# Ernexa Therapeutics Inc.: Form 10-K for the period ended Dec 31, 2011

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-K
- Filed: 2012-03-30
- Accepted by EDGAR: Mar 30, 2012, 13:57 ET
- Period: 2011-12-31
- Accession: 0001019687-12-001146
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000101968712001146/ntn_10k-123111.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000101968712001146/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 12 months, 2011-01-01 to 2011-12-31 | $23.9m | us-gaap:SalesRevenueNet |
| Selling, general and administrative | 12 months, 2011-01-01 to 2011-12-31 | $20.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 12 months, 2011-01-01 to 2011-12-31 | −$3.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 12 months, 2011-01-01 to 2011-12-31 | $52.0k | us-gaap:InterestExpense |
| Income tax | 12 months, 2011-01-01 to 2011-12-31 | $163.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 12 months, 2011-01-01 to 2011-12-31 | −$3.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 12 months, 2011-01-01 to 2011-12-31 | −$0.06 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 12 months, 2011-01-01 to 2011-12-31 | $574.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 12 months, 2011-01-01 to 2011-12-31 | $1.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2011-12-31 | $1.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-12-31 | $2.8m | us-gaap:AssetsCurrent |
| Total assets | at 2011-12-31 | $11.6m | us-gaap:Assets |
| Current liabilities | at 2011-12-31 | $3.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-12-31 | $5.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2011-12-31 | $6.3m | us-gaap:StockholdersEquity |

## Business

As filed, 34,749 characters.

Unless 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 and Play Along TV trademarks to be among our most valuable assets.

### Overview

We provide marketing services through interactive game content for hospitality venues that offer the games free to their customers. Founded in 1984, our company has evolved from a developer and distributor of content to an interactive entertainment network providing media, advertising and consumer marketing services. Built on an extended network platform, this entertainment system not only allows multiple players to interact at the venue, but also enables competition between different venues. We generate revenues by charging subscription fees for our service to our Network Subscribers and also from the sale of advertising aired on in-venue screens as well as in conjunction with customized games. Our games are currently available in over 3,900 locations in the U.S. and Canada, where they are shown on approximately 20,000 screens daily. We have over 2.4 million registered users and over 52 million games are played each year. Approximately 34% of our Network Subscriber venues are related to national and regional restaurants and include well-known names such as Buffalo Wild Wings, Black Angus, Hooters, Native New Yorker and Old Chicago.

In October 2011, we acquired substantially all of the assets of 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.

### Our Strategy

In 2011, our primary source of revenue was related to fees from Network Subscribers. We also generated revenue from advertising sales, and we believe advertising sales can be increased by showing that a demographically predictable, large number of people are seeing the advertisers' content and have responded to it. In order to achieve revenue growth from both of these sources, our strategy is as follows:

- Accelerate growth by improving the entertainment and marketing value of the in-venue content, developing the sales and account management teams and capabilities, continuing to focus on national accounts and launching the next generation of our handheld in-venue device, which we call a Playmaker, and which players use to interface with our interactive games.
- Launch our new line of customer marketing services, which will leverage our unique ability to register and “opt-in” patrons at Network Subscriber locations.
- Improve the in-venue “live” experience. We currently offer compelling in-venue interactive entertainment products, including our Hosted Trivia, Competition Manager and our recently acquired Stump! Trivia™ live trivia event service. We intend to connect these products via a common platform and loyalty program.
- Expand our ability to offer focused placement opportunities to advertisers and sponsors in both targeted and general interest categories. Our platform serves highly focused, interactive advertising and will expand to include targeting, analytics and segmentation capabilities.
- Significantly expand our brand reach and size of our player base by developing integrated mobile and online products designed to augment and create context and relevance for our in-venue products.

#### Strategic Initiatives

To achieve our revenue growth objectives we plan to pursue the following initiatives:

Loyalty/Player Rewards. In late February 2012, we launched a significant upgrade to our current player rewards system. In order to create more attractive game dynamics for casual users to join in, our rewards program features various “badges” and “levels” that are engineered to reward the most positive player behaviors. The program has generated over 2,000,000 badges, which have been awarded to over 50,000 unique Buzztime players.

Buzztime 360. We intend to connect our new player rewards system to a holistic player experience by expanding the functionality of our Buzztime Facebook, Buzztime Social Sign On and Buzztime Mobile products. We have expanded Buzztime Facebook 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).

In-Venue Marketing. Currently players join into an existing in-venue competition or self-select a group with whom they will interact. In the future, our field account teams will seek to increase player involvement and the frequency of in-venue visits by introducing innovative competitions and promotions. For example, competitive leagues could be established within or between venues where players form teams and play for prizes. In 2012 we also intend to improve our Competition Manager product to make it easier for customers to use and our Hosted Trivia product to simplify the customer interface, include enhanced player features and to integrate it with our Stump! Trivia business.

Additionally, we recently launched the first major enhancement to our customer marketing capabilities called Buzztime Patron Messaging, which will leverage our unique ability to register and “opt-in” patrons at Network Subscriber locations. Combined with our access to game play mechanics and information and ability to track in-venue behavior, this product will be designed to enable our Network Subscribers to message, incent and track their patrons more effectively and efficiently.

New User Interface Devices. The player's first contact with our product occurs when they handle our Playmaker user interface device. The current version is dated in both appearance and capability. In late 2012, we expect to launch a replacement to our Playmaker, which will be a tablet style device that will enable a richer, more robust user experience. We believe its full-screen player interface will attract more players in the 18 to 45 year-old segment, many of whom are accustomed to tablet style devices such as the Apple iPad®.

The new Playmaker will be designed to be managed entirely through software and to have the potential to be operated on a variety of 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's versatility to provide additional value for us and our Network Subscribers since it will allow players to interact with each other directly and will enable us to deliver more personalized advertising messages. We believe the delivery of personalized advertising messages could lead to partnership programs, sponsorships of specific network-based events and increased national account co-branding opportunities.

