Salaries.Each of our named executive officers receives a base salary. The base salary is the fixed cash compensation component of our executive compensation program and it recognizes individual performance, time in role, scope of responsibility, leadership skills and experience. The base salary compensates an executive for performing his or her job responsibilities on a day-to-day basis. Generally, base salaries are reviewed annually company-wide and adjusted (upward or downward) when appropriate based upon individual performance, expanded duties, changes in the competitive marketplace and, with respect to upward adjustments, if we are, financially and otherwise, able to pay it. We try to offer competitive base salaries to help attract and retain executive talent.

Non-Equity Incentive Plan Compensation For 2019, the N&CG/C Committee approved the NTN Buzztime, Inc. Executive Incentive Plan for Eligible Employees of NTN Buzztime, Inc. Fiscal Year 2019 (the “2019 Incentive Plan”). The 2019 Incentive Plan permits the payout of any incentive compensation earned under the plan to be paid, at the discretion and in the sole determination of the N&CG/C Committee, either in (i) cash, (ii) shares of our common stock issued under the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan or any successor long-term incentive plan, or (iii) any combination of (i) and (ii). If incentive compensation is paid in shares, the number of shares issued is determined by dividing the amount earned by the closing price of our common stock on the date on which the N&CG/C Committee approves the amount of incentive compensation earned. Payments under the 2019 Incentive Plan, if any, are contingent on the applicable participant’s continued employment with us on the payout date.

Participants in the 2019 Incentive Plan earn incentive compensation based on the level of achievement of the following performance measures:

● targeted earnings before interest, tax, depreciation and amortization (EBITDA), as approved by the N&CG/C Committee (weighted up to 10%);

● targeted revenue, as approved by the N&CG/C Committee (weighted up to 15%); and

● the extent to which certain strategic milestones are achieved, as evaluated and approved by the N&CG/C Committee (weighted up to 75%).

Each 2019 Incentive Plan participant had a target payout amount, based on a percentage of his or her annual base salary (excluding benefits) as of December 31, 2019, that was assigned according to such participant’s position and job level. The target payout amounts for the named executive officers for 2019, assuming all performance measures were achieved at a rate of 100%, were:

The N&CG/C Committee determines the extent to which the performance measures are achieved. In [MONTH 2020], after careful review, the N&CG/C Committee determined that the EBITDA performance target was achieved and that neither of the other two performance measures were achieved. Although the EBITDA performance target was achieved and a performance-based bonus was earned, in order to conserve cash, our executive officers and the N&CG/C Committee mutually agreed to waive payment of the bonus earned in 2019.

In connection with Mr. Wolff’s appointment as interim chief executive officer in September 2019, Mr. Wolff was eligible to participate in the 2019 Interim CEO Performance Incentive Plan (the “2019 Interim CEO PIP”). The 2019 Interim CEO PIP is a performance incentive plan under which, for the achievement of performance goals described therein, we would grant to Mr. Wolff such number of shares of our common stock equal to $20,000 divided by the closing price per share of our common stock on the date of grant. Upon grant, such shares would be fully vested. The performance goals were related to: (1) the retainment of certain key employees determined by the N&CG/C Committee through at least March 17, 2020; (2) having a target amount of unrestricted cash, as determined and approved by the N&CG/C Committee, as of March 17, 2020; and (3) meeting target sales for our Buzztime Basic product offering, as determined and approved by the N&CG/C Committee, by March 31, 2020. In March 2020, the N&CG/C Committee determined that the performance goal related to the retainment of key employees was achieved, and we issued 9,506 shares to Mr. Wolff, representing $20,000 worth of shares of our common stock, net of withholding taxes.

Employment Agreements

During 2019, we had written employment agreements with Mr. Wolff, Ms. Gurrola and Mr. Krishnan.

Mr. Wolff and Ms. Gurrola

As previously reported, in March 2020, we entered into an amendment to Mr. Wolff’s employee agreement dated March 19, 2018, which was subsequently amended in September 2019 and January 2020. In January 2020, we also entered into an amendment to Ms. Gurrola’s employment agreement dated September 17, 2010. The following is a summary of the material terms of Mr. Wolff’s and Ms. Gurrola’s employment agreements, as amended.

Base Salary. Mr. Wolff’s base salary is $325,000 and will increase to $350,000 effective July 1 2021. However, in an effort to help preserve cash, up to 20% of Mr. Wolff’s base salary may be paid in shares of our common stock. Additionally, Mr. Wolff agreed to defer payment of approximately 45% of all of his annual base salary payments between May 1, 2020 and October 31, 2020 until the earlier of October 31, 2020 or such time as our board of directors determines in good faith that we are in the financial position to pay his accumulated deferred salary. Ms. Gurrola’s base salary is $190,000.

Incentive Bonus. Mr. Wolff’s incentive performance-based bonus for 2020 will be 43% of his base salary, or $150,000. In 2019, the amount of such bonus was 50% of his base salary. Ms. Gurrola’s incentive performance-based bonus for 2020 will be 20% of her base salary, or $38,000. The performance-based bonuses, if earned, will be payable as follows: 16.66% will be payable if the applicable performance targets for each of our 1st, 2nd and 3rd fiscal quarters are achieved, and 50% will be payable if the applicable performance targets for the applicable fiscal year are achieved. The performance targets will be established by our board of directors (or its N&CG/C Committee), the level of achievement will be determined and approved by our board of directors (or its N&CG/C Committee), and we anticipate that the performance targets will continue to fall into three categories, the achievement of which will be determined following each quarter or year, as applicable: strategic, financial and operational. All incentive-based compensation payable to Mr. Wolff and Ms. Gurrola will be subject to any clawback policy that we may establish.

Mr. Wolff was also entitled to receive a $30,000 cash bonus if he were to remain employed with us for at least 180 days from September 17, 2019, the date on which he was appointed as interim chief executive officer. To preserve cash, we agreed to issue to him such number of shares of our common stock equal to a pro rata amount of the $30,000 bonus (determined by multiplying $30,000 by a fraction, the numerator of which is the number of days lapsed between September 17, 2019 and January 14, 2020, the effective date of the amendment to his employment agreement appointing him as chief executive officer, and the denominator of which is 180) divided by the closing price of our common stock on January 14, 2020. As a result, we issued 5,102 shares of our common stock to Mr. Wolff in respect of this report.bonus, the value of which was net of withholding taxes on the amount of bonus earned. The value of the portion of these shares issued in respect of the September 17, 2019 to December 31, 2019 period are included in the “Stock Awards” column in the 2019 Summary Compensation Table.

Equity Grants. Under the terms of their employment agreements, in January 2020, Mr. Wolff and Ms. Gurrola were each granted a stock unit award of 75,000 and 25,000 shares of our common stock, respectively. The awards were made under, and are subject to, our 2019 Performance Incentive Plan, and vest quarterly beginning on the 3-month anniversary of the grant date, in each case, subject to the executive’s continued service to us as of the applicable vesting date.

Mr. Krishnan

In September 2019, we entered into a limited term employment and separation agreement and general release of all claims (the “Krishnan Agreement”) with Mr. Krishnan. The Krishnan agreement replaced the previous employment agreement, as amended, that we entered into with Mr. Krishnan. Under the Krishnan Agreement, through October 17, 2019, Mr. Krishnan served as our director of special projects and worked with Mr. Wolff and members of our board as-needed. His base salary remained at the annualized rate of $350,000, and paid in accordance with our regular payroll practices over the limited term period of employment. If we terminated Mr. Krishnan’s employment without cause before October 17, 2019, then Mr. Krishnan would have received the base salary he would have received through October 17, 2019. On the effective date of the Krishnan Agreement and in consideration for a release of claims, 5,000 of Mr. Krishnan’s outstanding RSUs vested, and we granted to Mr. Krishnan 30,000 RSUs, which would generally have vested upon the effective date of a change in control if it occurred on or before March 17, 2020. That condition did not occur, and therefore all 30,000 RSUs were cancelled on March 17, 2020.

Termination of Employment and Change-in-Control Arrangements

Each of the employment agreements of Mr. Wolff and Ms. Gurrola provides for certain benefits upon termination of employment under specified circumstances. If the executive’s employment is terminated by us or by the executive, we will pay him or her any accrued and unpaid base salary and reimburse him or her for expenses incurred through the date of termination of employment. We refer to the foregoing as the “accrued obligations.” In addition to the accrued obligations, if the executive’s employment with us is terminated by us without cause or by the executive for good reason, subject to the executive delivering to us a general release of claims in our favor, we will pay Mr. Wolff as severance an amount equal to one month of his base salary for every full year of full-time employment, subject to a minimum of six months and a maximum of nine months, payable in substantially equal installments on a bi-weekly basis over the applicable severance period. Mr. Wolff has been employed with us for over five years. Similarly, the amount of severance to which Ms. Gurrola will be entitled if we terminate her employment without cause or if she resigns for good reason will be equal to nine months of her base salary, payable in one lump sum. She has been employed with us for over 10 years. Provided that each executive timely elects continued insurance coverage pursuant to COBRA, we will reimburse him or her for a period of months equal to the number of months paid in severance.

In the event of a change in control and if the executive is employed by us through the effective date of the change in control, then 100% of the then unvested portion of the stock units and stock options we granted to each of Mr. Wolff and Ms. Gurrola then outstanding will vest and, as applicable, become exercisable as of immediately before such effective date.

Other than as described above and the agreements that govern their equity awards, we do not have any contract, agreement, plan or arrangement, whether written or unwritten, that provides for payment to a named executive officer at, following, or in connection with the resignation, retirement or other termination of a named executive officer, or a change in control or a change in the named executive officer’s responsibilities following a change in control.

Risk Factors That May Affect Our BusinessOutstanding Equity Awards at Fiscal Year-End

We receive a significant portion of our revenues from Buffalo Wild Wings corporate-owned restaurants and its franchisees, and, absent an extension, our relationship will terminate in November 2019.

