UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

Commission file number 001-11460

 

 

 

NTN Buzztime, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   31-1103425
(State of incorporation)   (I.R.S. Employer Identification No.)

 

2231 RUTHERFORD ROAD, SUITE 200, CARLSBAD,
CALIFORNIA
  92008
(Address of principal executive offices)   (Zip Code)

 

(760) 438-7400

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer [  ] Accelerated filer [  ]
       
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]

 

As of May 6, 2016 the registrant had outstanding 92,439,174 shares of common stock, $.005 par value per share.

 

 

 

   
     

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

Item       Page
         
    PART I    
         
1.   Financial Statements   3
         
    Condensed Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015   3
         
    Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and 2015 (unaudited)   4
         
    Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (unaudited)   5
         
    Notes to Condensed Consolidated Financial Statements (unaudited)   6
         
2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   11
         
3.   Quantitative and Qualitative Disclosures About Market Risk   19
         
4.   Controls and Procedures   19
         
    PART II    
         
1.   Legal Proceedings   20
         
1A.   Risk Factors   20
         
2.   Unregistered Sales of Equity Securities and Use of Proceeds   21
         
3.   Defaults Upon Senior Securities   21
         
4.   Mine Safety Disclosures   22
         
5.   Other Information   22
         
6.   Exhibits   22
         
    Signatures   23

 

  2  
     

 

PART I

 

Item 1. Financial Statements .

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amount)

 

    March 31, 2016     December 31, 2015  
    (unaudited)        
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 3,549     $ 3,223  
Accounts receivable, net of allowances of $210 and $266, respectively     769       919  
Site equipment to be installed     3,763       3,990  
Prepaid expenses and other current assets     1,054       978  
Total current assets     9,135       9,110  
Fixed assets, net     3,799       3,915  
Software development costs, net of accumulated amortization of $2,498 and $2,381, respectively     924       943  
Deferred costs     1,300       1,328  
Goodwill     972       909  
Intangible assets, net     67       79  
Other assets     119       124  
Total assets   $ 16,316     $ 16,408  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current Liabilities:                
Accounts payable   $ 171     $ 211  
Accrued compensation     941       1,024  
Accrued expenses     647       670  
Sales taxes payable     129       192  
Income taxes payable     23       22  
Current portion of long-term debt (Note 4)     3,044       1,072  
Current portion of obligations under capital leases     79       78  
Deferred revenue     1,275       1,214  
Other current liabilities     534       639  
Total current liabilities     6,843       5,122  
Long-term debt     5,473       6,366  
Long-term obligations under capital leases     138       138  
Deferred revenue, excluding current portion     325       393  
Deferred rent     501       541  
Other liabilities     3       -  
Total liabilities     13,283       12,560  
Commitments and contingencies                
                 
Shareholders’ Equity:                
Series A 10% cumulative convertible preferred stock, $.005 par value, $156 liquidation preference, 5,000 shares authorized; 156 shares issued and outstanding at March 31, 2016 and December 31, 2015     1       1  
Common stock, $.005 par value, 168,000 shares authorized at March 31, 2016 and December 31, 2015; 92,439 shares issued and outstanding at March 31, 2016 and December 31, 2015     462       462  
Treasury stock, at cost, 503 shares at March 31, 2016 and December 31, 2015     (456 )     (456 )
Additional paid-in capital     128,869       128,756  
Accumulated deficit     (126,128 )     (125,087 )
Accumulated other comprehensive income (Note 5)     285       172  
Total shareholders’ equity     3,033       3,848  
Total liabilities and shareholders’ equity   $ 16,316     $ 16,408  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  3  
     

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share amounts)

 

    Three Months Ended
March 31,
 
    2016     2015  
    (unaudited)     (unaudited)  
Revenues                
Subscription revenue   $ 4,374     $ 4,200  
Sales-type lease revenue     396       840  
Other revenue     712       686  
Total Revenue     5,482       5,726  
Operating expenses:                
Direct operating costs (includes depreciation and amortization of $643 and $580, respectively)     2,036       2,649  
Selling, general and administrative     4,200       5,162  
Depreciation and amortization (excluding depreciation and amortization included in direct operating costs)     114       121  
Total operating expenses     6,350       7,932  
Operating loss     (868 )     (2,206 )
Other expense, net     (154 )     (43 )
Loss before income taxes     (1,022 )     (2,249 )
Provision for income taxes     (19 )     (14 )
Net loss   $ (1,041 )   $ (2,263 )
                 
Net loss per common share - basic and diluted   $ (0.01 )   $ (0.02 )
                 
Weighted average shares outstanding - basic and diluted     91,936       91,876  
                 
Comprehensive loss                
Net loss   $ (1,041 )   $ (2,263 )
Foreign currency translation adjustment     113       (153 )
Total comprehensive loss   $ (928 )   $ (2,416 )

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  4  
     

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    Three months ended
March 31,
 
    2016     2015  
Cash flows used in operating activities:                
Net loss   $ (1,041 )   $ (2,263 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
Depreciation and amortization     757       701  
Provision for doubtful accounts     24       (39 )
Excess and obsolete site equipment to be installed expense     25       163  
Stock-based compensation     113       99  
Amortization of debit issuance costs     10       -  
Issuance of common stock to consultant in lieu of cash payment     -       1  
Loss from disposition of equipment     5       1  
Changes in assets and liabilities:                
Accounts receivable     126       1,459  
Site equipment to be installed     (115 )     154  
Prepaid expenses and other assets     (76 )     100  
Accounts payable and accrued liabilities     (209 )     312  
Income taxes payable     (1 )     (13 )
Deferred costs     29       (70 )
Deferred revenue     (7 )     518  
Deferred rent     (40 )     (36 )
Other liabilities     (104 )     (92 )
Net cash used in (provided by) operating activities     (504 )     995  
Cash flows used in investing activities:                
Capital expenditures     (177 )     (215 )
Software development expenditures     (99 )     (222 )
Net cash used in investing activities     (276 )     (437 )
Cash flows provided by (used in) financing activities:                
Principal payments on capital lease     (21 )     (7 )
Proceeds from long-term debt     2,114       74  
Payments on long-term debt     (1,035 )     (699 )
Debt issuance costs on long-term debt     (5 )     -  
Net cash provided by (used in) financing activities     1,053       (632 )
Net increase (decrease) in cash and cash equivalents     273       (74 )
Effect of exchange rate on cash     53       52  
Cash and cash equivalents at beginning of year     3,223       7,185  
Cash and cash equivalents at end of year   $ 3,549     $ 7,163  
                 
Supplemental disclosures of cash flow information:                
Cash paid during the period for:                
Interest   $ 84     $ 103  
                 
Income taxes   $ 20     $ 27  
                 
Supplemental disclosure of non-cash investing and financing activities:                
                 
Site equipment transferred to fixed assets   $ 317     $ 240  
                 
Equipment acquired under capital lease   $ 22     $ 160  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  5  
     

 

NTN BUZZTIME, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1) BASIS OF PRESENTATION

 

Description of Business

 

NTN Buzztime, Inc. (the “Company”) delivers interactive entertainment and innovative dining technology to bars and restaurants in North America. Customers license the Company’s customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games, nationwide competitions, and self-service dining features including dynamic menus, touchscreen ordering and secure payment. The Company’s platform can improve operating efficiencies, create connections among the players and venues and amplify guests’ positive experiences. Built on an extended network platform, the Company’s interactive entertainment system has historically allowed multiple players to interact at the venue, and now also enables competition between venues, referred to as massively multiplayer gaming. The Company’s current platform, which it refers to as Buzztime Entertainment On Demand, or BEOND, was first introduced as a pilot program in December 2012, was expanded commercially during 2013, and the expansion was scaled during 2014. The Company continues to enhance its network architecture and the BEOND tablet platform and player engagement paradigms. The Company also continues to support its legacy network product line, which it refers to as Classic.

 

The Company currently generates revenue by charging subscription fees for its service to its network subscribers, by leasing equipment (including tablets used in its BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers, by hosting live trivia events, and by selling advertising aired on in-venue screens and as part of customized games. In 2014, the Company began offering pay-to-play premium content to certain customers via its BEOND tablet platform, such as paid arcade. During the second quarter of 2015, the Company made a strategic change in its premium content model by making the arcade offering available on both a free-to-consumer and pay-to-play basis. This change required the Company to delay the general availability of the pay-to-play arcade offering as it retooled the offering’s content, workflow and positioning. As a result, during 2015, the Company generated additional subscription fee revenue from those venues offering free-to-consumer arcade. The Company anticipates rolling out the new pay-to-play arcade offering during the second quarter of 2016. Currently, approximately 2,900 venues in the U.S. and Canada subscribe to the Company’s interactive entertainment network, of which approximately 65% are using the BEOND tablet platform.

 

The Company was incorporated in Delaware in 1984 as Alroy Industries and changed its corporate name to NTN Communications, Inc. in 1985. The Company changed its name to NTN Buzztime, Inc. in 2005 to better reflect the growing role of the Buzztime consumer brand.

 

Basis of Accounting Presentation

 

The accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments that are necessary, which are of a normal and recurring nature, for a fair presentation for the periods presented of the financial position, results of operations and cash flows of the Company and its wholly-owned subsidiaries: IWN, Inc., IWN, L.P., Buzztime Entertainment, Inc., NTN Wireless Communications, Inc., NTN Software Solutions, Inc., NTN Canada, Inc., and NTN Buzztime, Ltd., all of which, other than NTN Canada, Inc., are dormant subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2015. The accompanying condensed balance sheet as of December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2016, or any other period.

 

Reclassifications

 

The Company reclassified the condensed consolidated statement of cash flows for the three months ended March 31, 2015 to conform to the 2016 presentation. Reclassifications had no impact on net loss or cash flows.

 

  6  
     

 

(2) Basic and Diluted Earnings Per Common Share

 

The Company computes basic and diluted earnings per common share in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 260, Earnings per Share . Basic earnings per share excludes the dilutive effects of options, warrants and other convertible securities. Diluted earnings per share reflects the potential dilution of securities that could share in the Company’s earnings. The total number of shares of the Company’s common stock subject to options, warrants, and convertible preferred stock that were excluded from computing diluted net loss per common share was approximately 14,322,000 and 14,459,000 shares as of March 31, 2016 and 2015, respectively, as their effect was anti-dilutive.

 

(3) STOCK-BASED COMPENSATION

 

The Company’s stock-based compensation plans include the NTN Buzztime, Inc. 2004 Performance Incentive Plan (the “2004 Plan”), the NTN Buzztime, Inc. Amended 2010 Performance Incentive Plan (the “Amended 2010 Plan”) and the NTN Buzztime, Inc. 2014 Inducement Plan (the “2014 Plan”). The 2004 Plan expired in September 2009. From and after the date it expired, no awards could be granted under that plan and all awards that had been granted under that plan before it expired are governed by that plan until they are exercised or expire in accordance with that plan’s terms. The Amended 2010 Plan provides for the grant of up to 12,000,000 share-based awards and expires in February 2020. As of March 31, 2016, approximately 7,160,000 of share-based awards were available to be issued under the Amended 2010 Plan. The 2014 Plan, which provides for the grant of up to 4,250,000 share-based awards to a new employee as an inducement material to the new employee entering into employment with the Company, was approved by the Nominating and Corporate Governance/Compensation Committee of the Company’s Board of Directors (the “Committee”) in September 2014 in connection with the appointment of Ram Krishnan as the Company’s Chief Executive Officer. As of March 31, 2016, there were no share-based awards available to be granted under the 2014 Plan. The Company’s stock-based compensation plans are administered by the Committee, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures, if any, and other provisions of the award.

 

The Company records stock-based compensation in accordance with ASC No. 718 , Compensation – Stock Compensation and ASC No. 505-50, Equity – Equity-Based Payments to Non-Employees. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period. Stock-based compensation expense for share-based payment awards to employees is recognized using the straight-line single-option method. Stock-based compensation expense for share-based payment awards to non-employees is recorded at its fair value on the grant date and is periodically re-measured as the underlying awards vest.

 

The Company uses the historical stock price volatility as an input to value its stock options under ASC No. 718. The expected term of stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise patterns of the Company, which the Company believes are indicative of future exercise behavior. For the risk-free interest rate, the Company uses the observed interest rates appropriate for the term of time options are expected to be outstanding. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

 

The following weighted-average assumptions were used for grants issued during the three months ended March 31, 2016 and 2015 under the ASC No. 718 requirements.

 

    Three months ended March 31,  
    2016     2015  
Weighted average risk-free rate     1.26 %     1.17 %
Weighted average volatility     110.71 %     81.38 %
Dividend yield     0.00 %     0.00 %
Expected life     6.02 years       4.45 years  

 

ASC No. 718 requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeiture rates differ from those estimates. Forfeitures were estimated based on historical activity for the Company. Stock-based compensation expense for the three months ended March 31, 2016 and 2015 was $113,000 and $99,000, respectively, and is expensed in selling, general and administrative expenses and credited to additional paid-in-capital. The Company granted stock options to purchase 775,000 and 785,000 shares of common stock during the three months ended March 31, 2016 and 2015, respectively.

 

  7  
     

 

Stock options issued under all of the Company’s stock-based compensation plans may be exercised on a net-exercise arrangement, where shares of common stock equal to the value of the amount of the exercise price of the stock options being exercised are withheld as payment of the exercise price instead of cash. Under such net-exercise arrangements, for the three months ended March 31, 2015, options to purchase approximately 34,000 shares of common stock were exercised and approximately 8,000 shares of common stock were issued. No options were exercised and paid with cash during the three months ended March 31, 2015. During the three months ended March 31, 2016, no options were exercised.

 

(4) DEBT

 

Revolving Line of Credit

 

In April 2015, the Company entered into a loan and security agreement (the “Original Loan Agreement”) with East West Bank (the “Lender”), pursuant to which, the Company may request advances in an aggregate outstanding amount at any time up to the lesser of $7,500,000, which is referred to as the revolving line, or an amount equal to its borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. So long as there is no event of default, the Company may make a one-time request to increase the revolving line by up to $2,500,000, which the Lender may accept or decline. In March 2016, the Company and the Lender entered into an amendment (the “Amendment”) to the Original Loan Agreement. The Original Loan Agreement as amended by the Amendment is referred to as the “Amended Loan Agreement.” Under the Amended Loan Agreement, through March 31, 2017, the Company may request advances in an aggregate outstanding amount at any time up to the lesser of (a) the revolving line (or $7,500,000) or (b) the sum of $2,000,000 (which the Company refers to as the “sublimit”) plus the amount equal to the Company’s borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. On March 31, 2017, the sublimit becomes zero. If the aggregate amount of advances as of March 31, 2017 exceeds the lesser of the revolving line or the amount equal to the Company’s borrowing base, then it must pay the Lender the amount of such excess.

 

Under the Original Loan Agreement, the Company’s borrowing base was, as of the date of determination, an amount equal to the product of: (a) the average monthly recurring revenue for the immediately preceding three months; times (b) one plus the average churn rate for the immediately preceding three months (not to exceed zero); times (c) 300%. The churn rate, with respect to any month, is the quotient of the Company’s monthly net revenue change calculated with respect to such month, divided by its monthly revenue from subscriptions for the month. The manner in which the borrowing base is determined is unchanged under the Amendment, except that the monthly recurring revenue is limited to all recurring subscription revenue attributable to software that the Company sold or licensed and all recurring revenue relating to services it delivered and 50% of all revenue attributable to the Company’s “Stump” product line.

 

In addition, under the Amended Loan Agreement, the Company is required to meet a minimum adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), target and churn rate targets, in each case, as specified in the Amended Loan Agreement. Adjusted EBITDA is the sum (a) net profit (or loss), after provision for taxes, plus (b) interest expense, plus (c) to the extent deducted in the calculation of net profit (or loss), depreciation expense and amortization expense, plus (d) income tax expense, plus (e) non-cash stock compensation expenses, plus (f) other non-cash expenses and charges, plus (g) to the extent approved by the Lender, other one-time charges, plus (h) to the extent approved by the Lender, any losses arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business. Under the Original Loan Agreement, the Adjusted EBITDA target was measured as of the last day of each fiscal quarter with respect to the immediately prior six-month period. Under the Amended Loan Agreement, the Adjusted EBITDA target is measured as of the last day of each fiscal quarter with respect to the immediately prior three-month period. The churn rate targets, which were unchanged in the Amendment, are measured on a monthly and trailing three-month basis. The Company met the Adjusted EBITDA and the trailing three-month churn rate targets as of the quarter ended March 31, 2016. The Company did not meet the monthly churn rate for the month ended January 31, 2016, which constituted an event of default under the Original Loan Agreement, however, the Lender waived that event of default.

 

The Amended Loan Agreement requires: (a) that the Company maintain a balance on deposit with the Lender equal to (i) on March 31, 2017, 100% of the aggregate outstanding principal amount of the advances at such time, and (ii) at all times after March 31, 2017, an amount determined by the Lender based on the Company’s 2017 financial projections; and (b) that the sum of the following be not less than $2,000,000: (i) the aggregate amount of unrestricted cash that the Company holds in accounts maintained with the Lender and (ii) the amount available to the Company under the Amended Loan Agreement.

 

Under the Amended Loan Agreement, all then-outstanding advances are due on December 31, 2017 (under the Original Loan Agreement, the due date was April 14, 2018). On or before March 31, 2017, advances will bear interest, at the Company’s option, at the rate of either (A) a variable rate per annum equal to the prime rate as set forth in The Wall Street Journal plus 2.75%, up from 1.25% under the original terms, or (B) at a fixed rate per annum equal to the LIBOR rate for the interest period for the advance plus 5.50%, up from 4.00% under the original terms. After March 31, 2017, the interest rates will revert to their original terms.

 

  8  
     

 

As of March 31, 2016, the Company requested and received advances in the aggregate of $6,500,000, all of which were advanced at the LIBOR rate plus the applicable margin with a three-month interest period. Each time the interest period expired on these advances, the Company elected to renew the advance at the LIBOR rate plus the applicable margin with a three-month interest period. Prior to the Amendment, the interest rate on advances ranged from 4.313% to 4.688% per annum. The interest rate on advances since the Amendment have ranged from 6.125% to 6.188% per annum. As of March 31, 2016, $6,500,000 remained outstanding under this credit facility, of which, $2,000,000 is recorded in current portion of long-term debt on the accompanying consolidated balance sheet. The Company had approximately $103,000 available to borrow as of March 31, 2016 based on its borrowing base calculated as of that date. The Company used approximately $3,381,000 of the total amount borrowed under this credit facility to pay down existing indebtedness that was owed to an equipment lender (see “—Equipment Notes Payable,” below). Under the Amended Loan Agreement, the amount that the Company may owe under its current credit facility with that equipment lender is not limited to any specified amount. In addition, with the Lender’s consent, the Company may incur additional indebtedness with other equipment lenders of up to $2,000,000 in the aggregate for equipment financing.

