# Ernexa Therapeutics Inc.: Form 10-K for the period ended Dec 31, 2012

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-K
- Filed: 2013-03-29
- Accepted by EDGAR: Mar 29, 2013, 15:37 ET
- Period: 2012-12-31
- Accession: 0001019687-13-001065
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000101968713001065/ntn_10k-123112.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000101968713001065/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-10-01 to 2012-12-31 | $5.9m | us-gaap:SalesRevenueNet |
| Revenue | 12 months, 2012-01-01 to 2012-12-31 | $24.1m | us-gaap:SalesRevenueNet |
| Selling, general and administrative | 12 months, 2012-01-01 to 2012-12-31 | $18.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-10-01 to 2012-12-31 | $479.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 12 months, 2012-01-01 to 2012-12-31 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 12 months, 2012-01-01 to 2012-12-31 | $44.0k | us-gaap:InterestExpense |
| Income tax | 12 months, 2012-01-01 to 2012-12-31 | −$83.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-10-01 to 2012-12-31 | $629.0k | us-gaap:NetIncomeLoss |
| Net income | 12 months, 2012-01-01 to 2012-12-31 | −$995.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-10-01 to 2012-12-31 | $0.01 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 12 months, 2012-01-01 to 2012-12-31 | −$0.01 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 12 months, 2012-01-01 to 2012-12-31 | $2.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 12 months, 2012-01-01 to 2012-12-31 | $1.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-12-31 | $2.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-12-31 | $4.2m | us-gaap:AssetsCurrent |
| Total assets | at 2012-12-31 | $12.7m | us-gaap:Assets |
| Current liabilities | at 2012-12-31 | $3.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-12-31 | $4.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2012-12-31 | $7.9m | us-gaap:StockholdersEquity |

## Business

As filed, 17,465 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. We have evolved from a developer and distributor of content to an interactive entertainment network provider that helps our network subscribers to acquire, engage and retain their patrons. Built on an extended network platform, this entertainment system has historically allowed multiple players to interact at the venue, but also enables competition between different venues, referred to as massively multiplayer gaming. We are now embarking on a complete change of our network architecture, technology platform and player engagement paradigm, which we currently refer to as our next generation product line, or Next-Gen.

We generate revenues by charging subscription fees for our service to our network subscribers and 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 3,600 locations in the U.S. and Canada, where they are shown on approximately 10,000-15,000 screens daily. We have over 3 million player registrations and over 52 million of our games are played each year. Approximately 38% of our network subscriber venues are related to national and regional restaurants and include well-known names such as Buffalo Wild Wings, Black Angus, Boston Pizza, Fox and Hound, Native New Yorker and Old Chicago.

### Recent Acquisitions and Developments

In December 2012, we acquired substantially all of the assets of Interactive Hospitality. We also hired its founder, Barry Chandler, as our Chief Marketing Officer, or CMO. Interactive Hospitality’s digital media business specializes in creating digital marketing strategies for the hospitality industry. The business assists clients in attracting, engaging and retaining customers through the strategic use of social media. In addition to one-on-one digital strategies that Interactive Hospitality provides its national, regional and local clients, the industry- specific blog, TheBarBlogger.com, is seen as a trusted content source for strategies that independent bars and restaurants can implement quickly and effectively. In addition, Interactive Hospitality’s proprietary subscription based management toolkit, ManageYourBar.com, has been used by more than 1,500 bars and restaurants in the U.S. since its launch in 2009. We believe that the addition of Mr. Chandler as our CMO and the assets of Interactive Hospitality will be instrumental in helping us transition our strategy to include an inbound content marketing strategy versus primarily traditional outbound strategies that we have historically employed.

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 13,000 annually, primarily in the Northeastern region of the U.S. We have incorporated the Stump! Trivia business as part of our larger effort in the live event business, which we are launching under the “Buzztime Live” moniker.

Starting in late December 2012 and continuing into February 2013, we launched the first iteration of our new Next-Gen configuration in a pilot for one of our national chain clients. Next-Gen will be our new technology platform and product line. The Next-Gen configuration, when fully developed, will consist of application programming interfaces, or APIs, and mobile applications, or apps.