ForThe following table sets forth information concerning equity awards held by the year ended December 31, 2018, Buffalo Wild Wings corporate-owned restaurants and its franchisees accounted for approximately 44%, or $10,180,000, of our total revenue. As ofnamed executive officers that date, approximately $552,000 was included in accounts receivable. In October 2018, Buffalo Wild Wings informed us that it determined not to rollout our order, payment and guest insights functionality and that its relationship with us would continue in accordance with existing agreements we entered into in the ordinary course of business, and which terminate in accordance with their terms in November 2019. If we do not extend the Buffalo Wild Wings relationship beyond November 2019 or add network subscribers to sufficiently offset the subscription revenue we receive and have received in recent years from Buffalo Wild Wings corporate-owned restaurants and its franchisees, we expect our subscription revenue to materially decrease beginning in the first quarter of 2020, which could materially and adversely affect our operating results and cash flows. In addition, the inability to demonstrate Buffalo Wild Wingswere outstanding as a strategic user of our expanded functionality tablet platform system could negatively impact achievement of our chain customer site growth goals. Likewise, if any other customer who may in the future represent a significant portion of our revenue were to breach or terminate their subscriptions or otherwise decrease the amount of business they transact with us, we could lose a significant portion of our revenues and cash flow.

Our cash flow may not cover our capital needs and we may need to raise additional funds in the future. Such funds may not be available when needed, on acceptable terms or at all and, if available, may dilute current stockholders.

As of December 31, 2018, we had cash, cash equivalents and restricted cash of $2,786,000. We have borrowed substantially all amounts available to us under existing credit facilities and, subject to limited exceptions, our loan and security agreement with Avidbank prohibits us from borrowing additional amounts from other lenders. As of December 31, 2018, $3,750,000 was outstanding under that loan agreement, of which $1,000,000 was recorded in current portion of long-term debt and $2,750,000 was recorded in long-term debt on our balance sheet, which is gross of any unamortized debt issuance costs that are recorded as a reduction of long-term debt. The loan matures on September 30, 2022. We must make monthly principal payments of approximately $83,000 plus accrued and unpaid interest on the last business day of each month commencing on October 31, 2018 and through maturity.2019:

Our ability to meet our debt service obligations and to fund working capital, capital expenditures and investments in our business, will depend upon our future performance, which will depend on many factors, including:

We account for stock-based payments including equity awards under our equity incentive plans in accordance with the requirements of FASB ASC No. 718, Compensation – Stock Compensation. For a discussion regarding the effect of a change in control on certain equity awards held by Messrs. Krishnan and Wolff and Ms. Gurrola, see “Termination of Employment and Change-in-Control Arrangements,” above.

Director Compensation

We compensate our non-employee directors for their service in such capacity with annual retainers and equity compensation as described below. Directors who are also our employees do not receive any additional compensation for their services as directors. We do not pay fees to any of our directors for meeting attendance. The N&CG/C Committee reviews our non-employee director compensation practices and policies at least annually and makes a recommendation to our board of directors as to the amount, form and terms of non-employee director compensation. Our board of directors, taking the N&CG/C Committee’s recommendation into consideration, sets the amount, form and terms of non-employee director compensation.

Annual Retainers

We pay our non-employee directors a $25,000 annual retainer for their services as directors. We pay the chairman of our board of directors, assuming she or he is a non-employee director, an additional $20,000 annual retainer for services in such capacity. We pay our non-employee directors an additional annual retainer for their service on board committees as set forth in the table below.

The annual retainers are paid quarterly in arrears and are paid no later than 30 days following the end of the applicable quarter. Each non-employee director may elect that the retainer payment he or she is eligible to receive, or a portion of such retainer, be paid in the form of a restricted stock award under our equity incentive plan rather than cash. Such an election must be made during an open trading window under our insider trading policy and no later than the 15^th day of the last month of the quarter for which the retainer is to be paid. An election applies only to the quarter for which it is made. Once an election is made with respect to a quarter, it may not be withdrawn or substituted unless our board of directors determines, in its sole discretion, that the withdrawal or substitution is occasioned by an extraordinary or unanticipated event. Restricted stock awards will be made on the same date as a cash retainer payment would otherwise be paid, will vest in full on the date of grant, and the amount of shares subject to such award will equal the amount of the applicable cash retainer payment divided by the closing price of our common stock on the last day of the applicable quarter.

Equity Compensation

We grant stock options to our non-employee directors upon the commencement of their service as a director and upon their re-election to our board of directors. The stock options are granted under our stockholder-approved equity incentive plan.

In connection with the commencement of a new non-employee director’s term of service, we grant to such new director a stock option to purchase 600 shares of our common stock. These stock options have an exercise price equal to the closing price of our common stock on the date of grant, and are fully vested and exercisable on the date of grant as to 50% of the shares and the remaining 50% of the shares vest and become exercisable, subject to the director’s continued service on our board of directors, in 12 equal monthly installments beginning in the month immediately following the date of grant.

Each non-employee director who is re-elected for an additional term of service on our board of directors is automatically granted a stock option to purchase 400 shares of our common stock on the date of our annual stockholder meeting. These stock options have an exercise price equal to the closing price of our common stock on the date of grant and vest and become exercisable, subject to the director’s continued service on our board of directors, in 12 equal monthly installments thereafter.

The stock options described above expire on the earlier of 10 years from the date of grant or 90 days from the date the director ceases to serve on our board of directors. In the event of a change in control, as defined in the Amended 2010 Performance Incentive Plan, the N&CG/C Committee may in its discretion determine that these stock options vest and become fully exercisable as of immediately before such change in control.

2019 Director Compensation

The following table sets forth the compensation of each director, who is not a named executive officer, for service during 2019. This table excludes Mr. Wolff, who is a named executive officer and does not receive any compensation from us for his service as a director. See the section below entitled “Executive Officer Compensation” for information about Mr. Wolff’s compensation.

In addition, to fully execute on our long-term strategic initiatives discussed above under the section entitled “ITEM 1. Business—Our Strategy,” we believe we will likely require additional funding in the future.

We cannot ensure that we will generate cash flow from operations in an amount sufficient to enable us to meet our debt service obligations or to fund our working capital needs, capital expenditures and investments in our business. Avidbank has a first-priority security interest in all our existing and future personal property. If we default on our monthly payment obligations to Avidbank, and our debt obligations become immediately due and payable in full, Avidbank may dispose of our personal property to satisfy our payment obligations. If we need to raise additional funds in the future, such funds may not be available when needed, on acceptable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, or at all, we may not be able to continue to develop and implement our platform and product line, develop or enhance our other products and services, successfully execute our business plan or any or all of our strategic initiatives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.

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

We have a history of significant losses, including net losses of $259,000 and $1,077,000 for the years ended December 31, 2018 and 2017, respectively, and have an accumulated deficit of $129,394,000 as of December 31, 2018. We may also incur future operating and net losses, due in part to expenditures required to continue to implement our business strategies, including the continued development and implementation of our technology platform and product line. Despite significant expenditures, we may not achieve or maintain profitability. Even if we achieve profitability, the level of profitability cannot be predicted and may vary significantly from quarter to quarter and year to year. See also “—Risks Relating to the Market for Our Common Stock—If we are again determined to be non-compliant with any of the NYSE American continued listing standards within twelve months of December 14, 2018, depending on the nature of such non-compliance, NYSE Regulation may truncate the compliance procedures available to us or immediately initiate delisting proceedings,” below.

We may not compete effectively within the highly competitive and evolving interactive games, entertainment and marketing services industries.

We face intense competition in the markets in which we operate. We face significant competition for entertainment and marketing services in hospitality venues from other companies offering similar content and services. Our services also compete with games, apps and other forms of entertainment offerings available directly to consumers on their smart phones and tablets. See “ITEM 1. Business—Competition,” above. Some of our current and potential competitors enjoy substantial competitive advantages, including greater financial resources for competitive activities, such as content development and programming, research and development, strategic acquisitions, alliances, joint ventures, and sales and marketing. As a result, our current and potential competitors may respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or consumer preferences.

The increased availability of the internet and wireless networks provides consumers with an increasing number of alternatives to our entertainment offerings. With this increasing competition and the rapid pace of change in product and service offerings, we must be able to compete in terms of technology, content, and management strategy. If we fail to provide competitive, engaging, quality services and products, we will lose revenues to competing companies and technologies. Increased competition may also result in price reductions, fewer customer orders, reduced gross margins, longer sales cycles, reduced revenues, and loss of market share.

New products and rapid technological change, especially in the mobile and wireless markets, may render our operations obsolete or noncompetitive.

The emergence of new entertainment products and technologies, changes in consumer preferences, the adoption of new industry standards, and other factors may limit the life cycle and market penetration of our technologies, products, and services. In particular, the mobile and wireless device, content, applications, social media, and entertainment markets are highly competitive and rapidly changing. Accordingly, our future performance will depend on our ability to:

If we do not compete successfullyConsolidated Financial Statements contained in developing new products and keep pace with rapid technological change, we will be unable to achieve profitability or sustain a meaningful market position.

We may not succeed in developing and marketing new products and services that respond to technological and competitive developments, changing customer needs, and consumer preferences. We may have to incur substantial costs to modify or adapt our products or services to respond to these developments, customer needs, and changing preferences. We must be able to incorporate new technologies into the products we design and develop to address the increasingly complex and varied needs of our customer base. Any significant delay or failure in developing new or enhanced technology, including new product and service offerings, could result in a loss of actual or potential market share and a decrease in revenues.

If we fail to comply with our financial covenants to Avidbank, it may declare a default, which could lead to all payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business.

We must comply with financial covenants our loan and security agreement with Avidbank: our EBITDA must be at least $1,000,000 for the trailing six-month period as of the last day of each fiscal quarter, and the aggregate amount of unrestricted cash we have in deposit accounts or securities accounts maintained with Avidbank must be not less than $2,000,000 at all times. See “PART II—ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” below.