 

Pursuant to the Amended Loan Agreement, the Company continues to grant and pledge to the Lender a first-priority security interest in all the Company’s existing and future personal property.

 

The Company has paid $37,500 to the Lender as a facility fee at the time of closing in April 2014, and has accrued approximately $5,000 for fees associated with the Amendment. An additional facility fee (equal to the product of (x) 0.50% of the increase in the revolving line times (y) the quotient of the number of days remaining between the effective date of such increase and December 31, 2017, divided by 1,095) will be due if the revolving line is increased pursuant to the Company’s request. The Company also pays an unused line fee equal to 0.50% per year of the difference between the amount of the revolving line as in effect from time to time and the average monthly balance in each month, which is payable monthly in arrears. The average monthly balance is calculated by adding the ending outstanding balance under the revolving line for each day in the month divided by the number of days in the month.

 

Equipment Notes Payable

 

In May 2013, the Company entered into a financing arrangement with a lender under which the Company may borrow up to $500,000 to purchase certain equipment. Over time, the lender has increased the maximum amount the Company may borrow, and as of March 31, 2016, the maximum amount was $9,853,000. The Company may borrow up to the maximum amount in tranches as needed. Each tranche borrowed through August 2015 incurred interest at 8.32% per annum; the interest for tranches borrowed thereafter was reduced to 7.75% per annum. With respect to the first $1,000,000 in the aggregate borrowed, principal and interest payments are due in 36 equal monthly installments. With respect to amounts borrowed in excess of the first $1,000,000 in the aggregate, the first monthly payment will be equal to 24% of the principal amount outstanding, and the remaining principal and interest due is payable in 35 equal monthly installments. The Company granted the lender a first security interest in the equipment purchased with the funds borrowed.

 

In April 2015, the Company used approximately $3,381,000 of the proceeds received from the East West Bank credit facility to pay down a portion of the principal amount the Company had borrowed under this financing arrangement, accrued interest and a prepayment fee. Through March 31, 2016, the Company borrowed approximately $9,302,000 of the $9,853,000 maximum amount available under this financing arrangement. As of March 31, 2016, approximately $2,017,000 of principal remained outstanding under this financing arrangement, of which, $1,044,000 is recorded in current portion of long-term debt on the accompanying consolidated balance sheet, and approximately $551,000 was available for borrowing.

 

(5) ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The United States dollar is the Company’s functional currency, except for its operations in Canada where the functional currency is the Canadian dollar. The financial position and results of operations of the Company’s foreign subsidiaries are measured using the foreign subsidiary’s local currency as the functional currency. In accordance with ASC No. 830, Foreign Currency Matters , revenues and expenses of the Company’s foreign subsidiaries have been translated into U.S. dollars at weighted average exchange rates prevailing during the period, and the assets and liabilities of such subsidiaries have been translated at the period end exchange rate. Accumulated other comprehensive income includes the accumulated gains or losses from these foreign currency translation adjustments. As of March 31, 2016 and December 31, 2015, $285,000 and $172,000 of foreign currency translation adjustments were recorded in accumulated other comprehensive income, respectively.

 

  9  
     

 

(6) RECENT ACCOUNTING PRONOUNCEMENTS

 

Management has considered all recent accounting pronouncements issued since the last audit of the Company’s consolidated financial statements, and believes that these recent pronouncements will not have a material effect on the Company’s consolidated financial statements.

 

(7) CONCENTRATIONS OF RISK

 

Significant Customer

 

For the three months ended March 31, 2016 and 2015, the Company generated approximately $2,292,000 and $2,389,000, respectively, of total revenue from Buffalo Wild Wings corporate-owned restaurants and its franchisees, which represented approximately 42% of total revenue in each of those years. As of March 31, 2016 and December 31, 2015, approximately $170,000 and $172,000, respectively, was included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and its franchisees.

 

Equipment Suppliers

 

The tablet used in the Company’s BEOND product line is manufactured by one unaffiliated third party. The Company currently purchases the BEOND tablets from various unaffiliated third parties. The Company also currently purchases each piece of the tablet equipment (consisting of cases and charging trays for the tablet) from a different unaffiliated third party. The Company currently does not have an alternative manufacturer of the tablet or an alternative device to the tablet or alternative manufacturing sources for its tablet equipment.

 

As of March 31, 2016 and December 31, 2015, approximately $82,000 and $127,000, respectively, were included in accounts payable or accrued expenses for equipment suppliers.

 

  10  
     

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations .

 

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

 

This report and the documents incorporated herein by reference, if any, contain “forward-looking statements” – that is statements related to future events, results, performance, prospects and opportunities, including statements related to our strategic plans and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry trends and our financial position. Forward-looking statements are based on information currently available to us, on our current expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions of management. Forward looking statements often contain words such as “expects,” “anticipates,” “could,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “would,” and similar expressions. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or contribute to such differences include (1) our ability to compete effectively within the highly competitive interactive games, entertainment and marketing services industries, (2) the impact of new products and technological change, especially in the mobile and wireless markets, on our operations and competitiveness, (3) our relationship with Buffalo Wild Wings, who together with its franchisees accounted for a significant portion of our revenues, (4) our ability to maintain an adequate supply of the tablet and related equipment used in our BEOND product line, (5) our ability to adequately protect our proprietary rights and intellectual property, (6) our ability to raise additional funds in the future, if necessary, on favorable terms, (7) our ability to significantly grow our subscription revenue and implement our other business strategies, (8) our ability to successfully and efficiently manage the design, manufacturing and assembly process of our BEOND tablet platform and (9) the other risks and uncertainties described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and described in other documents we file from time to time with the Securities and Exchange Commission, or SEC, including our Quarterly Reports on Form 10-Q. Readers are urged not to place undue reliance on the forward-looking statements contained in this report or incorporated by reference herein, which speak only as of the date of this report. Except as required by law, we do not undertake any obligation to revise or update any such forward-looking statement to reflect future events or circumstances.

 

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this report.

 

INTRODUCTION

 

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying unaudited condensed consolidated financial statements and notes, included in Item 1 of this Quarterly Report on Form 10-Q, to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. Our discussion is organized as follows:

 

  Overview and Highlights . This section provides a general description of our business and significant events and transactions that we believe are important in understanding our financial condition and results of operations.
     
  Critical Accounting Policies . This section provides a listing of our significant accounting policies, including any material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2016 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2015.
     
  Results of Operations . This section provides an analysis of our results of operations presented in the accompanying unaudited condensed consolidated statements of operations by comparing the results for the three months ended March 31, 2016 to the results for the three months ended March 31, 2015.
     
  Liquidity and Capital Resources . This section provides an analysis of our historical cash flows, as well as our future capital requirements.

 

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OVERVIEW AND HIGHLIGHTS

 

About Our Business and How We Talk About It

 

We deliver interactive entertainment and innovative dining technology to bars and restaurants in North America. Our customers license our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games, nationwide competitions, and self-service dining features including dynamic menus, touchscreen ordering and secure payment. Our platform can improve operating efficiencies, create connections among the players and venues and amplify guests’ positive experiences. Built on an extended network platform, our interactive entertainment system has historically allowed multiple players to interact at the venue, and now also enables competition between venues, referred to as massively multiplayer gaming. Our current tablet platform, which we refer to as Buzztime Entertainment On Demand, or BEOND, was first introduced as a pilot program in December 2012, was expanded commercially during 2013, and the expansion was scaled during 2014. We continue to enhance our network architecture and the BEOND tablet platform and player engagement paradigms. We also continue to support our legacy network product line, which we refer to as Classic.

 

We currently generate revenue by charging subscription fees for our service to our network subscribers, by leasing equipment (including tablets used in our BEOND tablet platform and the cases and charging trays for the tablets) to certain network subscribers, by hosting live trivia events, and by selling advertising aired on in-venue screens and as part of customized games. In 2014, we began offering pay-to-play premium content to certain customers via our BEOND tablet platform, such as paid arcade. During the second quarter of 2015, we made a strategic change in our premium content model by making the arcade offering available on both a free-to-consumer and pay-to-play basis. This change required us to delay the general availability of the pay-to-play arcade offering as we retooled its content, workflow and positioning. As a result, during 2015, we generated additional subscription fee revenue from those venues offering free-to-consumer arcade. We anticipate rolling out the new pay-to-play arcade offering during the second quarter of 2016.

 

Over 115 million games were played on our network during 2015, and as of March 31, 2016, approximately 49% of our network subscriber venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Old Chicago, Beef O’Brady’s, Buffalo Wings & Rings, Native New Yorker, Houlihans, Boston Pizza, and Arooga’s.

 

We own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, BEOND Powered by Buzztime and Play Along trademarks to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our property. Other trademarks are the property of their respective owners.

 

Unless otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us” and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers” or “customers” refer to hospitality venues that subscribe to our network service; (c) to “consumers” or “players” refer to the individuals that engage in our games, events, and entertainment experiences available at our customers’ venues and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant) of our customers at which our games, events, and entertainment experiences are available to consumers.

 

Recent Developments

 

Notice of non-compliance with NYSE MKT continued listing standard

 

As previously reported, in November 2015, we received a letter from the NYSE Regulation Inc. stating that we are not in compliance with Section 1003(a)(iii) of the NYSE MKT Company Guide because we reported stockholders’ equity of less than $6 million as of September 30, 2015 and had net losses in five of our most recent fiscal years ended December 31, 2014. In December 2015, we submitted a plan to NYSE Regulation advising of actions we have taken or will take to regain compliance with Section 1003(a)(iii) by May 13, 2017. In January 2016, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that extends through May 13, 2017 to regain compliance with Section 1003(a)(iii).

 

In April 2016, as previously reported, we received a letter from NYSE Regulation stating that we are not in compliance with Section 1003(a)(ii) of the Company Guide because we reported stockholders’ equity of less than $4 million as of December 31, 2015 and had net losses in three of our four most recent fiscal years ended December 31, 2015. As a result, we continue to be subject to the procedures and requirements of Section 1009 of the Company Guide. Because this instance of noncompliance is in addition to our current noncompliance with Section 1003(a)(iii) of the Company Guide, we are not required to submit a new compliance plan.

 

The listing of our common stock on the NYSE MKT is being continued during the plan period pursuant to an extension. The NYSE Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with Sections 1003(a)(iii) and 1003(a)(ii) by May 13, 2017 or if we do not make progress consistent with our plan during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate. See “PART II – OTHER INFORMATION ———— ITEM 1A. RISK FACTORS—Our common stock could be delisted or suspended from trading on the NYSE MKT if we fail to maintain compliance with continued listing criteria,” below.

 

  12  
     

 

East West Bank Credit Facility

 

In April 2015, we entered into a loan and security agreement with East West Bank, or the lender, pursuant to which, we could request advances in an aggregate outstanding amount at any time up to the lesser of $7,500,000, which we refer to as the revolving line, or an amount equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. In March 2016, we entered into an amendment (the “Amendment”) to the loan and security agreement. The loan and security agreement as amended by the Amendment is referred to as the “Amended Loan Agreement.”

 

Under the Amended Loan Agreement, through March 31, 2017, we may request advances in an aggregate outstanding amount at any time up to the lesser of (a) the revolving line or (b) the sum of $2,000,000 (which we refer to as the “sublimit”) plus the amount equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. On March 31, 2017, the sublimit becomes zero. If the aggregate amount of advances as of March 31, 2017 exceeds the lesser of the revolving line or the amount equal to our borrowing base, then we must pay the lender the amount of such excess.

 

Other changes to the original terms of the loan and security agreement made under the Amendment are:

 

●     Under the original terms of the loan and security agreement, our borrowing base was, as of the date of determination, an amount equal to the product of: (a) the average monthly recurring revenue for the immediately preceding three months; times (b) one plus our average churn rate for the immediately preceding three months (not to exceed zero); times (c) 300%. The manner in which our borrowing base is determined is unchanged under the Amendment, except that our monthly recurring revenue is limited to all recurring subscription revenue attributable to software that we sold or licensed and all recurring revenue relating to services we delivered and 50% of all revenue attributable to our “Stump” product line.

 

●     All advances under the revolving line are due on December 31, 2017 as opposed to April 14, 2018 as was the case under the original terms.

 

●     On or before March 31, 2017, advances will bear interest, at our option, at the rate of either (A) a variable rate per annum equal to the prime rate as set forth in The Wall Street Journal plus 2.75%, up from 1.25% under the original terms, or (B) at a fixed rate per annum equal to the LIBOR rate for the interest period for the advance plus 5.50%, up from 4.00% under the original terms. After March 31, 2017, the interest rates will revert to their original terms.

 

●     Our financial covenants with respect to our minimum adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, changed from a six-month measurement period to a three-month measurement period, beginning with the three-month period ending March 31, 2016, and, accordingly, the minimum adjusted EBITDA targets we are required to achieve over each of the three-month measurement periods were changed.

 

●     The Amendment provides for two additional financial covenants: (a) that we maintain a balance on deposit with the lender equal to (i) on March 31, 2017, 100% of the aggregate outstanding principal amount of the advances at such time, and (ii) at all times after March 31, 2017, an amount determined by the lender based on our 2017 financial projections; and (b) that the sum of the following be not less than $2,000,000: (i) the aggregate amount of unrestricted cash that we hold in accounts maintained with the lender and (ii) the amount available to us under the Amended Loan Agreement.

 

●     The aggregate amount that we owe under our current credit facility with our equipment lender at any time is no longer limited to $2,500,000.

 

●     With the lender’s consent, we may incur additional indebtedness with other equipment lenders of up to $2,000,000 in the aggregate for equipment financing.

 

Under the Amendment, the lender also waived an event of default that occurred because we did not achieve the specified churn rate required under the loan and security agreement for the month ended January 31, 2016.

 

Our Strategy and Current Highlights

 

During 2016, we continued to make progress on our 2016 priorities. Below are some highlights of current accomplishments and milestones achieved:

 

  Scale digital menu and payment functionality. We are heavily focused on delivering digital menu and payment functionality on the tablet platform, which we believe will improve the operational and marketing value of our product offering. After ensuring our tablet met the Payment Card Industry, or PCI, compliance standards applicable to our platform, we officially launched digital menu and payment functionality in a pilot test at Buffalo Wild Wings. A successful pilot will help provide a national reference for other chain customers in our sales pipeline that are also looking for this same functionality.
     
  Improve value and price for our “independent” customers. We are focused on increasing the value of our offering by improving game content and reducing the BEOND tablet platform cost to attract and retain quality independent customers. To help improve our value, we entered into promotional partnerships centered around our game content with the Washington Redskins, FanDuel, and Fandango that are each tied to driving guest traffic at our customer’s venues, increasing the guest community and improving loyalty. With respect to price, we continued to make progress on our hardware design and quality in order to reduce expense and to give us the ability to offer flexibility in our pricing for quality independent customers.
     
  Monetize the network. We intend to grow the consumer audience by engaging them more with improved entertainment experiences and providing premium content that we can monetize through direct payment. In addition to the free-to-consumer arcade offering we provide to certain customers, we launched a pay-to-play premium games lobby at a few of these sites, and we expect to scale to additional sites throughout 2016, which we expect to result in accretive revenue from the consumers who play on a pay-to-play basis. Additionally, we continued to leverage our network with on-tablet local and national advertising campaigns.

  

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CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (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, the provision for income taxes including the valuation allowance, stock-based compensation, bad debts, investments, impairment of software development costs, goodwill, fixed assets, intangible assets and contingencies, including the reserve for sales tax inquiries. We base our estimates on historical experience and on various other assumptions that we believe 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 from these estimates under different assumptions or conditions. 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.

 

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2016 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

RESULTS OF OPERATIONS

 

Three months ended March 31, 2016 compared to the three months ended March 31, 2015

 

We generated a net loss of $1,041,000 for the three months ended March 31, 2016 compared to a net loss of $2,263,000 for the three months ended March 31, 2015.

 

Revenue

 

The tables below summarize the type of revenue we generated for the three months ended March 31, 2016 and 2015:

 

    Three months ended March 31,              
    2016     2015              
    $     % of Total
Revenue
    $     % of Total
Revenue
    $
Change
    %
Change
 
Subscription revenue     4,374,000       79.8 %     4,200,000       73.3 %     174,000       4.1 %
Sales-type lease revenue     396,000       7.2 %     840,000       14.7 %     (444,000 )     -52.9 %
Other revenue     712,000       13.0 %     686,000       12.0 %     26,000       3.8 %
Total     5,482,000       100.0 %     5,726,000       100.0 %     (244,000 )     -4.3 %

 

Subscription revenue increased for the three months ended March 31, 2016 primarily due to a higher average revenue per site (which we refer to as ARPU) when compared to the same period in 2015. During the three months ended March 31, 2016, equipment lease revenue recognized under sales-type lease arrangements decreased due to fewer installations of our BEOND platform for certain customers under sales-type lease arrangements when compared to the same period in 2015. Equipment lease revenue (which has lower margins due to the cost we incur to purchase the equipment that we lease) is recognized when we lease BEOND equipment. The equipment lease revenue is a one-time payment that covers the lease of the equipment for three-years, after which the lessee may purchase the equipment for a nominal fee or lease new equipment. We expect the amount of equipment lease revenue to continue to decrease because the number of customers that have not converted from our legacy product line to the BEOND tablet platform with which we enter into sales-type lease arrangements has decreased. Other revenue increased for the three months ended March 31, 2016 due primarily to an increase in our live hosted trivia events.

 

Geographic breakdown of our network subscribers is as follows:

 

    Network Subscribers
as of March 31,
 
    2016     2015  
United States     2,742       2,733  
Canada     161       175  
Total     2,903       2,908  

 

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Direct Costs and Gross Margin

 

A comparison of direct costs and gross margin for the three months ended March 31, 2016 and 2015 is shown in the table below:

 

    For the three months ended
March 31,
 
    2016     2015  
Revenues   $ 5,482,000     $ 5,726,000  
Direct Costs     2,036,000       2,649,000  
Gross Margin   $ 3,446,000     $ 3,077,000  
                 
Gross Margin Percentage     63 %     54 %

 

The $613,000, or 23%, decrease in direct costs for the three months ended March 31, 2016 compared to the same period in 2015 was primarily due to decreased equipment expense of approximately $634,000 as a result of fewer installations of our BEOND platform for certain customers under sales-type lease arrangements as well as less scrap expense and repair expense related to the BEOND platform when compared to the same period in 2015.

 

The approximately 17% increase in gross margin for the three months ended March 31, 2016 was primarily related to the decreased equipment expense discussed above.