The first iteration of Next-Gen consists primarily of a new 7” tablet playmaker device, which we have customized and ruggedized and to which we added a video game arcade. The first iteration of Next-Gen does not contain all the features we plan to offer, for example, it does not incorporate the new technology stack we are developing. However, at the end of February 2013, these tablet playmakers were installed in 32 locations, and engagement metrics, such as visits to our multiplayer games and registration rates, for these locations showed significant improvement relative to similar metrics measured at locations that contain our existing playmaker device. Because of our new game arcade, we will have new engagement metrics to monitor in the future.

Customization of the platform might be available for larger subscribers, and systems integration work might consist of venue-specific development to provide more advanced services such as music programming, POS integration, digital and dynamic menu management, and back of house utilities and training. These additional services are not yet proven on an economic basis and are still under development.

The new tablet playmakers are designed to be managed entirely through software and to have the potential to operate on a variety of networks. We also expect the platform in conjunction with our new playmaker to be versatile to support video playback and social networking.

We expect the tablet playmaker’s versatility to provide additional value for us and our network subscribers.

### Our Strategy

We have historically operated under a recurring subscription-based model, whereby our primary source of revenue was related to monthly fees from network subscribers. Although we expect that subscription revenues will remain our primary source of revenue, we believe there are other revenue streams that could grow as a result of additional different functionality in and economic models related to our Next-Gen product offerings. These potential revenue streams include virtual currency and revenues from advanced services functionality contemplated on the Next-Gen platform and proprietary devices. We also generate revenue from advertising sales. Our strategy for achieving revenue growth from these various sources includes the following:

- Establish the foundation for growth by improving the entertainment and marketing value of the in-venue content via our Next-Gen product concept, which includes more content, more games, different programming and more emphasis on both proprietary devices and the bring-your-own-device, or BYOD, consumer market.
- Revamp the sales, account management and field marketing teams and capabilities. This strategy includes more focus on national accounts as well as increased discipline around qualifying prospective customers in an effort to ensure we are selling to only successful bars and grills in the independent market, our ideal client profile. We also hope to create more affiliate relationships to help sell, manage and retain network subscribers.
- Transform our marketing approach utilizing more inbound content marketing strategies through proprietary articles, blog posts, videos and social media content that is shared within the industry and targeted at increasing the number of network subscribers as well as much more aggressive tactics aimed at increasing the number of players and the size of our audience, including through media partnerships. In conjunction with our Next-Gen platform, we intend to offer customer marketing services, designed to leverage our enhanced ability to register and “opt-in” patrons at network subscriber locations.
- Improve the in-venue “live” experience and enable a variety of live trivia, game and casino style events under different formats for our network subscribers. We currently offer in-venue interactive entertainment products, including our Hosted Trivia, Competition Manager and our recently acquired Stump! Trivia™ live trivia event service.
- Apply a more strategic approach to our poker product and other casino style games. We have approximately 250,000 registered poker players, and our ability to drive registration of poker players should grow significantly with new proprietary devices like our Android tablet and our Next-Gen poker app, which is under development.
- Increase advertising revenue. Our Next-Gen platform should provide a more focused, interactive advertising opportunity, and we will expand the sales resources focused on selling these capabilities.
- Significantly expand our brand reach and size of our player base by developing integrated mobile products that can be accessed out-of-venue, designed to augment and create context and relevance for our in-venue products.

### Transition to the Next-Gen Platform

The Next-Gen platform and product line incorporates a series of APIs and mobile apps that will be made available on proprietary Buzztime playmakers and consumer devices. This platform and product line will enable patrons to interact with a series of networked multiplayer games, single player arcades, synchronized programming and loyalty programs. The product line is the result of new technology efforts that will be built to operate independently from Buzztime’s legacy network.

Building on the experience and data received from our pilot of the first iteration of Next-Gen for one of our large clients in 32 locations, we expect significantly higher levels of engagement by patrons as well as more ways to monetize that engagement.

### Geographic Areas

The following table presents the geographic breakdown of our revenue for the last two fiscal years.

|  | Year Ended December 31, 2012 | 2011 |
| --- | ---: | ---: |
| United States | 94% | 92% |
| Canada | 6% | 8% |
| 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, 2012 | 2011 |
| --- | ---: | ---: |
| United States | 100% | 99% |
| Canada | 0% | 1% |
| Total | 100% | 100% |

### 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., TableTop Media, E la Carte, Inc., AMI Rowe 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 Significant Customer

Our customers are diverse and vary in venue size and location. For the years ended December 31, 2012 and 2011, we generated approximately 23% and 21%, respectively, of revenue from a single national chain, Buffalo Wild Wings, together with its franchisees. As of December 31, 2012 and 2011, approximately $123,000 and $95,000, 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.