As of December 31, 2018, we were in compliance with these covenants. However, there can be no assurance we will be in compliance with these covenants in the future, including due to events or conditions outside of our control. For example, fluctuations in our operating results, such as what may result if we don’t extend the Buffalo Wild Wings relationship beyond November 2019 or add network subscribers to sufficiently offset the subscription revenue we receive and have received in recent years from Buffalo Wild Wings corporate-owned restaurants and its franchisees, could result in violation of the adjusted EBITDA covenant. See “We receive a significant portion of our revenues from Buffalo Wild Wings corporate-owned restaurants and its franchisees, and, absent an extension, our relationship will terminate in November 2019,” above.

If we fail to comply with our covenants, Avidbank may declare a default, which could lead to all payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business. Avidbank has a first-priority security interest in all our existing and future personal property. Accordingly, in an event of a default, Avidbank could dispose of such property to satisfy our payment obligations.

We cannot assure you that our exploration of strategic alternatives will result in us pursuing a transaction or that any such transaction would be successfully completed, and there may be negative impacts on our business and stock price as a result of the process of exploring strategic alternatives.

On December 7, 2018, we announced that our board of directors is exploring and evaluating strategic alternatives focused on maximizing shareholder value, and that we engaged a financial advisor to assist in the process. The strategic process is ongoing. Our board of directors has not set a timetable for the strategic process nor has it made any decisions relating to any strategic alternatives at this time. These alternatives could include, among other things, a potential acquisition of our company or our assets, a transaction with a strategic partner involving one or more of our assets, or continuing to execute on our business plan. No assurance can be given as to the outcome of the process, including whether the process will result in a transaction or that any transaction that is agreed to will be completed. Whether the process will result in a transaction, and our ability to complete a transaction, if our board of directors decides to pursue one, will depend on numerous factors, some of which are beyond our control, including the interest of potential acquirers or strategic partners in a potential transaction with our company, the value potential acquirers or strategic partners attribute to our business and its prospects, including in light of the potential end of our relationship with Buffalo Wild Wings corporate-owned restaurants and its franchisees, market conditions, and industry trends. Our stock price may be adversely affected if the process does not result in a transaction or if a transaction is not completed. Even if a transaction is completed, there can be no assurance that it will be successful or have a positive effect on shareholder value. Our board of directors may also determine that no transaction is in the best interest of our stockholders.

In addition, our financial results and operations may be adversely affected by the strategic process and by the uncertainty regarding its outcome. We have diverted the attention of management and our board of directors from our business operations to the process and have applied capital resources to the process that otherwise could have been used in our business operations, and we will continue to do so until the process is completed. We could incur substantial expenses associated with identifying and evaluating potential strategic alternatives, including those related to employee retention payments, equity compensation, severance pay and legal, accounting and financial advisory fees. In addition, the process could lead us to lose or fail to attract, retain and motivate key employees, and to lose or fail to attract customers or business partners, and could expose us to litigation in connection with the process or any resulting transaction. The public announcement of a strategic alternative may also yield a negative impact on operating results if prospective or existing service providers are reluctant to commit to new or renewal contracts or if existing customers decide to move their business to a competitor.

Further, we do not intend to disclose developments or provide updates on the progress or status of the strategic process until our board of directors deems further disclosure is appropriate or required. Accordingly, speculation regarding any developments related to the review of strategic alternatives and perceived uncertainties related to the future of our company could cause our stock price to fluctuate significantly.

A disruption in the supply of equipment could negatively impact our subscriptions and revenue.

During the fourth quarter of 2016, we began having an unaffiliated third party manufacture an Android-based tablet customized to our specifications. This third-party manufacturer also manufactures our tablet equipment—tablet charging trays and tablet cases. We have no alternative manufacturing source for our customized tablet or tablet equipment or alternatives for the tablet equipment.

If our sole manufacturer is delayed in delivering tablets to us, becomes unavailable, has product quality issues, or shortages occur, besides not realizing the benefits of having a tablet manufactured to our specifications, we would need to return to the historical third-party tablets or find an alternative device. Similarly, if our sole manufacturer is delayed in delivering the tablet equipment to us, becomes unavailable, has product quality issues, or shortages occur, we may not timely obtain replacement tablet equipment. Delays, unavailability of the tablet or tablet equipment, product quality issues and shortages could damage our reputation and customer loyalty, cause subscription cancellations, increase our expense and reduce our revenue. See also “Our business could be adversely impacted if the sole manufacturer of our customized tablet and tablet equipment is not able to meet our manufacturing quality standards,” below.

If our sole manufacturer and/or suppliers were to go out of business or otherwise become unable to meet our needs for reliable equipment, locating and qualifying alternate sources could take months, during which time our production could be delayed, and may, in some cases, require us to redesign our products and systems. Such delays and potentially costly re-sourcing and redesign could have a material adverse effect on our business, operating results, and financial condition.

Our business could be adversely impacted if the sole manufacturer of our customized tablet and tablet equipment cannot meet our manufacturing quality standards.

As discussed above, one unaffiliated third-party manufactures our customized tablet and tablet equipment. Continued improvement in supply-chain management and in manufacturing of our customized tablet and tablet equipment and manufacturing quality and product testing are important to our business. Flaws in the design and manufacturing of our customized tablet or tablet equipment or both (by us or our supplier) could result in substantial delays in shipment and in substantial repair, replacement or service costs, could damage our reputation and customer loyalty, could cause subscription cancellations, and could increase our expense and reduce our revenue. Costs associated with tablet or tablet equipment defects due to, for example, problems in our design and manufacturing processes, could include: (a) writing off the value of inventory; (b) disposing of items that cannot be fixed; (c) recalling items that have been shipped; and (d) providing replacements or modifications. These costs could be significant and may increase expenses and lower gross margin. There can be no assurance that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our tablet and related equipment will be sufficient to permit us to avoid quality issues. Significant quality issues could have a material adverse effect on our business, results of operations or financial condition.

If we do not adequately protect our proprietary rights and intellectual property or we are subjected to intellectual property claims by others, our business could be seriously damaged.

We rely on a combination of trademarks, copyrights, patents, and trade secret laws to protect our proprietary rights in our products. We have a few patents and patent applications pending in jurisdictions related to our business activities. Our pending patent applications and any future applications might not be approved. Moreover, our patents might not provide us with competitive advantages. Third parties might challenge our patents or trademarks or attempt to use infringing technologies or brands which could harm our ability to compete and reduce our revenues, as well as create significant litigation expense. In addition, patents and trademarks held by third parties might have an adverse effect on our ability to do business and could likewise result in significant litigation expense. Furthermore, third parties might independently develop similar products, duplicate our products or, to the extent patents are issued to us, design around those patents. Others may have filed and, in the future may file, patent applications that are similar or identical to ours. Such third-party patent applications might have priority over our patent applications. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office. Such interference proceedings could result in substantial cost to us.

We believe that the success of our business also depends on such factors as the technical expertise and innovative capabilities of our employees. It is our policy that all employees and consultants sign non-disclosure agreements and assignment of invention agreements. Our competitors, former employees, and consultants may, however, misappropriate our technology or independently develop technologies that are as good as or better than ours. Our competitors may also challenge or circumvent our proprietary rights. If we have to initiate or defend against an infringement claim to protect our proprietary rights, the litigation over any such claim, with or without merit, could be time-consuming and costly to us, adversely affecting our financial condition.

From time to time, we hire or retain employees or consultants who may have worked for other companies developing products similar to those that we offer. These other companies may claim that our products are based on their products and that we have misappropriated their intellectual property. Any such claim, with or without merit, could be time-consuming and costly to us, adversely affecting our financial condition.

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

We make content and entertainment services available on our Buzztime network and the internet which includes games and game content, software, and a variety of other entertainment content. The availability of this content and services and our branding could result in claims against us based on a variety of theories, including defamation, obscenity, negligence, or copyright or trademark infringement. We could also be exposed to liability for third-party content accessed through the links from our websites to other websites. Federal laws may limit, but not eliminate, our liability for linking to third-party websites that include materials that infringe copyrights or other rights, so long as we comply with certain statutory requirements. We may incur costs to defend against claims related to either our own content or that of third parties, and our financial condition could be materially adversely affected if we are found liable for information that we make available. Implementing measures to reduce our exposure may require us to spend substantial resources and may limit the attractiveness of our services to users which would impair our profitability and harm our business operations.

We may not grow our subscription revenue and successfully implement our other business strategies.

Our success depends on our ability to increase market awareness and encourage the adoption of the Buzztime brand and our Buzztime network among hospitality venues such as restaurants, sports bars, taverns and pubs, and within the interactive game player community. Our success also depends on our ability to improve customer retention. We may not be able to leverage our resources to expand awareness of and demand for our Buzztime network. In addition, our efforts to improve our game platform and content may not succeed in generating additional demand for our products or in strengthening the loyalty and retention of our existing customers. The degree of market adoption of our Buzztime network will depend on many factors, including consumer preferences, the availability and quality of competing products and services, and our ability to leverage our brand.

Our success also depends on our ability to implement our other business strategies, which include developing our tablet platform that allows for consumer play across the digital platform, developing more premium content that allow us to grow the revenue stream directly from consumers, developing dynamic menuing and point-of-sale, or POS, integration competency, and growing our marketing services and sponsorship revenues. Implementing these strategies will require us to dedicate significant resources to, among other things, fully developing and implementing our tablet platform and product line, expanding our other product offerings, customizing our products and services to meet the unique needs of select accounts, and expanding and improving our marketing services and promotional efforts. We may not successfully implement these strategies as planned.

Our products and services are subject to government regulations that may restrict our operations or cause demand for our products to decline significantly.