 

During 2015, due to our design and manufacturing process problems with the second generation tablet platform, we re-evaluated the strategy of managing the manufacture, design and supply chain in-house. Also during 2015, and as part of our re-evaluation, we out-sourced the supply-chain management and manufacturing of certain equipment related to our third generation BEOND tablet platform. The primary reasons for doing so were to reduce exposure to repair and maintenance expense related to, and to increase the long-term stability of the quality of, such equipment. In the fourth quarter of 2015, we began deploying the third generation platform, which includes EMV functionality for secure payment.

 

We may continue to experience challenges with our tablet platform equipment, and as a result, we may be required to recognize additional repair expense in the future.

 

Operating Expenses

 

    For the three months ended
March 31,
       
    2016     2015     Change  
Selling, general and administrative   $ 4,200,000     $ 5,162,000     $ (962,000 )
                         
Depreciation and amortization (non-direct)   $ 114,000     $ 121,000     $ (7,000 )

 

Selling, General and Administrative Expenses

 

The decrease in selling, general and administrative expenses for the three months ended March 31, 2016 was primarily due to lower headcount as a result of the restructuring that took place at the end of the second quarter of 2015, reflecting a reduction of approximately $573,000 in payroll and related expenses, as well as a reduction in marketing expenses of approximately $329,000 primarily related to market research activities that occurred during the first quarter of 2015, which were not repeated during the first quarter of 2016.

 

Depreciation and Amortization Expense

 

The decrease in depreciation and amortization expense for the three months ended March 31, 2016 compared to the same period in 2015 is primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.

 

  15  
     

 

Other Expense, Net

 

    For the three months ended
March 31,
    Increase in  
    2016     2015     expense, net  
Total other expense, net   $ (154,000 )   $ (43,000 )   $ (111,000 )

 

The increase in total other expense, net for the three months ended March 31, 2016 compared to the same period in 2015 is primarily due to higher long-term debt balances, resulting in an increase in interest expense, and increased foreign currency exchange losses related to the operations of our Canadian subsidiary.

 

Income Taxes

 

    For the three months ended
March 31,
 
    2016     2015  
Provision for income taxes   $ (19,000 )   $ (14,000 )

 

We expect to incur state income tax liability in 2016 related to our U.S. operations. We also expect to pay income taxes in Canada due to profitability of our Canadian subsidiary. We have established a full valuation allowance for substantially all deferred tax assets, including our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets.

 

Adjusted EBITDA—Consolidated Operations

 

To supplement our consolidated financial disclosures and statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States (GAAP), we use certain non-GAAP financial measures, including adjusted earnings before interest, taxes, depreciation and amortization, or Adjusted EBITDA. We compute Adjusted EBITDA by excluding from net profit (or loss) the impact of the following: (a) depreciation and amortization expense; (b) interest expense, net; (c) provision for income taxes; (d) non-cash stock-based compensation expense; (e) other non-cash expenses and charges; and (f) to the extent approved by our lender, other one-time charges and any losses arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business. We use this non-GAAP financial measure when evaluating our financial results as well as for internal resource management, planning and forecasting purposes. This non-GAAP financial measure is not intended to represent a measure of performance in accordance with GAAP. Nor should this non-GAAP financial measure be considered as an alternative to statements of cash flows as a measure of liquidity. This non-GAAP financial measure is included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation and amortization charges in comparison to their net income or loss calculated in accordance with GAAP. The following table reconciles our consolidated net loss per GAAP to Adjusted EBITDA:

 

    For the three months ended
March 31,
 
    2016     2015  
Net loss per GAAP   $ (1,041,000 )   $ (2,263,000 )
Interest expense, net     127,000       102,000  
Income tax provision     19,000       14,000  
Depreciation and amortization     757,000       701,000  
EBITDA     (138,000 )     (1,446,000 )
                 
Adjustments to EBITDA:                
Non-cash stock based compensation     113,000       99,000  
Excess and obsolete site equipment to be installed expense     25,000       163,000  
Other one-time charges     73,000       52,000  
Adjusted EBITDA   $ 73,000     $ (1,132,000 )

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2016, we had cash and cash equivalents of $3,549,000 compared to cash and cash equivalents of $3,223,000 as of December 31, 2015.

 

  16  
     

 

In April 2015, we entered into a loan and security agreement with East West Bank, which was amended in March 2016. We refer to the loan and security agreement, as amended, as the “Amended Loan Agreement.” Under the original terms of this agreement, we could request advances in an aggregate outstanding amount at any time up to the lesser of $7,500,000, which we refer to as the revolving line, or an amount equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. Under the Amended Loan Agreement, through March 31, 2017, we may request advances in an aggregate outstanding amount at any time up to the lesser of (a) the revolving line or (b) the sum of $2,000,000 (which we refer to as the “sublimit”) plus the amount equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. On March 31, 2017, the sublimit becomes zero. If the aggregate amount of advances as of March 31, 2017 exceeds the lesser of the revolving line or the amount equal to our borrowing base, then we must pay the lender the amount of such excess. The manner in which our borrowing base is determined is unchanged under the Amended Loan Agreement, except that our monthly recurring revenue is limited to all recurring subscription revenue attributable to software that we sold or licensed and all recurring revenue relating to services we delivered and 50% of all revenue attributable to our “Stump” product line. So long as there is no event of default, we may make a one-time request to increase the revolving line by up to $2,500,000, which the lender may accept or decline. All advances under this credit facility are due on December 31, 2017 as opposed to April 14, 2018 as was the case under the original terms.

 

Also under the Amended Loan Agreement, the aggregate amount that we owe under our current credit facility with our equipment lender at any time is no longer limited to $2,500,000, and with the lender’s consent, we may incur additional indebtedness with other equipment lenders of up to $2,000,000 in the aggregate for equipment financing.

 

Under the Amended Loan Agreement, the amount of our borrowing base is calculated, in part, based on our monthly recurring revenue from all recurring subscription revenue attributable to software that we sold or licensed and all recurring revenue relating to services we delivered and 50% of all revenue attributable to our “Stump” product line. Because the amount of our monthly recurring revenue and how much each source contributes to it will change from month to month, our borrowing base will fluctuate accordingly. As of March 31, 2016, we had borrowed $6,500,000 under this credit facility, and we had approximately $103,000 available to borrow as of that date based on our borrowing base calculated as of that date.

 

We have another financing arrangement under which we may borrow up to $9,853,000 for the purchase of certain capital equipment. Through March 31, 2016, we borrowed approximately $9,188,000. In April 2015, we used approximately $3,381,000 of the proceeds received from the East West Bank credit facility to pay down a portion of the principal amount we borrowed under this financing arrangement, accrued interest and a prepayment fee. As of March 31, 2016, approximately $2,017,000 of principal remained outstanding under this financing arrangement, and approximately $551,000 was available for borrowing.

 

We believe our existing cash and cash equivalents and the availability on our credit facilities will be sufficient to meet our operating cash requirements and to fulfill our debt obligations for at least the next twelve months. In order to increase the likelihood that we will be able to successfully execute our operating and strategic plan and to position the company to better take advantage of market opportunities for growth, we are evaluating additional financing alternatives. If our cash and cash equivalents are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce operational cash uses or seek financing. Any actions we may undertake to reduce planned capital purchases or reduce expenses may be insufficient to cover shortfalls in available funds. If we require additional capital, we may be unable to secure additional financing on terms that are acceptable to us, or at all.

 

Working Capital

 

As of March 31, 2016, we had working capital (current assets in excess of current liabilities) of $2,292,000 compared to working capital of $3,988,000 as of December 31, 2015. The following table shows the change in our working capital from December 31, 2015 to March 31, 2016.

 

  17  
     

 

    Increase
(Decrease)
 
Working capital as of December 31, 2015   $ 3,988,000  
Changes in current assets:        
Cash and cash equivalents     326,000  
Accounts receivable, net of allowance     (150,000 )
Site equipment to be installed     (227,000 )
Prepaid expenses and other current assets     76,000  
Change in total current assets     25,000  
Changes in current liabilities:        
Accounts payable     (40,000 )
Accrued compensation     (83,000 )
Accrued expenses     (23,000 )
Sales taxes payable     (63,000 )
Income taxes payable     1,000  
Current portion of long-term debt     1,972,000  
Current portion of obligations under capital leases     1,000  
Deferred revenue     61,000  
Other current liabilities     (105,000 )
Change in total current liabilities     1,721,000  
Net change in working capital     (1,696,000 )
Working capital as of March 31, 2016   $ 2,292,000  

 

Cash Flows

 

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

 

    For the three months ended
March 31,
 
    2016     2015  
Cash provided by (used in):                
Operating activities   $ (504,000 )   $ 995,000  
Investing activities     (276,000 )     (437,000 )
Financing activities     1,053,000       (632,000 )
Effect of exchange rates     53,000       52,000  
Net increase (decrease) in cash and cash equivalents   $ 326,000     $ (22,000 )

 

Net cash (used in) provided by operating activities. The $1,499,000 increase in cash used in operating activities was due to a net decrease in assets and liabilities of $2,747,000 during the three months ended March 31, 2016 compared to the same period in 2015, primarily related to a large past-due receivable payment being received in the first quarter of 2015, offset by decreased net loss of $1,248,000, after giving effect to adjustments made for non-cash transactions.

 

Our inventory levels of site equipment to be installed decreased to $3,763,000 as of March 31, 2016, from $3,990,000 as of December 31, 2015, reflecting released product as part of our conversion of existing sites to the BEOND platform. Since we are supporting multiple generations of the BEOND tablet platforms, we have seen an increase in the complexity of our supply chain. We anticipate this complexity will remain with us for the 2016 fiscal year and thus will affect retaining a higher level of inventory for site equipment to be installed.

 

Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $64,000 to $2,737,000 for the three months ended March 31, 2016 from $2,801,000 during the same period in 2015.

 

Our primary source of cash is cash we generate from customers. Cash received from customers decreased $2,011,000 to $5,949,000 for the three months ended March 31, 2016 from $7,960,000 during the same period in 2015. This decrease was primarily a result of receiving a large past-due receivable during the three months ended March 31, 2015, and to a lesser extent, decreased revenue during the three months ended March 31, 2016 when compared to the same period in 2015.

 

Net cash used in investing activities. The $161,000 decrease in cash used in investing activities was primarily due to a decrease in capital expenditures and software development expenditures.

 

  18  
     

 

Net cash provided by (used in) financing activities. The $1,685,000 increase in cash provided by financing activities is primarily attributable borrowing an additional $2,040,000 of long-term debt compared to the amount of long-term debt borrowed during the same period in 2015, offset by paying an additional $336,000 of long-term debt compared to the amount of long-term debt payments made during the same period in 2015.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Refer to Note 6 of the condensed consolidated financial statements, “Recent Accounting Pronouncements.”

 

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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk .

 

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

 

Item 4. Controls and Procedures .

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, our management evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, or the Exchange Act) as to whether such disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on our evaluation, our principal executive officer and principal financial officer concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

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

 

  19  
     

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings .

 

None

 

Item 1A. Risk Factors .

 

An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2015 together with all other information contained or incorporated by reference in this report before you decide to invest in our common stock. If any of the risks described in this report or in our annual report occur, our business, financial condition, results of operations and our future growth prospects could be materially and adversely affected. Under these circumstances, the trading price of our common stock could decline, and you may lose all or part of your investment. As of the date of this report, we do not believe that there have been any material changes to the risk factors previously disclosed in our annual report other than as follows:

 

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

 

As previously reported in November 2015, we are not in compliance with NYSE MKTS LLC’s (“NYSE MKT”) continued listing standards. Specifically, we are not in compliance with Section 1003(a)(iii) of the NYSE MKT Company Guide (the “Company Guide”) because we reported stockholders’ equity of less than $6 million as of September 30, 2015 and had net losses in five of our most recent fiscal years ended December 31, 2014. As a result, we became subject to the procedures and requirements of Section 1009 of the Company Guide. We were required to submit a plan to NYSE Regulation, Inc. advising of actions we have taken or will take to regain compliance with Section 1003(a)(iii) of the Company Guide by May 13, 2017. We submitted such a plan in December 2015. In January 2016, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that extends through May 13, 2017 to regain compliance with Section 1003(a)(iii).

 

In April 2016, we received a letter from NYSE Regulation stating that we are not in compliance with Section 1003(a)(ii) of the Company Guide because we reported stockholders’ equity of less than $4 million as of December 31, 2015 and had net losses in three of our four most recent fiscal years ended December 31, 2015. As a result, we continue to be subject to the procedures and requirements of Section 1009 of the Company Guide. Because this instance of noncompliance is in addition to our current noncompliance with Section 1003(a)(iii) of the Company Guide, we are not required to submit a new compliance plan.

 

The listing of our common stock on the NYSE MKT is being continued during the plan period pursuant to an extension. The NYSE Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with Sections 1003(a)(ii) and 1003(a)(iii) by May 13, 2017 or if we do not make progress consistent with our plan during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate.

 

Under Section 1003(a)(i) of the Company Guide, the NYSE MKT will normally consider suspending dealings in, or removing from the list, securities of an issuer which has stockholders’ equity of less than $2 million if such issuer has sustained losses from continuing operations and/or net losses in two of its three most recent fiscal years. We had net losses in two of our three most recent fiscal years ended December 31, 2015. While our stockholders’ equity as of March 31, 2016 is greater than $2 million, if we continue to recognize losses and do not take other measures that would increase our stockholders’ equity, we could potentially have less than $2 million of stockholders’ equity and become out of compliance with Section 1003(a)(i), as well.

 

Under Section 1003(f)(v) of the Company Guide, the NYSE MKT will normally consider suspending dealings in, or delisting, common stock from the exchange if the common stock is selling for a substantial period of time at a low price per share and if the issuer fails to effect a reverse split of such stock within a reasonable time after being notified that NYSE MKT deems such action to be appropriate under all the circumstances. NYSE Regulation has informed us that it deems it appropriate for us to effect a reverse stock split or other action within a reasonable amount of time, or become subject to the continued listing evaluation and follow-up procedures set forth in Section 1009 of the Company Guide, which could, among other things, result in the initiation of delisting proceedings. Moreover, the NYSE MKT can take accelerated delisting action if our common stock trades at levels viewed to be abnormally low. In light of the foregoing, at our 2016 annual meeting of stockholders, we expect to ask that our stockholders approve an amendment to our restated certificate of incorporation to give effect to, first, a reverse split of our outstanding common stock at an exchange ratio of 1-for-100 and, then, immediately following such reverse split, a forward split of our outstanding common stock at a ratio that is not less than 2-for-1 nor greater than 4-for-1, with the final ratio to be selected by our board of directors in its sole discretion (“Reverse/Forward Split”). Our board of directors believes that effecting the Reverse/Forward Split, could, in certain circumstances, be an effective means of addressing the concern of NYSE Regulation regarding the low trading price of our common stock.

 

  20  
     

 

If our stockholders approve the amendment to our restated certificate of incorporation described above, and if we were to effect the Reverse/Forward Split, there can be no assurance that it will result in an increase in the trading price of our common stock above the price that the NYSE MKT views as a low trading price per share, or that even if the trading price of our common stock does increase above such price, that the increased trading price will be sustained for any period of time, all of which depends on many factors, including our performance, prospects and other factors that may be unrelated to the number of shares outstanding. Moreover, even if the trading price of our common stock does increase above the price that the NYSE MKT views as a low price per share, there can be no assurance that we will continue to meet the other NYSE MKT listing requirements. Immediately following the effective date of the Reverse/Forward Split, if effected, we will have fewer outstanding shares, which may reduce the trading liquidity of our common stock. Accordingly, the total market capitalization of our common stock after the Reverse/Forward Split may be lower than it was before the Reverse/Forward Split. In addition, if effected, the Reverse/Forward Split may result in some stockholders owning “odd lots” of less than 100 shares of common stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in “round lots” of even multiples of 100 shares. The Reverse/Forward Split, if effected, will not change the number of authorized shares of our common stock. However, upon the effectiveness of the Reverse/Forward Split, the number of authorized shares of our common stock that are not issued or outstanding would increase due to the reduction in the number of shares of our common stock issued and outstanding as a result of the Reverse/Forward Split. Our board of directors can issue the authorized shares of our common stock (or equity securities convertible into or exchangeable or exercisable for such shares) from time to time as it may deem advisable and without stockholder approval. Future issuances of our common stock would have a dilutive effect on the earnings or loss per share, book value per share, voting power and percentage interest of the holders of our then-outstanding shares of capital stock.

 

We are exploring options to address our non-compliance with the NYSE MKT continued listing standards, in particular, options to address our low stockholders’ equity. We can give no assurances that we will be able to address our non-compliance with the NYSE MKT continued listing standards or, even if we do, that we will be able to maintain the listing of our common stock on the NYSE MKT. Our common stock could be delisted because we do not make progress consistent with our plan during the plan period, because we do not regain compliance with Sections 1003(a)(ii) and 1003(a)(iii) by May 13, 2017, because we cannot successfully resolve our low trading price within a reasonable time, or because we fall below compliance with other NYSE MKT listing standards, including those described above. 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 MKT 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 a loss of 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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3. Defaults Upon Senior Securities.

 

None

 

  21  
     

 

Item 4. Mine Safety Disclosures.

 

Not Applicable

 

Item 5. Other Information .

 

None

 

Item 6. Exhibits.

 

Exhibit   Description   Incorporated By Reference
         
3.1   Restated Certificate of Incorporation   Exhibit to Form 10-Q filed on August 14, 2013
         
3.2   Bylaws of the Company, as amended   Exhibit to Form 10-K filed on March 26, 2008
         
10.1   First Amendment to Loan and Security Agreement and Waiver by and between East West Bank and the registrant dated March 10, 2016.   Filed herewith
         
10.2*   NTN Buzztime, Inc. Executive Incentive Plan for Eligible Employees of NTN Buzztime, Inc. Fiscal Year 2016   Filed herewith
         
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
         
32.1#   Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Furnished herewith
         
32.2#   Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Furnished herewith
         
101.INS   XBRL Instance Document   Filed herewith
         
101.SCH   XBRL Taxonomy Extension Schema Document   Filed herewith
         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   Filed herewith
         
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document   Filed herewith
         
101.LAB   XBRL Taxonomy Extension Label Linkbase Document   Filed herewith

 

 

*   Management Contract or Compensatory Plan
         
#   This certification is being furnished solely to accompany this report pursuant to U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated herein by reference into any filing of the Company whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

  22  
     

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  NTN BUZZTIME, INC.
     
Date: May 9, 2016 By: /s/ Allen Wolff
    Allen Wolff
    Chief Financial Officer and Executive Vice President
    (on behalf of the Registrant, and as its Principal Financial Officer)

 

  23  
     

 

Exhibit A

 

LOAN AND SECURITY AGREEMENT

 

by and between

 

EAST WEST BANK

 

and

 

NTN BUZZTIME, INC.