We have a small number of patent applications pending in the United States and Canada related to our interactive, network-based game technologies. These include applications for interactive gaming via mobile devices, systems and method for multiplayer gaming, and video feed synchronization. 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, Playmaker and Play Along 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 (the “FCC”) for our 900 MHz Playmakers, and in December 2012, we received approval from the FCC for our tablet playmaker charging trays. The tablets we currently use have been certified by its manufacturer. 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, 2013, we employed approximately 120 people on a full-time basis and 211 people on a part-time basis. We also utilize independent contractors for specific projects and hire as many as 5 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, 35,353 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 $995,000 and $3,419,000 for the years ended December 31, 2012 and 2011, respectively, and an accumulated deficit of $111,730,000 as of December 31, 2012. We may also incur future operating and net losses, due in part to expenditures required to implement our business strategies, including the development and implementation of our Next-Gen technology platform and product line. 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, 2012, we generated approximately 23% of our total revenue from this national chain. As of that date, approximately $123,000 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 and implementing our Next-Gen technology platform and product line;
- the costs of developing new entertainment content, products or technology or expanding our offering to new media platforms such as the internet and mobile phones;
- the extent to which we invest in the creation of new entertainment content and new technology; and
- the number and timing of acquisitions and other strategic transactions, if any.

In addition, in order to fully execute on our strategic initiatives discussed above, 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. 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 and implement our Next-Gen technology platform and product line, develop or enhance our other 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 playmaker controllers or components could negatively impact our subscriptions and revenue.***

We currently purchase our Classic 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 purchase our Next-Gen playmaker tablets from a single manufacturer and certain tablet components from another unaffiliated manufacturer located in China. We currently do not have an alternative source of supply for these devices or components. If these sole suppliers are delayed, become unavailable, have product quality issues or shortages occur, we may be unable to timely obtain replacement equipment, which, in turn could hurt our customer loyalty, cause subscription cancellations and reduce our revenue. If our suppliers 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 volatility in credit and equity markets. These continued financial and economic problems could adversely affect our operating results if they result, 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 advertising.

In addition, global economic conditions, 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 our market.

We cannot predict other negative events that may have adverse effects on the global economy in general and the hospitality and advertising 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, we face 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., TableTop Media, E la Carte, Inc., AMI Rowe 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, game and 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 products and services 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 subscription 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 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 our Next-Gen 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, fully developing and implementing our Next-Gen technology platform and product line, expanding our other 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. Jeff Berg, our Chairman of the Board, has served as our Interim Chief Executive Officer since June 2012. Michael Bush was appointed Chief Executive Officer in April 2010 and resigned effective June 2012. 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 substantially all the assets of Interactive Hospitality in December 2012 and 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, such expenses may 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 affected if we are found liable for information that we make available. Implementing measures to reduce our exposure may require us to spend substantial resources and may limit the attractiveness of our services to users which would impair our profitability and harm our business operations.

***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 likely we will be unable to use.***

As of December 31, 2012, we had federal income tax net operating loss, or NOL, carryforwards of approximately $54.4 million, which begin to expire in 2017. As of December 31, 2012, we had state income tax NOL carryforwards of approximately $20.7 million, which will continue expiring in 2013. 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 MKT if we fail to maintain compliance with continued listing criteria.***

The NYSE MKT 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 MKT deems such action to be appropriate under the circumstances. While the NYSE MKT 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 MKT 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. Although our stockholders' equity increased from $6.4 million as of December 31, 2011 to $7.9 million as of December 31, 2012, 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 MKT continued listing requirements, including its trading price requirements, our common stock may be suspended from trading on and/or delisted from the NYSE MKT. Alternatively, in order to avoid delisting by the NYSE MKT 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 the NYSE MKT 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, 2012, there were approximately 1,814,000 shares of common stock reserved for issuance upon the exercise of outstanding stock options at exercise prices ranging from $0.14 to $3.33 per share. As of December 31, 2012, 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.