In addition to laws and regulations applicable to businesses generally, we are also subject to laws and regulations that apply specifically to the interactive entertainment and product marketing industries. In addition, we operate games of chance and skill, and we award nominal cash prizes to winners of certain games and may provide items of nominal value (e.g., key chains, etc.) to venues who may award such items to consumers. These games are regulated in many jurisdictions and the laws and regulations vary from jurisdiction to jurisdiction. See “ITEM 1. BUSINESS—Government Regulations.”

We may find it necessary to eliminate, modify, suspend, or cancel certain features of our offerings (including the games we offer) in certain jurisdictions based on the adoptions of new laws and regulations or changes in law or regulations or the enforcement thereof, which could result in additional development costs and/or the loss of customers and revenue.

Communication or other system failures could result in customer cancellations and a decrease in our revenues.

We rely on continuous operation of our information technology and communications systems, and those of a variety of third parties, to communicate with and to distribute our services to the locations of our network subscribers. We currently transmit our data to our customers via broadband internet connections including telephone and cable TV networks. Both our communications systems and those of third parties on which we rely are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, storms, fires, power loss, telecommunications and other network failures, equipment failures, computer viruses, computer denial of service or other attacks, and other causes. These systems are also subject to break-ins, sabotage, vandalism, and to other disruptions, for example if we or the operators of these systems and system facilities have financial difficulties. Some of our systems are not fully redundant, and our system protections and disaster recovery plans cannot prevent all outages, errors, or data losses. In addition, our services and systems are highly technical and complex and may contain errors or other vulnerabilities. Any errors or vulnerabilities in our products and services, damage to or failure of our systems, any natural or man-made disaster, or other unanticipated problems at our facilities or those of a third party, could result in lengthy interruptions in our service to our customers, which could reduce our revenues and cash flow, and damage our brand. Any interruption in communications or failure of proper hardware or software function at our or our customers’ venues could also decrease customer loyalty and satisfaction and result in a cancellation of our services.

Our success depends on our ability to recruit and retain skilled professionals.

Our business requires experienced programmers, creative designers, application developers, and sales and marketing personnel. Our success will depend on identifying, hiring, training, and retaining such experienced and knowledgeable professionals. We must recruit and retain talented professionals for our business to grow. There is significant competition for the individuals with the skills required to develop the products and perform the services we offer. We may not attract enough qualified individuals to sustain and grow our business, and we may not succeed in motivating and retaining the individuals we do attract. If we cannot attract, motivate, and retain qualified technical and sales and marketing professionals, our business, financial condition, and results of operations will suffer.

We have incurred significant net operating loss carryforwards that we will likely be unable to use.

At December 31, 2018, we had net operating loss (“NOL”) carryforwards of approximately $66,572,000 available for federal income tax purposes, which will continue expiring in 2019, and of approximately $36,044,000 available for state income tax purposes, which will continue expiring in 2019. We believe that our ability to utilize our NOL carryforwards may be substantially restricted by the passage of time and the limitations of Section 382 of the Internal Revenue Code, which apply when there are certain changes in ownership of a corporation. To the extent we begin to realize significant taxable income, these Section 382 limitations may result in our incurring federal income tax liability notwithstanding the existence of otherwise available NOL carryforwards. We performed a Section 382 analysis through December 31, 2018 to determine the impact of any changes in ownership. This analysis indicates that no ownership change occurred that would limit the use of the NOLs. We established a full valuation allowance for substantially all of our deferred tax assets, including the NOL carryforwards, since we do not believe we are likely to generate future taxable income to realize these assets.

We are subject to cybersecurity risks and incidents.

Our business involves transmitting payment information of our customers and certain personal information of consumers (such as their name, date of birth, and email address). In the future, we may store and transmit additional personal information of consumers, particularly as the services of the tablet platform become more advanced to include POS integration. While we have implemented measures designed to prevent security breaches and cyber incidents, any failure of these measures and/or any material security breaches, theft, misplaced or lost data, programming errors, employee errors and/or malfeasance could lead to the compromise of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, system downtimes, and operational disruptions. In addition, a cyber-related attack could result in other negative consequences, including damage to our reputation or competitiveness, remediation or increased protection costs, litigation or regulatory action.

We could become subject to additional regulations and compliance requirements as we introduce features in direct payments from consumers.

In preparation for expanding features and functionality to our tablet platform that involve us accepting credit card and other forms of payments directly from consumers, we certified our compliance with Payment Card Industry (“PCI”) Data Security Standard v3.1 as a service provider, and will have to do so annually. Compliance with additional regulations and requirements may be difficult for us; thereby limiting our ability to grow the amount of revenue we receive directly from consumers. In addition to these additional regulations and requirements, if we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods we accept, or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit card and debit card payments from consumers.

Risks Relating to the Market for Our Common Stock

If we are again determined to be non-compliant with any of the NYSE American continued listing standards within twelve months of December 14, 2018, depending on the nature of such non-compliance, NYSE Regulation may truncate the compliance procedures available to us or immediately initiate delisting proceedings.

On December 14, 2018, as previously reported, we received a letter from NYSE Regulation Inc. notifying us that we have regained compliance with Section 1003(a)(iii) of the NYSE American Company Guide. As previously reported, NYSE Regulation previously notified us that we were not in compliance with Section 1003(a)(iii) because we reported stockholders’ equity of less than $6 million as of December 31, 2017 and had net losses in five of our most recent fiscal years ended December 31, 2017.

In accordance with Section 1009(h) of the Company Guide, if we are again determined to be below any of the NYSE American continued listing standards within twelve months of December 14, 2018, NYSE Regulation will examine the relationship between the two incidents of noncompliance and re-evaluate our method of financial recovery from the first incident. NYSE Regulation will then take appropriate action, which, depending on the circumstances, may include truncating the compliance procedures described in Section 1009 of the Company Guide or immediately initiating delisting proceedings.

We can give no assurances we can maintain the listing of our common stock on the NYSE American. Our common stock could be delisted because we fall below compliance with any NYSE American listing standards. In addition, we may determine to pursue business opportunities or grow our business at levels or on timelines that reduces our stockholders’ equity below the level required to maintain compliance with NYSE American continued listing standards. The delisting of our common stock for whatever reason could, among other things, substantially impair our ability to raise additional capital; result in losing institutional investor interest and fewer financing opportunities for us; and/or result in potential breaches of representations or covenants of our warrants or other agreements pursuant to which we made representations or covenants relating to our compliance with applicable listing requirements. Claims related to any such breaches, with or without merit, could result in costly litigation, significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on our financial condition, business and results of operations. In addition, the delisting of our common stock for whatever reason may materially impair our stockholders’ ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock.

If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock in the secondary market.

If our common stock were delisted or suspended from trading on the NYSE American, it may be subject to the so-called “penny stock” rules. The SEC has adopted regulations that define a “penny stock” to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange. For any transaction involving a “penny stock,” unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. If our common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade our common stock and an investor may find it more difficult to acquire or dispose of our common stock.

The market price of our common stock historically has been and likely will continue to be highly volatile and our common stock is thinly traded.

The market price for our common stock historically has been highly volatile, and the market for our common stock has from time to time experienced significant price and volume fluctuations, based both on our operating performance and for reasons that appear to us unrelated to our operating performance. Our stock is also thinly traded, which can affect market volatility, which could significantly affect the market price of our common stock without regard to our operating performance. In addition, the market price of our common stock may fluctuate significantly in response to several factors, including:

The realization of any of the foregoing could have a dramatic and adverse impact on the market price of our common stock.

Future sales of substantial amounts of our common stock in the public market or the anticipation of such sales could have a material adverse effect on then-prevailing market prices.

As of December 31, 2018, there were approximately (1) 147,000 shares of common stock reserved for issuance upon the exercise of outstanding stock options at exercise prices ranging from $4.30 to $30.50 per share, (2) 61,000 shares of common stock reserved for issuance upon the settlement of outstanding restricted stock units, and (3) 156,000 shares of our Series A Preferred Stock outstanding which, based on their current conversion price, would convert into approximately 12,000 shares of common stock. Registration statements registering the shares of common stock underlying the outstanding options and restricted stock units are currently effective. Generally, the shares of common stock issuable upon conversion of the Series A Preferred Stock, which the holders may do at any time, may be sold under Rule 144 of the Securities Act of 1933. Accordingly, a significant number of shares of our common stock could be sold at any time. Depending upon market liquidity at the time our common stock is resold by the holders thereof, such resales could cause the trading price of our common stock to decline. In addition, the sale of a substantial number of shares of our common stock, or anticipation of such sales, could make it more difficult for us to obtain future financing. To the extent the trading price of our common stock at the time any of our outstanding options are exercised exceeds their exercise price or at the time any of our outstanding shares of Series A Preferred stock are converted exceeds their conversion price, such exercise or conversion will have a dilutive effect on our stockholders.

Raising additional capital may cause dilution to our existing stockholders and may restrict our operations.

We may raise additional capital at any time and may do so through one or more financing alternatives, including public or private sales of equity or debt securities directly to investors or through underwriters or placement agents. We have a shelf registration statement on file under which we could currently sell up to approximately $21.6 million worth of securities. See also “Our ability to raise capital may be limited by applicable laws and regulations,” below. Raising capital through the issuance of common stock (or securities convertible into or exchangeable or exercisable for shares of our common stock) may depress the market price of our stock and may substantially dilute our existing stockholders. In addition, our board of directors may issue preferred stock with rights, preferences and privileges senior to those of the holders of our common stock. Debt financings could involve covenants that restrict our operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens or make investments and may, among other things, preclude us from making distributions to stockholders (either by paying dividends or redeeming stock) and taking other actions beneficial to our stockholders. In addition, investors could impose more one-sided investment terms on companies that have or are perceived to have limited remaining funds or limited ability to raise additional funds. The lower our cash balance, the more difficult it is likely to be for us to raise additional capital on commercially reasonable terms, or at all.

Our ability to raise capital may be limited by applicable laws and regulations.