 

Dated as of April 14, 2015

 

Loan No. 3470001226

 

 
 

 

TABLE OF CONTENTS

 

  Page
   
1.   DEFINITIONS AND CONSTRUCTION 1
1.1   Definitions 1
1.2   Accounting Terms 1
2.   LOAN AND TERMS OF PAYMENT. 1
2.1   Credit Extensions 1
2.2   Interest Rates, Payments, and Calculations 3
2.3   Crediting Payments 4 5
2.4   Fees 5
2.5   Additional Costs 5
2.6   Term 5 6
3.   CONDITIONS OF LOANS. 5 6
3.1   Conditions Precedent to Initial Credit Extension 5 6
3.2   Conditions Precedent to all Credit Extensions 6 7
4.   CREATION OF SECURITY INTEREST. 7
4.1   Grant of Security Interest 7
4.2   Perfection of Security Interest 7
4.3   Field Exams 7 8
4.4   Collateral Collections 7 8
5.   REPRESENTATIONS AND WARRANTIES. 8
5.1   Due Organization and Qualification 8
5.2   Due Authorization; No Conflict 8
5.3   Collateral. 8
5.4   Intellectual Property Collateral 8
5.5   Name; Location of Chief Executive Office 8 9
5.6   Litigation 8 9
5.7   Accuracy of Financial Statements 9
5.8   Solvency, Payment of Debts 9
5.9   Compliance with Laws and Regulations 9
5.10   Subsidiaries 9
5.11   Government Consents 9
5.12   Material Adverse Effect 9
5.13   Inbound Licenses 9
5.14   Full Disclosure 9 10
6.   AFFIRMATIVE COVENANTS. 10
6.1   Good Standing and Government Compliance 10
6.2   Financial Statements, Reports, Certificates 10
6.3   Inventory; Returns 11
6.4   Taxes 11
6.5   Insurance. 11
6.6   Primary Depository 11 12
6.7   Financial Covenants 11 12
6.8   Registration of Intellectual Property Rights. 12 13
6.9   Consent of Inbound Licensors 13
6.10   Creation/Acquisition of Subsidiaries 13 14
6.11   Further Assurances 13 14

 

 
 

 

TABLE OF CONTENTS continued

 

7.   NEGATIVE COVENANTS. 13 14
7.1   Dispositions 13 14
7.2   Change in Name, Location, Executive Office, or Executive Management; Change in Business; Change in Fiscal Year; Change in Control 13 14
7.3   Mergers or Acquisitions 14
7.4   Indebtedness 14
7.5   Encumbrances 14 15
7.6   Distributions 14 15
7.7   Investments 14 15
7.8   Transactions with Affiliates 14 15
7.9   Subordinated Debt 15
7.10   Inventory and Equipment 15
7.11   No Investment Company; Margin Regulation 15
8.   EVENTS OF DEFAULT. 15 16
8.1   Payment Default 15 16
8.2   Covenant Default. 15 16
8.3   Defective Perfection 15 16
8.4   [Reserved 15 16
8.5   Attachment 15 16
8.6   Insolvency 16
8.7   Other Agreements 16
8.8   Subordinated Debt 16 17
8.9   Judgments 16 17
8.10   Misrepresentations 16 17
8.11   Guaranty 16 17
9.   BANK’S RIGHTS AND REMEDIES. 16 17
9.1   Rights and Remedies 16 17
9.2   Power of Attorney 18
9.3   Accounts Collection 18 19
9.4   Bank Expenses 18 19
9.5   Bank’s Liability for Collateral 18 19
9.6   No Obligation to Pursue Others 18 19
9.7   Remedies Cumulative 19
9.8   Demand; Protest 19
10.   NOTICES. 19
11.   CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER; JUDICIAL PREFERENCE. 19 20
11.1   Governing Law and Venue 19 20
11.2   JURY TRIAL WAIVER 20
11.3   JUDICIAL REFERENCE PROVISION 20
12.   GENERAL PROVISIONS. 20 21
12.1   Successors and Assigns 20 21
12.2   Indemnification 20 21
12.3   Time of Essence 20 21
12.4   Severability of Provisions 21
12.5   Correction of Loan Documents 21
12.6   Amendments in Writing, Integration 21
12.7   Counterparts 21
12.8   Survival 21
12.9   Confidentiality 21 22
12.10   Patriot Act 21 22
12.11   No Consequential Damages 21 22

 

EXHIBITS    
A - Definitions
B - Collateral Description
C - Loan Advance/Paydown Request Form
D - Form of Borrowing Base Certificate
E - Form of Compliance Certificate
F - Form of LIBOR Loan Continuation Certificate

 

DISCLOSURE SCHEDULES

 

Permitted Indebtedness (Exhibit A)

Permitted Investments (Exhibit A)

Permitted Liens (Exhibit A)

Prior Names (Section 5.5)

Litigation (Section 5.6)

Inbound Licenses (Section 5.13)

Inventory and Equipment (Section 7.10)

Excluded Equipment (Exhibit B)

 

    i  
 

 

This LOAN AND SECURITY AGREEMENT (this “ Agreement ”), dated as of April 14, 2015, is entered into by and between EAST WEST BANK, a California banking corporation (“ Bank ”), and NTN BUZZTIME, INC., a Delaware corporation (“ Borrower ”).

 

RECITALS

 

Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will extend credit to Borrower and Borrower will repay the amounts owing to Bank.

 

AGREEMENT

 

The parties agree as follows:

 

1. DEFINITIONS AND CONSTRUCTION .

 

1.1 Definitions. As used in this Agreement, capitalized terms shall have the respective meanings set forth on Exhibit A. Any term used in the Code and not defined herein shall have the meaning given to such term in the Code.

 

1.2 Accounting Terms. Any accounting term not specifically defined on Exhibit A shall be construed in accordance with GAAP, and all financial covenant calculations shall be made in accordance with GAAP. The term “financial statements” shall include the accompanying notes and schedules.

 

2. LOAN AND TERMS OF PAYMENT.

 

2.1 Credit Extensions

 

(a) Promise to Pay . Borrower hereby unconditionally promises to pay to Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower, together with accrued and unpaid interest on the unpaid principal amount of such Credit Extensions at the rates set forth herein, and all other Obligations owing by Borrower to Bank, in each case as and when due in accordance with the terms hereof.

 

(b) Advances Under Revolving Line .

 

(i) Amount; Principal and Interest Payments . Subject to and upon the terms and conditions of this Agreement, Borrower may request Advances in an aggregate outstanding amount at any time not to exceed the amount (the “Availability Amount”), which is the lesser of (A) the Revolving Line less the aggregate outstanding principal amount of the Advances made under this Section 2.1(b) , or (B) the result of (i) the Borrowing Base less plus (ii) the Non-Formula Sublimit Amount in effect at such time less (iii) the aggregate outstanding principal amount of the Advances made under this Section 2.1(b) . Amounts borrowed pursuant to this Section 2.1(b) may be repaid and reborrowed at any time prior to the Revolving Line Maturity Date. On the Revolving Line Maturity Date, all Advances under this Section 2.1(b) shall be immediately due and payable. If an Overadvance occurs on any date or for any reason, Borrower shall immediately pay to Bank, upon Bank’s election and demand, in cash, the amount of such Overadvance, which Bank shall use to repay the outstanding Advances. For the avoidance of doubt, if any Overadvance exists on the Non-Formula Sublimit Maturity Date as a result of the Non-Formula Sublimit Amount reducing to $0, Borrower shall immediately pay to Bank the total amount of the Overadvance. Borrower may prepay Advances under this Section 2.1(b) without penalty or premium; provided that the prepayment of any Advance that constitutes a LIBOR Loan shall be subject to Section 2.2(e)(iii) . Interest shall accrue from the date of each Advance and until such Advance is repaid at the rate specified in Section 2.2(a)(i) and shall be payable in accordance with Section 2.2(c) . Notwithstanding the foregoing, in respect of calculating the Availability Amount as of any date in Borrower’s 2017 fiscal year, the components of clause (B) of such definition shall be determined by Bank no later than January 30, 2017 based on the financial projections delivered pursuant to Section 6.2(a) in respect of Borrower’s 2017 fiscal year.

 

    1  
 

 

(ii) Form of Advance Request . Whenever Borrower desires an Advance under this Section 2.1(b) , Borrower will notify Bank by facsimile transmission, telephone or email no later than 3:00 p.m. Pacific time (12:00 p.m. Pacific time for wire transfers) (A) on the Business Day that the Advance is to be made if the Advance will be a Prime Rate Advance or (B) at least 3 Business Days prior to the day the Advance is to be made if the Advance will be a LIBOR Loan. Each such notification shall be promptly confirmed by a Loan Advance/Paydown Request Form. Bank is authorized to make Advances under this Agreement based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank’s discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1(b) to such deposit account or Obligation as Borrower specifies.

 

(iii) Letters of Credit . Subject to availability under the Revolving Line and to the other terms and conditions of this Agreement, at any time and from time to time from the date hereof through the Business Day immediately prior to the Revolving Line Maturity Date, Bank shall issue for the account of Borrower such Letters of Credit denominated in Dollars as Borrower may request by delivering to Bank a duly executed letter of credit application on Bank’s standard form. The amount available to be drawn under each such Letter of Credit shall reduce dollar-for-dollar the amount of Advances available under the Revolving Line, and any drawn but unreimbursed amount under any Letter of Credit shall be charged as an Advance. All Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank’s standard form application and letter of credit agreement. Borrower agrees to execute and deliver to Bank any further documentation in connection with any Letter of Credit as Bank may reasonably request. Borrower will pay any standard issuance and other fees that Bank notifies Borrower it will charge for issuing and processing Letters of Credit.

 

(iv) Cash Collateralization of Obligations Extending Beyond Maturity. If Borrower has not secured to Bank’s satisfaction Borrower’s obligations with respect to any Letter of Credit by the Revolving Line Maturity Date, then, effective as of such date, the balance in any deposit accounts of Borrower held by Bank and the certificates of deposit or time deposit accounts issued by Bank in Borrower’s name (and any interest paid thereon or proceeds thereof, including any amounts payable upon the maturity or liquidation of such certificates or accounts), shall automatically secure such obligations to the extent of the then continuing or outstanding and undrawn Letters of Credit. Borrower authorizes Bank to hold such balances in pledge and to decline to honor any drafts thereon or any requests by Borrower or any other Person to pay or otherwise transfer any part of such balances for so long as the Letters of Credit are outstanding or continue. If the aggregate balance held in such accounts on the Revolving Line Maturity Date is insufficient to secure all of Borrower’s obligations with respect to any Letter of Credit on the Revolving Line Maturity Date, then Borrower shall pledge to Bank, and grant Bank a security interest in, such additional cash as Bank may request to secure such obligations fully and in cash.

 

(c) Request for Optional Increase .

 

(i) Provided there exists no Event of Default, upon notice to Bank, Borrower may on a one-time basis, request an increase in the Revolving Line by an amount not exceeding $2,500,000 in the aggregate.

 

(ii) Bank’s Election to Increase; Effective Date . Bank shall notify Borrower within 10 Business Days whether or not it agrees to increase the Revolving Line and, if so, by what amount it agrees to do so and shall determine the effective date of such increase (the “ Increase Effective Date ”); provided that if Bank does not respond within 10 Business Days it shall be deemed to have declined to increase the Revolving Line.

 

(iii) Conditions to Effectiveness of Increase . The obligation of Bank to increasing the Revolving Line is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:

 

    2  
 

 

(1) a certificate dated as of the Increase Effective Date signed by a Responsible Officer of Borrower (x) certifying and attaching the resolutions adopted by Borrower approving or consenting to such increase, (y) certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Article 5 and the other Loan Documents are true and correct on and as of the Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, (B) no Event of Default exists, and (C) Borrower is in pro forma compliance with financial covenants set forth in Section 6.7 hereof.

 

(2) such other agreements, instruments and information (including supplements or modification to this Agreement or the other Loan Documents executed by Borrower as Bank reasonably deems necessary in order to document the increase and to protect preserve and continue the perfection and priority of the liens, security interests, rights and remedies of bank hereunder and under the other Loan Documents in light of such increase.

 

(3) all costs and expenses incurred by Bank in connection with the negotiations regarding, and the preparation, execution and delivery of all agreement and instruments executed in connection with such increase and any additional facility fee required pursuant to Section 2.4 hereof.

 

2.2 Interest Rates, Payments, and Calculations .

 

(a) Interest Rates . Except as set forth in Section 2.2(b), the all Advances shall bear interest, on the outstanding daily balance thereof, at Borrower’s option, either (i) on or before the Non-Formula Sublimit Maturity Date (A) if such Advance is a Prime Rate Loan, at a variable rate per annum equal to the Prime Rate plus 2.75% or (B) if such Advance is a LIBOR Loan, at a fixed rate per annum equal to the LIBOR-Based Rate for the Interest Period applicable to such Advance plus 5.50% and (ii) at all times after the Non-Formula Sublimit Maturity Date (A) if such Advance is a Prime Rate Loan, at a variable rate per annum equal to the Prime Rate plus 1.25% or (B) if such Advance is a LIBOR Loan, at a fixed rate per annum equal to the LIBOR-Based Rate for the Interest Period applicable to such Advance plus 4.00%.

 

(b) Default Rate . All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to 2 percentage points above the respective interest rates applicable to such Obligations immediately prior to the occurrence of the Event of Default.

 

(c) Payments . Interest hereunder on each Prime Rate Loan shall be due and payable on the last calendar day of each month during the term hereof, commencing on April 30, 2015. Interest hereunder on each LIBOR Loan shall be due and payable on the last day of each Interest Period applicable to such LIBOR Loan; provided, however, in the case of any Interest Period greater than 3 months in duration, interest shall be payable at 3 month intervals after the commencement of the applicable Interest Period and on the last day of such Interest Period. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower’s deposit accounts or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.

 

(d) Changes in Prime Rate; Computation of Interest . If the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased, effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed.

 

(e) Additional Provisions Regarding LIBOR Loans .

 

(i) Borrower may from time to time submit in writing a request that any existing LIBOR Loan continue for an additional Interest Period or convert to a Prime Rate Loan. Each written request for a continuation of a LIBOR Loan shall be substantially in the form of a LIBOR Loan Continuation Certificate substantially in the form of Exhibit F , with appropriate insertions, which shall be duly executed by a Responsible Officer. Each written request for a conversion from a LIBOR Loan to a Prime Rate Loan shall be substantially in the form of the Payment/Advance Form attached as Exhibit C . Subject to the terms and conditions contained herein, after Bank’s receipt of such a request from Borrower, such LIBOR Loan shall continue or convert, as the case may be provided that:

 

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i. In the case of any request for the continuation of a LIBOR Loan, no Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists;

 

ii. no party hereto shall have sent any notice of termination of this Agreement;

 

iii. Borrower shall have complied with such reasonable and customary procedures as Bank has established from time to time for requests for LIBOR Loans and provided written notice thereof to Borrower at least 1 Business Day prior to the date of the request for such LIBOR Loan;

 

iv. the amount of a LIBOR Loan shall be at least $500,000;

 

v. Bank shall have determined that the Interest Period or LIBOR is available to Bank as of the date of the request for such LIBOR Loan; and

 

vi. such request for a LIBOR Loan shall be delivered to Bank by 3:00 p.m. Pacific time at least 3 Business Days prior to the proposed date of the requested LIBOR Loan.

 

Any request by Borrower to continue any existing LIBOR Loan shall be irrevocable. Notwithstanding anything to the contrary contained herein, Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable LIBOR market to fund any LIBOR Loan, but the provisions hereof shall be deemed to apply as if Bank had purchased such deposits to fund such LIBOR Loan.

 

(ii) At no time shall more than five (5) different Interest Periods be outstanding under this Agreement.

 

(iii) Any LIBOR Loan shall automatically continue for the same Interest Period upon the last day of the applicable Interest Period, unless Bank has received and approved a complete and proper request to continue such LIBOR Loan for a different Interest Period by 3:00 p.m. Pacific time on the last day of the applicable Interest Period in accordance with the terms hereof. Borrower shall pay to Bank, upon demand by Bank, any amounts required to compensate Bank for any loss, cost or expense incurred by Bank, as a result of the conversion of any LIBOR Loan to a Prime Rate Loan on a day that is not the last day of the applicable Interest Period.

 

(iv) If for any reason (including voluntary or mandatory prepayment or acceleration), Bank receives all or part of the principal amount of a LIBOR Loan prior to the last day of the Interest Period for such LIBOR Loan, Borrower shall on demand by Bank, pay Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period or term exceeds (ii) the interest that would have been recoverable by Bank by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period or term at the interest rate determined by Bank.

 

(v) If Bank shall have determined in good faith that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining LIBOR for such Interest Period, Bank shall give email or telephonic notice (promptly confirmed in writing) thereof to Borrower. If such notice is given (x) Borrower may revoke any Payment/Advance Form or LIBOR Loan Continuation Certificate then submitted by it, and (y) if Borrower does not revoke such notice, Bank shall make, convert or continue the Advance, as proposed by the Borrower, in the amount specified in the applicable Payment/Advance Form or LIBOR Loan Continuation Certificate, but such Advance shall be made, converted or continued as a Prime Rate Loan. Until such notice has been withdrawn by Bank, no further LIBOR Loans shall be made or continued as such, nor shall Borrower have the right to convert Advances to LIBOR Loans.

 

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2.3 Crediting Payments . Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, Bank shall have the right, in its sole discretion, to immediately apply any wire transfer of funds, check, or other item of payment Bank may receive to conditionally reduce Obligations, but such applications of funds shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.

 

2.4 Fees . Borrower shall pay to Bank the following:

 

(a) Total Facility Fee . On the Closing Date, a fee equal to $37,500 (i.e., 0.50% of the sum of the Revolving Line), which shall be non-refundable; Borrower has paid to Bank a deposit of Ten Thousand Dollars ($10,000) (the “Good Faith Deposit”) to initiate Bank’s due diligence review process. Any portion of the Good Faith Deposit not utilized to pay Bank Expenses will be applied to the Facility Fee. Additional facility fees will be due and payable on the Increase Effective Date each time the amount of the Revolving Line is increased pursuant to Section 2.1(c) hereof, with each such additional fee to be in an amount equal to the product of (x) 0.50% of the increase in the Revolving Line times (y) the quotient of (A) the number of days remaining between such Increase Effective Date and the Revolving Maturity Date, divided by (B) 1,095.

 

(b) Letter of Credit Fees . Bank’s customary fees and expenses for the issuance or renewal of Letters of Credit, upon the issuance of each Letter of Credit, each anniversary of the issuance of such Letter of Credit, and each renewal of such Letter of Credit; and

 

(c) Bank Expenses . On the Closing Date, all Bank Expenses incurred through the Closing Date, and, after the Closing Date, all Bank Expenses, as and when they become due.

