately $127,000 related tomanage the relocation of our corporate offices and warehouse during the year ended December 31, 2011, which were not recognized during the same period in 2010. These increases were offset by loweroperations, decreased bad debt expense of $186,000 resulting from improved collection efforts$84,000, decreased membership fees of $47,000 related to the non-renewal of an industry association membership, and decreased occupancynet miscellaneous expenses of $118,000 as$96,000. These decreases were offset by increased consulting fees of $160,000, increased write-offs of software development costs, and a resultnon-reoccurring favorable outcome of the lease for the new corporate headquarters.
Depreciation and Amortization
Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) increased $226,000$12,000 to $891,000$733,000 for the year ended December 31, 20112013 from $665,000$721,000 for 20102012 primarily due to accelerating theincreased amortization expense of an intangible asset we$42,000 related to acquired in 2009.
Other Income (Expense), Net
Other income (expense), net increased in income by $53,000changed from $16,000 of other net expense during the year ended December 31, 2012 to $20,000$112,000 of other net income for the year ended December 31, 2011 from $33,000 of other expense for the same period in 2010. The majority of this increase is2013. This change was primarily due to the recognition ofincreased income recognized from a sales tax refund of $49,000 and lower interest expense of $49,000 due to reduced capital lease balances during the year ended December 31, 2011 when compared to 2010. These increases in other income were offset by an increase insublease, increased foreign currency exchange losses of $38,000gains related to the operations of our foreign operationsCanadian subsidiary, and other net income decreases of $7,000 for the year ended December 31, 2011 when compared to 2010.
Income Taxes
We expect to incur state income tax liability in 20112013 related to our U.S. operations. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. For the yearsyear ended December 31, 2011 and 2010,2013, we recorded a net tax provision of $163,000 and $42,000, respectively. We have established$46,000. For the year ended December 31, 2012, we recorded a full valuation allowance for substantially all deferrednet tax assets, including ourbenefit of approximately $83,000 due to recognizing certain state tax credit carryforwards.
At December 31, 2013, we had net operating loss, carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets.
EBITDA—Consolidated Operations
Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with accounting principles generally accepted in the United States (GAAP). Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation and amortization charges in comparison to their GAAP earnings or loss.
The following table reconciles our consolidated net loss per GAAP to EBITDA:
For the three months ended December 31, | For the years ended December 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Net (loss) income per GAAP | $ | (1,039,000 | ) | $ | 322,000 | $ | (3,419,000 | ) | $ | (400,000 | ) | |||||
| Interest expense, net | 13,000 | 19,000 | 49,000 | 98,000 | ||||||||||||
| Depreciation and amortization | 947,000 | 797,000 | 3,260,000 | 3,203,000 | ||||||||||||
| Income taxes | 115,000 | 4,000 | 163,000 | 42,000 | ||||||||||||
| EBITDA | $ | 36,000 | $ | 1,142,000 | $ | 53,000 | $ | 2,943,000 | ||||||||
| For the years ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Net income (loss) per GAAP | $ | (1,053,000 | ) | $ | (995,000 | ) | ||
| Interest expense, net | 23,000 | 41,000 | ||||||
| Depreciation and amortization | 2,849,000 | 2,879,000 | ||||||
| Income tax (benefit) provision | 46,000 | (83,000 | ) | |||||
| EBITDA | $ | 1,865,000 | $ | 1,842,000 | ||||
Liquidity and Capital Resources
As of December 31, 2011,2013, we had cash and cash equivalents of $1,374,000$5,455,000 compared to cash and cash equivalents of $3,906,000$2,721,000 as of December 31, 2010.
In February 2012,November 2013, we completed a stockholders rights offering to our stockholdersprivate placement of record asunits (consisting of February 2, 2012. We issued a total of 2,070,719 shares of our common stock at a subscriptionand warrants to purchase shares of common stock) to accredited investors. The purchase price of $0.25 per share. In connection with the rights offering, we entered into an investment agreement with Matador Capital Partners, LP, or Matador. Mr. Jeffrey A. Berg, one of our directors, is the managing member of the general partner of Matador. Under the terms of the investment agreement, upon expiration of the rights offering, Matador purchasedeach unit was $0.40 for $0.25 per share 8,000,000 shares of our common stock not subscribed for and purchased by holders upon exercise of their subscription rights. We received gross proceeds of $2.5 million from$2,400,000. In the rights offeringaggregate, we issued 6,000,000 shares of common stock and warrants to purchase 3,600,000 shares. The warrants have an exercise price of $0.40 per share and are exercisable beginning on the six-month anniversary of the issuance date and expire on the five-year anniversary of the issuance date.
We have a credit facility with a lender under which we may borrow up to $3,000,000 for the investment agreement.
We believe existing cash and cash equivalents, funds generated from operations, the remaining availability on our credit facility, and the proceeds received from the rights offeringprivate placement completed in February 2012 (see Note 19)November 2013 will be sufficient to meet our operating cash requirements and to fulfill our debt obligations for at least the next twelve months. We have noIn order to increase the likelihood that we will be able to successfully execute our operating and strategic plan and to position the company to better take advantage of market opportunities and opportunities for growth, we are evaluating additional financing alternatives, including raising additional capital through public or private equity or debt obligations other than capital leases and a note payable for certain equipment purchases. It is our intentionfinancing directly to continue entering into capital leaseinvestors or financing facilities for certain equipment requirements when economically advantageous. In the event thatthrough underwriters or placement agents. If net cash provided by operating activities and our cash and cash equivalents on hand are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce operational cash uses, sell assets, or seek financing. Any actions we may undertake to reduce planned capital purchases, reduce expenses, or generate proceeds from the sale of assets may be insufficient to cover shortfalls in available funds. If we require additional capital, we may be unable to secure additional financing on terms that are acceptable to us, or at all.
Working Capital
As of December 31, 2011,2013, we had negative working capital (current liabilities in excess of current assets) of $1,070,000 compared to working capital (current assets in excess of current liabilities) of $1,891,000$4,310,000 compared to working capital of $841,000 as of December 31, 2010.2012. The following table shows our change in working capital from December 31, 20102012 to December 31, 2011.
Increase (Decrease) | ||||
| Working capital as of December 31, 2010 | $ | 1,891,000 | ||
| Changes in current assets: | ||||
| Cash and cash equivalents | (2,532,000 | ) | ||
| Restricted cash | 50,000 | |||
| Accounts receivable, net of allowance | 201,000 | |||
| Investment available-for-sale | (184,000 | ) | ||
| Prepaid expenses and other current assets | 36,000 | |||
| Total current assets | (2,429,000 | ) | ||
| Changes in current liabilities: | ||||
| Accounts payable | 105,000 | |||
| Accrued compensation | 129,000 | |||
| Accrued expenses | 350,000 | |||
| Sales taxes payable | (92,000 | ) | ||
| Income taxes payable | 69,000 | |||
| Obligations under capital lease | (90,000 | ) | ||
| Deferred revenue | (57,000 | ) | ||
| Other current liabilities | 118,000 | |||
| Total current liabilities | 532,000 | |||
| Net change in working capital | (2,961,000 | ) | ||
| Working capital as of December 31, 2011 | $ | (1,070,000 | ) | |
| Increase (Decrease) | ||||
| Working capital as of December 31, 2012 | $ | 841,000 | ||
| Changes in current assets: | ||||
| Cash and cash equivalents | 2,734,000 | |||
| Accounts receivable, net of allowance | 31,000 | |||
| Prepaid expenses and other current assets | 924,000 | |||
| Total current assets | 3,689,000 | |||
| Changes in current liabilities: | ||||
| Accounts payable | 4,000 | |||
| Accrued compensation | 49,000 | |||
| Accrued expenses | 122,000 | |||
| Sales taxes payable | (16,000 | ) | ||
| Income taxes payable | 2,000 | |||
| Notes payable | 590,000 | |||
| Obligations under capital lease | (75,000 | ) | ||
| Deferred revenue | (326,000 | ) | ||
| Other current liabilities | (130,000 | ) | ||
| Total current liabilities | 220,000 | |||
| Net change in working capital | 3,469,000 | |||
| Working capital as of December 31, 2013 | $ | 4,310,000 | ||
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows, are summarized as follows:
For the years ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | 574,000 | $ | 2,831,000 | ||||
| Investing activities | (2,790,000 | ) | (2,203,000 | ) | ||||
| Financing activities | (300,000 | ) | (364,000 | ) | ||||
| Effect of exchange rates | (16,000 | ) | 5,000 | |||||
| Net (decrease) increase in cash and cash equivalents | $ | (2,532,000 | ) | $ | 269,000 | |||
| For the years ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | 1,493,000 | $ | 2,156,000 | ||||
| Investing activities | (2,449,000 | ) | (2,777,000 | ) | ||||
| Financing activities | 3,750,000 | 1,952,000 | ||||||
| Effect of exchange rates | (60,000 | ) | 16,000 | |||||
| Net increase in cash and cash equivalents | $ | 2,734,000 | $ | 1,347,000 | ||||
Net cash provided by operating activities.
We are dependent on cash flows from operations to meet our cash requirements. Net cash generated from operating activities wasOur largest use of cash is payroll and related costs. Cash used related to payroll increased $216,000decreased $1,347,000 to $11,157,000$10,035,000 for the year ended December 31, 20112013 from $10,941,000$11,382,000 during 2010. This increase is2012 due primarily the result of increases in headcount during 2011, offset by the pay out of corporateto decreased employee salaries, incentive compensation, in 2010 that was earned in 2009. No corporate incentive compensation was paid out during 2011. Our primary source of cash is cash we generate from customers.and severance expense. Cash received from customers decreased $2,394,000$456,000 to $24,020,000$24,796,000 for the year ended December 31, 20112013 from $26,414,000$25,252,000 during 2010the same period in 2012 primarily due to lower revenue generated duringa decrease in the year ended December 31, 2011 as compared to 2010.
Net cash used in investing activities.
We usedNet cash provided by investing activities of $134,000 related to proceeds from the sale of securities available for sale and a decrease in cash used for a trademark license of $35,000 in 2010.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us 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, we evaluate our estimates, including those related to deferred costs and revenues, depreciation of broadcast equipment, allowance for doubtful accounts, investments, intangible assets, and contingencies. We base our estimates on a combination of historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
—We maintain allowances for doubtful accounts for estimated losses resulting from nonpayment by our customers. We reserve for all accounts that have been suspended or terminated from our BuzztimeBroadcast Equipment and Fixed Assets
—Broadcast equipment and fixed assets are recorded at cost. Equipment under capital leases is recorded at the present value of future minimum lease payments. Depreciation of broadcast equipment and 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.We incur a relatively significant level of depreciation expense in relation to our operating income. The amount of depreciation expense in any fiscal year is largely related to the estimated life of handheld wireless Playmaker devices and associated electronics and the computers located at our customer’s sites. TheOur Classic Playmakers are depreciated over a five-year life, our BEOND Playmakers are depreciated over a three-year life and the associated electronics and computers are depreciated over two to four years. The depreciable life of these assets was determined based on the shorter of the contractual capital lease period or their estimated useful life, which considers anticipated technology changes. We determined that the useful life of our Playmakers we purchased after September 2011 decreased from seven to five years, and any existing Playmaker prior to October 2011 was deemed to have a remaining useful life of five years as of December 31, 2011. We based this determination on our expectation of the current version Playmakers’ usefulness in the marketplace. As a result, we recognized approximately $21,000 in accelerated depreciation expense associated with reducing the remaining useful lives of the existing Playmakers to five years as of December 31, 2011. If our Playmakers and associated electronics and the computers turn out to have longer lives, on average, than estimated, our depreciation expense would be significantly reduced in those future periods. Conversely, if the Playmakers and associated electronics and the computers turn out to have shorter lives, on average, than estimated, our depreciation expense would be significantly increased in those future periods.
Goodwill and Other Intangible Assets
—Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite useful life are not amortized, but instead areASC No. 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC No. 360,Property, Plant and Equipment.
Purchase Accounting
– We account for acquisitions pursuant to ASC No. 805,Business Combinations. We record all acquired tangible and intangible assets and all assumed liabilities based upon their estimated fair values. During the year ended December 31, 2012, we entered into two immaterial asset acquisitions. The purchase price allocation for the asset acquisition of| 17 |
Assessments of Functional Currencies
—The United States dollar is our functional currency, except for our operations in Canada where the functional currency is the Canadian dollar. The financial position and results of operations of our foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. In accordance with ASC No. 830,Foreign Currency Matters, revenues and expenses of our subsidiaries have been translated into U.S. dollars at weighted average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded as a separate component of shareholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the years ended December 31,Revenue Recognition
—We recognize revenue from recurring service fees earned from our network subscribers, Stump! Trivia events, advertising revenues, leased equipment and distribution and licensing fees from our Buzztime-branded contentIn addition, the direct expenses of the installation, commissions, setup and training are being deferred and amortized on a straight-line basis and are classified as deferred costs on the accompanying consolidated balance sheets. TheFor these direct expenses that are associated with our Classic product, the amortization period approximates the estimated life of the customer relationship for deferred direct costs that are of an amount that is less than or equal to the deferred revenue for the related contract. For costs that exceed the deferred revenue, the amortization period is the initial term of the contract, in accordance with ASC No. 605, which is generally one year.