Over the past few years we have raised capital through the sale of our equity securities. The offerings we completed in April 2014, November 2016, March 2017, April 2017 and June 2018 were equity offerings conducted under the “shelf” registration statement on Form S-3. Using a shelf registration statement on Form S-3 to raise additional capital generally takes less time and is less expensive than other means, such as conducting an offering under a Form S-1 registration statement. However, our ability to raise capital using a shelf registration statement may be limited by, among other things, SEC rules and regulations. Under SEC rules and regulations, we must meet certain requirements to use a Form S-3 registration statement to raise capital without restriction as to the amount of the market value of securities sold thereunder. One such requirement is that we periodically evaluate the market value of our outstanding shares of common stock held by non-affiliates, or public float, and if, at an evaluation date, our public float is less than $75.0 million, then the aggregate market value of securities sold by us or on our behalf under the Form S-3 in any 12-month period is limited to an aggregate of one-third of our public float. Based on the closing price of our common stock on March 20, 2019, the highest closing price of our common stock within the past 60 days, our public float is approximately $7.8 million and therefore we are currently subject to the one-third of our public float limitation. Assuming our public float remains the same amount the next time we must evaluate it, we will only be able to sell up to approximately $1.0 million if we seek to use our shelf registration statement on or before June 29, 2019, and we will only be able to sell up to approximately $2.6 million if we seek to use our shelf registration statement after June 29, 2019, in each case, assuming we sell no securities using our shelf registration statement before then. If our ability to use our shelf registration statement for a primary offering of our securities is limited to one-third of our public float, we may conduct such an offering pursuant to an exemption from registration under the Securities Act or under a Form S-1 registration statement, and we would expect either alternative to increase the cost of raising additional capital relative to utilizing a Form S-3 registration statement.

In addition, under SEC rules and regulations, our common stock must be listed and registered on a national securities exchange in order to utilize a Form S-3 registration statement (i) for a primary offering, if our public float is not at least $75.0 million as of a date within 60 days prior to the date of filing the Form S-3 or a re-evaluation date, whichever is later, and (ii) to register the resale of our securities by persons other than us (i.e., a resale offering). While currently our common stock is listed on the NYSE American, there can be no assurance we can maintain such listing. See also our risk factor “Although we have regained compliance with the continued listing standards of the NYSE American with which we were previously not compliant, if we are again determined to be non-compliant with any of its continued listing standards within twelve months of December 14, 2018, depending on the nature of such non-compliance, NYSE Regulation may truncate the compliance procedures available to us or immediately initiate delisting proceedings” above.

Our ability to timely raise sufficient additional capital also may be limited by the NYSE American’s stockholder approval requirements for transactions involving the issuance of our common stock or securities convertible into our common stock. For instance, the NYSE American requires that we obtain stockholder approval of any transaction involving the sale, issuance or potential issuance by us of our common stock (or securities convertible into our common stock) at a price less than the greater of book or market value, which (together with sales by our officers, directors and principal stockholders) equals 20% or more of our then outstanding common stock, unless the transaction is considered a “public offering” by the NYSE American staff. In addition, certain prior sales by us may be aggregated with any offering we may propose in the future, further limiting the amount we could raise in any future offering not considered a public offering by the NYSE American staff and involves the sale, issuance or potential issuance by us of our common stock (or securities convertible into our common stock) at a price less than the greater of book or market value. The NYSE American also requires that we obtain stockholder approval if the issuance or potential issuance of additional shares will be considered by the NYSE American staff to result in a change of control of our company.

Obtaining stockholder approval is a costly and time-consuming process. If we must obtain stockholder approval for a potential transaction, we would expect to spend substantial additional money and resources. In addition, seeking stockholder approval would delay our receipt of otherwise available capital, which may materially and adversely affect our ability to execute our business strategy, and there is no guarantee our stockholders ultimately would approve a proposed transaction. A public offering under the NYSE American rules typically involves broadly announcing the proposed transaction, which often depresses the issuer’s stock price. Accordingly, the price at which we could sell our securities in a public offering may be less, and the dilution existing stockholders experience may in turn be greater, than if we were able to raise capital through other means.

Our charter contains provisions that may hinder or prevent a change in control of our company, which could result in our inability to approve a change in control and potentially receive a premium over the current market value of your stock.

Certain provisions of our certificate of incorporation could make it more difficult for a third party to acquire control of us, even if such a change in control would benefit our stockholders, or to make changes in our board of directors. For example, our certificate of incorporation (i) prohibits stockholders from filling vacancies on our board of directors, calling special stockholder meetings, or taking action by written consent, and (ii) requires a supermajority vote of at least 80% of the total voting power of our outstanding shares, voting together as a single class, to remove our directors from office or to amend provisions relating to stockholders taking action by written consent or calling special stockholder meetings.

Additionally, our certificate of incorporation and restated bylaws contain provisions that could delay or prevent a change of control of our company. Some provisions:

These provisions could discourage third parties from taking control of our company. Such provisions may also impede a transaction in which you could receive a premium over then current market prices and your ability to approve a transaction that you consider in your best interest.

In addition, we are governed by Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including delaying or impeding a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

ITEM 1B.Unresolved Staff Comments

We do not have any unresolved comments issued by the SEC Staff.

ITEM 2.Properties

We lease approximately 16,000 square feet of office space in Carlsbad, California. The term of the lease is from December 2018 through April 2026, and we have the option to renew the lease for an additional five-year extension. We also lease approximately 7,500 square feet of warehouse space in Hilliard, Ohio. The term of this lease is from May 2013 through April 2019, and we anticipate extending this lease through April 2020. The facilities we lease are suitable for our current needs and are considered adequate to support expected growth.

ITEM 3.Legal Proceedings

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

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

ITEM 4.Mine Safety Disclosures

Not Applicable.

PART II

ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NYSE American under the symbol “NTN.”

On March 20, 2019, the closing price for our common stock as reported on the NYSE American was $3.95 and there were approximately 489 holders of record.

We have 156,000 shares of Series A Preferred Stock issued and outstanding. The Series A Preferred Stock provides for a cumulative annual dividend of 10 cents per share, payable in semi-annual installments in June and December. Dividends may be paid in cash or in shares of our common stock. In 2018, we paid approximately $16,000 in cash dividends to the holders of our Series A Preferred Stock. We expect to pay the dividends on our Series A Preferred Stock in accordance with its terms, though we may elect to pay the dividend in shares of our common stock in the future.

ITEM 6.Selected Financial Data

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

ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the accompanying audited consolidated financial statements and notes, included in Item 8 of this report, to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. You should also see the section entitled “Forward-Looking Statements” at the beginning of this report. All dollar amounts in MD&A are rounded to the nearest thousand. Our MD&A is organized as follows:

Overview

We deliver interactive entertainment and innovative technology, including performance analytics and secure payment with Europay, MasterCard® and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple, Android and Samsung Pay. Our tablets and technology offer engaging solutions to establishments with guests who experience dwell time, such as in bars, restaurants, casinos and senior living centers. Casual dining venues subscribe to our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games, customized menus and self-service dining features. Our platform improves operating efficiencies, creates connections among the players and venues, and amplifies guests’ positive experiences.

Results of Operations

Year Ended December 31, 2018 compared to the Year Ended December 31, 2017

We generated a net loss of $259,000 for the year ended December 31, 2018, compared to net loss of $1,077,000 for the year ended December 31, 2017.

Revenue

We generate revenue by charging subscription fees for our service to network subscribers, by leasing our tablet platform equipment to certain network subscribers, by selling our tablet platform equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, by licensing our content for use with third-party equipment, from providing professional services (such as developing certain functionality within our platform for customers), and from pay-to-play arcade games. The table below summarizes the type of revenue we generated for the years ended December 31, 2018 and 2017:

Subscription Revenue

The decrease in subscription revenue during 2018 was primarily due to lower average site count and lower average revenue per site when compared to 2017. In October 2018, Buffalo Wild Wings informed us that it determined not to rollout our order, payment and guest insights functionality and that its relationship with us would continue in accordance with existing agreements we entered into in the ordinary course of business, and which terminate in accordance with their terms in November 2019. If we do not extend the Buffalo Wild Wings relationship beyond November 2019 or add network subscribers to sufficiently offset the subscription revenue we receive and have received in recent years from Buffalo Wild Wings corporate-owned restaurants and its franchisees, we expect our subscription revenue to materially decrease beginning in the first quarter of 2020, which is the first full quarter after our existing agreements with Buffalo Wild Wings corporate-owned restaurants and its franchisees terminate in accordance with their terms. See “ITEM 1A., Risk Factors—Risk Factors That May Affect Our Business—We receive a significant portion of our revenues from Buffalo Wild Wings corporate-owned restaurants and its franchisees, and, absent an extension, our relationship will terminate in November 2019.”

Hardware Revenue

Hardware revenue increased during 2018 primarily due to increased sales-type lease arrangements (which resulted in a corresponding decrease in deferred revenue) when compared to 2017, and due to sales of our tablets to a third-party using our tablets and operating system to deliver its services in local jails, which sales did not occur during 2017. We expect to continue to recognize hardware revenue under sales-type lease arrangements during the first quarter of 2019 (and we would recognize a corresponding decrease in deferred revenue), but we are uncertain if we will enter into sales-type lease arrangements thereafter. We expect the amount of hardware revenue under other equipment sale contracts to fluctuate quarter to quarter in correlation with customer contracts. We do not expect to enter into an equipment sale contract similar to the one we entered into with the third-party using our tablets and operating system to deliver its services in local jails every quarter or even annually.

Other Revenue

During the year ended December 31, 2018, other revenue increased due primarily to an increase in advertising and professional services when compared to the year ended December 31, 2017.