 

(d) Unused Fee . An unused fee equal to 0.50% per annum of the difference between the amount of the Revolving Line as in effect from time to time and the Average Monthly Balance in each month, which fee shall be payable monthly in arrears on the first day of each month and shall be nonrefundable. For the purposes of this Section 2.4(d), “Average Monthly Balance” means the amount derived from adding the ending outstanding balance under the Revolving Line for each day in the month and dividing by the number of days in the month.

 

2.5 Additional Costs . If Bank shall determine that the adoption or implementation of any applicable law, rule, regulation, or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its applicable lending office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank (a “Parent”) as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change, or compliance (taking into consideration policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within five (5) days after demand by Bank, Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. A statement of Bank claiming compensation under this Section 2.5 and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error. Notwithstanding anything to the contrary in this Section 2.5, Borrower shall not be required to compensate Bank pursuant to this Section 2.5 for any amounts incurred more than 6 months prior to the date that Bank notifies Borrower of Bank’s intention to claim compensation therefor; provided that if the circumstances giving rise to such claim have a retroactive effect, then such 6-month period shall be extended to include the period of such retroactive effect. The obligations of the Borrower arising pursuant to this Section 2.5 shall survive the maturity of the Credit Extensions, the termination of this Agreement and the repayment of all Obligations.

 

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2.6 Term . This Agreement shall become effective on the Closing Date and, subject to Section 12.8, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default.

 

3. CONDITIONS OF LOANS.

 

3.1 Conditions Precedent to Initial Credit Extension

 

The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following:

 

(a) this Agreement, duly executed by the parties hereto;

 

(b) an officer’s certificate of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement, duly executed by Borrower;

 

(c) a financing statement on Form UCC-1, reflecting Borrower as debtor and Bank as secured party;

 

(d) the IP Security Agreement, duly executed by Borrower;

 

(e) [reserved];

 

(f) certificates of insurance naming Bank as loss payee on all property insurance policies and as an additional insured on all liability insurance policies;

 

(g) payment of the fees and Bank Expenses then due specified in Section 2.4 ;

 

(h) current UCC reports indicating that except for Permitted Liens and Liens to be terminated by satisfying obligations to the holders of such Liens with the proceeds of the initial Advances on the Closing Date, there are no other security interests or Liens of record in the Collateral;

 

(i) current financial statements, including audited statements for Borrower’s most recently ended fiscal year, together with an unqualified opinion, company-prepared balance sheets and income statements for the most recently ended month in accordance with Section 6.2 , and such other updated financial information as Bank may reasonably request;

 

(j) a current Compliance Certificate in accordance with Section 6.2 , duly executed by Borrower;

 

(k) subject to Section 6.6 , Control Agreements with respect to any accounts permitted hereunder to be maintained with a depository institution other than Bank;

 

(l) a landlord waiver or subordination with respect to each of Borrower’s leased locations, and a bailee waiver with respect to each third-party location where Borrower maintains any Material Collateral;

 

(m) an Authorization for Automatic Loan Payment on Bank’s standing form, duly executed by Borrower; and

 

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(n) an initial field examination of Borrower’s Books and the Collateral; and

 

(o) such other documents or certificates, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

 

3.2 Conditions Precedent to all Credit Extensions . The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:

 

(a) timely receipt by Bank of a Payment/Advance Form; and

 

(b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension ( provided , however , that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such other date). The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2 .

 

4. CREATION OF SECURITY INTEREST.

 

4.1 Grant of Security Interest . Borrower grants and pledges to Bank a continuing security interest in and Lien on the Collateral to secure the prompt repayment of any and all Obligations and to secure the prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Disclosure Schedules, and subject only to Permitted Liens that may have priority by operation of law, such security interest constitutes a valid, first-priority security interest in all presently existing Collateral, and will constitute a valid, first-priority security interest in later-acquired Collateral. Borrower also hereby agrees not to sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of its Intellectual Property, except as provided in this Agreement in connection with Permitted Liens and Permitted Transfers. Notwithstanding any termination of this Agreement, Bank’s Lien on the Collateral shall remain in effect for so long as any Obligations (other than inchoate indemnification obligations) are outstanding. Following the payment in full in cash of the Obligations (other than inchoate indemnification obligations) and the termination of Bank’s obligations to make any Credit Extensions, Bank shall, at Borrower’s sole costs and expense, and upon receipt of a written request from Borrower to do so, release its Liens in the Collateral and the rights therein shall revert to Borrower.

 

4.2 Perfection of Security Interest . Borrower authorizes Bank to file at any time financing statements, continuation statements, and amendments thereto that (i) either specifically describe the Collateral or describe the Collateral as all assets of Borrower of the kind pledged hereunder, and (ii) contain any other information required by the Code for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, including whether Borrower is an organization, the type of organization and any organizational identification number issued to Borrower, if applicable. Borrower shall from time to time endorse and deliver to Bank, at the request of Bank, all Negotiable Collateral and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank’s security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. Borrower shall have possession of the Collateral, except where expressly otherwise provided in this Agreement or where Bank chooses to perfect its security interest by possession in addition to the filing of a financing statement. Where material (as determined by Bank) Collateral is in possession of a third party bailee, Borrower shall take such steps as Bank reasonably requests for Bank to (i) obtain an acknowledgment, in form and substance satisfactory to Bank, of the bailee that the bailee holds such Collateral for the benefit of Bank, (ii) obtain “control” of any Collateral consisting of investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such items and the term “control” are defined in Division 9 of the Code) by causing the securities intermediary or depositary institution or issuing bank to execute a control agreement in form and substance satisfactory to Bank. Borrower will not create any chattel paper without placing a legend on the chattel paper acceptable to Bank indicating that Bank has a security interest in the chattel paper. Borrower from time to time may deposit with Bank specific cash collateral to secure specific Obligations; Borrower authorizes Bank to hold such specific balances in pledge and to decline to honor any drafts thereon or any request by Borrower or any other Person to pay or otherwise transfer any part of such balances for so long as the specific Obligations (other than inchoate indemnification obligations) are outstanding.

 

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4.3 Field Exams . Bank (through its officers, employees or agents) shall conduct, during Borrower’s usual business hours and at Borrower’s expense, an initial field examination of Borrower’s Books and the Collateral. Thereafter, Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, annually (or more frequently if an Event of Default has occurred and is continuing), during Borrower’s usual business hours and at Borrower’s expense, to conduct additional field examinations of Borrower’s Books and the Collateral. The cost of each field examination shall be $850 per day, per examiner, plus expenses.

 

4.4 Collateral Collections . Bank and Borrower will establish a lockbox and related cash collection deposit account at Bank for the remittance and deposit of payments from Borrower’s customers. Borrower shall instruct its customers to remit all checks and other similar tangible payment items to the lockbox and to remit all electronic payments directly to the collection account. If despite such instructions, Borrower receives any checks or other tangible payment items from its customers, Borrower shall hold such items in trust and promptly deposit the same, in kind, with any appropriate endorsement, into the collection account. Borrower authorizes Bank, at Bank’s discretion, to apply all collections on deposit in the collection account to reduce the balance of the Advances.

 

5. REPRESENTATIONS AND WARRANTIES.

 

Borrower represents and warrants as follows:

 

5.1 Due Organization and Qualification . Borrower is a corporation duly existing under the laws of the Borrower State and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.

 

5.2 Due Authorization; No Conflict . The execution, delivery, and performance of the Loan Documents are within Borrower’s powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower’s organizational documents, nor will they constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement by which it is bound, except to the extent such default would not reasonably be expected to cause a Material Adverse Effect.

 

5.3 Collateral .

 

(a) Borrower has rights in or the power to transfer the Collateral, and its title to the Collateral is free and clear of Liens, adverse claims, and restrictions on transfer or pledge except for Permitted Liens.

 

(b) All Accounts are bona fide existing obligations. Other than with respect to software subscription, maintenance and service contracts and other agreements pursuant to which Borrower bills or invoices customers in advance, the property or services giving rise to such Accounts have been delivered or rendered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor.

 

(c) All Inventory is in all material respects of good and merchantable quality, free from all material defects, except for Inventory for which adequate reserves have been made in accordance and as required by GAAP; provided however, the Borrower does from time to time discover, in the ordinary course of its business, Inventory that may be defective in one or more respects and generally takes reserves for such Inventory within three months of such discovery.

 

5.4 Intellectual Property Collateral. Borrower is the sole owner of the Intellectual Property Collateral, except for non-exclusive licenses granted by Borrower to third parties in the ordinary course of business and other licenses of property that may be exclusive in one or more respects but do not result in a transfer of title to the underlying licensed property. To the best of Borrower’s knowledge, each of the material Copyrights, Trademarks and Patents (other than pending applications) is valid and enforceable, and no part of any material Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made to Borrower that any part of the Intellectual Property Collateral violates the rights of any third party except to the extent such claim would not reasonably be expected to cause a Material Adverse Effect.

 

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5.5 Name; Location of Chief Executive Office . Except as disclosed in the Disclosure Schedules or as disclosed pursuant to Section 7.2, Borrower has not done business under any name other than that specified on the signature page hereof, and its exact legal name is as set forth in the first paragraph of this Agreement. Except as disclosed to Bank pursuant to Section 7.2, the chief executive office of Borrower is located in the Chief Executive Office State at the address indicated in Section 10 hereof.

 

5.6 Litigation. Except as set forth in the Disclosure Schedules or as disclosed pursuant to Section 6.2, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which a likely adverse decision would reasonably be expected to have a Material Adverse Effect.

 

5.7 Accuracy of Financial Statements . All financial statements related to Borrower that are delivered by Borrower to Bank fairly present in all material respects Borrower’s financial condition as of the date thereof and Borrower’s results of operations for the period then ended. There has not been a material adverse change in the financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.

 

5.8 Solvency, Payment of Debts . Borrower is able to pay its debts (including trade debts) as they mature.

 

5.9 Compliance with Laws and Regulations . Borrower has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower’s failure to comply with ERISA that is reasonably likely to result in Borrower’s incurring any liability that could have a Material Adverse Effect. Borrower is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System). Borrower has complied in all material respects with all the provisions of the Federal Fair Labor Standards Act. Borrower is in compliance with all environmental laws, regulations and ordinances except where the failure to comply is not reasonably likely to have a Material Adverse Effect. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, the violation of which could reasonably be expected to have a Material Adverse Effect. Borrower has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein except those being contested in good faith with adequate reserves under GAAP or where the failure to file such returns or pay such taxes would not reasonably be expected to have a Material Adverse Effect.

 

5.10 Subsidiaries . As of the Closing Date, Borrower has no Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments.

 

5.11 Government Consents. Borrower has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower’s business as currently conducted, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.

 

5.12 Material Adverse Effect . Since December 31, 2014, no Material Adverse Effect has occurred.

 

5.13 Inbound Licenses . Except as disclosed on the Disclosure Schedules or as disclosed pursuant to Section 6.9, Borrower is not a party to, nor is bound by, any license or other agreement that is material to Borrower’s business (other than over-the-counter software, open-source software, and other software that is commercially available to the public) which prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property (other than to the extent that any such prohibition would be rendered ineffective pursuant to Sections 9406, 9407, 9408 or 9409 of the Code or any other applicable law or principles of equity).

 

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5.14 Full Disclosure . No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank taken together with all such certificates and written statements furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading in light of the circumstances in which they were made, it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may differ from the projected or forecasted results.

 

6. AFFIRMATIVE COVENANTS.

 

Borrower covenants that, until payment in full of all outstanding Obligations (other than inchoate indemnification obligations), and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following:

 

6.1 Good Standing and Government Compliance . Borrower shall maintain its and each of its Subsidiaries’ organizational existence and good standing in the Borrower State, shall maintain qualification and good standing in each other jurisdiction in which the failure to so qualify could have a Material Adverse Effect, and shall furnish to Bank the organizational identification number issued to Borrower by the authorities of the Borrower State. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply in all material respects with all applicable Environmental Laws, and maintain all material permits, licenses and approvals required thereunder where the failure to do so could have a Material Adverse Effect. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, and shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which or failure to comply with which would reasonably be expected to have a Material Adverse Effect.

 

6.2 Financial Statements, Reports, Certificates.

 

(a) Borrower shall deliver to Bank: (i) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company-prepared balance sheet, income statement, and cash flow statement covering Borrower’s operations during such period, in a form reasonably acceptable to Bank and certified by a Responsible Officer; (ii) as soon as available, but in any event within 180 days after the end of Borrower’s fiscal year, audited financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an opinion which is unqualified (except with respect to a going concern clause specifying the need for future equity financings) or otherwise consented to in writing by Bank on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (iii) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could reasonably be expected to result in damages or costs to Borrower or any Subsidiary of $100,000 or more; (iv) promptly upon receipt, each management letter prepared by Borrower’s independent certified public accounting firm regarding Borrower’s management control systems; (v) as soon as available, but in any event not later than February 15 of each calendar year, Borrower’s financial and business projections and budget, presented in a month-by-month format, for such year, with written certification signed by a Responsible Officer of approval thereof by Borrower’s board of directors; (vi) such budgets, sales projections, operating plans or other financial information generally prepared by Borrower in the ordinary course of business as Bank may reasonably request from time to time; and (vii) within the time periods prescribed by Section 6.8(b), a report signed by Borrower, in form reasonably acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrower’s Patents, Copyrights or Trademarks, including but not limited to any subsequent ownership right of Borrower in or to any Trademark, Patent or Copyright not previously identified to Bank.

 

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(b) Within thirty (30) days after the end of each month, Borrower shall deliver to Bank a company-prepared report of Borrower’s recurring revenue for such month in a form reasonably satisfactory to Bank.

 

(c) Within thirty (30) days after the end of each month, Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate certified as of the last day of the applicable month and signed by a Responsible Officer in substantially the form of Exhibit E hereto.

 

(d) Borrower shall deliver to Bank a duly completed Borrowing Base Certificate signed by a Responsible Officer on the Non-Formula Sublimit Maturity Date and within thirty (30) days after the end of each month with the monthly financial statements;

 

Borrower may deliver to Bank on an electronic basis any certificates, reports or information required pursuant to this Section 6.2 , and Bank shall be entitled to rely on the information contained in the electronic files, provided that Bank in good faith believes that the files were delivered by a Responsible Officer. If Borrower delivers this information electronically, it shall also deliver to Bank by U.S. Mail, reputable overnight courier service, hand delivery, facsimile or .pdf file within five (5) Business Days after submission of the unsigned electronic copy the certification of monthly financial statements, the intellectual property report, the Borrowing Base Certificate and the Compliance Certificate, each bearing the physical signature of the Responsible Officer.

 

6.3 Inventory; Returns. Borrower shall keep all Inventory in good and merchantable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist on the Closing Date.

 

6.4 Taxes . Borrower shall make and cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, including, but not limited to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability, and will execute and deliver to Bank, on demand, proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits and any appropriate certificates attesting to the payment or deposit thereof; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.

 

6.5 Insurance .

 

(a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower’s business is conducted on the date hereof. Borrower shall also maintain liability and other insurance in amounts and of a type that are customary to businesses similar in size and scope to Borrower’s.

 

(b) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All policies of property insurance shall contain a lender’s loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee, and all liability insurance policies shall show Bank as an additional insured. Upon Bank’s request, Borrower shall deliver to Bank certified copies of the policies of insurance and evidence of all premium payments. If no Event of Default has occurred and is continuing, proceeds payable under any casualty policy will, at Borrower’s option, be payable to Borrower to replace the property subject to the claim, provided that any such replacement property shall be deemed Collateral in which Bank has been granted a first priority security interest. If an Event of Default has occurred and is continuing, all proceeds payable under any such policy shall, at Bank’s option, be payable to Bank to be applied on account of the Obligations.

 

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6.6 Primary Depository . Within 90 days of the Closing Date (or such later date as Bank may agree in writing), Borrower shall maintain its primary depository and operating accounts with Bank. At all times from and after the date that is 10 days after the Closing Date (or such later date as Bank may agree in writing), Borrower shall cause all banks or other depositary institutions with which Borrower maintains any deposit account to enter into a deposit account control agreement with Bank, in form and substance reasonably satisfactory to Bank.

 

6.7 Financial Covenants . Borrower shall at all times maintain the following financial ratios and covenants:

 

(a) Adjusted EBITDA . Borrower shall achieve Adjusted EBITDA for each periods period noted below of not less than the applicable amount set forth below for such fiscal quarter:

 

Six Month Period Ending Ended   Minimum Adjusted EBITDA  
March 31, 2015   $ (2,200,000 )
June 30, 2015   $ (3,250,000 )
September 30, 2015   $ (2,750,000 )
December 31, 2015   $ (2,000,000 )
Three Month Period Ending     Minimum Adjusted EBITDA  
March 31, 2016   $ ( 1,500,000 750,000 )
June 30, 2016   $ ( 750,000 250,000 )
September 30, 2016   $ (250,000) 100,000  
December 31, 2016 and thereafter  
  $ 0 600,000  
March 31, 2017 and thereafter     No later than January 30, 2017, Bank shall notify Borrower of the applicable minimum Adjusted EBITDA levels, which levels shall be based upon the financial projections delivered pursuant to Section 6.2(a) in respect of Borrower’s 2017 fiscal year.  

 

Bank shall test Borrower’s compliance with this covenant as of the last day of each fiscal quarter of Borrower.

 

(b) Churn Rate . Borrower shall achieve a Churn Rate (i) for each month during the term of this Agreement of not less than -1%, and (ii) for each trailing three month period (calculate on a rolling basis) during the term of this Agreement of not less than -2%.

 

(c) Minimum Cash Amount. Borrower shall maintain a balance on deposit in deposit accounts maintained with Bank at least equal to (i) on March 31, 2017, 100% of the aggregate outstanding principal amount of the Advances at such time made under Section 2.1(b), and (ii) at all times after March 31, 2017, an amount determined by Bank based on the financial projections delivered pursuant to Section 6.2(a) in respect of Borrower’s 2017 fiscal year.

 

(d) Minimum Liq uidity. Borrower shall maintain Liquidity at all times of not less than $2,000,000.

 

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6.8 Registration of Intellectual Property Rights.

 

(a) Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as the case may be, those registrable intellectual property rights now owned or hereafter developed or acquired by Borrower, to the extent that Borrower, in its reasonable business judgment, deems it appropriate to so protect such intellectual property rights.

 

(b) Borrower shall provide Bank written notice of any applications or registrations of intellectual property rights filed with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, including the date of such filing and the registration or application numbers, (i) with respect to any filings with the United States Patent and Trademark Office, within 30 days of each fiscal quarter-end, and (ii) with respect to any filings with the United States Copyright Office, within 5 days of any such filing.