We evaluate our lease transactions in accordance with ASC No. 840,Leases, to determine classification of the leases against the following criteria:
| · | The lease transfers ownership of the property to the lessee by the end of the lease term; | |
| · | There is a bargain purchase option; | |
| · | The lease term is equal to or greater than 75% of the economic life of the equipment; or | |
| · | The present value of the minimum payments is equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. |
Because our current leasing agreement meets at least one of the criteria above and collectability of the minimum lease payments is reasonably assured and there are no important uncertainties surrounding the amount of reimbursable costs yet to be incurred under the lease, we classify the lease as a sales-type lease, and we recognize revenue when persuasive evidence of an arrangement exists, product delivery has occurred or the services have been rendered, the price is fixed and determinable and collectability is reasonably assured.
We recognize revenues from advertising, Stump! Trivia events, and royalties are recognized when all material services or conditions relating to the transaction have been performed or satisfied.
We have arrangements with certain third parties to share the revenue generated from some of our products and services. We evaluate recognition of the associated revenue in accordance with ASC No. 605-45,Revenue Recognition, Principal Agent Considerations.When indicators suggest that we are functioning as a principal, we record revenue gross and the corresponding amounts paid to third parties are recorded as direct expense. Conversely, when indicators suggest that we are functioning as an agent, we record revenue net of amounts paid to third parties.
Software Development Costs
—We capitalize costs related to the development of certain software productsWe performed our annual review of software development projects for the years ended December 31, 20112013 and 2010,2012, and determined to abandon various software development projects that we determinedconcluded were no longer a current strategic fit or for which we determined that the marketability of the content had decreased due to obtaining additional information regarding the specific industry for which the content was intended. As a result, an impairment of $155,000$230,000 and $236,000$7,000 was recognized for the years ended December 31, 20112013 and 2010,2012, respectively, which was included in our selling, general and administrative expenses.
Stock Based Compensation
—We estimate the fair value of our stock options using a Black-Scholes option pricing model, consistent with the provisions of ASC No. 718, Compensation – Stock CompensationWe used the historical stock price volatility as an input to value our stock options under ASC No. 718. The expected term of our stock options represents the period of time options are expected to be outstanding, and is based on observed historical exercise patterns for our company, which we believe are indicative of future exercise behavior. For the risk-free interest rate, we use the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend yield assumption is based on our history and expectation of dividend payouts.
The following weighted average assumptions were used for grants issued during 20112013 and 20102012 under the ASC No. 718 requirements:
| 2011 | 2010 | |||||||
| Weighted average risk-free rate | 1.54 | % | 1.68 | % | ||||
| Weighted average volatility | 97.70 | % | 93.72 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
| Expected life | 5.22 years | 6.50 years | ||||||
| 2013 | 2012 | |||||||
| Weighted average risk-free rate | 0.60% | 0.53% | ||||||
| Weighted average volatility | 79.82% | 95.21% | ||||||
| Dividend yield | 0.00% | 0.00% | ||||||
| Expected life | 4.80 years | 5.71 years | ||||||
ASC No. 718 requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeiture rates differ from those estimates. Forfeitures were estimated based on historical activity for our company. Stock-based compensation expense for employees for the years ended December 31,201131, 2013 and 20102012 was $332,000$132,000 and $299,000,$185,000, respectively, and is expensed in selling, general and administrative expenses based upon the departments to which substantially all of the associated employees report and credited to additional paid-in-capital.
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 shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. We have reviewed our tax positions and determined that an adjustment to the tax provision is not considered necessary nor is a reserve for income taxes required.
Segment Reporting - In accordance with ASC No. 280,Segment Reporting, we have determined that we operate as one operating segment. Decisions regarding our overall operating performance and allocation of our resources are assessed on a consolidated basis.
Recent Accounting Pronouncements
In May 2011,July 2013, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement2013-11,Income Taxes (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS740). This update clarifiesimproves the applicationreporting for unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The update is expected to reduce diversity in practice by providing guidance on the presentation of certain existing fair value measurement guidanceunrecognized tax benefits and expandswill better reflect the disclosures for fair value measurementsmanner in which an entity would settle at the reporting date any additional income taxes that are estimated using significant unobservable (Level 3)inputs. Thiswould result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The update is effective on a prospective basisprospectively for annualfiscal years, and interim reporting periods within those years, beginning on or after December 15, 2011,2013, which for us is January 1, 2012.2014. We do not expectanticipate that adopting this update will have a material impact on our consolidated financial statements.
In June 2011,April 2013, the FASB issued ASU No. 2011-05, Comprehensive Income2013-07,Presentation of Financial Statements (Topic 220)205) - Liquidation Basis of Accounting. This update (1) eliminatesaddresses the option to presentrequirements and methods of applying the componentsliquidation basis of other comprehensive income as partaccounting and the disclosure requirements within ASC Topic 205 for the purpose of providing consistency among liquidating entities reporting under U.S. GAAP. Generally, this update provides guidance for the statementpreparation of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. This update does not change the items that must be reported in other comprehensive income orand disclosures when an item of other comprehensive income must be reclassified to net income nor does the update affect how earnings per shareliquidation is calculated or presented.imminent. This update is required to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011,2013, which for us is January 1, 2012. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220). The amendment for this update is temporary and supersedes certain pending paragraphs in ASU No. 2011-05 to effectively defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income until the FASB has time to reconsider these reclassification requirements. Since ASU No. 2011-05 and No. 2011-12 only pertain to enhanced disclosure, we do not expect that adopting these updates will have a material impact on our consolidated financial statements.
In March 2013, FASB issued ASU No. 2013-05,Foreign Currency Matters. The amendments in this update resolve the diversity in practice about whether current literature applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment ina foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business withina foreign entity. In addition, the amendments in this update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This update is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013, which for us is January 1, 2014. We do not anticipate that adopting this update will have a material impact on our consolidated financial statements.
ITEM 7A.Quantitative
and Qualitative Disclosures about Market RiskUnder SEC rules and regulations, as a smaller reporting company we are not required to provide the information otherwise required by this item.
ITEM 8.
Financial Statements and Supplementary DataSee “Index to Consolidated Financial Statements and Schedule” on page F-1 for a listing of the Consolidated Financial Statements and Schedule filed with this report.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed, in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as of the end of the period covered by this report under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.
Based on our evaluation and subject to the foregoing, our Interim Chief Executive Officer and Chief Financial Officer concluded that there were no material weaknesses in our disclosure controls and procedures and that such disclosure controls and procedures were effective as of the end of the period covered by this report in providing reasonable assurance of achieving the desired control objectives, and therefore there were no corrective actions taken.
Management’s Report on Internal Control Over Financial Reporting
Our Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our Interim Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011.2013. According to the guidelines established byInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, one or more material weaknesses renders a company’s internal control over financial reporting ineffective. Based on this evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2011.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
Other InformationNot Applicable.
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance| Name | Age (1) | Director Since | ||
| Jeff Berg | 52 | 2008 | ||
| Michael Bush | 51 | 2009 | ||
| Mary Beth Lewis | 54 | 2009 | ||
| Terry Bateman | 55 | 2008 | ||
| Steve Mitgang | 50 | 2010 |
Information | ||||
ITEM 11.
Executive CompensationInformation responsive to Part III,this Item 11 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information responsive to Part III,this Item B will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 13.
Certain Relationships and Related Transactions,and Director IndependenceInformation concerning certain relationships and related transactions will be included in the Proxy Statement under the captions entitled “Certain Relationships and Related Transactions” and “Company Policy Regarding Related Party Transactions” and is incorporated herein by reference. Information concerning director independence will be included in the Proxy Statement under the heading “Election of Directors” and is incorporated herein by reference.
ITEM 14.
Principal Accounting Fees and ServicesInformation responsive to Part III,this Item 14 will be included in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15.
Exhibits, Consolidated Financial Statement Schedules(a) The following documents are filed as a part of this report:
Consolidated Financial Statements and Schedule.
Financial Statement Schedules. None
Exhibits.
The following exhibits are filed or furnished as a part of this report:INDEX TO EXHIBITS
Exhibit | Description | Incorporation By Reference | ||
| 2.1 | Asset Purchase Agreement dated October 5, 2011 between NTN Buzztime, Inc. and Trailside Entertainment Corporation | |||
| Previously filed as an exhibit to the registrant’s on Form 10-K filed on March 30, 2012. | ||||
| 2.2 | Asset Purchase Agreement dated May 11, 2009 between NTN Buzztime, Inc. and Instant Access Media, LLC | Previously filed as an exhibit to | ||
| 2.3 | Asset Purchase Agreement dated April 24, 2009 between NTN Buzztime, Inc. and iSports Inc. | Previously filed as an exhibit to | ||
| 3.1 | Previously filed as an exhibit to | |||
| 3.3 | Bylaws of the Company, as amended | Previously filed as an exhibit to | ||
| 4.1 | Specimen Common Stock Certificate | Previously filed as an exhibit to | ||
| 4.2 | ||||
| Form of Common Stock Purchase Warrant issued on May 11, 2009 by and between NTN Buzztime, Inc. and Instant Access Media, LLC | Previously filed as an exhibit to | |||
| 4.3 | Form of warrant issued on November 12, 2013 | Previously filed as an exhibit to the registrant’s report on Form 8-K filed on November 13, 2013 and incorporated herein by reference. | ||
| 2004 Performance Incentive Plan | Previously filed as Appendix A to the Definitive Proxy Statement on Schedule 14A filed by the registrant on September 3, 2004 and incorporated herein by reference. | |||
| 10.1(b)* | Form of Executive Employee Incentive Stock Option Agreement under the 2004 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on August 9, 2007 and incorporated herein by reference. | ||
| 10.1(c)* | Form of Non-Executive Employee Incentive Stock Option Agreement under the 2004 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on August 9, 2007 and incorporated herein by reference. | ||
| 10.1(d)* | Form of Stock Unit Award Agreement under the 2004 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on August 9, 2007 and incorporated herein by reference. |
| Exhibit | Description | Incorporation By Reference | ||
| 10.1(e)* | Form of Initial Director Stock Option Agreement under the 2004 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on August 9, 2007 and incorporated herein by reference. | ||
| 10.1(f)* | Form of Annual Director Stock Option Agreement under the 2004 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on August 9, 2007 and incorporated herein by reference. | ||
| 10.1(g)* | Form of Stock Unit Award Agreement under the 2004 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on March 24, 2009 and incorporated herein by reference. | ||
| 10.2(a)* | 2010 Performance Incentive Plan | Previously filed as an exhibit to the Definitive Proxy Statement on Schedule 14A filed by the registrant on April 29, 2010 and incorporated herein by reference. | ||
| 10.2(b)* | Form of Incentive Stock Option Agreement under the 2010 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on May 14, 2010 and incorporated herein by reference. | ||
| 10.2(c)* | Form of Nonstatutory Stock Option Agreement under the 2010 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on May 14, 2010 and incorporated herein by reference. | ||
| 10.2(d)* | Form of Stock Unit Agreement under the 2010 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on November 9, 2012 and incorporated herein by reference. | ||
| 10.2(e)* | Form of Restricted Stock Grant Agreement under the 2010 Performance Incentive Plan | Previously filed as an exhibit to the registrant’s report on Form 10-K filed on March 29, 2013 and incorporated herein by reference. | ||
| 10.3* | Confidential Separation Agreement and General Release of all Claims, dated June 4, 2012, by and between NTN Buzztime, Inc. and Michael Bush | Previously filed as an exhibit to the registrant’s report on Form 8-K filed on June 5, 2012 and incorporated herein by reference. | ||
| 10.4(a) | Office Lease, dated February 24, 2011, by and between Beckman/Carlsbad I, LLC and the Company Filed herewith. | Previously filed as an exhibit to the registrant’s report on Form 10-K filed on March 25, 2011 and incorporated herein by reference. | ||
| 10.4(b) | Confirmation of Lease Term, dated June 24, 2011, by and between Beckman/Carlsbad I, LLC and the Company | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on August 12, 2011 and incorporated herein by reference. | ||
| 10.5 | Master Equipment Lease dated as of September 29, 2009, by and between the Company and Data Sales Co. | Previously filed as an exhibit to the registrant’s report on Form 10-K filed on March 25, 2011 and incorporated herein by reference. | ||
| 10.6 | Registration Rights Agreement dated as of May 11, 2009 by and between the Company and Instant Access Media, LLC et al. | Previously filed as an exhibit to the | ||
| Previously filed as an exhibit to | ||||
| 10.7(b)* | First Amendment to Consulting Agreement, dated July 2, 2012, between NTN Buzztime, Inc. and JABAM, Inc. | Previously filed as an exhibit to the registrant’s report on Form 10-K filed on March 29, 2013 and incorporated herein by reference. | ||
| 10.7(c)* | Second Amendment to Consulting Agreement, dated January 11, 2013, by and between NTN Buzztime, Inc. and JABAM, Inc. | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on May 13, 2013 and incorporated herein by reference. | ||
| 10.7(d)* | Third Amendment to Consulting Agreement, dated July 1, 2013, by and between NTN Buzztime, Inc. and JABAM, Inc. | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on August | ||
| 10.7(e)* | Fourth Amendment to Consulting Agreement, dated September 27, 2013, by and between NTN Buzztime, Inc. and JABAM, Inc. | Previously filed as an exhibit to the registrant’s report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference. | ||
| 10.7(f)* | Fifth Amendment to Consulting Agreement, dated December 19, 2013, by and between NTN Buzztime, Inc. and JABAM, Inc. | Filed herewith. |
| Exhibit | Description | Incorporation By Reference | ||
| Previously filed as an exhibit to the | ||||
| 10.9* | ||||
| Previously filed as an exhibit to | ||||
| 10.10 | ||||
| Previously filed as an exhibit to | ||||
| 10.11 | ||||
| Previously filed as an exhibit to | ||||
| 10.12* | ||||
| Previously filed as an exhibit to | ||||
| 14.1 | Previously filed as an exhibit to | |||
| 21.1 | Subsidiaries of Registrant | Filed herewith. | ||
| 23.1 | Consent of Squar, Milner, Peterson, Miranda & Williamson, LLP | Filed herewith. | ||
| Consent of Mayer Hoffman McCann P.C. | Filed herewith. | |||
| 24.1 | Power of attorney | Included on the signatures page of this report. | ||
| 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
| 31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith. | ||
| 32.1# | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith. | ||
| 32.2# | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith. | ||
| XBRL Instance Document | ||||
| XBRL Taxonomy Extension Schema Document | ||||
| XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| XBRL Taxonomy Extension Definition Linkbase Document | ||||
| XBRL Taxonomy Extension Label Linkbase Document |
________________________
| * | Management Contract or Compensatory Plan | |||
| # | This certification is being furnished solely to accompany this report pursuant to U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated herein by reference into any filing of the Company whether made before or after the date hereof, regardless of any general incorporation language in such filing. | |||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NTN BUZZTIME, INC. | ||
| Dated: March 31, 2014 | /s/ KENDRA BERGER | |
Chief Financial Officer | ||
| (As Principal Financial and Accounting Officer) | ||
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael J. BushJeff Berg and Kendra Berger, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, each with full power to act alone, with full powers of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitute or resubstitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | |||
| Date | ||||
/s/ | March 31, 2014 | |||
| Jeff Berg | Chairman of the Board (Principal Executive Officer) | |||
| /s/Kendra Berger | Chief Financial Officer and Accounting Officer | March 31, 2014 | ||
| Kendra Berger | ||||
/s/ | March | |||
/s/ | Director | March | ||
/s/ | Director | March | ||
/s/ | Director | March | ||
NTN BUZZTIME, INC. AND SUBSIDIARIES
(Formerly NTN Communications, Inc. and Subsidiaries)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page | |
| Reports of Independent Registered Public Accounting | |
| Consolidated Financial Statements: | |
| Consolidated Balance Sheets as of December 31, | |
| Consolidated Statements of Operations for the years ended December 31, | |
| Consolidated Statements of Comprehensive Loss for the years ended December 31, | |
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, | |
| Consolidated Statements of Cash Flows for the years ended December 31, | |
| Notes to the Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
NTN Buzztime, Inc.