The table below provides a geographic breakdown of our site count as of the date indicated:

Direct Costs and Gross Margin

The following table compares the direct costs and gross margin for the years ended December 31, 2018 and 2017:

The increase in direct costs for the year ended December 31, 2018 was primarily due to increased equipment expense of $1,384,000 related to higher sale-type lease revenue and equipment sales, and to increased depreciation expense of $465,000 for capitalized site equipment and software development programs. These increases were offset by decreased freight expense of $190,000, decreased direct wages of $128,000, decreased service provider fees of $111,000 and a decrease in other miscellaneous direct costs of $105,000 when compared to the year ended December 31, 2017.

Operating Expenses

Selling, General and Administrative Expenses

The decrease in selling, general and administrative expenses for the year ended December 31, 2018 was primarily due to decreased payroll and related expense of $1,176,000, decreased marketing expense of $101,000 and decreased operating supplies expenses of $56,000, offset by increased professional fees of $226,000, in each case, when compared to the year ended December 31, 2017.

Impairment of Goodwill

We have goodwill resulting from the excess of costs over the fair value of assets we acquired in 2003 related to our Canadian business (the “Reporting Unit”). Goodwill and intangible assets acquired in a purchase combination that are determined to have an indefinite useful life are not amortized, but instead are assessed annually for impairment based on qualitative factors, such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events, to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Reporting Unit is less than its carrying amount. If there are indications of impairment, then a quantitative impairment test is performed . During the year ended December 31, 2018, we determined that because of declines in revenue of the Reporting Unit, the decline in our stock price and other general market conditions, it was more likely than not that there were indications of impairment. Therefore, we performed the step-one quantitative assessment of our goodwill. We used three methods of determining the fair value of the Reporting Unit: the public company market method, the transaction market method and the income method. Each method was equally weighted to calculate the total fair value, and then we compared this fair value to the carrying value of the Reporting Unit, which resulted in the carrying value exceeding the fair value. Accordingly, we recognized goodwill impairment loss of $261,000 during the year ended December 31, 2018. There was no goodwill impairment recorded for the year ended December 31, 2017.

Depreciation and Amortization

The decrease in depreciation and amortization expense for the year ended December 31, 2018 compared to 2017 was primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing them with new assets.

Other (Expense) Income, Net

The increase in other expense, net, for the year ended December 31, 2018 was related to receiving a one-time payment from a supplier during 2017 related to a supply chain matter that was resolved in exchange for such payment and the absence of a similar payment during 2018. Additionally, during the year ended December 31, 2018, we recognized an increased loss on the sale of fixed assets of approximately $179,000 when compared to the year ended December 31, 2017. These increases in other expense, net, were offset by increased foreign currency transaction gains related to our Canadian business and by decreased interest expense due to lower debt balances during the year ended December 31, 2018 when compared to the year ended December 31, 2017.

Income Taxes

We expect to incur state income tax liability in 2018 related to our U.S. operations. We also expect to incur income tax liability in 2018 in Canada due to the profitability of our Canadian subsidiary.During the year ended December 31, 2018, an impairment to goodwill resulted in a deferred tax benefit under generally accepted accounting principles (or “GAAP”), which resulted in a net tax benefit in Canada.

At December 31, 2018, we had available NOL carryforwards of approximately $66,572,000 for federal income tax purposes, which will continue expiring in 2019. The NOL carryforwards for state purposes, which will continue expiring in 2019, are approximately $36,044,000. There can be no assurance that we will ever be able to realize the benefit of some or all of the federal and state loss carryforwards due to continued operating losses. Further, under Internal Revenue Code Section 382 and similar state provisions, ownership changes may limit the annual utilization of NOL carryforwards existing prior to a change in control that are available to offset future taxable income. Such limitations would reduce, potentially significantly, the gross deferred tax assets related to the NOL carryforwards. We performed a Section 382 analysis through December 31, 2018 to determine the impact of any changes in ownership. Based on this analysis, no ownership change occurred that would limit the use of the NOLs, provided we generate sufficient future earnings prior to the expiration of the NOLs and that future changes in ownership do not trigger a Section 382 limitation. We continue to disclose the NOL carryforwards at their original amount as no potential limitation has been quantified. We also established a full valuation allowance for substantially all deferred tax assets, including the NOL carryforwards, since we could not conclude that we are more likely than not able to generate future taxable income to realize these assets. In addition, we have approximately $152,000 of state tax credit tax carryforwards that expire in the years 2019 through 2026.

EBITDA—Consolidated Operations

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with GAAP. Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. We include EBITDA 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 compared to their net income or loss calculation in accordance with GAAP.

The reconciliation of our consolidated net loss calculated in accordance with GAAP to EBITDA for the years ended December 31, 2018 and 2017 is shown in the table below. EBITDA should not be considered as substitutes for, or superior to, net loss calculated in accordance with GAAP.

Liquidity and Capital Resources

As of December 31, 2018, we had cash, cash equivalents and restricted cash of $2,786,000 compared to cash, cash equivalents and restricted cash of $3,378,000 as of December 31, 2017.

In September 2018, we entered into a loan and security agreement with Avidbank, under which we borrowed $4,000,000 in the form of a one-time 48-month term loan, all of which we used to pay-off the $4,050,000 of principal borrowed from East West Bank (“EWB”). We used our cash on hand to pay the remaining $50,000 we borrowed from EWB plus accrued and unpaid interest. The amended and restated loan and security agreement we entered into with EWB on November 29, 2017, as amended on March 12, 2018, terminated in connection with such payments.

As of December 31, 2018, $3,750,000 was outstanding under the Avidbank term loan, with $1,000,000 recorded in current portion of long-term debt and the remaining $2,750,000 recorded as long-term debt on our balance sheet. We recorded debt issuance costs of $23,000, which includes a $20,000 facility fee. The debt issuance costs are being amortized to interest expense using the effective interest rate method over the life of the loan. The unamortized balance of the debt issuance costs as of December 31, 2018 was $21,000 and is recorded as a reduction of long-term debt.

We must comply with these financial covenants under the loan and security agreement:

As of December 31, 2018, we were in compliance with both covenants.

Subject to customary exceptions, under the loan and security agreement, we are prohibited from borrowing additional indebtedness. We granted and pledged to Avidbank a first-priority security interest in all our existing and future personal property. We paid $20,000 to Avidbank as a facility fee upon entering into the loan and security agreement. If we prepay the Avidbank loan before September 28, 2019, we must pay a prepayment fee of 1.75% of the principal amount repaid, and if we prepay the loan on or after such date but before September 28, 2020, we must pay a prepayment fee of 1.00% of the principal amount prepaid. There is no prepayment fee if we prepay the loan on or after September 28, 2020.

The loan and security agreement includes customary representations, warranties and covenants (affirmative and negative), including restrictive covenants that, subject to specified exceptions, limit our ability to: dispose of our business or property; merge or consolidate with or into any other business organization; incur or prepay additional indebtedness; create or incur any liens on its property; declare or pay any dividend or make a distribution on any class of our stock; or enter specified material transactions with our affiliates.

The loan and security agreement also includes customary events of default, including: payment defaults; breaches of covenants following any applicable cure period; material breaches of representations or warranties; the occurrence of a material adverse effect; events relating to bankruptcy or insolvency; and the occurrence of an unsatisfied material judgment against us. Upon the occurrence of an event of default, Avidbank may declare all outstanding obligations immediately due and payable, do such acts as it considers necessary or reasonable to protect its security interest in the collateral, and take such other actions as are set forth in the loan and security agreement.

In connection with preparing the financial statement as of and for the year ended December 31, 2018, we evaluated whether there are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt about our ability to continue as a going concern within twelve months after the date that such financial statements are issued. We believe we will have sufficient cash to meet our operating cash requirements and to fulfill our debt obligations for at least the next twelve months from the date that such financial statements are issued. To increase the likelihood that we will be able to successfully execute our operating and strategic plan and to better position the company take advantage of market opportunities for growth, we are continuing to evaluate additional financing alternatives, including additional equity financings and alternative sources of debt. If our cash and cash equivalents do not meet our future cash requirements, we may have to reduce planned capital expenses, reduce operational cash uses or raise capital on terms that are not as favorable to us as they otherwise might be. Any actions we may undertake to reduce planned capital purchases or reduce expenses might not cover shortfalls in available funds. If we require additional capital, we may not secure additional financing on terms acceptable to us, or at all.

Strategic Process

On December 7, 2018, we announced that our board of directors is exploring and evaluating strategic alternatives focused on maximizing shareholder value, including, among other things, a potential acquisition of our company or our assets, and that we engaged a financial advisor to assist in the process. The strategic process is ongoing. Our board of directors has not set a timetable for the strategic process nor has it made any decisions relating to any strategic alternatives at this time, and no assurance can be given as to the outcome of the process. We do not intend to disclose additional details regarding the strategic process unless and until further disclosure is appropriate or necessary. See also “PART I—ITEM 1A. Risk Factors—Risk Factors That May Affect Our Business—We cannot assure you that our exploration of strategic alternatives will result in us pursuing a transaction or that any such transaction would be successfully completed, and there may be negative impacts on our business and stock price as a result of the process of exploring strategic alternatives,” above.

Working Capital

As of December 31, 2018, we had working capital (current assets in excess of current liabilities) of $2,761,000 compared to negative working capital (current liabilities in excess of current assets) of $1,109,000 as of December 31, 2017. The following table shows our change in working capital from December 31, 2017 to December 31, 2018.

Cash Flows

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

Net cash provided by operations. The increase in cash provided by operating activities was due to a decrease in net loss of $1,352,000, after giving effect to adjustments made for non-cash transactions, offset by an increase in cash used in operating assets and liabilities of $536,000 during 2018 compared to 2017.

Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $1,118,000 to $10,060,000 for 2018 from $11,178,000 for 2017, primarily due to reduced headcount.

Our primary source of cash is cash we generate from customers. Cash received from customers decreased $4,513,000 to $21,537,000 for 2018 from $26,050,000 for 2017. This decrease was primarily related to a one-time prepayment received from Buffalo Wild Wings in 2017 for equipment and services to be delivered in the future.