 

(c) Borrower shall (i) give Bank written notice, as required pursuant to Section 6.2(a)(vii) and 6.2(b) , of the filing of any applications or registrations with the United States Copyright Office, including the title of such intellectual property rights to be registered, as such title appears on such applications or registrations, and the date such applications or registrations are filed; (ii) execute such documents as Bank may reasonably request for Bank to maintain its perfection in such intellectual property rights to be registered by Borrower; (iii) upon the request of Bank, either deliver to Bank or file such documents simultaneously with the filing of any such applications or registrations; and (iv) upon filing any such applications or registrations, promptly provide Bank with a copy of such applications or registrations together with any exhibits, evidence of the filing of any documents requested by Bank to be filed for Bank to maintain the perfection and priority of its security interest in such intellectual property rights, and the date of such filing.

 

(d) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect and maintain the perfection and priority of Bank’s security interest in the Intellectual Property Collateral.

 

(e) Borrower shall use commercially reasonable efforts in its reasonable business judgment to (i) protect, defend and maintain the validity and enforceability of the trade secrets, Trademarks, Patents and Copyrights that are material to its business, (ii) detect infringements of the Trademarks, Patents and Copyrights that are material to its business and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld.

 

(f) Bank may audit Borrower’s Intellectual Property Collateral to confirm compliance with this Section 6.8 , provided such audit may not occur more often than twice per year, unless an Event of Default has occurred and is continuing. Bank shall have the right, but not the obligation, to take, at Borrower’s sole expense, any actions that Borrower is required under this Section 6.8 to take but which Borrower fails to take, after 15 days’ notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.8 .

 

6.9 Consent of Inbound Licensors . Prior to entering into or becoming bound by any inbound license or agreement (other than over-the-counter software, open-source software, and other software that is commercially available to the public) the failure, breach or termination of which could reasonably be expected to cause a Material Adverse Effect, Borrower shall: (i) provide written notice to Bank of the material terms of such license or agreement with a description of its likely impact on Borrower’s business or financial condition; and (ii) upon the request of Bank, in good faith use commercially reasonable efforts to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (A) Borrower’s interest in such licenses or contract rights to be deemed Collateral and for Bank to have a security interest in it that might otherwise be restricted by the terms of the applicable license or agreement, whether now existing or entered into in the future, and (B) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Bank’s rights and remedies under this Agreement and the other Loan Documents, provided, however, the failure to obtain any such consent or waiver shall not constitute a default under this Agreement.

 

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6.10 Creation/Acquisition of Subsidiaries . If Borrower creates or acquires any Subsidiary, Borrower shall promptly notify Bank of the creation or acquisition of such Subsidiary and take all such action as may be reasonably required by Bank to cause such Subsidiary, if a domestic Subsidiary that is not an Immaterial Subsidiary, to guarantee the Obligations of Borrower under the Loan Documents and to grant a continuing pledge and security interest in and to the personal property of such domestic Subsidiary (substantially as described on Exhibit B hereto), and Borrower shall grant and pledge to Bank a perfected security interest in 100% of the Shares of such Subsidiary, if a domestic Subsidiary, or in 65% of the Shares of such Subsidiary, if such Subsidiary is a foreign Subsidiary.

 

6.11 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement.

 

7. NEGATIVE COVENANTS.

 

Borrower covenants and agrees that, so long as any credit hereunder shall be available and until the outstanding Obligations (other than inchoate indemnification obligations) are paid in full or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following:

 

7.1 Dispositions . Convey, sell, lease, license, transfer or otherwise dispose of (collectively, “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, or, subject to Section 6.6, move cash balances on deposit with Bank to accounts opened at another financial institution, other than Permitted Transfers.

 

7.2 Change in Name, Location, Executive Office, or Executive Management; Change in Business; Change in Fiscal Year; Change in Control . Change its name or the Borrower State or relocate its chief executive office without 30 days prior written notification to Bank; replace its chief executive officer or chief financial officer (i) without prompt notice to Bank and (ii) unless a replacement for such officer is approved by Borrower’s Board of Directors and engaged by Borrower within ninety (90) days after such change; engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by Borrower; change its fiscal year end; have a Change in Control; provided that the foregoing clause shall not apply to any Change in Control pursuant to which the Obligations are indefeasibly paid in full in cash contemporaneously with the close or consummation of such transaction and the Bank’s obligations to make any Credit Extensions are terminated as of the close or consummation of such transaction.

 

7.3 Mergers or Acquisitions . Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of a Subsidiary into another Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person without Bank’s prior written consent (which shall not be unreasonably withheld) except where (i) such transactions do not in the aggregate exceed $250,000 during any fiscal year, (ii) no Event of Default has occurred, is continuing or would exist after giving effect to such transactions, (iii) such transactions do not result in a Change in Control, and (iv) Borrower is the surviving entity; provided that the foregoing Section 7.3 shall not apply to any transaction pursuant to which the Obligations are indefeasibly paid in full in cash contemporaneously with the close or consummation of such transaction and the Bank’s obligations to make any Credit Extensions are terminated as of the close or consummation of such transaction.

 

7.4 Indebtedness . Create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than, in each case, with respect to Permitted Indebtedness, or prepay any Indebtedness or take any actions which impose on Borrower an obligation to prepay any Indebtedness; provided however, Borrower may prepay (a) Indebtedness to Bank, (b) Indebtedness described in clause (c) of the Permitted Indebtedness definition to the extent required by the terms thereof as a result of a casualty, condemnation or similar event with respect to the assets securing such Indebtedness and (c) Indebtedness described in clause (d) of the Permitted Indebtedness definition to the extent permitted under the terms of the applicable subordination agreement with Bank.

 

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7.5 Encumbrances . Create, incur, assume or allow any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens, or covenant to any other Person (other than Bank or the lenders holding Subordinated Debt) that Borrower in the future will refrain from creating, incurring, assuming or allowing any Lien with respect to any of Borrower’s property, other than Permitted Liens and customary restrictions on Liens and assignments contained in-bound license agreements entered into by Borrower in the ordinary course of its business to the extent such restrictions would be rendered ineffective pursuant to Sections 9406, 9407, 9408 or 9409 of the Code or any other applicable law or principles of equity.

 

7.6 Distributions . Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock of Borrower, except that Borrower may (i) repurchase the stock of former employees pursuant to stock repurchase agreements as long as an Event of Default does not exist prior to such repurchase or would not exist after giving effect to such repurchase, (ii) repurchase the stock of former employees pursuant to stock repurchase agreements by the cancellation of indebtedness owed by such former employees to Borrower regardless of whether an Event of Default exists; (iii) make dividends and other distributions payable solely in additional shares of capital stock and (iv) issue shares of capital stock in connection with the conversion of other shares of capital stock or Indebtedness.

 

7.7 Investments . Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments, or maintain or invest any of its property with a Person other than Bank or Bank’s Affiliates or permit any Subsidiary to do so unless such Person has entered into a control agreement with Bank, in form and substance satisfactory to Bank, or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower.

 

7.8 Transactions with Affiliates . Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for (i) transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person, (ii) reasonable and customary fees paid to members of Borrower’s Board of Directors or members of the Board of Directors of any Subsidiary, to the extent the payment of such fees are consistent with past practices, (iii) reasonable and customary employment agreements in the ordinary course of the Borrower’s business or otherwise approved by the Borrower’s Board of Directors; (iv) Permitted Investments, and (v) bona fide equity and Subordinated Debt investments in Borrower from an Affiliate of Borrower.

 

7.9 Subordinated Debt . Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt and the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision of any document evidencing such Subordinated Debt, except in compliance with the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision affecting Bank’s rights contained in any documentation relating to the Subordinated Debt without Bank’s prior written consent.

 

7.10 Inventory and Equipment . Store any Material Collateral with a bailee, warehouseman, or similar third party unless the third party has been notified of Bank’s security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold such Material Collateral for Bank’s benefit or (b) is in possession of the warehouse receipt, where negotiable, covering such Material Collateral. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory and Equipment only at the location set forth on the Disclosure Schedules, or such other locations of which Borrower gives Bank prior written notice.

 

7.11 No Investment Company; Margin Regulation . Become or be controlled by an “investment company,” within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose.

 

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8. EVENTS OF DEFAULT.

 

Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:

 

8.1 Payment Default . If Borrower fails to pay when due any payment of principal or interest due on the Credit Extensions, or Borrower fails to pay any fee within 3 Business Days of the due date thereof, or Borrower fails to pay any Bank Expenses or any other amount payable hereunder or under any Loan Document within 10 Business Days of the due date thereof (provided that during the cure period, the failure to cure such payment default shall not be an Event of Default);

 

8.2 Covenant Default .

 

(a) If Borrower fails to perform any obligation under Sections 6.2 , 6.4 , 6.5 , 6.6 , or 6.7 or violates any of the covenants contained in Section 7 of this Agreement; or

 

(b) If Borrower fails or neglects to perform or observe any other material term, provision, condition or covenant contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition or covenant that can be cured, has failed to cure such default within 30 days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof;

 

8.3 Defective Perfection . If Bank shall receive at any time following the Closing Date an SOS Report indicating that except for Permitted Liens, Bank’s security interest in the Collateral is not prior to all other security interests or Liens of record reflected in the report;

 

8.4 [Reserved ].

 

8.5 Attachment . If any material portion of Borrower’s assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within 10 days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower’s assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower’s assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within 10 days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be made during such cure period);

 

8.6 Insolvency . If Borrower becomes unable to pay its debts (including trade debts) as the come due, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within 60 days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);

 

8.7 Other Agreements . If there is a default or other failure to perform in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of $100,000 or that would reasonably be expected to have a Material Adverse Effect; provided, however, that the Event of Default under this Section 8.7 caused by the occurrence of a breach or default under such other agreement shall be cured or waived for purposes of this Agreement upon Bank receiving written notice from the party asserting such breach or default of such cure or waiver of the breach or default under such other agreement, if at the time of such cure or waiver under such other agreement (x) Bank has not declared an Event of Default under this Agreement or exercised any rights with respect thereto; (y) any such cure or waiver does not result in an Event of Default under any other provision of this Agreement or any Loan Document; and (z) in connection with any such cure or waiver under such other agreement, the terms of any agreement with such third party are not modified or amended in any manner which could in the good faith business judgment of Bank be materially less advantageous to Borrower or any Guarantor;

 

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8.8 Subordinated Debt . If Borrower makes any payment on account of Subordinated Debt, except to the extent the payment is allowed under any subordination agreement entered into with Bank relating to such Subordinated Debt;

 

8.9 Judgments . If one or more final judgments, orders, or decrees for the payment of money in an amount, individually or in the aggregate, of at least $100,000 (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against Borrower or the Subsidiary and the same are not within 10 days after the entry thereof, discharged or execution thereof stayed or bonded pending appeal, or such judgments are not discharged prior to the expiration of any such stay (provided that no Credit Extensions will be made prior to the discharge, stay, or bonding of such judgment, order or decree).

 

8.10 Misrepresentations . If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document.

 

8.11 Guaranty . If any guaranty of all or a portion of the Obligations (a “Guaranty”) ceases for any reason to be in full force and effect, or any “Event of Default” under any Guaranty or any security agreement securing any Guaranty (collectively, the “Guaranty Documents”) has occurred and is continuing, or any guarantor revokes a Guaranty, or any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth in any Guaranty Document or in any certificate delivered to Bank in connection with any Guaranty Document, or if any of the circumstances described in Sections 8.3 through 8.8 occur with respect to any Guarantor.

 

9. BANK’S RIGHTS AND REMEDIES.

 

9.1 Rights and Remedies . Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower:

 

(a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable ( provided that upon the occurrence of an Event of Default described in Section 8.6, all Obligations shall become immediately due and payable without any action by Bank);

 

(b) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit, and Borrower shall promptly deposit and pay such amounts;

 

(c) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank;

 

(d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order Bank reasonably considers advisable;

 

(e) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank’s determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower’s owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank’s rights or remedies provided herein, at law, in equity, or otherwise;

 

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(f) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, and (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank;

 

(g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1 , to use, without charge, Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section 9.1 , Borrower’s rights under all licenses and all franchise agreements shall inure to Bank’s benefit;

 

(h) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower’s premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate. Bank may sell the Collateral without giving any warranties as to the Collateral. Bank may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. If Bank sells any of the Collateral upon credit, Borrower will be credited only with payments actually made by the purchaser, received by Bank, and applied to the indebtedness of the purchaser. If the purchaser fails to pay for the Collateral, Bank may resell the Collateral and Borrower shall be credited with the proceeds of the sale;

 

(i) Bank may credit bid and purchase at any public sale;

 

(j) Apply for the appointment of a receiver, trustee, liquidator or conservator of the Collateral, without notice and without regard to the adequacy of the security for the Obligations and without regard to the solvency of Borrower, any guarantor or any other Person liable for any of the Obligations; and

 

(k) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower.

 

Bank may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.

 

9.2 Power of Attorney . Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank’s designated officers, or employees) as Borrower’s true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank’s security interest in the Accounts; (b) endorse Borrower’s name on any checks or other forms of payment or security that may come into Bank’s possession, cash or deposit such checks or other items of payment or security, and apply to the Obligations all proceeds of such checks or other items; (c) sign Borrower’s name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral and apply all cash sale proceeds to the Obligations; (e) make, settle, and adjust all claims under and decisions with respect to Borrower’s policies of insurance and apply to the Obligations all amounts received by Bank pursuant to such policies; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable, and apply to the Obligations all amounts received by Bank in connection with any such settlement and adjustment; (g) enter into a short-form intellectual property security agreement consistent with the terms of this Agreement for recording purposes only or modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower’s approval of or signature to such modification by amending Exhibits A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest; and (h) file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in clause (g) above, regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower’s attorney in fact, and each and every one of Bank’s rights and powers, being coupled with an interest, is irrevocable until all of the Obligations (other than inchoate indemnification obligations) have been fully repaid and performed and Bank’s obligation to provide advances hereunder is terminated.

 

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9.3 Accounts Collection . At any time after the occurrence and during the continuation of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank’s security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank’s trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit.

 

9.4 Bank Expenses . If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.5 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement.

 

9.5 Bank’s Liability for Collateral . Bank has no obligation to clean up or otherwise prepare the Collateral for sale. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.

 

9.6 No Obligation to Pursue Others . Bank has no obligation to attempt to satisfy the Obligations by collecting them from any other person liable for them and Bank may release, modify or waive any collateral provided by any other Person to secure any of the Obligations, all without affecting Bank’s rights against Borrower. Borrower waives any right it may have to require Bank to pursue any other Person for any of the Obligations.

 

9.7 Remedies Cumulative . Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower’s part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. Borrower expressly agrees that this Section 9.7 may not be waived or modified by Bank by course of performance, conduct, estoppel or otherwise.

 

9.8 Demand; Protest . Except as otherwise provided in this Agreement, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment and any other notices relating to the Obligations.

 

10. NOTICES.

 

Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements, compliance certificates and other informational documents which may be sent by first-class mail, postage prepaid or e-mail) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below:

 

    19  
 

 

  If to Borrower: NTN Buzztime, Inc.
2231 Rutherford Road, Suite 200
Carlsbad, California 92008
    Attn: Allen Wolff
    E-mail: allen.wolff@buzztime.com
     
  If to Bank: East West Bank
555 Montgomery Street, 9 th Floor
San Francisco, CA 94111
Attn: Alexis Coyle
    Fax: (415) 986-0847
    E-mail: alexis.coyle@eastwestbank.com

 

The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.

 

11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER; JUDICIAL PREFERENCE.

 

11.1 Governing Law and Venue . This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Los Angeles, State of California; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Bank from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Bank. Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Borrower hereby waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Borrower hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to Borrower at the address set forth in, or subsequently provided by Borrower in accordance with, Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of Borrower’s actual receipt thereof or 3 days after deposit in the U.S. mails, proper postage prepaid.

 

11.2 JURY TRIAL WAIVER . BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

 

11.3 JUDICIAL REFERENCE PROVISION . WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential, and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and orders applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to California Code of Civil Procedure§ 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

 

    20  
 

 

12. GENERAL PROVISIONS.

 

12.1 Successors and Assigns . This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties and shall bind all persons who become bound as a debtor to this Agreement; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank’s prior written consent, which consent may be granted or withheld in Bank’s sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights and benefits hereunder.

 

12.2 Indemnification . Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement or any other Loan Document; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank, its officers, employees and agents as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys’ fees and expenses), except for losses caused by Bank’s gross negligence or willful misconduct.

 

12.3 Time of Essence . Time is of the essence for the performance of all obligations set forth in this Agreement.

 

12.4 Severability of Provisions . Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

 

12.5 Correction of Loan Documents . Bank may correct patent errors and fill in any blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties.

 

12.6 Amendments in Writing, Integration . All amendments to or termination of this Agreement or the other Loan Documents must be in writing and signed by the parties to this Agreement or to such other Loan Document, as applicable. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the other Loan Documents, if any, are merged into this Agreement and the other Loan Documents.

 

12.7 Counterparts . This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same agreement.

 

12.8 Survival . All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations (other than inchoate indemnification obligations) remain outstanding or Bank has any obligation to make any Credit Extension to Borrower. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.

 

    21  
 

 

12.9 Confidentiality . In handling any confidential information, Bank and all employees and agents of Bank shall exercise the same degree of care that Bank exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or Affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Credit Extensions, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank, (v) to Bank’s accountants, auditors and regulations, and (vi) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information.

 

12.10 Patriot Act . To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. WHAT THIS MEANS FOR YOU: when you open an account, we will ask your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.

 

12.11 No Consequential Damages . No party to this Agreement or any other Loan Document, nor any agent or attorney of such party or Bank, shall be liable to any other party to this Agreement or any other Person on any other theory of liability of any special, indirect, consequential or punitive damages.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

    22  
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written.

 

  BORROWER:
   
  NTN BUZZTIME, INC. ,
  a Delaware corporation
     
  By:  
  Name: Allen Wolff
  Title: Chief Financial Officer

 

[Signature Pages Continue]

 

Loan and Security Agreement

 

 
 

 

 

  BANK:
   
  EAST WEST BANK,
  a California banking corporation
     
  By:  
  Name: Gregory Peterson
  Title: Vice President

 

Loan and Security Agreement

 

 
 

 

EXHIBIT A

 

DEFINITIONS

 

Accounts ” means all presently existing and hereafter arising accounts, contract rights, payment intangibles and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower’s Books relating to any of the foregoing.

 

“Adjusted EBITDA” means, as calculated on a consolidated basis for Borrower and its Subsidiaries for any period as at any date of determination, (a) Net Income, plus (b) Interest Expense, plus (c) to the extent deducted in the calculation of Net Income, depreciation expense and amortization expense, plus (d) income tax expense, plus (e) non-cash stock, compensation expenses, plus (f) other non-cash expenses and charges, plus (g) to the extent approved by Bank, other one-time charges, plus (h) to the extent approved by Bank, any losses arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business.