***Our authorized but unissued and unreserved shares of common stock may not be sufficient to address our need to raise additional funds, which could adversely affect our business.***

We may need to raise additional funds in the future and it could require us to issue additional shares of our common stock. Currently, we have 84,000,000 shares of common stock authorized and as of December 31, 2012, approximately 71,123,000 shares of common stock were outstanding and approximately 11,830,000 shares were reserved for issuance under our stock option plans and outstanding warrants. As a result, we only had approximately 1,047,000 authorized shares of common stock available for issuance as of December 31, 2012, and any increase in the authorized shares will require stockholder approval. If we do not have enough shares authorized to effect an equity financing and we are unable to obtain stockholder approval to increase the number of shares or such approval is not able to be obtained in a timely manner, our ability to raise capital through equity financing may be harmed and our business could suffer.

## 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, 2,134 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 legal proceedings could materially adversely affect our business, results of operations or financial condition. In addition, defending any claim requires resources, including cash to pay legal fees and expenses, and our limited financial resources could severely impact our ability to defend any such claim.

Also from time to time, state and provincial tax agencies have made, and we anticipate will make in the future, inquiries as to whether our service offerings are subject to taxation in their jurisdictions. Many states have expanded their interpretation of their sales and use tax statutes, which generally had the effect of increasing the scope of activities that may be subject to such statutes. We evaluate inquiries from state and provincial tax agencies on a case-by-case basis and have favorably resolved the majority of these inquiries in the past, though we can give no assurances as to our ability to favorably resolve such inquiries in the future. Any such inquiry could, if not resolved favorably to us, materially adversely affect our business, results of operations or financial condition.

We are currently involved in sales tax inquiries with certain states and provinces. As a result of those inquiries, we recorded a total net liability of $70,000 and $604,000 as of December 31, 2012 and 2011, respectively, with respect to tax assessments to which we may be subject as a result of such inquiries. Based on the guidance set forth by ASC No. 450, *Contingencies,* we deemed the likelihood that we will be required to pay all or part of these assessments as reasonably possible. During the year ended December 31, 2012, we prevailed in one state tax inquiry, resulting in a reversal of the liability of approximately $425,000.

## Management's discussion and analysis

As filed, 38,551 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. We have evolved from a developer and distributor of content to an interactive entertainment network provider that helps our network subscribers to acquire, engage and retain their patrons. Built on an extended network platform, this entertainment system has historically allowed multiple players to interact at the venue, but also enables competition between different venues, referred to as massively multiplayer gaming. We are now embarking on a complete change of our network architecture, technology platform and player engagement paradigm, which we currently refer to as our next generation product line, or Next-Gen.

We generate revenues by charging subscription fees for our service to our network subscribers and 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 3,600 locations in the U.S. and Canada, where they are shown on approximately 10,000-15,000 screens daily. We have over 3 million player registrations and over 52 million of our games are played each year. Approximately 38% of our network subscriber venues are related to national and regional restaurants and include well-known names such as Buffalo Wild Wings, Black Angus, Boston Pizza, Fox and Hound, Native New Yorker and Old Chicago.

### Recent Acquisitions and Developments

In December 2012, we acquired substantially all of the assets of Interactive Hospitality. We also hired its founder, Barry Chandler, as our Chief Marketing Officer, or CMO. Interactive Hospitality’s digital media business specializes in creating digital marketing strategies for the hospitality industry. The business assists clients in attracting, engaging and retaining customers through the strategic use of social media. In addition to one-on-one digital strategies that Interactive Hospitality provides its national, regional and local clients, the industry- specific blog, TheBarBlogger.com, is seen as a trusted content source for strategies that independent bars and restaurants can implement quickly and effectively. In addition, Interactive Hospitality’s proprietary subscription based management toolkit, ManageYourBar.com, has been used by more than 1,500 bars and restaurants in the U.S. since its launch in 2009. We believe that the addition of Mr. Chandler as our CMO and the assets of Interactive Hospitality will be instrumental in helping us transition our strategy to include an inbound content marketing strategy versus primarily traditional outbound strategies that we have historically employed.

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, 2012 compared to the Year Ended December 31, 2011

We generated a net loss of $995,000 for the year ended December 31, 2012, compared to net loss of $3,419,000 for the year ended December 31, 2011.

#### Revenue

Revenue increased $194,000, or 1%, to $24,064,000 for the year ended December 31, 2012 from $23,870,000 for the year ended December 31, 2011 due primarily to an increase of $1,356,000 generated by the Stump! Trivia business that we acquired in October 2011 and a net increase of approximately $7,000 in other revenues, offset by a decrease in subscription revenue of $1,169,000 related to lower average site count and lower average revenue generated per site. Comparative site count information for the Buzztime network is as follows:

|  | Network Subscribers as of December 31, 2012 | 2011 |
| --- | ---: | ---: |
| Site Count - Beginning of Period | 3,932 | 3,925 |
| Installations | 602 | 1,016 |
| Terminations | (896) | (1,009) |
| Site Count - End of Period | 3,638 | 3,932 |
| Churn Percentage | 23.7% | 25.7% |

Geographic breakdown of our ending site count for the Buzztime network is as follows:

|  | Network Subscribers as of December 31, 2012 | 2011 |
| --- | ---: | ---: |
| United States | 3,416 | 3,692 |
| Canada | 222 | 240 |
| Total | 3,638 | 3,932 |

14

#### Direct Costs and Gross Margin

The following table compares the direct costs and gross margin for the years ended December 31, 2012 and 2011:

|  | For the years ended December 31, 2012 | 2011 |
| --- | ---: | ---: |
| Revenues | $24,064,000 | $23,870,000 |
| Direct Costs | 6,157,000 | 5,807,000 |
| Gross Margin | $17,907,000 | $18,063,000 |
| Gross Margin Percentage | 74% | 76% |

Gross margin as a percentage of revenue decreased to 74% for the year ended December 31, 2012 compared to 76% in the prior year. Direct costs increased $350,000, or 6%, to $6,157,000 for the year ended December 31, 2012 as compared to $5,807,000 for the prior year period. The increase in direct costs was primarily due to direct wages of $1,004,000 as a result of acquiring Stump! Trivia and $90,000 of other net miscellaneous increases. These increases were offset by decreased direct depreciation and amortization expense of $211,000 due to assets becoming fully depreciated, decreased service provider fees of $192,000 primarily due to fewer installations and deinstallations of customer sites during the year ended December 31, 2012 compared to the same period in 2011, decreased freight expense of $179,000 also due to fewer installations and deinstallations of customer sites and decreased content fees of $162,000.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $2,200,000, or 11%, to $18,248,000 for the year ended December 31, 2012 from $20,448,000 for the prior year period. The decrease in selling, general and administrative expenses was primarily due to decreased payroll and related expenses of $1,766,000 due to the reorganization that took place during the second quarter of 2012, decreased other tax expense of $541,000 primarily due to the favorable outcome of a sales tax assessment resulting in a reversal of an accrued liability of approximately $425,000, decreased selling and marketing expenses of $373,000, decreased occupancy expense of $303,000 resulting from lower rent related to our new facility lease, decreased travel and entertainment expense of $268,000 due to our reorganization and a decrease of $126,000 related to expenses incurred during the year ended December 31, 2011 in connection with moving our corporate headquarters and warehouse. These decreases were offset by increased consulting fees of $731,000 for product development and administrative services, increased severance expense of $147,000 related to our reorganization, increased bad debt expense of $113,000, increased service fees of $90,000, and other net increases totaling $96,000.

#### Depreciation and Amortization

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) decreased $170,000 to $721,000 for the year ended December 31, 2012 from $891,000 for 2011 primarily due to accelerating the amortization expense of an intangible asset we acquired in 2009.

#### Other (Expense) Income, Net

Other (expense) income, net changed from $20,000 of other net income during the year ended December 31, 2011 to $16,000 of other net expense for the year ended December 31, 2012. The change was primarily due to having recognized as income in the prior period a $49,000 sales tax refund and an increase of $8,000 in other miscellaneous expenses. This was offset by a decrease in foreign currency exchange losses of $21,000 related to our foreign operations.

#### Income Taxes

We expect to incur state income tax liability in 2012 related to our U.S. operations. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. For the year ended December 31, 2012, we recorded a net tax benefit of approximately $83,000 due to recognizing certain state tax credit carryforwards. For the year ended December 31, 2011, we recorded a net tax provision of $163,000.

At December 31, 2012, we had net operating loss, or NOL, carryforwards of approximately $54,371,000 and $20,708,000 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 to offset future taxable income. We have not yet performed an analysis through December 31, 2012 due to the complexity and cost associated with the study, and the fact that there may be additional ownership changes in the future. Such limitations would reduce, potentially significantly, gross deferred tax assets related to net operation loss carryforwards. We continue to disclose the net operating loss carryforwards at their original amount as no potential limitation has been quantified. We have also 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, 2012 | 2011 | For the years ended December 31, 2012 | 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) per GAAP | $629,000 | $(1,039,000) | $(995,000) | $(3,419,000) |
| Interest expense, net | 7,000 | 13,000 | 41,000 | 49,000 |
| Depreciation and amortization | 689,000 | 947,000 | 2,879,000 | 3,260,000 |
| Income tax (benefit) provision | (109,000) | 115,000 | (83,000) | 163,000 |
| EBITDA | $1,216,000 | $36,000 | $1,842,000 | $53,000 |

### Liquidity and Capital Resources

As of December 31, 2012, we had cash and cash equivalents of $2,721,000 compared to cash and cash equivalents of $1,374,000 as of December 31, 2011.

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 and also now our Interim Chief Executive Officer, is the managing member of the general partner of Matador. Under the terms of the investment agreement, upon expiration of the rights offering, Matador purchased for $0.25 per share 8,000,000 shares of our common stock not subscribed for and purchased by holders upon exercise of their subscription rights. 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 10) 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, 2012, we had working capital (current assets in excess of current liabilities) of $841,000 compared to negative working capital (current liabilities in excess of current assets) of $1,070,000 as of December 31, 2011. The following table shows our change in working capital from December 31, 2011 to December 31, 2012.

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2011 | $(1,070,000) |
| Changes in current assets: |  |
| Cash and cash equivalents | 1,347,000 |
| Restricted cash | (50,000) |
| Accounts receivable, net of allowance | (140,000) |
| Prepaid expenses and other current assets | 274,000 |
| Total current assets | 1,431,000 |
| Changes in current liabilities: |  |
| Accounts payable | 21,000 |
| Accrued compensation | (159,000) |
| Accrued expenses | (263,000) |
| Sales taxes payable | (567,000) |
| Income taxes payable | 2,000 |
| Obligations under capital lease | (186,000) |
| Deferred revenue | 456,000 |
| Other current liabilities | 216,000 |
| Total current liabilities | (480,000) |
| Net change in working capital | 1,911,000 |
| Working capital as of December 31, 2012 | $841,000 |

#### Cash Flows

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

| Cash provided by (used in): | For the years ended December 31, 2012 | 2011 |
| --- | ---: | ---: |
| Operating activities | $2,156,000 | $574,000 |
| Investing activities | (2,777,000) | (2,790,000) |
| Financing activities | 1,952,000 | (300,000) |
| Effect of exchange rates | 16,000 | (16,000) |
| Net increase (decrease) in cash and cash equivalents | $1,347,000 | $(2,532,000) |

*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 $2,156,000 for the year ended December 31, 2012 compared to net cash generated from operating activities of $574,000 for the same period in 2011. The $1,582,000 increase in cash provided by operations was primarily due to a decrease in net loss of $1,829,000, after giving effect to adjustments made for non-cash transactions, offset by a decrease of $247,000 in cash provided by operating assets and liabilities during the year ended December 31, 2012 compared to the same period in 2011.

Our largest use of cash is payroll and related costs. Cash used related to payroll increased $225,000 to $11,382,000 for the year ended December 31, 2012 from $11,157,000 during 2011 due primarily to having higher headcount related to Stump! Trivia as well as severance expenses related to our reorganization that took place during the second quarter of 2012. Cash received from customers increased $1,232,000 to $25,252,000 for the year ended December 31, 2012 from $24,020,000 during the same period in 2011 and includes payments received from a customer under an equipment leasing agreement as well as for amounts received under a services agreement.

*Net cash used in investing activities.* We used $2,777,000 in cash for investing activities for the year ended December 31, 2012 compared to $2,790,000 in cash used for investing activities during 2011. The $13,000 decrease in cash used in investing activities was primarily due to a decrease in capital expenditures of $368,000 resulting from fewer field equipment purchases, as well as a decrease of approximately $140,000 related to the acquisition of Stump! Trivia. These decreases were offset by an increase in capitalized software development activities of $361,000 and a decrease in proceeds from sales of securities available-for-sale of $134,000.

*Net cash provided by (used in) financing activities.* Net cash provided by financing activities increased $2,252,000 to $1,952,000 for the year ended December 31, 2012 compared to net cash used in financing activities of $300,000 for 2011. The increase in cash provided by financing activities was due to net proceeds from the rights offering and the related investment agreement completed in February 2012 of $2,310,000 and decreased payments on our capital leases of $128,000, offset by a decrease in proceeds from a note payable of $123,000, an increase of $26,000 in principal payments on our note payable, a $36,000 decrease in proceeds from the exercise of stock options, and $1,000 for tax withholding related to the net-share settlement of restricted stock units.

### 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.

*Goodwill and Other Intangible Assets—*Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite useful life are not amortized, but instead are assessed quarterly for impairment based on qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the goodwill is less than its carrying amount. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. If after assessing the totality of events or circumstances we determine it is not more likely than not that the goodwill is less than its carrying amount, then performing the two-step impairment test outlined in ASC No. 350 is unnecessary. During the year ended December 31, 2012, we performed the annual qualitative assessment of our goodwill related to NTN Canada, Inc., and determined that there were no indications of impairment.

ASC No. 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC No. 360, *Property, Plant and Equipment.* In accordance with ASC No. 360, 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 review of our other intangible assets and determined that there were no indications of impairment for the year ended December 31, 2012. During the year ended December 31, 2011, we determined that 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 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. During the year ended December 31, 2012, we entered into two immaterial asset acquisitions. The purchase price allocation for the asset acquisition of Interactive Hospitality and Panel Media Group were final as of December 31, 2012.

*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, 2012 and 2011, we recorded $20,000 and $41,000 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, 2012, 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, 2011.

*Revenue Recognition—*We recognize revenue from recurring service fees earned from our network subscribers, Stump! Trivia events, advertising revenues, leased equipment and distribution and licensing fees from our Buzztime-branded content delivered 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.

We evaluate our lease transactions in accordance with ASC No. 840, *Leases,* to determine classification of the leases against the following criteria:

- The lease transfers ownership of the property to the lessee by the end of the lease term;
- There is a bargain purchase option;
- The lease term is equal to or greater than 75% of the economic life of the equipment; or
- The present value of the minimum payments is equal to or greater than 90% of the fair market value of the equipment at the inception of the lease.

Because our current leasing agreement meets at least one of the criteria above and collectability of the minimum lease payments is reasonably assured and there are no important uncertainties surrounding the amount of reimbursable costs yet to be incurred under the lease, we classify the lease as a sales-type lease, and we recognize revenue when persuasive evidence of an arrangement exists, product delivery has occurred or the services have been rendered, the price is fixed and determinable and collectability is reasonably assured.

We recognize revenues from advertising, Stump! Trivia events, and royalties 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 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 $650,000 and $578,000 for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, approximately $156,000 and $462,000, 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, 2012 and 2011, 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 $7,000 and $155,000 was recognized for the years ended December 31, 2012 and 2011, 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 2012 and 2011 under the ASC No. 718 requirements:

|  | 2012 | 2011 |
| --- | ---: | ---: |
| Weighted average risk-free rate | 0.53% | 1.54% |
| Weighted average volatility | 95.21% | 97.70% |
| Dividend yield | 0.00% | 0.00% |
| Expected life | 5.71 years | 5.22 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, 2012 and 2011 was $185,000 and $332,000, 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 February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, *Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.* The amendments in this update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. This update is effective on a prospective basis for reporting periods beginning after December 15, 2012, which for us is January 1, 2013. 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, 3,166 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 principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as of the end of the period covered by this report under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

Based on our evaluation and subject to the foregoing, our Interim Chief Executive Officer and Chief Financial Officer concluded that there were no material weaknesses in our disclosure controls and procedures and that such disclosure controls and procedures were effective as of the end of the period covered by this report in providing reasonable assurance of achieving the desired control objectives, and therefore there were no corrective actions taken.

#### Management’s Report on Internal Control Over Financial Reporting

Our Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Under the supervision and with the participation of our management, including our Interim Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012. 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, 2012.

#### 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 29, 2013.
Source: SEC EDGAR, the filing index for accession 0001019687-13-001065. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.