Carlsbad, California
We have audited the accompanying consolidated balance sheetssheet ofNTN Buzztime, Inc. and Subsidiaries (“the Company”) as of December 31, 2011 and 2010,2013, and the related consolidated statementsstatement of operations, comprehensive loss, shareholders’ equity and cash flows for each of the years in the two-year periodyear ended December 31, 2011. Our audit also included2013. These financial statements are the financial statement schedule for eachresponsibility of the years in the two-year period ended December 31, 2011, listed in the Index at Item 15. NTN Buzztime, Inc.’s management is responsible for these consolidated financial statements and the financial statement schedule.Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofNTN Buzztime, Inc. and Subsidiaries as of December 31, 20112013, and 2010,the results of their operations and their cash flows the year ended December 31, 2013 in conformity with U.S. generally accepted accounting principles.
/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP
Newport Beach, CA
March 31, 2014
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
NTN Buzztime, Inc. and Subsidiaries
Carlsbad, California
We have audited the accompanying consolidated balance sheet ofNTN Buzztime, Inc. and Subsidiaries (“the Company”) as of December 31, 2012, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for the year ended December 31, 2012. Our audit also included the financial statement schedule for the year ended December 31, 2012, listed in the Index at Item 15. NTN Buzztime, Inc. and Subsidiaries’ management is responsible for these consolidated financial statements and the financial statement schedule. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofNTN Buzztime, Inc. and Subsidiaries as of December 31, 2012, and the consolidated results of its operations and its cash flows for each of the years in the two-year periodyear ended December 31, 20112012 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule referred to above, presents fairly, in all material respects, the information set forth therein.
/s/ Mayer Hoffman McCann P.C.
San Diego, CA
March 30, 2012
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amount)
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,374 | $ | 3,906 | ||||
| Restricted cash | 50 | - | ||||||
| Accounts receivable, net of allowances of $180 and $220, respectively | 750 | 549 | ||||||
| Investments available-for-sale (Note 6) | - | 184 | ||||||
| Prepaid expenses and other current assets | 624 | 588 | ||||||
| Total current assets | 2,798 | 5,227 | ||||||
| Broadcast equipment and fixed assets, net (Note 4) | 4,255 | 3,638 | ||||||
Software development costs, net of accumulated amortization of $1,584 and $1,591, respectively | 1,320 | 1,094 | ||||||
| Deferred costs | 1,132 | 839 | ||||||
| Goodwill (Note 5) | 1,236 | 1,261 | ||||||
| Intangible assets, net (Note 5) | 845 | 1,025 | ||||||
| Other assets | 61 | 41 | ||||||
| Total assets | $ | 11,647 | $ | 13,125 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 528 | $ | 423 | ||||
| Accrued compensation (Note 7) | 757 | 628 | ||||||
| Accrued expenses | 801 | 451 | ||||||
| Sales taxes payable | 764 | 856 | ||||||
| Income taxes payable | 77 | 8 | ||||||
Obligations under capital lease - current portion (Note 12) | 286 | 376 | ||||||
| Deferred revenue | 463 | 520 | ||||||
| Other current liabilities | 192 | 74 | ||||||
| Total current liabilities | 3,868 | 3,336 | ||||||
| Obligations under capital leases, excluding current portion | 164 | 105 | ||||||
| Deferred revenue, excluding current portion | 186 | 124 | ||||||
| Deferred rent | 756 | - | ||||||
| Other liabilities | 323 | 99 | ||||||
| Total liabilities | 5,297 | 3,664 | ||||||
| Commitments and contingencies (Notes 12 and 13) | ||||||||
| Shareholders' Equity: | ||||||||
Series A 10% cumulative convertible preferred stock, $.005 par value, $161 liquidation preference, 5,000 shares authorized; 161 shares issued and outstanding at December 31, 2011 and December 31, 2010 | 1 | 1 | ||||||
Common stock, $.005 par value, 84,000 shares authorized; 60,927 and 60,751 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively | 305 | 304 | ||||||
Treasury stock, at cost, 503 shares at December 31, 2011 and December 31, 2010, respectively | (456 | ) | (456 | ) | ||||
| Additional paid-in capital | 116,497 | 116,114 | ||||||
| Accumulated deficit | (110,719 | ) | (107,284 | ) | ||||
| Accumulated other comprehensive income (Note 15) | 722 | 782 | ||||||
| Total shareholders' equity | 6,350 | 9,461 | ||||||
| Total shareholders' equity and liabilities | $ | 11,647 | $ | 13,125 | ||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 5,455 | $ | 2,721 | ||||
| Accounts receivable, net of allowances of $184 and $226, respectively | 641 | 610 | ||||||
| Prepaid expenses and other current assets (Note 3) | 1,822 | 898 | ||||||
| Total current assets | 7,918 | 4,229 | ||||||
| Broadcast equipment and fixed assets, net (Note 4) | 3,237 | 3,783 | ||||||
| Software development costs, net of accumulated amortization of $2,371 and $1,774, respectively | 2,317 | 1,980 | ||||||
| Deferred costs | 562 | 600 | ||||||
| Goodwill (Note 5) | 1,179 | 1,265 | ||||||
| Intangible assets, net (Note 5) | 160 | 579 | ||||||
| Other assets | 84 | 220 | ||||||
| Total assets | $ | 15,457 | $ | 12,656 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 553 | $ | 549 | ||||
| Accrued compensation (Note 7) | 647 | 598 | ||||||
| Accrued expenses | 660 | 538 | ||||||
| Sales taxes payable | 181 | 197 | ||||||
| Income taxes payable | 81 | 79 | ||||||
| Notes payable - current portion (Note 12) | 631 | 41 | ||||||
| Obligations under capital lease - current portion(Note 12) | 25 | 100 | ||||||
| Deferred revenue | 593 | 919 | ||||||
| Other current liabilities | 237 | 367 | ||||||
| Total current liabilities | 3,608 | 3,388 | ||||||
| Notes payable, exluding current portion | 962 | 29 | ||||||
| Obligations under capital leases, excluding current portion | 58 | 67 | ||||||
| Deferred revenue, excluding current portion | 798 | 188 | ||||||
| Deferred rent | 829 | 949 | ||||||
| Other liabilities | – | 141 | ||||||
| Total liabilities | 6,255 | 4,762 | ||||||
| Commitments and contingencies (Notes 12 and 13) | ||||||||
| Shareholders' Equity: | ||||||||
| Series A 10% cumulative convertible preferred stock, $.005 par value, $156 liquidation preference, 5,000 shares authorized; 156 shares issued and outstanding at December 31, 2013 and December 31, 2012. | 1 | 1 | ||||||
| Common stock, $.005 par value, 168,000 and 84,000 shares authorized at December 31, 2013 and December 31, 2012, respectively; 78,649 and 71,123 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively. | 393 | 355 | ||||||
| Treasury stock, at cost, 503 shares at December 31, 2013 and December 31, 2012, respectively | (456 | ) | (456 | ) | ||||
| Additional paid-in capital | 121,432 | 118,956 | ||||||
| Accumulated deficit | (112,799 | ) | (111,730 | ) | ||||
| Accumulated other comprehensive income (Note 14) | 631 | 768 | ||||||
| Total shareholders' equity | 9,202 | 7,894 | ||||||
| Total liabilities and shareholders' equity | $ | 15,457 | $ | 12,656 | ||||
See accompanying notes to consolidated financial statements
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| Years Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Revenues | $ | 23,870 | $ | 25,309 | ||||
| Operating expenses: | ||||||||
Direct operating costs (includes depreciation and amortization of $2,369 and $2,538, respectively) | 5,807 | 6,063 | ||||||
| Selling, general and administrative | 20,448 | 18,906 | ||||||
Depreciation and amortization (excluding depreciation and amortization included in direct operating costs) | 891 | 665 | ||||||
| Total operating expenses | 27,146 | 25,634 | ||||||
| Operating loss | (3,276 | ) | (325 | ) | ||||
| Other income (expense): | ||||||||
| Interest income | 3 | 3 | ||||||
| Interest expense | (52 | ) | (101 | ) | ||||
| Other income | 69 | 65 | ||||||
| Total other income (expense), net | 20 | (33 | ) | |||||
| Loss before income taxes | (3,256 | ) | (358 | ) | ||||
| Provision for income taxes | (163 | ) | (42 | ) | ||||
| Net loss | $ | (3,419 | ) | $ | (400 | ) | ||
| Net loss per common share - basic and diluted | $ | (0.06 | ) | $ | (0.01 | ) | ||
| Weighted average shares outstanding - basic and diluted | 60,402 | 60,134 | ||||||
| Years Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Revenues | $ | 23,749 | $ | 24,064 | ||||
| Operating expenses: | ||||||||
| Direct operating costs (includes depreciation and amortization of $2,116 and $2,158, respectively) | 7,686 | 6,157 | ||||||
| Selling, general and administrative | 16,449 | 18,248 | ||||||
| Depreciation and amortization (excluding depreciation and amortization included in direct operating costs) | 733 | 721 | ||||||
| Total operating expenses | 24,868 | 25,126 | ||||||
| Operating loss | (1,119 | ) | (1,062 | ) | ||||
| Other income (expense): | ||||||||
| Interest income | 3 | 3 | ||||||
| Interest expense | (26 | ) | (44 | ) | ||||
| Other income | 135 | 25 | ||||||
| Total other income (expense), net | 112 | (16 | ) | |||||
| Loss before income taxes | (1,007 | ) | (1,078 | ) | ||||
| (Provision) benefit for income taxes | (46 | ) | 83 | |||||
| Net loss | $ | (1,053 | ) | $ | (995 | ) | ||
| Net loss per common share - basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted average shares outstanding - basic and diluted | 71,962 | 69,040 | ||||||
See accompanying notes to consolidated financial statements
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| Years Ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Net loss | $ | (3,419 | ) | $ | (400 | ) | ||
| Other comprehensive (loss) income, net of tax: | ||||||||
| Foreign currency translation adjustments (Note 15) | (40 | ) | 79 | |||||
| Unrealized holding gain on investment available-for-sale | - | 4 | ||||||
| Reclassification adjustment for gain on investment available-for-sale included in net income | (20 | ) | - | |||||
| Other comprehensive (loss) income | (60 | ) | 83 | |||||
| Comprehensive loss | $ | (3,479 | ) | $ | (317 | ) | ||
| Years Ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Net loss | $ | (1,053 | ) | $ | (995 | ) | ||
| Other comprehensive income (loss), net of tax: | ||||||||
| Foreign currency translation adjustments (Note 14) | (137 | ) | 46 | |||||
| Other comprehensive income (loss) | (137 | ) | 46 | |||||
| Comprehensive loss | $ | (1,190 | ) | $ | (949 | ) | ||
See accompanying notes to consolidated financial statements
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 20112013 and 20102012
(in thousands)
Series A Cumulative Convertible Preferred Stock | Common Stock | Additional Paid-in | Treasury | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Income | Total | ||||||||||||||||||||||||||||
| Balances at December 31, 2009 | $ | 161 | 1 | 60,359 | $ | 302 | $ | 115,740 | $ | (456 | ) | $ | (106,868 | ) | $ | 699 | $ | 9,418 | ||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | 79 | 79 | |||||||||||||||||||||||||||