 

Advance ” or “ Advances ” means a cash advance or cash advances under the Revolving Line.

 

Affiliate ” means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person’s senior executive officers, directors, and partners.

 

“Availability Amount” has the meaning assigned in Section 2.1(b)(i).

 

Bank Expenses ” means all reasonable costs or expenses (including reasonable attorneys’ fees and expenses), incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank’s reasonable attorneys’ fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought.

 

Bank Services ” are any products, credit services, and/or financial accommodations previously, now, or hereafter provided to Borrower or any of its Subsidiaries by Bank or any Bank Affiliate, including, without limitation, any letters of credit, cash management services (including, without limitation, merchant services, direct deposit of payroll, business credit cards, and check cashing services), interest rate swap arrangements, and foreign exchange services as any such products or services may be identified in Bank’s various agreements related thereto (each, a “ Bank Services Agreement ”).

 

Borrower State ” means Delaware, the state under whose laws Borrower is organized.

 

Borrower’s Books ” means all of Borrower’s books and records including: ledgers; records concerning Borrower’s assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.

 

Borrowing Base ” means, as of any date of determination thereof, an amount equal to the product of:

 

(a) the average Monthly Recurring Revenue for the immediately preceding three months; times

 

(b) one plus the Borrower’s average Churn Rate for the immediately preceding three months (not to exceed zero); times

 

(c) 300%.

 

 

Exhibit A

1

 
 

 

Borrowing Base Certificate ” means a certificate in the form attached hereto as Exhibit D , with appropriate insertions.

 

Business Day ” means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close.

 

Change in Control ” means any event, transaction, or occurrence as a result of which any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act) or a stockholder in Borrower as of the Closing Date, directly or indirectly, of securities of Borrower, representing more than fifty percent (50%) or more of the combined voting power of Borrower’s then outstanding securities; provided, however, that a Change in Control shall not include (i) any consolidation or merger effected exclusively to change the domicile of Borrower, or (ii) any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by Borrower or indebtedness of Borrower is cancelled or converted or a combination thereof.

 

Chief Executive Office State ” means California, the state in which Borrower’s chief executive office is located.

 

Churn Rate ” means, with respect to any month, the quotient of (a) (i) Monthly Net Revenue Change calculated with respect to such month, divided by (b) Borrower’s monthly revenue from subscriptions, as reflected in (i) of the definition of Monthly Recurring Revenue for the month of such date of determination.

 

Closing Date ” means the date of this Agreement.

 

Code ” means the California Commercial Code as amended or supplemented from time to time.

 

Collateral ” means the property described on Exhibit B attached hereto.

 

Compliance Certificate ” means a certificate in the form attached hereto as Exhibit E , with appropriate insertions.

 

Control Agreement ” means an agreement entered into among Borrower, Bank and, as applicable, a depository institution (other than Bank) at which Borrower maintains a deposit account or a securities intermediary or commodity intermediary at which Borrower maintains a securities account or a commodity account, pursuant to which Bank obtains control (within the meaning of the Code) over such deposit account, securities account, or commodity account.

 

Contingent Obligation ” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.

 

 

Exhibit A

2

 
 

 

Copyrights ” means, collectively:

 

(a) All present and future United States registered copyrights and copyright registrations (including all of the exclusive rights afforded a copyright registrant in the United States under 17 U.S.C. Section 106 and any exclusive rights which may in the future arise by act of Congress or otherwise), and all present and future applications for copyright registrations (including applications for copyright registrations of derivative works and compilations) (collectively, “ Registered Copyrights ”), and any and all royalties, payments and other amounts payable to Borrower in connection with Registered Copyrights, together with all renewals and extensions of Registered Copyrights, the right to recover for all past, present and future infringements of Registered Copyrights, and all computer programs and tangible property embodying or incorporating Registered Copyrights, and all other rights of every kind whatsoever accruing thereunder or pertaining thereto; and

 

(b) All present and future copyrights, computer programs and other rights subject to (or capable of becoming subject to) United States copyright protection which are not registered in the United States Copyright Office (collectively, “ Unregistered Copyrights ”), whether now owned or hereafter acquired, and any and all royalties, payments, and other amounts payable to Borrower in connection with Unregistered Copyrights, together with all renewals and extensions of Unregistered Copyrights, the right to recover for all past, present and future infringements of Unregistered Copyrights, and all computer programs and all tangible property embodying or incorporating Unregistered Copyrights, and all other rights of every kind whatsoever accruing thereunder or pertaining thereto.

 

Credit Extension ” means each Advance or any other extension of credit by Bank to or for the benefit of Borrower hereunder.

 

Disclosure Schedules ” means the schedule of exceptions attached hereto and approved by Bank, if any.

  

Dollars ,” “ dollars ” or use of the sign “$” means only lawful money of the United States and not any other currency, regardless of whether that currency uses the “$” sign to denote its currency or may be readily converted into lawful money of the United States.

 

 “EBITDA” means, as calculated on a consolidated basis for Borrower and its Subsidiaries for any period as at any date of determination, (a) Net Income, plus (b) Interest Expense, plus (c) to the extent deducted in the calculation of Net Income, depreciation expense and amortization expense, plus (d) income tax expense, plus (e) non-cash stock, compensation expenses, plus (f) other non-cash expenses and charges, plus (g) to the extent approved by Bank, other one-time charges, plus (h) to the extent approved by Bank, any losses arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business.

 

Environmental Laws ” means all laws, rules, regulations, orders and the like issued by any federal state, local foreign or other governmental or quasi-governmental authority or any agency pertaining to the environment or to any hazardous materials or wastes, toxic substances, flammable, explosive or radioactive materials, asbestos or other similar materials.

 

Equipment ” means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.

 

ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

 

Event of Default ” has the meaning assigned in Section 8 .

 

GAAP ” means United States generally accepted accounting principles, consistently applied, as in effect from time to time.

 

Guaranties ” means, collectively, any guaranty of the Obligations hereafter made by any other Person in favor of Bank, and “Guaranty” means any such guaranty individually.

 

Guarantors ” means, collectively, (i) each domestic Subsidiary of Borrower that is not an Immaterial Subsidiary, and (ii) any Person that guarantees Borrower’s payment and performance of the Obligations pursuant to a Guaranty, and “Guarantor” means such Person individually.

 

IBM Indebtedness ” means Indebtedness in an aggregate amount not to exceed $2,500,000 at any time owing by Borrower to IBM Credit LLC or its Affiliates (“IBM”), which Indebtedness is either (i) unsecured or (ii) secured by Liens ( i a ) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such Equipment, or ( ii b ) existing on such Equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such Equipment, and such Liens are subject to a subordination agreement in favor of Bank, in form and substance reasonably satisfactory to Bank .

 

 

Exhibit A

3

 
 

 

Immaterial Subsidiary ”: at any date of determination, any Subsidiary of any Borrower designated as such by such Borrower in writing and which as of such date holds assets representing 5% or less of the Borrower’s consolidated total assets as of such date (determined in accordance with GAAP), and which has generated less than 5% of the Borrower’s consolidated total revenues determined in accordance with GAAP for the four fiscal quarter period ending on the last day of the most recent period for which financial statements have been delivered after the Closing Date pursuant to Section 6.2 ; provided that all Subsidiaries that are individually “ Immaterial Subsidiaries ” shall not have aggregate consolidated total assets that would represent 10% or more of the Borrower’s consolidated total assets as of such date or have generated 10% or more of the Borrower’s consolidated total revenues for such four fiscal quarter period, in each case determined in accordance with GAAP.

 

Indebtedness ” means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, and (d) all Contingent Obligations.

 

Insolvency Proceeding ” means any proceeding commenced by or against any Person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

 

Intellectual Property ” means Copyrights, Patents, Trademarks, servicemarks and applications therefor, now owned or hereafter acquired, or any claims for damages by way of any past, present or future infringement of any of the foregoing.

 

Intellectual Property Collateral ” means all of Borrower’s right, title, and interest in and to the following:

 

(a) Copyrights, Trademarks and Patents;
   
(b) Any and all right, title and interest in and to any and all present and future licensing agreements with respect to Copyrights;
   
(c) Any and all present and future accounts, accounts receivable, royalties and other rights to payment arising from, in connection with, or relating to Copyrights;
   
(d) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held;
   
(e) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held;
   
(f) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above;
   
(g) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights;
   
(h) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and
   
(i) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing, and all license royalties and proceeds of infringement suits, and all rights corresponding to the foregoing throughout the world and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part of the foregoing.

 

 

Exhibit A

4

 
 

 

Interest Expense ” means for any fiscal period, interest expense (whether cash or non-cash) determined in accordance with GAAP for the relevant period ending on such date, including, in any event, interest expense with respect to any Credit Extension and other Indebtedness of Borrower and its Subsidiaries, including, without limitation or duplication, all commissions, discounts, or related amortization and other fees and charges with respect to letters of credit and bankers’ acceptance financing and the net costs associated with interest rate swap, cap, and similar arrangements, and the interest portion of any deferred payment obligation (including leases of all types).

 

Interest Period ” means, for any LIBOR Loan, the period commencing on the date of such LIBOR Loan, or on the conversion/continuation date on which such LIBOR Loan is converted into or continued as a LIBOR Loan, and ending on the date that is 1, 2, 3 or 6 months thereafter, or such other period upon which Bank and Borrower may agree, in each case as Borrower may elect in the applicable Payment/Advance Form or LIBOR Loan Continuation Certificate; provided , however , that (a) no Interest Period with respect to any LIBOR Loan shall end later than the Revolving Maturity Date, (b) the last day of an Interest Period shall be determined in accordance with the practices of the LIBOR interbank market as from time to time in effect, (c) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of a LIBOR Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day, (d) any Interest Period pertaining to a LIBOR Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period, and (e) interest shall accrue from and include the first Business Day of an Interest Period but exclude the last Business Day of such Interest Period.

 

Inventory ” means all present and future inventory in which Borrower has any interest.

 

Investment ” means any beneficial ownership of (including stock, partnership or limited liability company interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

 

IP Security Agreement ” means the Intellectual Property Security Agreement dated as of the Closing Date by and between Borrower and Bank.

 

IRC ” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

 

Letter of Credit ” means a commercial or standby letter of credit or similar undertaking issued by Bank at Borrower’s request in accordance with Section 2.1(b)(iii) .

 

LIBOR ” means, for any LIBOR Determination Date with respect to an Interest Period for any Advance to be made, continued as or converted into a LIBOR Loan, the rate of interest per annum for such Interest Period that appears on Bloomberg Page BBAM1 (or on such other substitute Bloomberg page that displays rates at which U.S. dollar deposits are offered by leading banks in the London interbank deposit market) as of 11:00 a.m. (local time in such interbank market) 3 Business Days prior to the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amount of such Advance.

 

LIBOR-Based Rate ” means, for any Interest Period in respect of any LIBOR Loan, an interest rate per annum (rounded upward, if necessary, to the nearest 1/16 of 1%) equal to LIBOR for such Interest Period divided by 1 minus the Reserve Requirement for such Interest Period.

 

LIBOR Interest Payment Date ” means, with respect to any LIBOR Loan, the last day of each Interest Period applicable to such LIBOR Loan.

 

LIBOR Loan ” means the portion of any Advance that bears interest based on the LIBOR-Based Rate.

 

 

Exhibit A

5

 
 

 

LIBOR Rate Determination Date ” means each date for calculating the LIBOR for the purpose of determining the interest rate in respect of an Interest Period. The LIBOR Rate Determination Date shall be the second Business Day prior to the first day of the related Interest Period for a LIBOR Loan.

 

Lien ” means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

 

“Liquidity” is, at any time, the sum of (a) the aggregate amount of unrestricted cash held at such time by Borrower in deposit accounts or securities accounts maintained with Bank, and (b) the Availability Amount at such time.

 

Loan Documents ” means, collectively, this Agreement, any Bank Services Agreement, any note or notes executed by Borrower, the IP Security Agreement, the Guaranties and any other document, instrument or agreement entered into in connection with this Agreement, all as amended or extended from time to time.

 

Material Collateral ” means Collateral having a fair market value of at least $200,000.

 

Material Adverse Effect ” means a material adverse effect on (i) the business operations, financial condition of Borrower and its Subsidiaries taken as a whole, (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents, or (iii) Borrower’s interest in, or the value, perfection or priority of Bank’s security interest in the Collateral.

 

Monthly Net Revenue Change ” means, with respect to any month of determination, (a) the sum of the One Month Recurring Revenue Amounts for recurring revenues attributable to subscriptions, software and hardware initially leased, sold or licensed by Borrower during the month of determination, minus (b) the sum of the One Month Recurring Revenue Amounts for recurring revenues lost during the month of determination due to customer cancellations and terminations.

 

Monthly Recurring Revenue Monthly Recurring Revenue ” means, with respect to any month, (i) all recurring subscription revenue attributable to software sold or licensed by Borrower and all recurring revenue relating to services delivered by Borrower (including revenue under software maintenance and service contracts regardless of whether services are required to be actually delivered) , and (ii) 50% of all revenue attributable to Borrower’s “ Arcade” and “ Stump” product lines , and (iii) 50% of all revenues attributable to the sale or leasing of hardware to an account debtor in connection with the revenues described in clauses (i) or (ii) of this definition, in each case  which have been earned during such period and calculated on a basis consistent with the financial statements delivered to Bank prior to the Closing Date .

 

Negotiable Collateral ” means all of Borrower’s present and future letters of credit of which it is a beneficiary, drafts, instruments (including promissory notes), securities, documents of title, and chattel paper, and Borrower’s Books relating to any of the foregoing.

 

Net Income ” means, as calculated on a consolidated basis for Borrower and its Subsidiaries for any period as at any date of determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a single accounting period.

 

“Non-Formula Sublimit Amount” means, for any date of determination, commencing on (i) March 8, 2016 through and including the Non-Formula Sublimit Maturity Date, $2,000,000 and (ii) the Non-Formula Sublimit Maturity Date and at all times thereafter, $0.

 

“Non-Formula Sublimit Maturity Date” means March 31, 2017.

 

Obligations ” means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement, the other Loan Documents, or otherwise, including, without limitation, all obligations relating to letters of credit (including reimbursement obligations for drawn and undrawn letters of credit), cash management services, Bank Services, and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank, and to perform Borrower’s duties under the Loan Documents.

 

One Month Recurring Revenue Amount ” means, with respect to a given stream of recurring revenue, the amount of recurring revenue expected for a period of one month.

 

 

Exhibit A

6

 
 

 

Overadvance ” means as of any date of determination, that (a) the sum of (i) the aggregate outstanding Advances on any date and (ii) the aggregate undrawn amount under all Letters of Credit outstanding on such date exceeds (b) the lesser of (i) the Revolving Line or (ii) the Borrowing Base plus the Non-Formula Sublimit Amount in effect on such date .

 

Patents ” means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

 

Payment/Advance Form ” shall be a form substantially similar to Exhibit C attached hereto, with appropriate insertions.

 

Periodic Payments ” means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank.

 

Permitted Indebtedness ” means:

 

(a) Indebtedness of Borrower in favor of Bank;
   
(b) Indebtedness existing on the Closing Date and disclosed in the Disclosure Schedules;
   
(c) (i) The IBM Indebtedness and such , (ii) other Indebtedness similar Indebtedness in an amount not to exceed $2,000,000 in the aggregate over the term of this Agreement for the purpose of equipment financing to the extent Bank provides prior written approval of such Indebtedness, and (iii) such other Indebtedness incurred solely for the purpose of financing the acquisition or lease of such Equipment in an amount not to exceed $250,000 in the aggregate in any fiscal year of Borrower secured by a lien described in clause (c) of the defined term “Permitted Liens” ; provided that in each case, such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness;
   
(d) Subordinated Debt;
   
(e) Indebtedness to trade creditors incurred in the ordinary course of business;
   
(f) Indebtedness not exceeding $100,000 in the aggregate with respect to surety bonds and similar obligations incurred in the ordinary course of business;
   
(g) Indebtedness arising with respect to customary indemnification and purchase price adjustment obligations incurred in connection with Permitted Transfers ;
   
(h) Indebtedness to the extent it is described in clause (i) of the defined term “Permitted Investments”;
   
(i) Indebtedness in the form of the obligation to reimburse or prepay any bank or other Person in respect to amounts paid under a letter of credit, banker’s acceptance, or similar instruments, whether drawn or undrawn; and
   
(j) Extensions, refinancings and renewals of any items of Permitted Indebtedness, provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be.

 

Permitted Investment ” means: Investments existing on the Closing Date disclosed in the Disclosure Schedules;

 

(a) (i) Marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one year from the date of acquisition thereof, (ii) commercial paper maturing no more than one year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (iii) Bank’s certificates of deposit maturing no more than one year from the date of investment therein, and (iv) Bank’s deposit and money market accounts;

 

 

Exhibit A

7

 
 

 

(b) Repurchases of stock from current or former employees, contractors or directors of Borrower under the terms of applicable repurchase agreements (i) in an aggregate amount not to exceed $100,000 in any fiscal year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases, or (ii) in any amount where the consideration for the repurchase is the cancellation of indebtedness owed by such employees, contractors or directors to Borrower regardless of whether an Event of Default exists;
   
(c) Investments accepted in connection with Permitted Transfers;
   
(d) Investments of Subsidiaries in or to other Subsidiaries or Borrower and Investments by Borrower in Subsidiaries not to exceed $100,000 in the aggregate in any fiscal year;
   
(e) Investments not to exceed $100,000 in the aggregate in any fiscal year consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plan agreements approved by Borrower’s Board of Directors;
   
(f) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of Borrower’s business;
   
(g) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided that this subparagraph (h) shall not apply to Investments of Borrower in any Subsidiary; and
   
(h) Joint ventures or strategic alliances in the ordinary course of Borrower’s business consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash Investments by Borrower do not exceed $100,000 in the aggregate in any fiscal year.

 

Permitted Liens ” means the following:

 

(a) Any Liens existing on the Closing Date and disclosed in the Disclosure Schedules (excluding Liens to be satisfied with the proceeds of the Advances) and any Liens in favor of Bank;
   
(b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and for which Borrower maintains adequate reserves, provided the same have no priority over any of Bank’s security interests;
   
(c) Liens securing the IBM Indebtedness and Liens securing such other Indebtedness not to exceed $250,000 in the aggregate at any time (i (i) the IBM Indebtedness to the extent such Liens are subject to a subordination agreement in favor of Bank, in form and substance reasonably satisfactory to Bank, (ii) the Indebtedness permitted pursuant to clause (c)(ii) of the definition of Permitted Indebtedness, and (iii) the Indebtedness permitted pursuant to clause (c)(iii) of the definition of Permitted Indebtedness, in each case (y) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such Equipment, or ( ii z ) existing on such Equipment at the time of its acquisition, provided that the Liens are confined solely to the property so acquired and improvements thereon, and the proceeds of such Equipment;
   
(d) Liens securing Subordinated Debt;

 

 

Exhibit A

8

 
 

 

(e) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (d) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase;
   
(f) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Sections 8.5 or 8.9 ;
   
(g) Liens in favor of other financial institutions arising in connection with Borrower’s deposit accounts held at such institutions to secure standard fees for deposit services charged by, but not financing made available by such institutions, provided that Bank has a perfected security interest in the amounts held in such deposit accounts;
   
(h) non-exclusive licenses of Intellectual Property granted to third parties in the ordinary course of business and other licenses of property that may be exclusive in one or more respects but do not result in a transfer of title to the underlying licensed property;
   
(i) the interests of licensors under licenses;
   
(j) Liens to secure payment of worker’s compensation, employment insurance, old age pensions or other social security obligations of Borrower in the ordinary course of business;
   
(k) Liens, deposits and pledges to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds or other similar obligations arising in the ordinary course of business; and
   
(l) Liens in the form of cash deposited with owners/lessors of premises that Borrower leases in the ordinary course of business.

 

Permitted Transfer ” means the conveyance, sale, lease, sale-leaseback, transfer or disposition by Borrower or any Subsidiary of:

 

(a) Inventory in the ordinary course of business;
   
(b) Non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business and other licenses of property that may be exclusive in one or more respects but do not result in a transfer of title to the underlying licensed property;
   
(c) Worn-out, surplus or obsolete Equipment;
   
(d) Permitted Liens and Permitted Investments; or
   
(e) Other assets of Borrower or its Subsidiaries that do not in the aggregate exceed $100,000 during any fiscal year.

 

Person ” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.

 

Prime Rate ” means the variable rate of interest, per annum, set forth in the “Money Rates” section of the Wall Street Journal as the “prime rate.”

 

Prohibited Territory ” means any person or country listed by the Office of Foreign Assets Control of the United States Department of Treasury as to which transactions between a United States Person and that territory are prohibited.

 

 

Exhibit A

9

 
 

 

Regulatory Change ” means, with respect to Bank, any change on or after the date of this Agreement in United States federal, state, or foreign laws or regulations, or the adoption or making on or after such date of any interpretations, directives, or requests applying to a class of lenders including Bank, of or under any United States federal or state, or any foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

 

Requirement of Law ” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

 

Reserve Requirement ” means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental, or emergency reserves) are required to be maintained during such Interest Period under Regulation D against “Eurocurrency liabilities” (as such term is used in Regulation D) by member banks of the Federal Reserve System. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Bank by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the LIBOR Rate is to be determined as provided in the definition of “LIBOR” or (b) any category of extensions of credit or other assets which include Advances.

 

Responsible Officer ” means each of the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the Controller of Borrower.

 

Revolving Line ” means a Credit Extension of up to $7,500,000, or such greater amount agreed to by Bank pursuant to Section 2.1 (c) hereof.

 

Revolving Line Maturity Date ” means April 14 December 31, 2018 2017 .

 

Shares ” means (i) 65% of the issued and outstanding capital stock, membership units or other securities owned or held of record by Borrower in any Subsidiary of Borrower which is not an entity organized under the laws of the United States or any territory thereof, and (ii) 100% of the issued and outstanding capital stock, membership units or other securities owned or held of record by Borrower in any Subsidiary or Borrower which is an entity organized under the laws of the United States or any territory thereof.

 

SOS Reports ” means the official reports from the Secretary of State of the Borrower State and from all other applicable federal, state or local government offices identifying all current security interests and Liens of record filed against the Collateral as of the date of such report.

 

Subordinated Debt ” means any debt incurred by Borrower that is subordinated in writing to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank).

 

Subsidiary ” means any corporation, partnership or limited liability company or joint venture in which (i) any general partnership interest or (ii) more than 50% of the stock, limited liability company interest or joint venture of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate.

 

Trademarks ” means any trademark and servicemark rights, whether registered or not, applications to register (other than “intent to use” applications until a verified statement of use is filed with respect to such application) and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.

 

 

Exhibit A

10

 
 

 

DEBTOR NTN BUZZTIME, INC.
   
SECURED PARTY: EAST WEST BANK

 

EXHIBIT B

 

COLLATERAL DESCRIPTION ATTACHMENT TO LOAN AND SECURITY AGREEMENT

 

All personal property of Borrower (herein referred to as “ Borrower ” or “ Debtor ”) whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:

 

(a) all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtor’s books and records with respect to any of the foregoing, and the computers and equipment containing said books and records;
   
(b) All present and future United States registered copyrights and copyright registrations (including all of the exclusive rights afforded a copyright registrant in the United States under 17 U.S.C. Section 106 and any exclusive rights which may in the future arise by act of Congress or otherwise), and all present and future applications for copyright registrations (including applications for copyright registrations of derivative works and compilations) (collectively, “ Registered Copyrights ”), and any and all royalties, payments and other amounts payable to Borrower in connection with Registered Copyrights, together with all renewals and extensions of Registered Copyrights, the right to recover for all past, present and future infringements of Registered Copyrights, and all computer programs and tangible property embodying or incorporating Registered Copyrights, and all other rights of every kind whatsoever accruing thereunder or pertaining thereto;
   
(c) All present and future copyrights, computer programs and other rights subject to (or capable of becoming subject to) United States copyright protection which are not registered in the United States Copyright Office (collectively, “ Unregistered Copyrights ”), whether now owned or hereafter acquired, and any and all royalties, payments, and other amounts payable to Borrower in connection with Unregistered Copyrights, together with all renewals and extensions of Unregistered Copyrights, the right to recover for all past, present and future infringements of Unregistered Copyrights, and all computer programs and all tangible property embodying or incorporating Unregistered Copyrights, and all other rights of every kind whatsoever accruing thereunder or pertaining thereto.
   
(d) All trademark and servicemark rights, whether registered or not, applications to register (other than “intent to use” applications until a verified statement of use is filed with respect to such application) and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.
   
(e) all (i) patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (ii) licenses pertaining to any patent whether Debtor is licensor or licensee, (iii) income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or in the name of Secured Party for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (vi) reissues, divisions, continuations, renewals, extensions and continuations-in-part with respect to any of the foregoing; and

 

 

Exhibit B

1

 
 

 

(f) any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time.

 

Notwithstanding the foregoing, the Collateral shall not include any of the following: (i) all leasehold interests in real property, (ii) equity interests in any foreign Subsidiaries in excess of 65% of the voting stock in such Subsidiaries, (iii) any permit or license issued to Borrower, any document, instrument or agreement of Borrower and any general intangibles (whether owned or held as licensee or lessee or otherwise) or other property of Borrower, in each case, only to the extent and for so long as the grant or existence of a security interest in such permit, license, document, instrument, agreement. general intangible or other property is prohibited, would give another person the right to terminate Borrower’s rights, accelerate Borrower’s obligations, or otherwise alter Borrower’s rights, titles, interests or obligations thereunder (including upon the giving of notice or the lapse of time or both) (other than to the extent that any such prohibition would be rendered ineffective pursuant to Sections 9406, 9407, 9408 or 9409 of the Code or any other applicable law or principles of equity), (iv) any asset or property that is subject to a Permitted Lien of the type described in clause (c) of the definition of Permitted Lien, to the extent that the documents, instruments or agreements relating to such Lien would not permit such asset or property to be subject to the security interests created hereby (other than to the extent that any such restriction in any such document would be rendered ineffective pursuant to Sections 9406, 9407, 9408 or 9409 of the Code or any other applicable law or principles of equity), and (v) any “intent to use” trademarks.

 

 

Exhibit B

2

 
 

 

EXHIBIT C

 

LOAN ADVANCE/PAYDOWN REQUEST FORM

 

DEADLINE FOR SAME BUSINESS-DAY PROCESSING IS 1:00 P.M., Pacific Time

 

To: Alexis Coyle (alexis.coyle@eastwestbank.com) Date:  
Copy: Gregory Peterson (gregory.peterson@eastwestbank.com)    
FAX #: (415) 986-0847    

 

FROM

 

Borrower’s Name: NTN Buzztime, Inc.    
       
  Authorized Signer’s Name:    
       
  Authorized Signature:    
       

 

All representations and warranties of Borrower stated in the Loan and Security Agreement are true and correct in all material respects as of the date of the telephone or email request for an Advance confirmed by this Loan Advance/Paydown Request Form; provided, however, that those representations and warranties expressly referring to another date shall be true and correct in all material respects as of such date.

 

DRAWDOWN     PAYDOWN  
         
             
FROM LOAN #:       FROM ACCOUNT #:    
             
TO ACCOUNT #       TO LOAN#:    
             
AMOUNT:       PRINCIPAL AMOUNT:    
           
        INTEREST AMOUNT:    
             
             

*IS THERE A WIRE REQUEST TIED TO THIS LOAN ADVANCE? (PLEASE CIRCLE ONE) YES NO

 

If YES, the Outgoing Wire Transfer Instructions must be completed below.

 

OUTGOING WIRE TRANSFER INSTRUCTIONS Fed Reference Number Bank Transfer Number
The items marked with an asterisk (*) are required to be completed.
*Beneficiary Name  
*Beneficiary Account Number  
*Beneficiary Address  
Amount [SAME AS AMOUNT OF DRAWDOWN ABOVE]
*Routing Number (ABA/SWIFT/IBAN)  
*Receiving Institution Name  
*Receiving Institution Address  
Other Instructions  
       

   

  Exhibit C
  1
 
 

 

EXHIBIT D
BORROWING BASE CERTIFICATE

 

Measurement Period Ending [____ __, 20__]

 

Borrower : NTN Buzztime, Inc.

 

Availability Amount: The lesser of (a) $7,500,000 (or such greater amount agreed to by Bank pursuant to Section 2.1(c) hereof) less the aggregate outstanding principal amount of the Advances made under Section 2.1(b) of the Loan Agreement or (b) the product of (i) the average Monthly Recurring Revenue for the immediately preceding three month period; times (ii) one plus the Borrower’s average Churn Rate for the immediately preceding three month period; times (iii) 300%.

  

Availability Amount Calculation:

 

1. Non-Formula Sublimit Amount in effect as of the date above   $__[2,000,000][0]____
       
2. 1. Average Monthly Recurring Revenue for the immediately preceding 3 months   $_________________
       
3. 2. One plus the Borrower’s average Churn Rate (not to exceed 0) for the immediately preceding three month period   _________________%
       
3 4. 300%   300%
       
4 5. Line 1 times plus (Line 2 times Line 3 times Line 4 )   $__________________
       
5 6. Revolving Line Commitment amount:   $[7,500,000] 1
       
6 7. Total Availability (the lessor of Line 4 5 and Line 5 6 )   $ _________________
       
7 8. The aggregate principal amount of the Advances made under Section 2.1(b) then outstanding   $ _________________
       
8 9. Net Availability (Line 6 7 minus Line 7 8 )   $ _________________

 

The undersigned represents and warrants to East West Bank the accuracy of the foregoing calculations.

 

  BORROWER:
   
  NTN BUZZTIME, INC. ,
  a Delaware corporation
   
  By:  
  Name:  
  Title:  

 

 

1 Revolving Line Commitment amount may be increased in accordance with Section 2.1(c) of the Loan Agreement

  

Exhibit D
  1  
     

 

EXHIBIT E

 

COMPLIANCE CERTIFICATE

 

TO: EAST WEST BANK

 

FROM: NTN BUZZTIME, INC.

 

The undersigned authorized officer of NTN Buzztime, Inc., a Delaware corporation ( Borrower ”), for and on behalf of Borrower, hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement dated as of April 14, 2015 by and between Bank and Borrower (the “ Agreement ”), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) except as noted below all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof except that those representations and warranties referring to another date shall be true and correct in all material respects on that other date. Attached hereto are the required documents supporting the above certification. The summary descriptions in the Reporting Covenants below are qualified by, and subject to, the terms of the Agreement.

 

Please indicate compliance status by circling Yes/No under “Complies” column.

 

Reporting Covenant Required Complies
       
Annual audited consolidated and consolidating financial statements and Compliance Certificate FYE within 180 days Yes No
       
Monthly balance sheet , income statements and statements of cash (Borrower prepared) Monthly within 30 days after each month Yes No
       
Recurring revenue report Monthly within 30 days after each month Yes No
       
Annual financial projections Annually, within 45 days after the start of each fiscal year Yes No
       
Compliance Certificate Monthly within 30 days after each month Yes No
       
Financial Covenants Required Complies
     
Minimum Adjusted EBITDA $_______ 2 Yes No
       
Churn Rate – one month period Not < -1% Yes No
       
Churn Rate – trailing three month period Not < -2% Yes No
       
Minimum Cash Amount $_______ 3 Yes No
       
Minimum Liquidity $2,000,000 Yes No

 

Comments Regarding Exceptions: See Attached.   BANK USE ONLY
       
    Verified:  
SIGNATURE   AUTHORIZED SIGNER
       
    Date:  
TITLE      

 

    Compliance Status Yes No
       
DATE      

 

 

2 Insert applicable amount pursuant to Section 6.7(a).

 

3 Insert applicable amount pursuant to Section 6.7(c).

  

  Exhibit E
1
 
     

 

EXHIBIT F

 

LIBOR LOAN CONTINUATION CERTIFICATE

 

The undersigned hereby certifies as follows:

 

I, ___________________, am the duly elected and acting ________________ of NTN Buzztime, Inc., a Delaware corporation (“ Borrower ”).

 

This LIBOR Loan Continuation Certificate (this “ Certificate ”) is delivered by Borrower to East West Bank (“ Bank ”) pursuant to the Loan and Security Agreement dated as of April 14, 2015 by and among Borrower and Bank (as amended, restated, supplemented or otherwise modified from time to time, the “ Loan Agreement ”). The terms used herein that are defined in the Loan Agreement have the same respective meanings herein as ascribed to them in the Loan Agreement.

 

Borrower requests on ______________, 201_ a LIBOR Loan (the “ Loan ”) as follows:

 

(a) A continuation of an existing LIBOR Loan.

 

(b) The date on which the Loan is to be continued is _____________________, 201__.

 

(c) The amount of the Loan is to be ___________________ ($____________), for an Interest Period of: (select one) [1 month ] [2 months] [3 months] [6months].

 

All representations and warranties stated in the Loan Agreement are true, correct and complete in all material respects as of the date of this Certificate; provided , however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

 

IN WITNESS WHEREOF, this Certificate is executed by the undersigned as of this _____________ day of ____________________, 201_.

 

  NTN BUZZTIME, INC.,
  a Delaware corporation
   
  By:  
  Name:  
  Title:  

 

For Internal Use Only

 

LIBOR Pricing Date   LIBOR Rate   LIBOR Rate Variance   Maturity Date
        ____ %  

 

Disclosure Schedules

 

  Exhibit F
1
 
     

 

DISCLOSURE SCHEDULE EXHIBIT A

 

Permitted Indebtedness

 

None, except as publicly disclosed.

 

Disclosure Schedules

 

     
     

 

DISCLOSURE SCHEDULE EXHIBIT A

 

Permitted Investments

 

None, except as publicly disclosed.

 

Disclosure Schedules

 

     
     

 

DISCLOSURE SCHEDULE EXHIBIT A

 

Permitted Liens

 

None, except as publicly disclosed.

 

Disclosure Schedules

 

     
     

 

DISCLOSURE SCHEDULE 5.5

 

Prior Names

 

Incorporated on April 13, 1984 as Alroy Industries, Inc.

 

Amended certificate of incorporation to change name to NTN Communications, Inc. effective Nov. 13, 1996.

 

Amended certificate of incorporation to change name to NTN Buzztime, Inc. effective Dec. 28, 2005.

 

Disclosure Schedules

 

     
     

 

DISCLOSURE SCHEDULE 5.6

 

Litigation

 

None, except as publicly disclosed.

 

Disclosure Schedules

 

     
     

 

DISCLOSURE SCHEDULE 5.13

 

Inbound Licenses

 

None, except as publicly disclosed.

 

Disclosure Schedules

 

     
     

 

DISCLOSURE SCHEDULE 7.10

 

Inventory and Equipment

 

  Ohio Warehouse
    4138 Weaver Court, East Hilliard, OH 43026
    Mid-Ohio Development Corporation – Landlord
    Property at premises: customer site equipment (PCs, tablets, playmakers, Wi-Fi’s, and other peripheral equipment)
     
  Stump Trivia Office
    14 New England Executive Park, Burlington, MA 01903
    Regus - Landlord
    Property at premises: desks and PCs/laptops for 2 – 3 people)
     
  Stump Trivia Office
    May 1, 2015 estimated start of lease
    159 Overland Road, Waltham, MA 02451
    Source Code Corporation – Sublessor; ABC Commercial Properties - Landlord
    Property at premises: desks and PCs/laptops for 2 – 3 people)
     
  Data Center
    CenturyLink
    17838 Gillette Ave., Irvine, CA 92614
    Property at premises: production servers, switches and firewall currently at facility. Within the next three months, the production data warehouse and development environment servers will also be located at facility.

 

Disclosure Schedules

 

     
     

 

DISCLOSURE SCHEDULE EXHIBIT B

 

Excluded Equipment

 

None, except as publicly disclosed.

 

Disclosure Schedules

 

     
     

 

 

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Ram Krishnan, certify that:

 

1. I have reviewed this report on Form 10-Q of NTN Buzztime, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
     
  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 9, 2016

/s/ Ram Krishnan

  Ram Krishnan
  Chief Executive Officer
  NTN Buzztime, Inc.

  

     
 

 

Exhibit 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

SECURITIES EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Allen Wolff, certify that:

 

1. I have reviewed this report on Form 10-Q of NTN Buzztime, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
     
  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  (d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 9, 2016 /s/ Allen Wolff
  Allen Wolff
  Chief Financial Officer and Executive Vice President
  NTN Buzztime, Inc.

 

     
 

 

 

Exhibit 32.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of NTN Buzztime, Inc. (the “Registrant“) on Form 10-Q for the period ended March 31, 2016 (the “Report“), I, Ram Krishnan, Chief Executive Officer of the Registrant, do hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

(1) the Report, as filed with the Securities and Exchange Commission, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Dated: May 9, 2016 /s/ Ram Krishnan
  Ram Krishnan
  Chief Executive Officer
  NTN Buzztime, Inc.

 

     
 

 

Exhibit 32.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of NTN Buzztime, Inc. (the “Registrant“) on Form 10-Q for the period ended March 31, 2016 (the “Report“), I, Allen Wolff, Chief Financial Officer of the Registrant, do hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

(1) the Report, as filed with the Securities and Exchange Commission, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Dated: May 9, 2016

/s/ Allen Wolff

  Allen Wolff
  Chief Financial Officer and Executive Vice President
  NTN Buzztime, Inc.