Net cash used in investing activities. The $127,000 increase in cash used in investing activities was primarily due to increased software development expenditures, offset by decreased capital expenditures and by proceeds received from the sale of certain assets.

Net cash used in financing activities. The $1,165,000 decrease in cash used in financing activities was primarily attributable to the following:

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.

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 fixed assets, allowance for doubtful accounts, site equipment to be installed, 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.

Site Equipment to be Installed—Site equipment to be installed consist of fixed assets related to our tablet platform that have not yet been placed in service and are stated at cost. These assets remain in site equipment to be installed until installed at our customer sites. For tablet platform customers that are under sales-type lease arrangements, the cost of the equipment is recognized in direct costs upon installation. For all other tablet platform customers, the cost of the equipment is reclassified to fixed assets upon installation and depreciated over its useful life. We evaluate the recoverability of site equipment to be installed for impairment whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset or asset group to estimated undiscounted future net cash flows expected to be generated. If the carrying amount of the asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. We have determined that there were no indications of impairment for either of the years ended December 31, 2018 and 2017.

Fixed Assets—Fixed assets are recorded at cost. Equipment under capital leases is recorded at the present value of future minimum lease payments. We evaluate the recoverability of our fixed assets for impairment whenever events or circumstances indicate that the carrying amounts of such assets may not be recoverable. If the carrying amount of the asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. We have determined that there were no indications of impairment for either of the years ended December 31, 2018 and 2017.

Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements and fixed assets under capital leases is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the lease period.

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 equipment located at our customers’ sites that are not under sales-type lease arrangements. Such equipment includes our Classic Playmaker, our tablet platform, other associated electronics and the computers located at our customer’s sites (collectively, “Site Equipment”). The components within Site Equipment are depreciated over one to three years based on the shorter of the contractual capital lease period or the estimated useful life, which considers anticipated technology changes. Machinery and equipment is depreciated over three to five years, furniture and fixtures is depreciated over five to seven years and our vehicle is depreciated over five years. If our fixed assets turn out to have longer lives, on average, than estimated, then our depreciation expense would be significantly reduced in those future periods. Conversely, if the fixed assets turn out to have shorter lives, on average, than estimated, then our depreciation expense would be significantly increased in those future periods. We reviewed the estimated useful lives for each of our asset groups as of December 31, 2018 and determined that the useful life of certain of our tablets and tablet cases decreased from two and three years to one year. We based this determination on our expectation of the usefulness of these assets in the marketplace. As a result, we expect depreciation expense for assets currently depreciating to increase by approximately $160,000 during the year ended December 31, 2019.

Goodwill and Other Intangible Assets—Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite useful life are not amortized, but instead are assessed annually for impairment based on qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. If after assessing the totality of events or circumstances we determine it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then we must perform the step one quantitative impairment test outlined in ASC No. 350. (SeeRecent Accounting Pronouncementsfor more information on the early adoption of Accounting Standards Update (“ASU”) 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.)

We have goodwill resulting from the excess of costs over the fair value of assets we acquired in 2003 related to our Canadian business (the “Reporting Unit”). During the year ended December 31, 2018, we determined that because of declines in revenue of the Reporting Unit, the decline in our stock price and other general market conditions, it was more likely than not that there were indications of impairment. Therefore, we performed the step one impairment test of our goodwill. We used three methods of determining the fair value of the Reporting Unit: the public company market method, the transaction market method and the income method. Each method was equally weighted to calculate the total fair value, and then we compared this fair value to the carrying value of the Reporting Unit, which resulted in the carrying value exceeding the fair value. Accordingly, we recognized a goodwill impairment loss of approximately $261,000 during the year ended December 31, 2018. There was no goodwill impairment recorded for the year ended December 31, 2017.

ASC No. 350 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC No. 360,Property, Plant and Equipment. In accordance with ASC No. 360, 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 reviews as of December 31, 2018 and 2017 of our other intangible assets and determined that there were no indications of impairment for either period.

Revenue Recognition— On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers (Topic 606) and its amendments.We adopted the new standard using the full retrospective approach.

Topic 606 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized:

Topic 606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.

We determined that the timing and amount of revenue recognized based on Topic 606 is consistent with our revenue recognition policy under previous guidance, and accordingly, there was no transition adoption adjustment necessary upon the adoption of the Topic 606 guidance.

We generate revenue by charging subscription fees for our service to network subscribers, by leasing tablet platform equipment to certain network subscribers, by selling tablet platform equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, by licensing our content for use with third-party equipment, from providing professional services (such as developing certain functionality within our platform for customers), and from pay-to-play arcade games.

In general, when multiple performance obligations are present in a customer contract, the transaction price is allocated to the individual performance obligation based on the relative stand-alone selling prices, and the revenue is recognized when or as each performance obligation has been satisfied. Discounts are treated as a reduction to the overall transaction price and allocated to the performance obligations based on the stand-alone selling prices. All revenues are recognized net of sales tax collected from the customer. The following describes how we recognize our revenue streams under Topic 606.

Subscription Revenue - We recognize our recurring subscription fees over time as customers receive and consume the benefits of such services, which includes our content, our equipment to access the content and the installation of the equipment. In general, customers pay for the subscription services during the month in which they receive the services. Due to the timing of providing the services and receiving payment for the services, we do not record any unbilled contract asset. Occasionally, a customer will prepay for up to one year of subscription services, in which case, we will record deferred revenue on the balance sheet related to such prepayment and will recognize the revenue over the time the customer receives the subscription services. Revenue from installation services is also recorded as deferred revenue and recognized over the longer of the contract term and the expected term of the customer relationship using the straight line method. We have certain contingent performance obligations with respect to repairing or replacing equipment and would recognize any such revenue at the point in time we perform such services.

Costs associated with installing the equipment are considered direct costs. Costs associated with sales commissions are considered incremental costs for fulfilling the contract because such costs would not have been incurred without obtaining the contract. We expect to recover both costs through future fees we collect and both costs are recorded in deferred costs on the balance sheet and amortized on a straight-line basis. For costs that are of an amount that is less than or equal to the deferred revenue for the related contract, the amortization period approximates the longer of the contract term and the expected term of the customer relationship. For any excess costs that exceed the deferred revenue, the amortization period of the excess cost is the initial term of the contract, which is generally one year because we can still recover that excess cost in the initial term of the contract.

Sales-type Lease Revenue – For certain customers that lease equipment under sale-type lease arrangements, we recognize revenue in accordance with Accounting Standards Codification (“ASC”) No. 840,Leases. Such revenue is recognized at the time of installation based on the net present value of the leased equipment. Interest income is recognized over the life of the lease for customers who have remaining lease payments to make. In the event a customer under a sales-type lease arrangement prepays for the lease in full prior to receiving the equipment under the lease, such amounts are recorded in deferred revenue and recognized as revenue once the equipment has been installed and activated at the customer’s location. The cost of the leased equipment is recognized at the same time as the revenue. Effective January 1, 2019, we adopted ASC No. 842,Leases. The adoption will not impact the way in which we recognize revenue for sales-type lease arrangements. SeeRecent Accounting Pronouncements below for more information on ASC No. 842.

Equipment Sales – We recognize revenue from equipment sales at a point in time, which is when control has been transferred to the customer, the customer holds legal title and the customer has significant risks and rewards of ownership. Generally, we have determined that any customer acceptance provisions of the equipment is a formality, as we have historically demonstrated the ability to produce and deliver similar equipment. If we sell equipment with unique specifications, then customer control of the equipment will occur upon customer acceptance as defined in the contract, and revenue will be recognized at that time. Costs associated with the equipment sold is recognized at the same point in time as the revenue.

Live Hosted Trivia Revenue – We recognize our live-hosted trivia revenue at a point in time, which is when the event takes place. Some customers host their own trivia events and we provide the game materials. In these cases, we recognize the revenue at the point in time we send the game materials to the customer. We recognize related costs at the same point in time we recognize the revenue. Generally, there is no unbilled revenue or deferred revenue associated with live hosted trivia events.

Advertising Revenue – We recognize advertising revenue over the time the advertising campaign airs in our customers’ locations. We use the time elapsed output method to measure our progress toward satisfying the performance obligation. When we contract with an advertising agent, we share in the advertising revenue generated with that agent. In these cases, we generally recognize revenue on a net basis, as the agent typically has the responsibility for the relationship with the advertiser and the credit risk. When we contract directly with the advertiser, we will recognize the revenue on a gross basis and will recognize any revenue share arrangement we have with a third party as a direct expense, as we have the responsibility for the relationship with the advertiser and the credit risk. Generally, there is no unbilled revenue or deferred revenue associated with our advertising activities.

Pay-to-Play Revenue– We recognize revenue generated from our customers’ patrons who access our premium games on the tablets. This revenue is recognized at a point in time based on usage-based royalty revenue guidance. We generally share the revenue with the customer whose patrons generated the revenue. In cases where we determine we are the principal and the customer is the agent, we recognize the revenue on a gross basis, with the amount of revenue shared with the customer as a direct expense. In cases where we determine we are the agent and the principal is the customer, we recognize the revenue on a net basis. Costs associated with procuring the game license or developing the games are recognized over the life of the license or expected life of the developed game. Generally, there is no unbilled revenue or deferred revenue associated with our pay-to-play games.

Content Licensing – We license content (trivia packages) to a certain customer, who in turn installs the content on its equipment that it sells to its customers. The content license is characterized as a “right to use intellectual property as it exists at the point in time at which the license is granted,” meaning we are not expected to undertake activities that affect the intellectual property or any such activities would not affect the intellectual property the customer is using. The content license is considered to be on consignment, and we retain title of the licensed content throughout the license period. Our customer has no obligation to pay for the licensed content until the customer sells and installs the content to its customer. Accordingly, we recognize revenue at the point in time when such installation occurs. We recognize costs related to developing the content during the period incurred.