Unrealized holding gain on investment available-for-sale | - | - | - | - | - | - | - | 4 | 4 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (400 | ) | - | (400 | ) | |||||||||||||||||||||||||
Issuance of stock in lieu of dividends | - | - | 34 | - | 16 | - | (16 | ) | - | - | ||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock option | - | - | 358 | 2 | 59 | - | - | - | 61 | |||||||||||||||||||||||||||
Non-cash stock based compensation | - | - | - | - | 299 | - | - | - | 299 | |||||||||||||||||||||||||||
| Balances at December 31, 2010 | 161 | 1 | 60,751 | 304 | 116,114 | (456 | ) | (107,284 | ) | 782 | 9,461 | |||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | - | - | (40 | ) | (40 | ) | |||||||||||||||||||||||||
Reclassification adjustment for gain on investment available-for-sale included in net income | - | - | - | - | - | - | - | (20 | ) | (20 | ) | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (3,419 | ) | - | (3,419 | ) | |||||||||||||||||||||||||
Issuance of stock in lieu of dividends | - | - | 37 | - | 16 | - | (16 | ) | - | - | ||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock option | - | - | 139 | 1 | 35 | - | - | - | 36 | |||||||||||||||||||||||||||
Non-cash stock based compensation | - | - | - | - | 332 | - | - | - | 332 | |||||||||||||||||||||||||||
| Balances at December 31, 2011 | 161 | $ | 1 | 60,927 | $ | 305 | $ | 116,497 | $ | (456 | ) | $ | (110,719 | ) | $ | 722 | $ | 6,350 | ||||||||||||||||||
| Series A Cumulative Convertible Preferred Stock | Common Stock | Additional Paid-in | Treasury | Accumulated | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Income | Total | ||||||||||||||||||||||||||||
| Balances at December 31, 2011 | 161 | $ | 1 | 60,927 | $ | 305 | $ | 116,497 | $ | (456 | ) | $ | (110,719 | ) | $ | 722 | $ | 6,350 | ||||||||||||||||||
| Foreign currency translation adjustment | – | – | – | – | – | – | – | 46 | 46 | |||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | (995 | ) | – | (995 | ) | |||||||||||||||||||||||||
| Net proceeds from issuance of common stock related to rights offering | – | – | 10,071 | 50 | 2,260 | – | – | – | 2,310 | |||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | – | – | 37 | – | (2 | ) | – | – | – | (2 | ) | |||||||||||||||||||||||||
| Issuance of stock in lieu of dividends | – | – | 73 | – | 16 | – | (16 | ) | – | – | ||||||||||||||||||||||||||
| Conversion of preferred stock to common stock | (5 | ) | – | 15 | – | – | – | – | – | – | ||||||||||||||||||||||||||
| Non-cash stock based compensation | – | – | – | – | 185 | – | – | – | 185 | |||||||||||||||||||||||||||
| Balances at December 31, 2012 | 156 | $ | 1 | 71,123 | $ | 355 | $ | 118,956 | $ | (456 | ) | $ | (111,730 | ) | $ | 768 | $ | 7,894 | ||||||||||||||||||
| Foreign currency translation adjustment | – | – | – | – | – | – | (137 | ) | (137 | ) | ||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | (1,053 | ) | – | (1,053 | ) | |||||||||||||||||||||||||
| Net proceeds from issuance of common stock and warrants related to private placement | – | – | 6,000 | 30 | 2,312 | – | – | – | 2,342 | |||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | – | – | 17 | – | 1 | – | – | – | 1 | |||||||||||||||||||||||||||
| Issuance of common stock upon vesting of restricted stock units | – | – | 326 | 2 | (18 | ) | – | – | – | (16 | ) | |||||||||||||||||||||||||
| Issuance of common stock upon exercise of warrants | – | – | 798 | 4 | (4 | ) | – | – | – | – | ||||||||||||||||||||||||||
| Issuance of common stock related to acquisition of Interactive Hospitality | – | – | 250 | 1 | (1 | ) | – | – | – | – | ||||||||||||||||||||||||||
| Issuance of common stock in lieu of payment to consultant | – | – | 100 | 1 | 38 | – | – | – | 39 | |||||||||||||||||||||||||||
| Issuance of stock in lieu of dividends | – | – | 35 | – | 16 | – | (16 | ) | – | – | ||||||||||||||||||||||||||
| Non-cash stock based compensation | – | – | – | – | 132 | – | – | – | 132 | |||||||||||||||||||||||||||
| Balances at December 31, 2013 | 156 | $ | 1 | 78,649 | $ | 393 | $ | 121,432 | $ | (456 | ) | $ | (112,799 | ) | $ | 631 | $ | 9,202 | ||||||||||||||||||
See accompanying notes to consolidated financial statements
NTN BUZZTIME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the years ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Cash flows provided by operating activities: | ||||||||
| Net loss | $ | (3,419 | ) | $ | (400 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 3,260 | 3,203 | ||||||
| Provision for doubtful accounts | 5 | 191 | ||||||
| Stock-based compensation | 332 | 299 | ||||||
| Loss on sales of securities available-for-sale | 30 | - | ||||||
| Loss from disposition of equipment and capitalized software | 166 | 259 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (204 | ) | (131 | ) | ||||
| Prepaid expenses and other assets | (58 | ) | 41 | |||||
| Accounts payable and accrued liabilities | 494 | (1,082 | ) | |||||
| Income taxes payable | 70 | 169 | ||||||
| Deferred costs | (293 | ) | 244 | |||||
| Deferred revenue | 4 | 38 | ||||||
| Deferred rent | 187 | - | ||||||
| Net cash provided by operating activities | 574 | 2,831 | ||||||
| Cash flows used in investing activities: | ||||||||
| Capital expenditures | (1,594 | ) | (1,323 | ) | ||||
| Software development expenditures | (1,080 | ) | (845 | ) | ||||
| Trademark license | - | (35 | ) | |||||
| Proceeds from sale of securities available-for-sale | 134 | - | ||||||
| Acquisitions, net of cash acquired | (200 | ) | - | |||||
| Changes in restricted cash | (50 | ) | - | |||||
| Net cash used in investing activities | (2,790 | ) | (2,203 | ) | ||||
| Cash flows used in financing activities: | ||||||||
| Principal payments on capital lease | (446 | ) | (425 | ) | ||||
| Proceeds from note payable | 123 | - | ||||||
| Payments on note payable | (13 | ) | - | |||||
| Proceeds from exercise of stock options | 36 | 61 | ||||||
| Net cash used in financing activities | (300 | ) | (364 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | (2,516 | ) | 264 | |||||
| Effect of exchange rate on cash | (16 | ) | 5 | |||||
| Cash and cash equivalents at beginning of year | 3,906 | 3,637 | ||||||
| Cash and cash equivalents at end of year | $ | 1,374 | $ | 3,906 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 49 | $ | 90 | ||||
| Income taxes | $ | 57 | $ | 50 | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Equipment acquired under capital lease | $ | 414 | $ | 419 | ||||
| Issuance of common stock in lieu of payment of dividends | $ | 16 | $ | 16 | ||||
| Unrealized holding gain on investments available-for-sale | $ | - | $ | 4 | ||||
Reclassification adjustment for gain on investment available-for-sale included in net income | $ | (20 | ) | $ | - | |||
Earn-out liability in connection with the acquisition of intangible assets | $ | 185 | $ | - | ||||
| Lease incentive paid by landlord | $ | 569 | $ | - | ||||
| For the years ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Cash flows (used in) provided by operating activities: | ||||||||
| Net loss | $ | (1,053 | ) | $ | (995 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,849 | 2,879 | ||||||
| Provision for doubtful accounts | 35 | 119 | ||||||
| Stock-based compensation | 132 | 185 | ||||||
| Issuance of common stock to consultant in lieu of cash payment | 39 | – | ||||||
| Loss from disposition of equipment and capitalized software | 243 | 15 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (66 | ) | 21 | |||||
| Prepaid expenses and other assets | (845 | ) | (432 | ) | ||||
| Accounts payable and accrued liabilities | (49 | ) | (821 | ) | ||||
| Income taxes payable | 7 | 2 | ||||||
| Deferred costs | 37 | 532 | ||||||
| Deferred revenue | 284 | 458 | ||||||
| Deferred rent | (120 | ) | 193 | |||||
| Net cash provided by operating activities | 1,493 | 2,156 | ||||||
| Cash flows (used in) provided by investing activities: | ||||||||
| Capital expenditures | (861 | ) | (1,226 | ) | ||||
| Software development expenditures | (1,588 | ) | (1,441 | ) | ||||
| Acquisitions, net of cash acquired | – | (160 | ) | |||||
| Changes in restricted cash | – | 50 | ||||||
| Net cash used in investing activities | (2,449 | ) | (2,777 | ) | ||||
| Cash flows (used in) provided by financing activities: | ||||||||
| Principal payments on capital lease | (100 | ) | (318 | ) | ||||
| Proceeds from notes payable | 1,607 | – | ||||||
| Payments on notes payable | (84 | ) | (39 | ) | ||||
| Proceeds from exercise of stock options | 1 | – | ||||||
| Proceeds from rights offering, net | – | 2,310 | ||||||
| Proceeds from private placement of common stock, net | 2,342 | – | ||||||
| Tax withholding related to net-share settlements of restricted stock units | (16 | ) | (1 | ) | ||||
| Net cash provided by financing activities | 3,750 | 1,952 | ||||||
| Net increase in cash and cash equivalents | 2,794 | 1,331 | ||||||
| Effect of exchange rate on cash | (60 | ) | 16 | |||||
| Cash and cash equivalents at beginning of year | 2,721 | 1,374 | ||||||
| Cash and cash equivalents at end of year | $ | 5,455 | $ | 2,721 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 26 | $ | 40 | ||||
| Income taxes | $ | 26 | $ | 45 | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Equipment acquired under capital lease | $ | 23 | $ | 36 | ||||
| Issuance of common stock in lieu of payment of dividends | $ | 16 | $ | 15 | ||||
| Issuance of common stock in connection with net-share exercise of stock options and warrants | $ | 4 | $ | – | ||||
| Issuance of common stock in connection with acquisition | $ | 1 | $ | – | ||||
See accompanying notes to consolidated financial statements
NTN BUZZTIME, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 20112013 and 2010
| 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 provides an entertainment and marketing services through interactive game contentplatform for hospitality venues that offer the games, freeevents, and entertainment experiences to their customers.consumers. The Company has evolved from a developer and distributor of content to anCompany’s interactive entertainment network providing media, advertisinghelps its network subscribers to acquire, engage and consumer marketing services.retain their consumers. The Company generates revenues from by charging subscription fees for its servicesservice to its Network Subscribersnetwork subscribers, leasing equipment (including tablets used in its BEOND line and alsothe cases and charging trays for such tablets) to certain network subscribers, hosting live trivia events, and from the sale ofselling advertising aired on in-venue screens and as well as in conjunction withpart of customized games. Its games are currently available in over 3,900 locationsCurrently, approximately 3,200 venues in the U.S. and Canada.
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 “NTN,” “we”, “us” and “our” include the Company and its consolidated subsidiaries.
Reclassifications
The Company reclassified the consolidated statement of cash flowsbalance sheet for the period ended December 31, 20102012 to conform to the 20112013 presentation.
| 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 broadcast equipment; allowance for doubtful accounts; investments; stock-based compensation assumptions; impairment of software development costs, intangible assets and goodwill, and broadcast equipment; contingencies, including the reserve for sales tax inquiries; the provision for income taxes, including the valuation allowance; and purchase price allocations related to acquisitions. The Company bases its estimates on a combination of historical experience and various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about significant carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates.Cash and Cash Equivalents
—Capital Resources
—The Company is dependent upon cash on hand and cash flow from operations to meet its liquidity needs. The Company has a credit facility with a lender under which the Company may borrow up to $3,000,000 for the purchase of certain capital equipment. As of December 31, 2013, the Company borrowed approximately $1,623,000, which is recorded in short-term and long-term notes payable on the accompanying consolidated balance sheet. As of December 31, 2013, $1,564,000 remained outstanding. The Company believes existing cash and cash equivalents,| F-9 |
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 BuzztimeBroadcast Equipment and Fixed Assets
—Broadcast equipment and fixed assets are recorded at cost. Equipment under capital leases is recorded at the present value of future minimum lease payments. Depreciation of broadcast equipment and fixed assets is computed using the straight-line method over the estimated useful lives of the assets.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 estimated life of handheld wireless Playmaker devices and associated electronics and the computers located at our customer’snetwork subscribers’ sites. The Classic Playmakers are depreciated over a five-year life, the BEOND Playmakers are depreciated over three-year life and the associated electronics and computers are depreciated over two to four years. The depreciable life of these assets was determined based on the shorter of the contractual capital lease period or their estimated useful life, which considers anticipated technology changes. The Company determined that the useful life of its Playmakers purchased after September 2011 decreased from seven to five years, and any existing Playmaker prior to October 2011 was deemed to have a remaining useful life of five years as of December 31, 2011. The Company based this determination on its expectation of the current version Playmakers’ usefulness in the marketplace. As a result, the Company recognized approximately $21,000 in accelerated depreciation expense associated with reducing the remaining useful lives of the existing Playmakers to five years as of December 31, 2011.IfIf the Playmakers and associated electronics and the computers turn out to have longer lives, on average, than estimated, then depreciation expense would be significantly reduced in those future periods. Conversely, if the Playmakers and associated electronics and the computers turn out to have shorter lives, on average, than estimated, then depreciation expense would be significantly increased in those future periods.
Goodwill and Other Intangible Assets
—Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite useful life are not amortized, but instead areASC No. 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC No. 360,Property, Plant and Equipment.
Assessments of Functional Currencies
—The United States dollar is the Company’s functional currency, except for its operations in Canada where the functional currency is the Canadian dollar. The financial position and results of operations of the Canadian subsidiary is measured using the foreign subsidiary’s local currency as the functional currency. In accordance with ASC No. 830,Foreign Currency Matters, revenues and expenses of its foreign subsidiary have been translated into U.S. dollars at weighted average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded as a separate component of shareholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the years ended December 31,Revenue Recognition
—The Company recognizes revenue from recurring service fees earned from its network subscribers, Stump! Trivia events, advertising revenues, leased equipment and distribution and licensing fees from its Buzztime-branded content delivered primarily through its interactive consumer platforms. To the extent its arrangements contain multiple deliverables the Company evaluates the criteria in ASC No. 605,Revenue Recognition, to determine whether such deliverables represent separate units of accounting. In order to be considered a separate unit of accounting, the delivered items in an arrangement must have stand-alone value to the customer and objective and reliable evidence of fair value must exist for any undelivered elements. The Company’s arrangements for the transmission of the BuzztimeIn addition, the direct expenses of the installation, commissions, setup and training are deferred and amortized on a straight-line basis and are classified as deferred costs on the accompanying consolidated balance sheets. TheFor these direct expenses that are associated with the Classic product, the amortization period approximates the estimated life of the customer relationship for deferred direct costs that are of an amount that is less than or equal to the deferred revenue for the related contract. For costs that exceed the deferred revenue, the amortization period is the initial term of the contract, in accordance with ASC No. 605, which is generally one year.
The Company evaluated its lease transactions in accordance with ASC No. 840,Leases, to determine classification of the leases against the following criteria:
| · | The lease transfers ownership of the property to the lessee by the end of the lease term; | |
| · | There is a bargain purchase option; | |
| · | The lease term is equal to or greater than 75% of the economic life of the equipment; or | |
| · | The present value of the minimum payments is equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. |
Because the Company’s current leasing agreement meets at least one of the criteria above and collectability of the minimum lease payments is reasonably assured and there are no important uncertainties surrounding the amount of reimbursable costs yet to be incurred under the lease, the Company classifies the lease as a sales-type lease, and it recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred or the services have been rendered, the price is fixed and determinable and collectability is reasonably assured.
Revenues from advertising, Stump! Trivia events and royalties are recognized when all material services or conditions relating to the transaction have been performed or satisfied.
The Company has arrangements with certain third parties to share in revenue generated from some of its products and services. The Company evaluates recognition of the associated revenue in accordance with ASC No. 605-45,Revenue Recognition, Principal Agent Considerations.When indicators suggest that the Company is functioning as a principal, it records revenue gross and the corresponding amounts paid to third parties are recorded as direct expense. Conversely, when indicators suggest that the Company is functioning as an agent, it records revenue net of amounts paid to third parties.
Software Development Costs
—The Company capitalizes costs related to developing certain software products in accordance with ASC No. 350. Amortization expense relating to capitalized software development costs totaledThe Company performed its annual review of software development projects for the years ended December 31, 20112013 and 2010, and2012, determined to abandon various software development projects that it determinedconcluded were no longer a current strategic fit or for which the Company determined that the marketability of the content had decreased due to obtaining additional information regarding the specific industry for which the content was intended. As a result, an impairment loss of $155,000$230,000 and $236,000$7,000 was recognized for the years ended December 31, 20112013 and 2010,2012, respectively, which iswas included in our selling, general and administrative expenses.
Advertising Costs –
Marketing-related advertising costs are expensed as incurred and amounted toShipping 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 forIncome 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 shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. The Company reviewed its tax positions and determined that an adjustment to the tax provision is not considered necessary nor is a reserve for income taxes required.
Earnings Per Share
—Basic and diluted loss per common share have been computed by dividing the losses applicable to common stock by the weighted average number of common shares outstanding. The Company’s basic and fully diluted EPS calculation are the same since the increased number of shares that would be included in the diluted calculation from assumed exercise of common stock equivalents would be anti-dilutive to the net loss in each of the years shown in the consolidated financial statements.Segment Reporting—In accordance with ASC No. 280,Segment Reporting, the Company has determined that it operates as one operating segment. Decisions regarding the Company’s overall operating performance and allocation of our resources are assessed on a consolidated basis.
Recent Accounting Pronouncements
In May 2011,July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU)(“ASU”) No. 2011-04, Fair Value Measurement2013-11,Income Taxes (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS740). This update clarifiesimproves the applicationreporting for unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The update is expected to reduce diversity in practice by providing guidance on the presentation of certain existing fair value measurement guidanceunrecognized tax benefits and expandswill better reflect the disclosures for fair value measurementsmanner in which an entity would settle at the reporting date any additional income taxes that are estimated using significant unobservable (Level 3) inputs. Thiswould result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The update is effective on a prospective basisprospectively for annualfiscal years, and interim reporting periods within those years, beginning on or after December 15, 2011,2013, which for the Company is January 1, 2012.2014. The Company does not expectanticipate that adopting this update will have a material impact on its consolidated financial statements.
In June 2011,April 2013, the FASB issued ASU No. 2011-05, Comprehensive Income2013-07,Presentation of Financial Statements (Topic 220)205) - Liquidation Basis of Accounting. This update (1) eliminatesaddresses the option to presentrequirements and methods of applying the componentsliquidation basis of other comprehensive income as partaccounting and the disclosure requirements within ASC Topic 205 for the purpose of providing consistency among liquidating entities reporting under U.S. GAAP. Generally, this update provides guidance for the statementpreparation of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. This update does not change the items that must be reported in other comprehensive income orand disclosures when an item of other comprehensive income must be reclassified to net income nor does the update affect how earnings per shareliquidation is calculated or presented.imminent. This update is required to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011,2013, which for the Company is January 1, 2012. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220). The amendment for this update is temporary and supersedes certain pending paragraphs in ASU No. 2011-05 to effectively defer only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income until the FASB has time to reconsider these reclassification requirements. Since ASU No. 2011-05 and No. 2011-12 only pertain to enhanced disclosure, the Company does not expect that adopting these updates will have a material impact on its consolidated financial statements.
In March 2013, FASB issued ASU No. 2013-05,Foreign Currency Matters. The amendments in this update resolve the diversity in practice about whether current literature applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment ina foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business withina foreign entity. In addition, the amendments in this update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. This update is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013, which for the Company is January 1, 2014. The Company does not anticipate that adopting this update will have a material impact on our consolidated financial statements.
| 3. |
Prepaid expenses and other current assets used in the conduct of Trailside Entertainment’s business of providing live hosted trivia events at hospitality venues (the “Acquired Assets”). The asset purchase was also consummated on October 5, 2011.
| Intangible assets - customer list | $ | 435,000 | ||
| Total assets | 435,000 | |||
| Earnout liability | (185,000 | ) | ||
| Total liabilities | (185,000 | ) | ||
| Purchase price allocated to assets and liabilities acquired | $ | 250,000 |
Twelve months ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Revenue | $ | 24,496,000 | $ | 26,082,000 | ||||
| Net (loss) income | $ | (3,514,000 | ) | $ | (598,000 | ) | ||
| Earnings per share - basic and diluted | $ | (0.06 | ) | $ | (0.01 | ) | ||
| Weighted average shares - basic and diluted | 60,402,000 | 60,134,000 | ||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Site equipment to be installed | $ | 1,069,000 | $ | 77,000 | ||||
| Deposits | 413,000 | 437,000 | ||||||
| Prepaid expenses | 340,000 | 384,000 | ||||||
| Total | $ | 1,822,000 | $ | 898,000 | ||||
| 4. | Broadcast Equipment and Fixed Assets |
Broadcast equipment and fixed assets are recorded at cost and consist of the following at December 31, 20112013 and 2010:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| Broadcast equipment | $ | 17,676,000 | $ | 17,793,000 | ||||
| Furniture and fixtures | 635,000 | 790,000 | ||||||
| Machinery and equipment | 3,828,000 | 5,449,000 | ||||||
| Leasehold improvements | 606,000 | 562,000 | ||||||
| Other equipment | 24,000 | 24,000 | ||||||
| 22,769,000 | 24,618,000 | |||||||
| Accumulated depreciation | (18,514,000 | ) | (20,980,000 | ) | ||||
| Total | $ | 4,255,000 | $ | 3,638,000 | ||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Broadcast equipment | $ | 18,699,000 | $ | 18,148,000 | ||||
| Machinery and equipment | 1,940,000 | 2,175,000 | ||||||
| Furniture and fixtures | 185,000 | 641,000 | ||||||
| Leasehold improvements | 610,000 | 610,000 | ||||||
| Other equipment | 24,000 | 24,000 | ||||||
| 21,458,000 | 21,598,000 | |||||||
| Accumulated depreciation | (18,221,000 | ) | (17,815,000 | ) | ||||
| Total | $ | 3,237,000 | $ | 3,783,000 | ||||
Depreciation expense totaled $2,068,000$1,567,000 and $2,252,000$1,851,000 for the years ended December 31, 2011and 2010,2013 and 2012, respectively.
| 5. | Goodwill and Other Intangible Assets |
The Company’s goodwill balance relates to the purchase of NTN Canada. The Company performed its annual test forqualitative assessment of goodwill impairment for NTN Canada as of September 30, 2011andDecember 31, 2013, and it was determined that there were no indications of impairment. The Company considered the need to perform an additional test of goodwill of its Canadian business as of December 31, 2011, but determined that the overall health of the underlying Canadian business has remained stable since the September 30, 2011 valuation.
The Company also has other intangible assets comprised predominantly of developed technology, trivia databases, trademarks, and acquired customer relationships acquired in 2009. The Company determined that the underlying customer base of the subscription customer intangible asset related to its acquisition in 2009 of substantially all of the assets of i-am TV had diminished to such a level that the future cash flow of the remaining customers did not substantially equal the remaining net book value of the asset.relationships. As a result, the Company accelerated the amortization expense of approximately $187,000 for those customers who terminated so that the net book value as of December 31, 2011 approximately equaled2013 and 2012, there were no indications of impairment on the future cash flow of the remaining i-am TV customers.
The weighted average remaining useful life for all intangible assets is 2.40.7 years as of December 31, 2011.2013. Amortization expense relating to all intangible assets totaled $614,000$418,000 and $430,000$378,000 for the years ended December 31, 20112013 and 2010,2012, respectively.
As of December 31, 20112013 and 2010,2012, intangible assets with estimable lives were comprised of the following:
| December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
Gross Carrying Value | Accumulated Amortization | Net Book Value | Gross Carrying Value | Accumulated Amortization | Net Book Value | |||||||||||||||||||
| Trivia database | $ | 438,000 | $ | (352,000 | ) | $ | 86,000 | $ | 446,000 | $ | (314,000 | ) | $ | 132,000 | ||||||||||
| Trademarks and trademark licenses | 67,000 | (67,000 | ) | - | 67,000 | (67,000 | ) | - | ||||||||||||||||
| Acquired technology | 599,000 | (322,000 | ) | 277,000 | 599,000 | (202,000 | ) | 397,000 | ||||||||||||||||
| Acquired advertising customers | 302,000 | (302,000 | ) | - | 302,000 | (302,000 | ) | - | ||||||||||||||||
| Acquired subscription customers | 874,000 | (803,000 | ) | 71,000 | 874,000 | (378,000 | ) | 496,000 | ||||||||||||||||
| Acquired customer list | 435,000 | (24,000 | ) | 411,000 | - | - | - | |||||||||||||||||
| Developed technology | - | - | - | 206,000 | (206,000 | ) | - | |||||||||||||||||
| Total | $ | 2,715,000 | $ | (1,870,000 | ) | $ | 845,000 | $ | 2,494,000 | $ | (1,469,000 | ) | $ | 1,025,000 | ||||||||||
| December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
| Gross Carrying Value | Accumulated Amortization | Net Book Value | Gross Carrying Value | Accumulated Amortization | Net Book Value | |||||||||||||||||||
| Acquired customer lists | $ | 545,000 | $ | (425,000 | ) | $ | 120,000 | $ | 545,000 | $ | (174,000 | ) | $ | 371,000 | ||||||||||
| Acquired technology | 599,000 | (559,000 | ) | 40,000 | 599,000 | (440,000 | ) | 159,000 | ||||||||||||||||
| Trivia database | 417,000 | (417,000 | ) | – | 448,000 | (405,000 | ) | 43,000 | ||||||||||||||||
| Acquired subscription customers | 874,000 | (874,000 | ) | – | 874,000 | (868,000 | ) | 6,000 | ||||||||||||||||
| Trademarks and trademark licenses | 67,000 | (67,000 | ) | – | 67,000 | (67,000 | ) | – | ||||||||||||||||
| Acquired advertising customers | 302,000 | (302,000 | ) | – | 302,000 | (302,000 | ) | – | ||||||||||||||||
| Total | $ | 2,804,000 | $ | (2,644,000 | ) | $ | 160,000 | $ | 2,835,000 | $ | (2,256,000 | ) | $ | 579,000 | ||||||||||
The estimated aggregate amortization expense relating to the Company’s intangible assets for the five succeeding years is as follows:
| Year Ending | Estimated Aggregate Amortization Expense | |||
| 2012 | $ | 379,000 | ||
| 2013 | 307,000 | |||
| 2014 | 159,000 | |||
| Thereafter | - | |||
| Total | $ | 845,000 | ||
| Year Ending | Estimated Aggregate Amortization Expense | |||||
| 2014 | $ | 160,000 | ||||
| Thereafter | – | |||||
| Total | $ | 160,000 | ||||
| 6. | Fair Value of Financial Instruments |
The carrying values of cash and cash equivalents, 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 records the investment on the balance sheetdoes not have assets or liabilities that are measured at fair value with changes in fair value recorded ason a component of other comprehensive income (loss) in the consolidated balance sheet (see Note 15).
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, 2011.
| 7. | Accrued Compensation |
Accrued compensation consisted of the following at December 31, 20112013 and 2010:
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| Accrued vacation | $ | 429,000 | $ | 436,000 | ||||
| Accrued bonuses | 55,000 | 58,000 | ||||||
| Accrued salaries | 59,000 | 62,000 | ||||||
| Accrued commissions | 214,000 | 72,000 | ||||||
| Total accrued compensation | $ | 757,000 | $ | 628,000 | ||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Accrued vacation | $ | 439,000 | $ | 423,000 | ||||
| Accrued salaries | 137,000 | 111,000 | ||||||
| Accrued bonuses | 45,000 | 33,000 | ||||||
| Accrued commissions | 26,000 | 31,000 | ||||||
| Total accrued compensation | $ | 647,000 | $ | 598,000 | ||||
| 8. | 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 Networknetwork 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, 20112013 and 2010,2012, the Company generated approximately 21%$7,648,000 and 19%,$5,585,000, respectively, of total revenue from a national chain, Buffalo Wild Wings together with its franchisees. As of December 31, 20112013 and 2010,2012, approximately $95,000$259,000 and $100,000,$123,000, respectively, was included in accounts receivable from this customer.
Equipment Suppliers
The tablet used in the Company’s BEOND product line is manufactured by one unaffiliated third party. The Company currently purchases the BEOND tablets from unaffiliated third parties, and it currently purchases equipment (consisting of cases and charging trays for the tablet playmaker) from an unaffiliated manufacturer located in China. The Company currently purchases its PlaymakersClassic playmakers from an unaffiliated Taiwanese manufacturer subjectlocated in Taiwan pursuant to the terms of a supply agreement, dated April 23, 2007 with athe term thatof which automatically renews for one year periods. The Company currently does not have alternative sources for its Classic playmakers or its tablet playmaker equipment or an alternative source for its playmaker devices. Management believes other manufacturers could be identifiedmanufacturer of the tablet or an alternative device to produce the Playmakers on comparable terms. A change in manufacturers, however, could cause delays in supply and may have an adverse effect on the Company’s operations. tablet.
As of December 31, 20112013 and 2010,2012, approximately $70,000$32,000 and $127,000,$15,000, respectively, were included in accounts payable or accrued expenses for this supplier.
| 9. | 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, convertible preferred stock and deferred stock units representing approximately 9,024,0009,607,000 and 9,244,0007,030,000 shares were excluded from the computations of diluted net loss per common share for the years ended December 31, 20112013 and 2010,2012, respectively, as their effect was anti-dilutive.
| 10. | Stockholders’ Equity |
Capital Stock
At the Company’s 2013 annual meeting of stockholders, the Company’s stockholders approved an amendment to the Company’s restated certificate of incorporation to increase the number of total authorized shares from 94,000,000 to 178,000,000 and to increase the number of authorized shares of common stock from 84,000,000 to 168,000,000. The Company filed a certificate of amendment of the restated certificate of incorporation of the Company with the Delaware Secretary of State on June 11, 2013 to effect such amendment and it was effective on that same date.
Private Placement
In November 2013, the Company completed a private placement of units (consisting of shares of common stock and warrants to purchase shares of common stock) to accredited investors. The purchase price of each unit was $0.40 for gross proceeds of $2,400,000. In the aggregate, the Company issued 6,000,000 shares of common stock and warrants to purchase 3,600,000 shares. The warrants have an exercise price of $0.40 per share and are exercisable beginning on the six-month anniversary of the issuance date and expire on the five-year anniversary of the issuance date.
Pursuant to the registration rights agreement entered into in connection with the private placement, the Company filed a registration statement with the Securities and Exchange Commission under the Securities Act of 1933 to register for resale by the investors the shares of common stock, and the shares of common stock issuable upon exercise of the warrants, sold to the investors in the private placement. The registration statement was declared effective on December 5, 2013.
Also pursuant to the registration rights agreement, the Company is obligated to pay to each investor a monthly payment of 1% (not to exceed 10%) of the aggregate purchase price paid by such investor as liquidation damages for as long as the following circumstances are in effect:
| · | In the event the Company does not file the registration statement within the timeframe indicated in the Agreement; | |
| · | If the registration statement is not declared effective; or | |
| · | After the effective date, the registration statement ceases to be effective for more than 15 consecutive calendar days or more than an aggregate of 30 calendar days (which need not be consecutive calendar days) during any 12-month period, unless the Company is required to suspend the effectiveness, in which case, such aggregate of 30 calendar days shall be extended to an aggregate of 60 calendar days. |
As indicated above, the Company filed the registration statement, and it was declared effective within the timeframe indicated in the registration rights agreement. The Company has determined that the likelihood of the effective registration statement becoming ineffective is remote. Accordingly, the Company did not record a loss contingency for the 1% liquidation damages payments.
Rights Offering
In February 2012, the Company completed a rights offering to its stockholders of record as of February 2, 2012. The Company issued a total of 2,070,719 shares of its common stock at a subscription price of $0.25 per share. In connection with the rights offering, the Company entered into an investment agreement with Matador Capital Partners, LP, or Matador. Mr. Jeffrey A. Berg, one of the Company’s directors and its Interim Chief Executive Officer, is the managing member of the general partner of Matador. Under the terms of the investment agreement, upon expiration of the rights offering, Matador purchased for $0.25 per share 8,000,000 shares of our common stock not subscribed for and purchased by holders upon exercise of their subscription rights. The Company received gross proceeds of $2.5 million from the rights offering and under the investment agreement.
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 2,500,000 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. On the effective date, the 1995 Plan had approximately 77,000 options available for grant. Options under both the 1995 Plan and the 2004 Plan have a term of up to ten years, and are exercisable at a price per share not less than the fair market value on the date of grant. In September 2009, the 2004 Plan expired. All awards that were granted under the 2004 Plan will continue to be governed by the 2004 Plan until they are exercised or expire in accordance with that plan’s terms. As of December 31, 2011,2013, there were approximately 1,120,000773,000 options outstanding under the 2004 Plan.
2010 Performance Incentive Plan
In June 2010, the Company’s shareholders approved the 2010 Performance Incentive Plan (the “2010 Plan”). The 2010 Plan provides for the issuance of up to 6,000,000 shares of NTN common stock. Under the 2010 Plan, options for the purchase of NTN common stock or other instruments such as deferredrestricted stock units may be granted to officers, directors, employees and consultants. The Board of Directors designated its Nominating and Corporate Governance/Compensation Committee as the 2010 Plan Committee. Stock options granted under the 2010 Plan may either be incentive stock options or nonqualified stock options. A stock option granted under the 2010 Plan generally cannot be exercised until it becomes vested. The 2010 Plan Committee establishes the vesting schedule of each stock option at the time of grant. At its discretion, the 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 2010 Plan. Options under the 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, 2011,2013, there were approximately 3,194,0001,891,000 options outstanding under the 2010 Plan.
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 all share-based payment awards to employees is recognized using the straight-line single-option method.
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 20112013 and 20102012 under the ASC No. 718 requirements:
| 2011 | 2010 | |||||||
| Weighted average risk-free rate | 1.54 | % | 1.68 | % | ||||
| Weighted average volatility | 97.70 | % | 93.72 | % | ||||
| Dividend yield | 0.00 | % | 0.00 | % | ||||
| Expected life | 5.22 years | 6.50 years | ||||||
| 2013 | 2012 | |||
| Weighted average risk-free rate | 0.60% | 0.53% | ||
| Weighted average volatility | 79.82% | 95.21% | ||
| Dividend yield | 0.00% | 0.00% | ||
| Expected life | 4.80 years | 5.71 years |
ASC No. 718 requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeiture rates differ from those estimates. Forfeitures were estimated based on historical activity for the Company. Stock-based compensation expense for employees in 20112013 and 20102012 was $332,000$132,000 and $299,000,$185,000, respectively, and is expensed in selling, general and administrative expenses and credited to the additional paid-in-capital account.
Stock Option Activity
The following table summarizes stock option activity for the year ended December 31, 2011:
Outstanding Options | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding December 31, 2010 | 4,496,000 | $ | 0.77 | 7.34 | $ | 42,000 | ||||||||||
| Granted | 993,000 | 0.44 | - | - | ||||||||||||
| Exercised | (139,000 | ) | 0.26 | - | - | |||||||||||
| Forfeited | (158,000 | ) | 0.40 | |||||||||||||
| Cancelled | (878,000 | ) | 1.41 | - | - | |||||||||||
| Outstanding December 31, 2011 | 4,314,000 | $ | 0.59 | 7.74 | $ | 2,000 | ||||||||||
| Options vested and exercisable at December 31, 2011 | 2,040,000 | $ | 0.74 | 6.72 | $ | 1,000 | ||||||||||
| Outstanding Options | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding December 31, 2011 | 4,314,000 | $ | 0.59 | 7.74 | $ | 2,000 | ||||||||||
| Granted | 452,000 | 0.15 | – | – | ||||||||||||
| Cancelled | (1,351,000 | ) | 0.51 | – | – | |||||||||||
| Forfeited | (1,596,000 | ) | 0.45 | – | – | |||||||||||
| Expired | (5,000 | ) | 0.98 | – | – | |||||||||||
| Outstanding December 31, 2012 | 1,814,000 | 0.66 | 6.37 | 25,000 | ||||||||||||
| Granted | 1,280,000 | 0.27 | – | – | ||||||||||||
| Exercised | (30,000 | ) | 0.17 | – | – | |||||||||||
| Cancelled | (245,000 | ) | 0.49 | – | – | |||||||||||
| Forfeited | (102,000 | ) | 0.19 | – | – | |||||||||||
| Expired | (53,000 | ) | 1.09 | – | – | |||||||||||
| Outstanding December 31, 2013 | 2,664,000 | $ | 0.50 | 7.14 | $ | 706,000 | ||||||||||
| Options vested and exercisable at December 31, 2013 | 1,315,000 | $ | 0.76 | 5.14 | $ | 201,000 | ||||||||||
The aggregate intrinsic value of options at December 31, 20112013 is based on the company’s closing stock price on that date of $0.25$0.56 per share as reported by the NYSE Amex.MKT. The total intrinsic value of options exercised during the yearsyear ended December 31, 20112013 was $6,000. Pursuant to the 2004 Plan and the 2010 was $26,000 and $113,000, respectively. The total cash received as a result ofPlan, stock option exercises could be made on a net-exercise arrangement, where shares of common stock are withheld in the amount of the exercise price as payment of the exercise price instead of cash. Under such net-exercise arrangements, options to purchase approximately 25,000 shares of common stock were exercised and approximately 13,000 shares of common stock were issued. The Company received approximately $1,400 in cash payments for the exercise of options to purchase approximately 4,000 shares. There were no stock options exercised during the twelve monthsyear ended December 31, 2011 and 2010 was approximately $36,000 and $61,000, respectively.
The per share weighted average grant-date fair value of stock options granted during 20112013 and 20102012 was $0.32$0.18 and $0.41,$0.15, respectively.
As of December 31, 2011,2013, the unamortized compensation expense related to outstanding unvested options was approximately $489,000$150,000 with a weighted average remaining requisite service period of 2.412.31 years. The Company expects to amortize this expense over the remaining requisite service period of these stock options. A deferred tax asset generally would be recorded related to the expected future tax benefit from the exercise of the non-qualified stock options. However, due to a history of net operating losses, a full valuation allowance has been recorded related to the tax benefit for non-qualified stock options.
Restricted Stock Unit Activity
Grants of deferredrestricted stock units are paid in an equal number of shares of common stock on the vesting date of the award, subject to any deferred payment date that the holder may elect. A stock unit award is paid only to the extent vested. Vesting generally requires the continued employment by the award recipient through the respective vesting date,date. Restricted stock units outstanding as of December 31, 2013 are not subject to accelerated vesting in certain circumstances.provisions. Since the deferredrestricted stock units are paid in an equal number of shares of common stock without any kind of offsetting payment by the employee, the measurement of cost is based on the quoted market price of the stock at the measurement date which is the date of grant.
The following table summarizes deferredrestricted stock unit activity during 2011:
| Outstanding Restricted Stock Units | Weighted Average Fair Value per Share | |||||||||
| December 31, 2011 | 49,000 | $ | 0.31 | |||||||
| Granted | 620,000 | – | ||||||||
| Released | (44,000 | ) | – | |||||||
| Cancelled | (65,000 | ) | – | |||||||
| December 31, 2012 | 560,000 | $ | 0.14 | |||||||
| Granted | – | – | ||||||||
| Released | (373,000 | ) | – | |||||||
| Cancelled | – | – | ||||||||
| December 31, 2013 | 187,000 | $ | 0.14 | |||||||
| Balance exercisable at December 31, 2013 | – | |||||||||
Under the 2010 Plan, employees may elect to have shares of common stock withheld on the vesting date in lieu of the employees paying cash for withholding taxes. As a result of employees making this election, approximately 373,000 restricted stock units outstanding have performance-based accelerated vesting provisions that are tied to certain revenue targets for the Company which could result in accelerated vestingvested and approximately 326,000 shares of up to 50% of the total award. The Company has evaluated the likelihood of attaining the performance based targets and they are not considered probable, therefore, accelerated expense was not recorded. The Company will continue to monitor its revenue results and should any estimates made regarding the satisfaction of those performances based conditions change at any time during the estimated requisite period, an adjustment will be calculated and recorded in accordance with ASC No. 718.
Warrant Activity
The following summarizes warrant activity during 2011:
Outstanding Warrants | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Outstanding December 31, 2010 | 4,500,000 | $ | 0.79 | 6.35 | ||||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Outstanding December 31, 2011 | 4,500,000 | $ | 0.79 | 5.35 | ||||||||
| Balance exercisable at December 31, 2011 | 4,500,000 | $ | 0.79 | 6.35 | ||||||||
| Outstanding Warrants | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life (in years) | ||||||||||||
| Outstanding December 31, 2011 | 4,500,000 | $ | 0.79 | 5.35 | ||||||||||
| Granted | – | – | – | |||||||||||
| Exercised | – | – | – | |||||||||||
| Forfeited | – | – | – | |||||||||||
| Outstanding December 31, 2012 | 4,500,000 | $ | 0.79 | 4.35 | ||||||||||
| Granted | 3,600,000 | 0.40 | – | |||||||||||
| Exercised | (1,500,000 | ) | 0.37 | – | ||||||||||
| Forfeited | – | – | – | |||||||||||
| Outstanding December 31, 2013 | 6,600,000 | $ | 0.67 | 4.18 | ||||||||||
| Balance exercisable at December 31, 2013 | 3,000,000 | $ | 0.40 | 3.36 | ||||||||||
During 2009, the Company issued warrants to purchase an aggregate of 4,500,000 warrants outstanding were issued during 2009shares of common stock in connection with asset acquisitions of iSports and i-am TV. The fair values of the warrants were approximately $908,000 in aggregate and were determined using the Black-Scholes model using the following weighted-average assumptions: risk-free interest rates of 2.79%; dividend yield of 0%; expected volatility of 78.1%; and a term of 8 years.
During 2013, the Company issued warrants to purchase an aggregate of 3,600,000 shares of common stock in connection with a private placement. The fair value of the warrants was approximately $1,379,000 in aggregate and was determined using the Black-Scholes model using the following weighted-average assumptions: risk-free interest rates of 1.06%; dividend yield of 0%; expected volatility of 80.25%; and a term of 5 years. The Company has concluded that these warrants qualify as equity instruments and not liabilities.
Cumulative Convertible Preferred Stock
The Company has authorized 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series. The only series currently designated is a series of 5,000,000 shares of Series A Cumulative Convertible Preferred Stock (Series A Preferred Stock).
As of December 31, 20112013 and 2010,2012, there were 161,000156,000 shares of Series A Preferred Stock issued and outstanding. The Series A Preferred Stock provides for a cumulative annual dividend of 10 cents per share, payable in semi-annual installments in June and December. Dividends may be paid in cash or with shares of common stock. ForDuring the twelve monthsyears ended December 31, 20112013 and 2010,2012, the Company issued approximately 37,00035,000 and 34,00073,000 common shares, respectively, for payment of dividends.
The Series A Preferred Stock has no voting rights and has a $1.00 per share liquidation preference over common stock. The registered holder has the right at any time to convert shares of Series A Preferred Stock into that number of shares of common stock that equals the number of shares of Series A Preferred Stock that are surrendered for conversion divided by the conversion rate. The conversion rate is subject to adjustment in certain events and is established at the time of each conversion, such thatconversion. During the numberyear ended December 31, 2012, 5,000 shares of cumulative convertible preferred stock were converted into approximately 15,000 shares of common stock issuable uponat a conversion rate of the preferred stock is convertible into is higher than the original conversion rate. During 2011 and 2010, there0.3276. There were no conversions.conversions for year ended December 31, 2013. There is no mandatory conversion term, date or any redemption features associated with the Series A Preferred Stock.
| 11. | Income Taxes |
For each of the years 20112013 and 2010,2012, current tax (benefit) provisions and current deferred tax provisions(benefit) provision were recorded as follows:
| 2011 | 2010 | |||||||
| Current Tax Provision | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 76,000 | 15,000 | ||||||
| Foreign | 47,000 | (11,000 | ) | |||||
| 123,000 | 4,000 | |||||||
| Deferred Tax Provision | ||||||||
| Federal | - | - | ||||||
| State | - | - | ||||||
| Foreign | 40,000 | 38,000 | ||||||
| 40,000 | 38,000 | |||||||
| Total Tax Provision | ||||||||
| Federal | - | - | ||||||
| State | 76,000 | 15,000 | ||||||
| Foreign | 87,000 | 27,000 | ||||||
| $ | 163,000 | $ | 42,000 | |||||
| 2013 | 2012 | |||||||
| Current Tax (Provision) Benefit | ||||||||
| Federal | $ | – | $ | – | ||||
| State | (27,000 | ) | 8,000 | |||||
| Foreign | (2,000 | ) | 27,000 | |||||
| (29,000 | ) | 35,000 | ||||||
| Deferred Tax (Provision) Benefit | ||||||||
| Federal | – | – | ||||||
| State | (3,000 | ) | 77,000 | |||||
| Foreign | (14,000 | ) | (29,000 | ) | ||||
| (17,000 | ) | 48,000 | ||||||
| Total Tax (Provision) Benefit | ||||||||
| Federal | – | – | ||||||
| State | (30,000 | ) | 85,000 | |||||
| Foreign | (16,000 | ) | (2,000 | ) | ||||
| $ | (46,000 | ) | $ | 83,000 | ||||
The net deferred tax assets and liabilities have been reported in other assets in the consolidated balance sheets at December 31, 20112013 and 20102012 as follows:
| 2011 | 2010 | |||||||||||||||
| Current | Noncurrent | Current | Noncurrent | |||||||||||||
| Deferred Tax Assets: | ||||||||||||||||
| NOL carryforwards | $ | - | $ | 19,193,000 | $ | - | $ | 21,204,000 | ||||||||
| UK NOL carryforwards | - | 724,000 | - | 724,000 | ||||||||||||
| Capital loss | - | 446,000 | - | - | ||||||||||||
| Compensation and vacation accrual | 152,000 | - | 151,000 | - | ||||||||||||
| Operating accruals | 568,000 | - | 277,000 | - | ||||||||||||
| Research and experimentation, AMT and foreign tax credits | - | 156,000 | - | 142,000 | ||||||||||||
| Fixed assets and intangibles | - | 868,000 | - | 980,000 | ||||||||||||
| Foreign | - | - | 8,000 | 13,000 | ||||||||||||
| Other | 127,000 | 123,000 | 134,000 | 344,000 | ||||||||||||
| Total gross deferred tax assets | 847,000 | 21,510,000 | 570,000 | 23,407,000 | ||||||||||||
| Valuation allowance | (566,000 | ) | (21,222,000 | ) | (350,000 | ) | (23,095,000 | ) | ||||||||
| Net deferred tax assets | 281,000 | 288,000 | 220,000 | 312,000 | ||||||||||||
| Deferred Tax Liabilities: | ||||||||||||||||
| Capitalized software | - | 341,000 | - | 299,000 | ||||||||||||
| Foreign | - | 19,000 | - | - | ||||||||||||
| Deferred revenue | 228,000 | - | 212,000 | - | ||||||||||||
| Total gross deferred liabilities | 228,000 | 360,000 | 212,000 | 299,000 | ||||||||||||
| Net deferred taxes | $ | 53,000 | $ | (72,000 | ) | $ | 8,000 | $ | 13,000 | |||||||
| 2013 | 2012 | |||||||||||||||
| Current | Noncurrent | Current | Noncurrent | |||||||||||||
| Deferred Tax Assets: | ||||||||||||||||
| NOL carryforwards | $ | – | $ | 19,406,000 | $ | – | $ | 19,743,000 | ||||||||
| UK NOL carryforwards | – | 772,000 | – | 756,000 | ||||||||||||
| Capital loss | – | 409,000 | – | 450,000 | ||||||||||||
| Compensation and vacation accrual | 150,000 | – | 154,000 | – | ||||||||||||
| Operating accruals | 37,000 | 302,000 | 60,000 | 380,000 | ||||||||||||
| Deferred revenue | 224,000 | – | – | – | ||||||||||||
| Research and experimentation, AMT and foreign tax credits | – | 156,000 | – | 156,000 | ||||||||||||
| State Margin Tax Credit | – | 137,000 | – | 140,000 | ||||||||||||
| Fixed assets and intangibles | – | 630,000 | – | 844,000 | ||||||||||||
| Foreign | 3,000 | – | 3,000 | – | ||||||||||||
| Other | 130,000 | 157,000 | 162,000 | 138,000 | ||||||||||||
| Total gross deferred tax assets | 544,000 | 21,969,000 | 379,000 | 22,607,000 | ||||||||||||
| Valuation allowance | (515,000 | ) | (21,042,000 | ) | (360,000 | ) | (21,715,000 | ) | ||||||||
| Net deferred tax assets | 29,000 | 927,000 | 19,000 | 892,000 | ||||||||||||
| Deferred Tax Liabilities: | ||||||||||||||||
| Capitalized software | – | 843,000 | – | 730,000 | ||||||||||||
| Foreign | – | 57,000 | – | 55,000 | ||||||||||||
| Deferred revenue | – | – | 23,000 | – | ||||||||||||
| Other | 40,000 | – | 74,000 | – | ||||||||||||
| Total gross deferred liabilities | 40,000 | 900,000 | 97,000 | 785,000 | ||||||||||||
| Net deferred taxes | $ | (11,000 | ) | $ | 27,000 | $ | (78,000 | ) | $ | 107,000 | ||||||
The reconciliation of computed expected income taxes to effective income taxes by applying the federal statutory rate of 34% is as follows:
For the year ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| Tax at federal income tax rate | $ | (1,107,000 | ) | $ | (121,000 | ) | ||
| State (benefit) | 76,000 | (15,000 | ) | |||||
| Foreign tax differential | (9,000 | ) | (2,000 | ) | ||||
| Change in valuation allowance | 1,108,000 | 97,000 | ||||||
| Permanent items | 60,000 | 83,000 | ||||||
| Other | 35,000 | - | ||||||
| Total Provision | $ | 163,000 | $ | 42,000 | ||||
| For the year ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| Tax at federal income tax rate | $ | 342,000 | $ | 367,000 | ||||
| State (provision) benefit | (30,000 | ) | 85,000 | |||||
| Foreign tax differential | 2,000 | (1,000 | ) | |||||
| Change in valuation allowance | (303,000 | ) | (139,000 | ) | ||||
| Permanent items | (61,000 | ) | (256,000 | ) | ||||
| Other | 4,000 | 27,000 | ||||||
| Total (Provision) Benefit | $ | (46,000 | ) | $ | 83,000 | |||
The net change in the total valuation allowance for the year ended December 31, 20112013 was an increase of $1,108,000.$303,000. The net change in the total valuation allowance for the year ended December 31, 20102012 was an increasea decrease of $97,000.$139,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and planning strategies in making this assessment. Based on the level of historical operating results and projections for the taxable income for the future, management has determined that it is more likely than not that the portion of deferred taxes not utilized through the reversal of deferred tax liabilities will not be realized. Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
At December 31, 2011,2013, the Company has available net operating loss (“NOL”) carryforwards of approximately $53,094,000$55,581,000 for federal income tax purposes, which will continue expiringbegin to expire in 2012.2017. The NOL carryforwards for state purposes, which will continue expiring in 2012,2014, are approximately $20,011,000.$21,401,000. There can be no assurance that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards due to continued operating losses. Further, Section 382 of the Internal Revenue Code (“IRC”) imposes limits on the ability to use NOL carryforwards that existed prior to a change in control to offset future taxable income. The Company completed a Section 382 analysis for the period from January 1, 1992 through September 30, 2011December 31, 2013 and determined that the Company does not expect to be limited in regards to utilizing the total NOL carryforwards that existed as of September 30, 2011. Based on the Company’s analysis of its stockholder activity for the three months ended December 31, 2011, there were no ownership changes that caused an annual limitation under the provisions of Section 382. Accordingly, the Company is expected to be able to utilize the total NOL carryforwards that existed as of December 31, 2011,2013, provided it generates sufficient future earnings prior to the expiration of the NOLs and that future changes in ownership do not trigger a Section 382 limitation. The Company has 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.
The deferred tax assets as of December 31, 20112013 include a deferred tax asset of $1,294,000$681,000 representing NOLs arising from the exercise of stock options by Company employees.employees from 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 2006.2009. 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.
| 12. | Commitments |
Operating Leases
The Company leases office and production facilities and equipment under agreements whichthat expire at various dates through 2018. Certain leases contain renewal provisions and escalating rental clauses and generally require usthe Company to pay utilities, insurance, taxes and other operating expenses. Lease expense under operating leases totaled $647,000$581,000 and $690,000$579,000 in 20112013 and 2010,2012, respectively.
The estimated aggregate lease payments under operating leases for each of the five succeeding years is as follows:
| Years Ending December 31, | Lease Payment | |||
| 2012 | $ | 370,000 | ||
| 2013 | 680,000 | |||
| 2014 | 690,000 | |||
| 2015 | 707,000 | |||
| 2016 | 685,000 | |||
| Thereafter | 1,205,000 | |||
| Total | $ | 4,337,000 | ||
| Years Ending December 31, | Lease Payment | |||||
| 2014 | $ | 704,000 | ||||
| 2015 | 716,000 | |||||
| 2016 | 692,000 | |||||
| 2017 | 626,000 | |||||
| Thereafter | 580,000 | |||||
| Total | $ | 3,318,000 | ||||
Sublease
In 2009,February 2013, the Company entered into a $500,000 equipment lease facility with an equipment leasing company.began subleasing approximately 2,700 square feet of its office space. The terms of that agreement allow for useterm of the facilitysublease expires in multiple tranches with each individual tranche having a 24 month term. Additionally,July 2014. The tenants will not be renewing the equipment lease has a collateral obligation whereby the Company has pledged certain equipment locatedsublease at the Carlsbad, California location to satisfyend of its term. Total sublease income for the equipment leasing company’s requirements. year ended December 31, 2013 was approximately $44,000. Total estimated aggregate sublease income for the year ended December 31, 2014 is approximately $31,000.
Capital Leases
As of December 31, 2011, the Company had utilized $457,000 of this facility, which has been accounted for as a capital lease. As of December 31, 2011, there were no remaining amounts outstanding under this facility.
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2011 | 2010 | |||||||
| Broadcast equipment | $ | 711,000 | $ | 1,023,000 | ||||
| Other equipment | 148,000 | 43,000 | ||||||
| 859,000 | 1,066,000 | |||||||
| Accumulated depreciation | (439,000 | ) | (592,000 | ) | ||||
| Total | $ | 420,000 | $ | 474,000 | ||||
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2013 | 2012 | |||||||
| Broadcast equipment | $ | – | $ | 277,000 | ||||
| Other equipment | 84,000 | 69,000 | ||||||
| 84,000 | 346,000 | |||||||
| Accumulated depreciation | (21,000 | ) | (217,000 | ) | ||||
| Total | $ | 63,000 | $ | 129,000 | ||||
Total depreciation expense under capital leases was $441,000$83,000 and $433,000$271,000 for the years ended December 31, 20112013 and 2010,2012, respectively.
As of December 31, 2011,2013, future minimum payments under all capital leases are as follows:
| Years Ending December 31, | Lease Payment | |||
| 2012 | $ | 318,000 | ||
| 2013 | 115,000 | |||
| 2014 | 40,000 | |||
| 2015 | 17,000 | |||
| 2016 | 12,000 | |||
| Thereafter | - | |||
| Total minimum payments | 502,000 | |||
| Less amounts representing interest | (52,000 | ) | ||
| Present value of net minimum payments | 450,000 | |||
| Less current portion | (286,000 | ) | ||
| Long-term capital lease obligations | $ | 164,000 | ||
| Years Ending December 31, | Lease Payment | |||
| 2014 | $ | 32,000 | ||
| 2015 | 31,000 | |||
| 2016 | 24,000 | |||
| 2017 | 7,000 | |||
| Thereafter | – | |||
| Total minimum payments | 94,000 | |||
| Less amounts representing interest | (11,000 | ) | ||
| Present value of net minimum payments | 83,000 | |||
| Less current portion | (25,000 | ) | ||
| Long-term capital lease obligations | $ | 58,000 | ||
Notes Payable
In May 2013, the Company entered into a financing agreement with a lender under which the Company may borrow up to $500,000 to purchase certain equipment. In August 2013, the maximum amount the Company may borrow was increased to $1,000,000, and in December 2013, the maximum amount the Company may borrow was further increased to $3,000,000. The Company may borrow amounts in tranches as needed. Each tranche bears interest at 8.32% per annum and is payable in 36 equal monthly installments. The Company granted the lender a first security interest in the equipment purchased with the funds borrowed under the agreement. Through December 31, 2013, the Company borrowed approximately $1,623,000. As of December 31, 2013, $1,564,000 remained outstanding, which reflects payments made through December 31, 2013.
In July 2011, the Company entered into an equipment financing agreement with a bank in the amount of $123,000, which is recorded in other current liabilitiesshort-term and other liabilities inlong-term notes payable on the accompanying consolidated balance sheet. The proceeds of the note payableamounts borrowed were used to finance certain equipment purchases and other services related to the relocation of the Company’s Carlsbad, California office. The note payableamount borrowed bears interest at 5.85% per annum and is collateralized by a first priority security interest in the equipment purchased with the proceeds.purchased. The Company will makeamount borrowed is payable over a 36 month period in equal monthly payments in the amount of $3,705, which includes interest, until fully paid in August 2014. As of December 31, 2011, $110,0002013, approximately $29,000 remained outstandingoutstanding.
Future minimum payments under this financing agreement.
| Years Ending December 31, | Payment | ||||
| 2014 | $ | 713,000 | |||
| 2015 | 547,000 | ||||
| 2016 | 498,000 | ||||
| 2017 | 13,000 | ||||
| Thereafter | – | ||||
| Total minimum payments | 1,771,000 | ||||
| Less amounts representing interest | (178,000 | ) | |||
| Total notes payable | 1,593,000 | ||||
| Less current portion | (631,000 | ) | |||
| Long-term portion | $ | 962,000 | |||
Interest expense related to notes payable for the years ended December 31, 2013 and 2012 was $9,000 and $5,000, respectively.
| 13. | Contingencies |
The Company is subject to litigation from time to time in the ordinary course of its business. There can be no assurance that any or all of the following 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. Other than set forth below, 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 derive additional revenue.subject more activities to tax. The Company evaluates such inquiries on a case-by-case basis and has favorably resolved the majority of these tax issues in the past without any material adverse consequences.
The Company is involved in ongoing sales tax inquiries including certain formal assessments which total $641,000, with certain states and provinces. As a result of those inquiries, the Company recorded a total net liability of $604,000$27,000 and $746,000$70,000 as of December 31, 20112013 and 2010,2012, respectively, which is included in the sales taxes payable balance in the accompanying consolidated balance sheets. Based on the guidance set forth by ASC No. 450,Contingencies, management has deemed the likelihood as reasonably possible that it will be required to pay all or part of these assessments.
| 14. |
| Accumulated Other Comprehensive Income |
Accumulated other comprehensive income is the combination of accumulated net unrealized gains or losses on investments available-for-sale andincludes the accumulated gains or losses from foreign currency translation adjustments. The Company translated the assets and liabilities of its Canadian statement of financial position into U.S. dollars using the period end exchange rate. Revenue and expenses were translated using the weighted averageweighted-average exchange rates for the reporting period.
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| Unrealized gain on investment available-for-sale | $ | - | $ | 20,000 | ||||
| Foreign currency translation adjustment | 722,000 | 762,000 | ||||||
| Ending balance | $ | 722,000 | $ | 782,000 | ||||
| Geographical Information |
Geographic breakdown of the Company’s revenue for the last two fiscal years were as follows:
For the years ended December 31, | ||||||||
| 2011 | 2010 | |||||||
| United States | $ | 21,933,000 | $ | 22,904,000 | ||||
| Canada | 1,937,000 | 2,405,000 | ||||||
| Total revenue | $ | 23,870,000 | $ | 25,309,000 | ||||
| For the years ended December 31, | ||||||||
| 2013 | 2012 | |||||||
| United States | $ | 22,480,000 | $ | 22,551,000 | ||||
| Canada | 1,269,000 | 1,513,000 | ||||||
| Total revenue | $ | 23,749,000 | $ | 24,064,000 | ||||
Geographic breakdown of the Company’s long-term tangible assets for the last two fiscal years were as follows:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| United States | $ | 4,226,000 | $ | 3,529,000 | ||||
| Canada | 29,000 | 109,000 | ||||||
| Total assets | $ | 4,255,000 | $ | 3,638,000 | ||||
| As of December 31, | ||||||||
| 2013 | 2012 | |||||||
| United States | $ | 3,220,000 | $ | 3,767,000 | ||||
| Canada | 17,000 | 16,000 | ||||||
| Total assets | $ | 3,237,000 | $ | 3,783,000 | ||||
| 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 one month of service and have reached age 18 to defer up to 50% of their pay on a pre-tax basis. Effective April 1, 2007,The Company does not contribute a match to the Company began matching 50% of the first 6% of employee contributions up to a maximum of $2,000 per employee. As of April 1, 2010, the Company discontinued the employeremployees’ contribution.
| For the three months ended | ||||||||||||||||||||
Mar 31, 2011 | Jun 30, 2011 | Sep 30, 2011 | Dec 31, 2011 | Total 2011 (1) | ||||||||||||||||
| Total revenue | $ | 6,001 | $ | 5,893 | $ | 5,872 | $ | 6,104 | $ | 23,870 | ||||||||||
| Operating loss | (520 | ) | (1,053 | ) | (795 | ) | (908 | ) | (3,276 | ) | ||||||||||
| Loss before income taxes | (548 | ) | (984 | ) | (800 | ) | (924 | ) | (3,256 | ) | ||||||||||
| Net loss | (559 | ) | (984 | ) | (837 | ) | (1,039 | ) | (3,419 | ) | ||||||||||
| Per share amounts: | ||||||||||||||||||||
| Net loss income per common share - basic and diluted | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.06 | ) | |||||
| Weighted average shares outstanding - basic and diluted | 60,372 | 60,388 | 60,404 | 60,424 | 60,402 | |||||||||||||||
| For the three months ended | ||||||||||||||||||||
Mar 31, 2010 | Jun 30, 2010 | Sep 30, 2010 | Dec 31, 2010 | Total 2010 (1) | ||||||||||||||||
| Total revenue | $ | 6,271 | $ | 6,191 | $ | 6,505 | $ | 6,342 | $ | 25,309 | ||||||||||
| Operating (loss) income | (359 | ) | (407 | ) | 155 | 286 | (325 | ) | ||||||||||||
| (Loss) income before income taxes | (353 | ) | (470 | ) | 139 | 326 | (358 | ) | ||||||||||||
| Net (loss) income | (389 | ) | (457 | ) | 124 | 322 | (400 | ) | ||||||||||||
| Per share amounts: | ||||||||||||||||||||
| Net (loss) income per common share - basic | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.00 | $ | 0.01 | $ | (0.01 | ) | |||||||
| Net (loss) income per common share - diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.00 | $ | 0.01 | $ | (0.01 | ) | |||||||
| Weighted average shares outstanding - basic | 59,900 | 60,188 | 60,209 | 60,248 | 60,134 | |||||||||||||||
| Weighted average shares outstanding - diluted | 59,900 | 60,188 | 60,849 | 60,746 | 60,134 | |||||||||||||||
Allowance for Doubtful Accounts | Balance at Beginning of Period | Additions Charged to Expense | Deductions (a) | Balance at End of Period | ||||||||||||
| 2011 | $ | 220,000 | 5,000 | (45,000 | ) | $ | 180,000 | |||||||||
| 2010 | $ | 321,000 | 191,000 | (292,000 | ) | $ | 220,000 | |||||||||