Additional factors that support our development of this new device include:

- Informal feedback and polling data from Network Subscribers indicate that demand for an updated device is high - particularly within national accounts;
- A new software-based user interface device, without the limitations of firmware, will enable us to deliver updates and enhancements electronically over the network;
- As a result of the widespread popularity and increasing sales of other tablet formats (e.g. Apple iPad®, Motorola Xoom®, etc.), we believe a new tablet style wireless device will be well received, allowing us to take advantage of current trends and product familiarity; and
- We believe our delivery of a significantly upgraded Playmaker will be a tangible demonstration of our commitment to a high quality player experience, which we believe will heighten the perceived value of our service to Network Subscribers and improve customer retention rates.

Entertainment Content. In order to keep players returning to the venue, new entertainment content and services need to be added on an on-going basis. Examples of new content and services that we have recently developed are:

- *The Season* - a new game that builds from our popular QB1 game. Players represent their favorite NFL team in a season long trivia competition.
- *CBS Sports’ March Madness –* Interstitial polling and trivia questions relating to the NCAA® men’s basketball tournament. These mini games tap into the excitement created by the annual tournament while leveraging the March Madness® and CBS Sports brands.
- *Live hosted trivia –* as a result of our Stump! Trivia acquisition, we now offer a live trivia event service where we currently conduct nearly 300 events per week, or 14,000 events annually. “Trivia Jockeys” run a fun and entertaining trivia contest pitting teams against each other and serve as venue advocates by encouraging participation and return visits.

Our Sales and Account Management Team and Capabilities. In order to achieve our goal of growing the number of Network Subscriber sites and users, we believe we must develop and maintain well-trained, professional sales and customer support (account management) teams. We continue to develop a more professional sales force capable of conveying to potential customers the value of our products and services and the marketing power Buzztime can bring to their businesses. We have deployed account management team members who provide the on-site customer support, training, event supervision and other field services to ensure that our Network Subscribers receive a return on their investment by way of increased traffic to their venues. Currently, we have 57 members on our sales and account management team.

A key area of our sales focus is to expand our presence in national accounts, which currently represent approximately 34% of our total number of Network Subscribers. We believe this segment offers significant growth opportunities that we intend to exploit by offering solutions that target the unique promotional, branding and operational needs of these larger customers. Such solutions include offering customized products, in-venue field support and enhanced consumer marketing tools and services, such as data analysis, online polls of users and behavioral-based target marketing.

Additionally, our field staff needs to continue supporting current customers by driving on-premise participation through well publicized local events, competitions, tournaments and prizing. Increasing gameplay at our customer locations increases revenues for our customers and reinforces the value of our services.

Our field staff is also responsible for generating qualified leads in their territories and developing those leads into new Network Subscribers and advertisers.

To keep a direct line of communications with our Network Subscribers, we have added five telemarketing resources to our inside sales teams. Their primary responsibilities include:

- calling on current Network Subscribers to get feedback on their experience with our services;
- offering renewal options and up-sell services to targeted customers;
- developing outbound telemarketing lead generation initiatives; and
- scheduling sales appointments for the sales and account management staff in the field.

Grow Advertising and Sponsorship Revenues. Increasing advertising and sponsorship revenues is a key component to our growth strategy. Each year, millions of consumers connect to our network and an even greater number of people are exposed to our network programming, which is shown on as many as 20,000 screens per day at our Network Subscribers' locations. We believe this large audience is attractive to advertisers. To better demonstrate the value of our audience to advertisers, we plan to install tracking tools that will enable us to define the demographics of our players. We believe we can use this information as a sales tool to significantly increase advertising and sponsorships revenues.

We commissioned two separate research projects in 2008 which were useful in validating the size and engagement of our audience. Nielsen Media Research performed a validation study of restaurant traffic, consumer dwell time, and advertising/brand awareness of both Buzztime players as well as non-Buzztime playing patrons. The study validated metrics for our advertising sales efforts and benchmarked measures against the Digital Place-based Advertising Association Audience Metrics Guidelines.

In an effort to monetize this large available audience through advertising sales, we intend to conduct in-depth research of our audience demographics and patterns, dedicate a sales team to advertising placements, and offer an integrated advertising package that combines in-venue advertisements, short interactive branded polls and question sets and direct digital marketing.

We anticipate that this fully integrated package will include a combination of game play ads, promotions between games, specific customer on-line responses and highly targeted messaging. For example, we recently launched 30- to 60-second mini-trivia games or polls called Buzztime Shorts. Specifically, Buzztime Shorts provides partners and sponsors with a new way to increase awareness of their product or service through fun, interactive, onscreen questions and polls. Based on the responses to the Buzztime Short questions, promotional partners are then able to send targeted email communications to interested consumers.

We are also able to track and collect data on users, which we believe provides us with an additional opportunity to increase advertising and promotional sales. Analysis of user patterns, reactions to advertising, and other trends can be drawn from such data and could provide a unique insight to the success of advertising expenditures for our subscribers.

In early 2011, we hired a new Chief Content Officer who is leading the evaluation of our current programming strategy. As part of this process, we are looking at new ways of testing and analyzing the network data with a specific focus on player-driven metrics. Examples of these types of analyses include:

- measuring game play metrics by time zone, designated market area and population type (i.e., urban, suburban, rural);
- evaluating the user response to the "graphic language" of our network programming at different times of the day and by different customer types;
- determining the types of players that play at different times of the day (i.e., registered user vs. guest, casual vs. avid, trivia vs. cards); and
- testing changes in question difficulty, category themes, and content scripting.

Besides identifying detailed user demographics, this analysis also helps design schedules for content and events that can increase user interaction and develop specific demographic gatherings that are valuable to advertisers.

Expand Accessibility of Buzztime Network and Products. We intend to make it as easy as possible for players to connect to our interactive entertainment media. We intend to adapt our current products to new technology platforms, such as smart phones and tablets, and to design offerings that can deliver Buzztime programming to broader audiences both in-venue and out-of-venue.

We plan to extend our interactive entertainment to the Internet and through mobile devices. By expanding the availability of Buzztime branded games beyond our traditional in-venue Playmakers, we are seeking to create a wider marketing platform, allowing more targeted advertising to reach specific customer segments. We believe we improve our opportunities to sell advertising by cross-promoting games across multiple platforms and driving traffic in both directions between hospitality venues and Internet/mobile applications. In late 2009, we introduced a downloadable application for the iPhone® that enables players to use their iPhone® in place of the Playmaker tablet to play real-time inside any of our Network Subscribers' locations. In early 2011, we introduced a similar application available for the Android® phones. Currently, 30% of all new registrations originate from these mobile platforms.

Another growth opportunity that we intend to exploit is in the area of social gaming, which we believe is a natural extension of our business. We are currently developing games and providing access to our products by leveraging online platforms and mobile devices. We recently launched our first social media focused trivia game with an application on Facebook. Players can play "mini-trivia" games for free and compete against their friends who they are encouraged to invite and challenge. The game also allows players to win badges and obtain various levels of achievement. Through Facebook we are able to introduce users to the Buzztime gaming experience and encourage them to try the full gaming experience at a Network Subscriber location. We recently launched an update to the game which includes geo-coded ads for nearby network locations informing the online players where they can play in-venue. In addition, we launched a significant upgrade to the Facebook game, including a collection of special question-altering items to provide an advantage known as “boosts” that we believe will allow for more social activation and will enable our Network Subscribers to communicate with their customers through Facebook. We are currently testing the delivery of digital coupons via Facebook redeemable for discounts at Network Subscriber locations. We also plan to start collating much of the player data available to us through Social Sign On, Facebook and through our network registration process to create an accurate and valuable segmentation of our audience, which we could use to add value to the marketing efforts of our Network Subscribers.

To take advantage of these new capabilities we plan to promote Buzztime media through online/mobile viral marketing, social networking channels, Internet based trivia challenges and direct-to-consumer grassroots marketing campaigns. These are all designed to raise awareness, interest and excitement among users, resulting in more players and traffic for Network Subscriber venues.

We plan to increase our utility to Network Subscribers by growing and enhancing our non-network products. The increasing availability of our interactive entertainment content on mobile devices provides enhanced messaging capabilities and enables us to gather far more extensive and in-depth play and demographics data. Our social media strategy includes expanding Facebook functionality to enable Network Subscribers to communicate with patrons in an effort to increase in-venue visits. In addition, the implementation of Social Sign On allows for more seamless registration, promotion, and communication with users. We also intend to pursue arrangements with strategic partners that expand our brand reach, subscriber services and cross-platform programming. We believe that by combining innovative gaming strategies with reward programs, players will be motivated to take their gaming activities into Network Subscribers' venues, which will generate additional value and return on investment for those locations.

### 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% |

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% |

### 2011 Asset Acquisitions

In October 2011, we acquired certain assets from Trailside Entertainment Corporation, also known as Stump! Trivia, which are used in providing live hosted trivia events at hospitality venues. We are using these acquired assets to complement our existing social entertainment offerings.

### Technology

Our Buzztime Network sends and receives data to our site servers via broadband internet. Content files (video and graphics) are delivered to our site servers via the EdgeCast content delivery network, a highly scalable third party network with multiple points of presence across the globe.

With the exception of our wireless Playmakers, each system installed at a hospitality location is assembled from off-the-shelf components available from a variety of sources. We internally developed the unique software that runs our on-site servers, and we carefully manage software releases over our Network. We are responsible for the installation and maintenance of each system, which we continue to own.

### End User “Playmaker” Devices

Our Buzztime Network system uses a 900 MHz wireless Playmaker, a hand-held radio frequency device with a monochrome LCD display and sealed keypad that players use to enter choices and selections. The Playmakers have been manufactured primarily by a non-affiliated manufacturer in Taiwan and are a rugged combination of hardware and firmware optimized for hospitality environments. We also offer the Buzztime Mobile Playmaker, an application that allows our players to interact in-venue with our game content using iPhones, iPod Touches and Android phones. We are currently evaluating options to develop a new generation Playmaker.

### Content Services

We internally develop and license from third party providers content that we deliver on our Buzztime Network. Each hospitality venue can be addressed individually, allowing us to send specific content to selected Network subscribers. Subscribing hospitality locations receive our content, in the form of programming, for approximately 15 hours each day, 365 days a year.

### Game Content and Promotion

Our primary product is the distribution of a variety of multi-player interactive games that entertain and challenge a player’s skill and knowledge while prompting the customer of the hospitality venue to stay longer, spend more money and return more often.

#### Trivia Games

We provide premium trivia competitions during evening hours when the venues, particularly restaurants and sports bars, tend to be busiest. During these programs, each venue system simultaneously displays selected trivia questions on television monitors. Participants use Playmakers to enter their individual answers. Answers are collected, transmitted and tabulated. We display the score of each participant on the television monitors in our customer venues, along with national, regional and local rankings, as applicable. Players can compete for prizes in their local venues, as well as on a regional and national scale. In addition to game interaction, other consumer features available on the Playmaker include player chat and real-time sports scores transmitted directly to the units.

#### Sports Games

We have developed and produced a number of interactive sports games for over 25 years including Predict the Play® sports games. Predict the Play sports games call for participants to predict the outcome of events before they happen, primarily in an intensive play-by-play method. One such game in this category is QB1, a live, play-along football game in which players predict the outcome of each play broadcast within professional and collegiate football games. We have developed a following of thousands of loyal players who participate weekly in our customer’s hospitality venues during football season.

In addition to our Predict the Play games, we offer a series of pre-event prediction games. *Race Day* consists of two game play components: one predictive before the race and one trivia during the race. Points from both elements are added together for a final score. *Brackets* asks players to predict the outcome of all 65 games of the NCAA Men’s Basketball tournament.

#### Turn Based Games

The turn-based game programming is designed with today’s young adults in mind, and primary products include multi-player card games Blackjack and Texas Hold’em poker. Programming is developed with a goal of securing subscription contracts with new hospitality venues that might not be attracted to our core trivia and sports products, as well as retaining existing hospitality venues with the expanded content offering by driving a broader group of consumers into our subscribing venues, based on varied tastes in interactive entertainment.

#### Playmaker Games

We also offer a suite of Playmaker only games. This suite of games is independent of the Buzztime Network and they are played directly on our wireless Playmakers rather than on one of the television screens in the hospitality venue. Players access the games by logging onto a Playmaker and following the instructions on the Playmaker screen. Currently, we have the following Playmaker only games:

|  |  |
| --- | --- |
| Playmaker Poker: | Compete against the house in a game of jacks-or-better poker. |
| Acey Duecey: | Two cards are dealt face up. Players bet that the third card will fall between the previous two. |
| Crystal Ball: | Ask the Crystal Ball a question and receive your answer. |
| Shark Attack: | Just like hangman, but with an oceanic twist. |

### Competition

We face direct competition in hospitality venues and face competition for total entertainment dollars in the marketplace from other companies offering similar content and services. A relatively small number of direct competitors are active in the bar and restaurant games market, including Touchtunes Interactive Networks, The Answer Is . . . Productions Inc. and Livewire/Incredible Technologies, Inc. Competing forms of technology and entertainment provided in public 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 Network Marketing, Sales and Distribution

We market our services to the industry primarily through national and regional trade shows, telemarketing, direct mail, online and direct contact through our field sales and marketing representatives. We organize and track all sales prospects through a distributed database software. We also use the internet to drive leads directly to our sales team. Potential customers learn of our products via marketing and promotional efforts, including direct mail trade ads or trade shows, and are directed to our website, where their information is collected, electronically sorted and delivered to the appropriate sales team.

We sell our Buzztime Network primarily through direct sales and account management employees organized by regions throughout the United States and Canada. Our sales cycle varies by customer type, and is generally longer for national accounts than independent subscribers. Our sales and account management team provides customer and consumer marketing support activities to continue driving on-premise participation through well publicized local events, competitions, tournaments and prizing. Increasing game play at our customer locations increases revenues for our customers and reinforces the value of our services.

### Buzztime Significant Customer

Our customers are diverse and vary in venue size as well as location. For the years ended December 31, 2011 and 2010, we generated approximately 21% and 19%, respectively, of revenue from a single national chain, Buffalo Wild Wings, together with its franchisees. As of December 31, 2011 and 2010, approximately $95,000 and $100,000, 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

We keep confidential as trade secrets our technology, know-how and software. The hardware used in our operations is purchased from outside vendors. We 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. We have either received, or have applied for, trademark protection for the names of our proprietary programming, to the extent that trademark protection is available for them. Our intellectual property assets, especially trademarks and copyright, are important to our business and, accordingly, we have launched a program directed to the protection of our intellectual property assets.

As of December 31, 2011, we owned one U.S. patent covering certain aspects of technology related to an interactive learning system, which expires in 2017. We have a small number of patent applications pending in the United States and Canada related to our interactive, network-based game technologies. We do not consider technology patents to be central to our competitive position. Instead, our content and branding, which are protected by copyright and trademark law, form the core of our market approach.

We consider the Buzztime and Play Along TV trademarks and our many related trademarks to be valuable assets and have registered these trademarks in the United States and aggressively seek to protect them. Our flagship game titles, Countdown and Showdown are protected by both trademark and copyright registrations in the United States.

### Government Contracts

We provide our content distribution services through the Buzztime Network to colleges, universities and a small number of government agencies, typically military base recreation units. However, the number of government customers is small compared to our overall customer base. We provide our products and services to government agencies under contracts with substantially the same terms and conditions as are in place with non-government customers.

### Government Regulations

The cost of compliance with federal, state and local laws has not had a material effect on our capital expenditures, earnings or competitive position to date. In June 1998, we received approval from the Federal Communications Commission for our 900 MHz Playmakers. The 900 MHz Playmaker is an integral component of our network. The multi-player card games offered on the Buzztime Network 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 television 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 games require any form of monetary payment. 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 internet website at *www.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 filed or furnished 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 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 internet website at *www.sec.gov* that contains reports, proxy and information statements, and other information regarding our company that we file electronically with the SEC.

### Employees

As of March 26, 2012, we employed approximately 147 people on a full-time basis and 176 people on a part-time basis. We also utilize independent contractors for specific projects and hire as many as 6 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.

## Risk factors

As filed, 33,654 characters.

### 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 have experienced significant losses, and we may incur significant losses in the future.***

We have a history of significant losses, including net losses of $3,419,000 and $400,000 for the years ended December 31, 2011 and 2010, respectively, and an accumulated deficit of $110,719,000 as of December 31, 2011. We may also incur future operating and net losses, due in part to expenditures required to implement our business strategies. Despite significant expenditures, we may not be able to achieve or maintain profitability. Moreover, 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 receive a significant portion of our revenues from a single customer, and any decrease in the amount of business from that customer or any other significant customer could materially and adversely affect our cash flow and revenue.***

Buffalo Wild Wings together with its franchisees is a significant customer. For the year ended December 31, 2011, we generated approximately 21% of our total revenue from this national chain. As of that date, approximately $95,000 was included in accounts receivable from this customer. If Buffalo Wild Wings, a significant number of its franchisees, and/or one or more other significant customers breach or terminate their subscriptions or otherwise decrease the amount of business they transact with us, we could lose a significant portion of our revenues and cash flow.

***Our cash flow may not cover 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 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, we believe we will likely require additional capital.

If we need to raise additional funds in the future, such funds may not be available on favorable terms, or at all, particularly given the continuing credit environment and downturn in the overall global economy. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, or at all, we may not be able to develop or enhance our products and services, 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.

***A disruption in our sole-source supply of game controllers could negatively impact our subscriptions and revenue.***

We currently purchase our Playmaker game controllers from an unaffiliated manufacturer located in Taiwan under a supply agreement executed in April 2007, with a term that automatically renews for one year periods. We currently do not have an alternative source of supply for these devices. If this sole supplier is delayed, becomes unavailable, has product quality issues or shortages occur, we may be unable to timely obtain replacement controllers, which, in turn could hurt our customer loyalty, cause subscription cancellations and reduce our revenue. If our supplier were to go out of business or otherwise become unable to meet our needs for reliable game controller equipment, the process of locating and qualifying alternate sources could take months, during which time our production could be delayed, and may, in some cases, require us to redesign our products and systems. Such delays and potentially costly re-sourcing and redesign could have a material adverse effect on our business, operating results and financial condition.

***Industry and economic conditions have and may continue to adversely affect the market and can affect demand for our services and ultimately harm our business.***

Negative trends in the general economy and reduced traffic and revenues in the restaurant and hospitality industry continue to depress the market for our products and services. The current and continuing financial and economic problems have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in credit and equity markets. This financial crisis could adversely affect our operating results if it results, for example, in spending cutbacks at our customers generally or the insolvency of one or more significant customers. Tight credit markets could eliminate or delay growth of our customers and the number of customer sites and could also delay or prevent us from acquiring or making investments in other technologies, products or businesses that could enhance or complement our Buzztime Network or ability to generate additional revenues, such as from out-of-home advertising.

In addition, global economic conditions, including the credit crisis, increased cost of commodities, widespread employee layoffs, actual or threatened military action by the United States and the continued threat of terrorism, have resulted in decreased consumer spending and may continue to negatively impact consumer confidence and spending. Continued weakness in consumer confidence or disposable income in general may negatively affect consumer spending at the hospitality venues that comprise the primary customer base for our Buzztime Network, and may also negatively affect spending by advertisers in the out-of-home market.

We cannot predict other negative events that may have adverse effects on the global economy in general and the hospitality and out-of-home media industries specifically. However, the factors described above and such unforeseen events could have a material adverse effect on our revenues and operating results.

***We may not be able to compete effectively within the highly competitive interactive games and entertainment industries.***

We face intense competition in the markets in which we operate. First, our Buzztime Network faces significant competition for total revenues in the overall market for entertainment in hospitality venues from other companies offering similar content and services. Our direct competitors in the hospitality games market comprise a small number of significant competitors including Touchtunes Interactive Networks, The Answer Is . . . Productions Inc. and Livewire/Incredible Technologies, Inc. Additionally, we compete with a variety of other forms of technology and entertainment for total entertainment dollars in the marketplace. These other forms of entertainment 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.

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. 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, these 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 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 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 of our technologies, products and services. 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 of 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. We may have to incur substantial costs to modify or adapt our products or services to respond to these developments. 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 may not be able to significantly grow our out-of-home Buzztime Network revenue and implement our other business strategies.***

We expect to derive substantially all of our revenue, including subscription and advertising revenue, for at least the next several years from our out-of-home Buzztime Network and Stump! Trivia events. Accordingly, our success depends on our ability to increase market awareness and encourage the adoption of the Buzztime brand and our game service among establishments 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 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 retention of our existing customers. The degree of market adoption of Buzztime 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 growing our advertising revenue, developing an integrated platform that allows for consumer play across the digital platform including our Buzztime Network and provides related cross-selling opportunities across our Buzztime Network, the internet, and mobile devices focusing on national accounts and growing our marketing services and sponsorship revenues. The implementation of these strategies will require us to dedicate significant resources to, among other things, expanding our product offerings, customizing our products and services to meet the unique needs of our national accounts and expanding and improving our marketing services and promotional efforts. We may be unable to implement these strategies as currently planned.

***Communication or other system failures could result in the cancellation of subscribers and a decrease in our revenues.***

We rely on continuous operation of our information technology and communications systems, and those of a variety of third parties, to communicate with our subscriber locations and distribute our services. We currently transmit our data to our hospitality customer sites via broadband internet connectivity including telephone and cable TV networks. These systems 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. A 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. In addition, our services and systems are highly technical and complex and may contain errors or other vulnerabilities. Any errors or vulnerabilities in our products and services, or damage to or failure of our systems, could result in interruptions in our services, 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 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 executive leadership over the past several years. Michael Bush has served as our Chief Executive Officer since April 2010. Terry Bateman was appointed Chief Executive Officer in February 2009 and resigned effective March 2010. Michael Fleming served as Interim Chief Executive Officer from May 2008 until his resignation in November 2008. Dario Santana, our former Chief Executive Officer and President, separated from our Company in May 2008. Because of our recent financial and stock performance, geographic location and other business factors in a relatively small industry, we face substantial challenges in attracting and retaining experienced senior executives. Changes in senior management are inherently disruptive, and efforts to implement any new strategic or operating goals may not succeed in the absence of a long-term management team. Changes to strategic or operating goals with the appointment of new executives may themselves prove to be disruptive. Executive leadership transition periods are often difficult as the new executives gain detailed knowledge of company 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 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 regulations applicable to businesses generally, but also to laws and regulations that apply directly 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 issues:

- 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 particular, 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 require or contemplate any form of monetary payment. 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 also vary in different jurisdictions and are subject to legislative and regulatory change as well as 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 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 loss of customers and revenue.

***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 experienced and knowledgeable professionals. We must recruit talented professionals in order for our business to grow. There is significant competition for employees with the skills required to develop the products and perform the services we offer. We may be unable to attract a sufficient number of qualified employees in the future to sustain and grow our business, and we may not be successful in motivating and retaining the employees we are able to attract. If we cannot attract, motivate and retain qualified technical and sales and marketing professionals, our business, financial condition and results of operations will suffer.

***Execution of our growth strategy may result in unsuitable acquisitions and we may fail to successfully integrate acquired companies.***

We expect to continue to consider and pursue opportunities to grow our business through acquisitions of other businesses, assets, technologies and products. We have in the past and may in the future invest significant resources in evaluating, consummating and integrating such acquisitions. For example, we acquired the assets of Trailside Entertainment, also known as Stump! Trivia, in October 2011. In making acquisition decisions, we may not be successful in selecting businesses, assets, technologies or products that complement our existing or future business and products. We may also be unsuccessful in integrating any acquired business and personnel.

### We may face exposure on sales and use taxes in various states.

From time to time, state tax authorities have made 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 assessments we have paid have not been significant to our operations, it is likely that such expenses will increase in the future.

***We may be liable for the content we make available on our Buzztime Network and the internet.***

We make content available on our Buzztime Network and the internet. The availability of this content 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 effected 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.

***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 believe that the success of our business also depends on such factors as the technical expertise and innovative capabilities of our employees. It is our policy that all employees and consultants sign non-disclosure agreements and assignment of invention agreements. Our competitors and former employees and consultants may, however, misappropriate our technology or independently develop technologies that are as good as, or better than ours. Our competitors may also challenge or circumvent our proprietary rights. If we have to initiate or defend against an infringement claim to protect our proprietary rights, the litigation over such claims could be time-consuming and costly to us, adversely affecting our financial condition.

From time to time, we hire or retain employees or external consultants who may have worked for other companies developing products similar to those that we offer. These other employers may claim that our products are based on their products and that 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. We have 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. Others may have filed and, in the future may file, patent applications that are similar or identical to ours. Such third-party patent applications might have priority over our patent applications. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office. Such interference proceedings could result in substantial cost to us.

***We have incurred significant net operating loss carryforwards that we may not fully use.***

As of December 31, 2011, we had federal income tax net operating loss, or NOL, carryforwards of approximately $53.1 million, which will continue expiring in 2012. As of December 31, 2011, we had state income tax NOL carryforwards of approximately $20.0 million, which will continue expiring in 2012. 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 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 Network 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.

### Risks Relating to the Market for Our Common Stock

***Our common stock could be delisted or suspended from trading on the NYSE Amex if we fail to maintain compliance with continued listing criteria.***

NYSE Amex 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 Amex deems such action to be appropriate under the circumstances. While NYSE Amex 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 Amex 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. Our stockholders' equity decreased from $9.5 million as of December 31, 2010 to $6.4 million as of December 31, 2011, and 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 Amex continued listing requirements, including its trading price requirements, our common stock may be suspended from trading on and/or delisted from NYSE Amex. 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.

***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.

***Future sales of our common stock reserved for issuance pursuant to stock option and warrant exercises may adversely affect the market price of our common stock.***

Future sales of substantial amounts of our common stock in the public market or the anticipation of such sales could have a material adverse effect on then-prevailing market prices. As of December 31, 2011, there were approximately 4,314,000 shares of common stock reserved for issuance upon the exercise of outstanding stock options at exercise prices ranging from $0.15 to $3.33 per share. As of December 31, 2011, there were also outstanding warrants to purchase an aggregate of approximately 4,500,000 shares of common stock at exercise prices ranging from $0.30 to $1.50 per share.

These outstanding options and warrants could adversely affect our ability to obtain future financing or engage in certain mergers or other transactions because the holders of the options and warrants may exercise these securities when we are attempting to raise additional capital through a new offering of securities at a price per share that exceeds the exercise price of such options and warrants. To the extent the trading price of our common stock at the time of exercise of any of our outstanding options or warrants exceeds the exercise price, such exercise will have a dilutive effect on our stockholders.

## Properties

As filed, 361 characters.

We lease approximately 28,000 square feet of office space at 2231 Rutherford Road, 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. The facility that we lease is suitable for our current needs and is considered adequate to support expected growth.

## Legal proceedings

As filed, 1,644 characters.

From time to time, we become subject to legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict. An unfavorable resolution of one or more of these lawsuits could materially adversely affect our business, results of operations or financial condition. The need to defend any such claims could require payments of legal fees and our limited financial resources could severely impact our ability to defend any such claims.

In addition, from time to time, state tax agencies have made, and we anticipate will make in the future, inquiries as to tax consequences of our service offerings. Many states have expanded their interpretation of their sales and use tax statues to derive additional revenue. We evaluate such inquiries on a case-by-case basis and have favorably resolved the majority of these tax issues in the past. However, any such inquiry could, if not resolved favorably to us, result in a material adverse consequence.

We are 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 and $746,000 as of December 31, 2011 and 2010, respectively. Based on the guidance set forth by 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.

## Management's discussion and analysis

As filed, 39,442 characters.

*This report (including, but not limited to, the following discussion of our financial condition and results of operations) and the documents incorporated herein by reference contain “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. Words such as “believes,” “anticipates,” “estimates,” “expects,” “projections,” “may,” “potential,” “plan,” “continue” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means 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 business strategy, plans or expectations, 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 our actual results and outcomes may be materially different from those expressed or implied by the forward-looking statements. Our actual results and outcomes may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in our operations, development efforts and business environment, including those set forth under the Section entitled “Risk Factors” in Item 1A, and other documents we file with the Securities and Exchange Commission. We cannot guarantee future results, levels of activity, performance or achievements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.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 marketing services through interactive game content for hospitality venues that offer the games free to their customers. Founded in 1984, our company has evolved from a developer and distributor of content to an interactive entertainment network providing media, advertising and consumer marketing services. Built on an extended network platform, this entertainment system not only allows multiple players to interact at the venue, but also enables competition between different venues. We generate revenues by charging subscription fees for our service to our Network Subscribers and also from the sale of advertising aired on in-venue screens as well as in conjunction with customized games. Our games are currently available in over 3,900 locations in the U.S. and Canada, where they are shown on approximately 20,000 screens daily. We have over 2.4 million registered users and over 52 million games are played each year. Approximately 34% of our Network Subscriber venues are related to national and regional restaurants and include well-known names such as Buffalo Wild Wings, Black Angus, Hooters, Native New Yorker and Old Chicago.

### 2011 Asset Acquisition

In October 2011, we acquired certain assets from Trailside Entertainment Corporation, also known as Stump! Trivia, which are used in providing live hosted trivia events at hospitality venues. We are using these acquired assets to complement our existing social entertainment offerings.

### Results of Operations

### Year Ended December 31, 2011 compared to the Year Ended December 31, 2010

We generated a net loss of $3,419,000 for the year ended December 31, 2011, compared to net loss of $400,000 for the year ended December 31, 2010.

#### Revenue

Revenue decreased $1,439,000, or 6%, to $23,870,000 for the year ended December 31, 2011 from $25,309,000 for the year ended December 31, 2010. This decrease was primarily due to a decrease in subscription revenue related to lower average site count and lower average revenue generated per site as well as a decrease in 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. Comparative ending site count information for the Buzztime Network 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 |

#### Direct Costs and Gross Margin

The following table compares the direct costs and gross margin for the years ended December 31, 2011 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% |

Gross margin as a percentage of revenue remained at 76% for the year ended December 31, 2011 compared to the prior year. Direct costs decreased $256,000, or 4%, to $5,807,000 for the year ended December 31, 2011 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 increased $1,542,000, or 8%, to $20,448,000 for the year ended December 31, 2011 from $18,906,000 for the prior year period. The increase in selling, general and administrative expenses was due to increased payroll and related expense of $1,054,000 primarily due to increased headcount, merit increases, increased incentive compensation, increased severance expense and increased recruiting and relocation expense for executive officers. Professional fees and consulting expenses increased $203,000 due to legal fees associated with the Stump! Trivia asset acquisition as well as increased consulting expenses related to software development and programming. Marketing expenses also increased by approximately $186,000 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 to 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 lower bad debt expense of $186,000 resulting from improved collection efforts and decreased occupancy expenses of $118,000 as a result 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 to $891,000 for the year ended December 31, 2011 from $665,000 for 2010 primarily due to accelerating the amortization expense of an intangible asset we acquired in 2009.

#### Other Income (Expense), Net

Other income (expense), net increased in income by $53,000 to $20,000 of other 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 is due to the recognition of 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 in foreign currency exchange losses of $38,000 related to our foreign operations 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 2011 related to our U.S. operations. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. For the years ended December 31, 2011 and 2010, we recorded a net tax provision of $163,000 and $42,000, respectively. We have established a full valuation allowance for substantially all deferred tax assets, including our 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.

At December 31, 2011, we had NOL carryforwards of approximately $53,094,000 and $20,011,000 for federal and state income tax purposes, respectively. 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 which are available to offset future taxable income. We completed a Section 382 analysis for the period from January 1, 1992 through September 30, 2011 and determined that we do not expect to be limited in regards to utilizing the total NOL carryforwards that existed as of September 30, 2011. Based on our analysis of our 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, we expect to be able to utilize the total NOL carryforwards that existed as of December 31, 2011, provided we generate sufficient future earnings prior to the expiration of the NOLs, which continues expiring in 2012, and that future changes in ownership do not trigger a Section 382 limitation. We have established a full valuation allowance for substantially all deferred tax assets, including the NOL 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, 2011 | 2010 | For the years ended December 31, 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 |

### Liquidity and Capital Resources

As of December 31, 2011, we had cash and cash equivalents of $1,374,000 compared to cash and cash equivalents of $3,906,000 as of December 31, 2010.

In February 2012, we completed a stockholders rights offering to our stockholders of record as of February 2, 2012. We issued a total of 2,070,719 shares of our common stock at a subscription 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 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. We received gross proceeds of $2.5 million from the rights offering and under the investment agreement.

We believe existing cash and cash equivalents, funds generated from operations and the proceeds received from the rights offering completed in February 2012 (see Note 19) will be sufficient to meet our operating cash requirements for at least the next twelve months. We have no debt obligations other than capital leases and a note payable for certain equipment purchases. It is our intention to continue entering into capital lease or financing facilities for certain equipment requirements when economically advantageous. In the event that net cash provided by operating activities and cash 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, 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 as of December 31, 2010. The following table shows our change in working capital from December 31, 2010 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) |

18

#### Cash Flows

Cash flows from operating, investing and financing activities, as reflected in the accompanying consolidated statements of cash flows, are summarized as follows:

| Cash provided by (used in): | For the years ended December 31, 2011 | 2010 |
| --- | ---: | ---: |
| 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 |

*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 was $574,000 for the year ended December 31, 2011 compared to net cash generated from operating activities of $2,831,000 for the same period in 2010. The $2,257,000 decrease in cash provided by operations was primarily due to an increase in net loss of $3,019,000 and a decrease of $159,000 in non-cash charges, offset by an increase of $921,000 in cash provided by operating assets and liabilities during the year ended December 31, 2011 compared to 2010.

Our largest use of cash is payroll and related costs. Cash used related to payroll increased $216,000 to $11,157,000 for the year ended December 31, 2011 from $10,941,000 during 2010. This increase is primarily the result of increases in headcount during 2011, offset by the pay out of corporate 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. Cash received from customers decreased $2,394,000 to $24,020,000 for the year ended December 31, 2011 from $26,414,000 during 2010 primarily due to lower revenue generated during the year ended December 31, 2011 as compared to 2010.

*Net cash used in investing activities.* We used $2,790,000 in cash for investing activities for the year ended December 31, 2011 compared to $2,203,000 used in cash for investing activities during 2010. The $587,000 increase in cash used in investing activities was primarily due to an increase in capital expenditures of $271,000, an increase in capitalized software expenditures of $235,000, an increase in cash used for acquisitions of $200,000, and an increase in restricted cash of $50,000 related to an acquisition. These increases in cash used for investing activities were offset by an increase in 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.

*Net cash used in financing activities.* Net cash used in financing activities decreased $64,000 to $300,000 for the year ended December 31, 2011 compared to net used in financing activities of $364,000 for 2010. The decrease in cash used in financing activities was due to proceeds from a note payable net of payments of $110,000, offset by a $21,000 increase in principal payments on capital leases and a $25,000 decrease in proceeds received from the exercise of stock options.

### 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 Buzztime Network services and for customers with balances that are greater than a predetermined number of days past due. We analyze historical collection trends, customer concentrations and creditworthiness, economic trends and anticipated changes in customer payment patterns when evaluating the adequacy of our allowance for doubtful accounts for specific and general risks. Additional reserves may also be established if specific customers’ balances are identified as potentially uncollectible. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

*Broadcast 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. The Playmakers are depreciated over a five-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.

*Investments—*ASC 320, *Investments-Debt and Equity Securities,* provides guidance on determining when an investment is other-than-temporarily impaired. Investments are reviewed quarterly for indicators of other-than-temporary impairment. This determination requires significant judgment. In making this judgment, we employ a systematic methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. We also consider specific adverse conditions related to the financial health and business outlook of the investee, including industry and sector performance, changes in technology, operational and financing cash flow factors, and ratings agency actions. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established. If market, industry and/or investor conditions deteriorate, we may incur future impairments.

*Goodwill and Other Intangible Assets—*Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of ASC No. 350, *Intangibles - Goodwill and Other*. ASC No. 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC No. 360, *Property, Plant and Equipment.*

In accordance with ASC No. 360, we assess potential impairments of our long-lived assets whenever events or changes in circumstances indicate the asset’s carrying value may not be recoverable. An impairment loss would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.

We performed our annual test for goodwill impairment by calculating the fair value for NTN Canada, Inc., as of September 30, 2011 and 2010. The valuation methods employed to determine the fair value for NTN Canada, Inc. as of these periods were (1) the market approach—guideline company method, (2) the market approach—guideline transaction method and (3) the income approach—discounted cash flow method.

We consider market conditions, new product offerings, pricing and selling strategies, revenue growth rates and additional investment needed to achieve these growth rates. We believe the projections are reasonable based on existing operations and prospective business opportunities. The resulting indicated value from each approach is weighted equally and added to interest bearing debt to arrive at the indicated fair market value of the invested capital. The resulting value is compared against the carrying value of equity after interest bearing debt to determine impairment. As a result of the annual test, we determined that there were no indications of impairment as of September 30, 2011. We considered the need to perform an additional test of goodwill of our 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.

We performed our annual review of our other intangible assets, including a review of the underlying customer base of the subscription customer intangible asset related to our asset acquisition in 2009 of substantially all of the assets of i-am TV. We determined that the underlying customer base 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. As a result, we 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 equaled the future cash flow of the remaining i-am TV customers.

*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. The purchase price allocation for the asset acquisition of Trailside Entertainment, also known as Stump! Trivia, was final as of December 31, 2011.

*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, 2011 and 2010, we recorded $41,000 and $2,000 in foreign currency losses, respectively, due to settlements of intercompany transactions and re-measurement of intercompany balances with our Canadian subsidiary and other non-functional currency denominated transactions, which are included in other income in the accompanying statements of operations. Fluctuations in the rate of exchange between the U.S. dollar and Canadian dollar may affect our results of operations and period-to-period comparisons of our operating results. We do not currently engage in hedging or similar transactions to reduce these risks. For the year ended December 31, 2011, the net impact to our results of operations from the effect of exchange rate fluctuations was immaterial when compared to the exchange rates for the year ended December 31, 2010.

*Revenue Recognition—*We recognize revenue from recurring service fees earned from our network subscribers, Stump! Trivia events, advertising revenues and distribution and licensing fees from our Buzztime-branded content delivery primarily through our interactive consumer platforms. To the extent these arrangements contain multiple deliverables, we evaluate 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. Arrangements for the transmission of our Buzztime Network contain two deliverables: the installation of equipment and the transmission of our network content for which we receive monthly subscription fees. As the installation deliverable does not have stand-alone value to the customer, it does not represent a separate unit of accounting and, therefore, all installation fees received are deferred and recognized as revenue on a straight-line basis over the estimated life of the customer relationship. As a result, installation fees not recognized in revenue have been recorded as deferred revenue in the accompanying consolidated balance sheets.

In addition, the direct expenses of the installation, commissions, setup and training are being deferred and amortized on a straight-line basis and are classified as deferred costs on the accompanying consolidated balance sheets. 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.

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.

*Software Development Costs—*We capitalize costs related to the development of certain software products for the Entertainment Division in accordance with ASC No. 350. Amortization of costs related to interactive programs is recognized on a straight-line basis over the programs’ estimated useful lives, generally two to three years. Amortization expense relating to capitalized software development costs totaled $578,000 and $521,000 for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, approximately $462,000 and $331,000, respectively, of capitalized software costs was not subject to amortization as the development of various software projects was not complete.

We performed our annual review of software development projects for the years ended December 31, 2011 and 2010, and determined to abandon various software development projects that we determined 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 and $236,000 was recognized for the years ended December 31, 2011 and 2010, 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 Compensation*. The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for all share-based payment awards is recognized using the straight-line single-option method. Stock-based compensation expense is reported as selling, general and administrative based upon the departments to which substantially all of the associated employees report.

We 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 2011 and 2010 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 |

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 31,2011 and 2010 was $332,000 and $299,000, 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.

#### Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, *Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS*. This update clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3)inputs. This update is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for us is January 1, 2012. We do not expect that adopting this update will have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, *Comprehensive Income (Topic 220)*. This update (1) eliminates the option to present the components of other comprehensive income as part of the statement 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 or when an item of other comprehensive income must be reclassified to net income nor does the update affect how earnings per share is calculated or presented. 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, 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 September 2011, the FASB issued ASU No. 2011-08, *Testing Goodwill for Impairment (Topic 350)*, to simplify how entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If this is the case, the entity will need to perform a more detailed two-step goodwill impairment test which is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses to be recognized, if any. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We did not adopt this update early. We do not expect that adopting this update will have a material impact on our consolidated financial statements.

## Market risk

As filed, 143 characters.

Under SEC rules and regulations, as a smaller reporting company we are not required to provide the information otherwise required by this item.

## Controls and procedures

As filed, 3,130 characters.

#### 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 Officer and Chief 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 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 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 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. According to the guidelines established by *Internal 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.

Filed Mar 30, 2012.
Source: SEC EDGAR, the filing index for accession 0001019687-12-001146. Last ingested by Listed: Nov 11, 2026, 02:49 ET. No prices; not investment advice.