Professional Development Revenue – Depending on the type of development work we are performing, we will recognize revenue, and associated costs, at the point in time when we satisfy each performance obligation, which is generally when the customer can direct the use of, and obtain substantially all of the remaining benefits of the goods or service provided. For services provided over time, the corresponding revenue is generally recognized over the time we provide such services. Any payments received before satisfying the performance obligations are recorded as deferred revenue and recognized as revenue when or as such obligations are satisfied. We do not have unbilled revenue assets associated with professional development services.

Geographic Breakdown of Revenue – Geographic breakdown of our revenue for the last two fiscal years were as follows:

Contract Assets and Liabilities – We enter into contracts and may recognized contract assets and liabilities that arise from these contracts. We recognize revenue and corresponding cash for our customers who auto pay via their bank account or credit card, or we recognize a corresponding accounts receivable for customers who we invoice. We may receive consideration from customers, per the terms of the contract, prior to transferring goods or services to the customer. In such instances, we record a contract liability and recognize the contract liability as revenue when all revenue recognition criteria are met. The table below shows the balance of contract liabilities as of December 31, 2018 and 2017, including the change between the periods.

We do not generally recognize revenue in advance of when the contract gives us the right to invoice a customer, and therefore we did not recognize any related contract assets as of December 31, 2018.

Research and Development— Research and development costs, which include the cost of equipment we are evaluating for future integration or use in our tablet platform, are expensed as incurred. For the years ended December 31, 2018 and 2017, research and developments costs totaled $72,000 and $139,000, respectively, and are included in selling, general and administrative expense.

Software Development Costs—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 $382,000 and $230,000 for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017, approximately $1,296,000 and $784,000, respectively, of capitalized software costs were not subject to amortization as the development of various software projects was not complete.

We performed our annual review of software development projects for the years ended December 31, 2018 and 2017, and determined to abandon various software development projects that we concluded 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, we recognized an impairment of $23,000 and $5,000 for the years ended December 31, 2018 and 2017, respectively, which was recorded in selling, general and administrative expenses on our consolidated statements of operations.

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 and ASC No. 505-50,Equity – Equity-Based Payments to Non-Employees.The fair value of stock options granted is recognized to expense over the requisite service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair value on the grant date and is periodically re-measured as the underlying awards vest.

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 2018 and 2017 under the ASC No. 718 requirements:

We estimate forfeitures, based on our historical activity, at the time of grant and revise if necessary in subsequent periods if actual forfeiture rates differ from those estimates. Stock-based compensation expense for employees for the years ended December 31, 2018 and 2017 was $443,000 and $457,000, respectively, and is included 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 are 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.

Earnings Per Share—Basic and diluted loss per common share have been computed by dividing the losses applicable to common stock by the weighted average number of common shares outstanding. Our basic and fully diluted earnings per share (“EPS”) calculation are the same since the increased number of shares that would be included in the diluted calculation from assumed exercise of common stock equivalents would be anti-dilutive to the net loss in each of the years shown in the consolidated financial statements.

Segment Reporting—In accordance with ASC No. 280,Segment Reporting, we have determined that we operate as one operating segment. Decisions regarding our overall operating performance and allocation of our resources are assessed on a consolidated basis.

Recent Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2018-18,Collaborative Arrangements (Topic 821). This ASU requires certain transactions between participants in a collaborative arrangement to be accounted for as revenue under the new revenue standard when the participant is a customer. The standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for us). We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15,Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for us) and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted for us at any time. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies certain disclosure requirements on fair value measurements. The standard is effective for fiscal years beginning after December 15, 2019 (which will be January 1, 2020 for us). We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07 (Topic 718),Improvements to Nonemployee Share-Based Payment Accounting.This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The standard is effective for fiscal years beginning after December 15, 2018 (which was January 1, 2019 for us), including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. We do not expect that the adoption of this standard will have a significant impact on our consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05,Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard incorporates SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses the accounting implications of the major tax reform legislation, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”), enacted on December 22, 2017. SAB 118 allows a company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. The adoption of this standard did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard eliminates the second step of the two-step impairment test and only requires a one-step quantitative impairment test, whereby the goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). An entity still has the option to perform the qualitative assessment for an entity to determine if the quantitative impairment test is necessary. This standard is effective on a prospective basis for fiscal years beginning after December 15, 2019, but can be adopted early for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted ASU No. 2017-04 during the year ended December 31, 2018 when we completed the step-one impairment test on our goodwill related to its Canadian business, resulting in a goodwill impairment loss of $261,000. We determined that adopting ASU No. 2017-04 early was preferable because it eliminated the second step of the two-step impairment test.

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842); in July 2018, the FASB issued ASU No. 2018-11,Leases (Topic 842): Targeted Improvements; and in December 2018, the FASB issued ASU No. 2018-20,Leases (Topic 842) – Narrow-Scope Improvements for Lessors, (collectively “Topic 842”). Topic 842 primarily requires lessees to recognize at the lease commencement date a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Topic 842 is effective for fiscal periods beginning after December 15, 2018 (which was January 1, 2019 for us), including interim periods within those fiscal years. Lessees and lessors must either (i) apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements or (ii) recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Applying a full retrospective transition approach is not allowed. We have elected to use the cumulative-effect transition method upon adoption.

Topic 842 also allows lessees and lessors to elect certain practical expedients. We expect to elect the following practical expedients:

Upon adoption of Topic 842, we expect to recognize on our consolidated balance sheet as of January 1, 2019 approximately $3.5 million of operating lease liabilities, and approximately $2.3 million of corresponding operating right-of use assets, net of tenant improvement allowances. We will also show the initial recognition of the leases as a supplemental noncash financing activity on the statement of cash flows and the amortization of the noncash lease expense in operating activities . We do not anticipate that the adoption of Topic 842 will have a material impact on our consolidated statement of operations.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

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

ITEM 8.Financial Statements and Supplementary Data

See “Index to Consolidated Financial Statements and Schedule” on page F-1 for a listing of the Consolidated Financial Statements and Schedule filed with this report.

ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

ITEM 9A.Controls and Procedures

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed, in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our 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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

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

Management’s Report on Internal Control over Financial Reporting

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

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018. According to the guidelines established byInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, one or more material weaknesses renders a company’s internal control over financial reporting ineffective. Based on this evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2018.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.Other Information

Not Applicable.

PART III

ITEM 10.Directors, Executive Officers and Corporate Governance

Information required by this item will be set forth under the headings “PROPOSAL 1: ELECTION OF DIRECTORS,” “BOARD OF DIRECTORS AND CORPORATE GOVERNANCE,” “EXECUTIVE OFFICERS,” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in our definitive proxy statement relating to our 2019 annual meeting of stockholders (the “Proxy Statement”), which we expect to filed no later than 120 days after the end of our fiscal year ended December 31, 2018, and is incorporated in this report by reference.

ITEM 11.Executive Compensation

The information required by this item will be set forth under the heading “EXECUTIVE OFFICER COMPENSATION” in the Definitive Proxy Statement and is incorporated in this report by reference.

ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be setfollowing table sets forth under the headings “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT”number and “EQUITY COMPENSATION PLAN INFORMATION”percentage ownership of common stock as of March 31, 2020 by:

Except as otherwise indicated in the Definitive Proxy Statementfootnotes to the table below: (i) each of the persons named has sole voting and investment power with respect to the shares of common stock shown, subject to applicable community property and similar laws; and (ii) the address for each director and named executive officer is incorporatedc/o NTN Buzztime, Inc., 1800 Aston Avenue, Suite 100, Carlsbad, California 92008.

Mr. Berg is the managing member of BFK. BFK is the general partner of Matador. Each of BFK and Mr. Berg disclaims beneficial ownership in this reportshares of common stock beneficially owned by reference.the other party or by Matador except to the extent of its or his pecuniary interest therein. The address for each of BFK, Mr. Berg and Matador is 603 N. Indian River Dr., Ste. 300, Ft. Pierce, FL 34950.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2019 regarding our compensation plans authorizing us to issue equity securities and the number of securities.

ITEM 13.Certain Relationships and Related Transactions,and Director Independence

The information required by this item will be set forth under the headings “PROPOSAL 1: ELECTION OF DIRECTORS,” “BOARD OF DIRECTORS AND CORPORATE GOVERNANCE” and “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” in the Definitive Proxy Statement and is incorporated in this report by reference.

Related Party Transactions

Since January 1, 2018, there has not been nor are there currently proposed any transactions or series of similar transactions to which we were or are to be a party in which the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years (which was $144,945) and in which any director, executive officer, holder of more than 5% of our common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.

Company Policy Regarding Related Party Transactions

Pursuant to its charter, our audit committee has the responsibility to review, approve and oversee any transaction between the Company and a related person (as defined in Item 404 of Regulation S-K) and to develop policies and procedures for the committee’s approval of such transactions.

Indemnity Agreements

We have entered into indemnity agreements with each of our directors and executive officers. The indemnity agreements provide that we will indemnify these individuals under certain circumstances against certain liabilities and expenses they may incur in their capacities as our directors or officers. We believe that the use of such indemnity agreements is customary and that the terms of the indemnity agreements are reasonable and fair to us, and are in our best interests to attract and retain experienced directors and officers.

Director Independence

Our board of directors has determined that, other than Allen Wolff, who is not considered independent because he is one of our executive officers, all of our current directors (Gregory Thomas, Richard Simtob, Susan Miller and Michael Gottlieb) are “independent directors” under NYSE American rules. In addition, our board of directors had determined that, other than Ram Krishnan, who is not considered independent because he was one of our executive officers, each of the other individuals who served as a director during any part of 2019 (Jeff Berg, Steve Mitgang and Paul Yanover) were “independent directors” under NYSE American rules.

ITEM 14.Principal Accounting Fees and Services

The information requiredfollowing table presents the aggregate fees billed for each of the last two fiscal years for professional services rendered by this item willSquar Milner LLP for the audit of our annual financial statements, review of our quarterly financial statements and for other services: