FASB ASC 350, Intangibles – Goodwill and Other, ASC 350-30-65, Transition and Open Effective Date Information (“ASC 350-30-65” and formerly referred to as FSP FAS 142-3) amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible. ASC 350-30-65 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The guidance in this ASC 350-30-65 for determining the useful life of a recognized intangible is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements of ASC 350-30-65, however, will be applied prospectively to all intangible assets recognized in the Company’s financial statements as of the effective date. The application of ASC 350-30-65 is not expected to have a material impact on the Company’s earnings or the financial position.

(13) SIGNIFICANT CUSTOMER

 

For the three months ended September 30, 2009 and 2008, the Company generated approximately 15% and 11%, respectively, of total revenue from a national chain, Buffalo Wild Wings together with its franchisees.  For the nine months ended September 30, 2009 and 2008, the Company generated approximately 15% and 12%, respectively, of revenue from that chain.  As of September 30, 2009 and 2008, approximately $71,000 and $158,000, respectively, were included in accounts receivable from this customer.

 

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(14) OBLIGATIONS UNDER CAPITAL LEASE

 

In 2009, the Company entered into a $500,000 equipment lease facility with an equipment leasing company.  The terms of that agreement allow for use of the facility in multiple tranches with each individual tranche having 24 month terms.  Additionally, the equipment lease has a collateral obligation whereby the Company has pledged certain equipment located at the Carlsbad, California location to satisfy the equipment leasing company’s requirements.   As of September 30, 2009, the Company had utilized $457,000 of that facility which has been accounted for as a capital lease.

 

As of September 30, 2009 and December 31, 2008, in aggregate, the Company had obligations under capital leases of $402,000 and $40,000, respectively.

 

On October 1, 2009, the Company entered into a $1,000,000 equipment lease facility with an equipment leasing company.  The terms of that agreement allow for use of the facility for 24 months and for use of the facility in multiple tranches with each individual tranche having 24 month terms.

 

(15) DISCONTINUED OPERATIONS

 

In November 2006, the Company began to actively pursue the sale of its Hospitality division comprised of NTN Wireless and Software Solutions. In the fourth quarter of 2006, the Company applied the provisions of ASC No. 360, “Property, Plant and Equipment,” to certain of its assets which were held for sale. ASC No. 360 requires that a long-lived asset classified as held for sale, be measured at the lower of its carrying amount or fair value, less costs to sell, and that the Company ceases depreciation, depletion and amortization. As of December 31, 2006, the Hospitality division’s assets were classified as held for sale and the respective assets were revalued as of December 31, 2006. Depreciation on these assets ceased effective December 31, 2006. Additionally, corporate expenses previously allocated to the discontinued operations have been reclassified to Buzztime iTV in accordance with ASC No. 360.

 

In March 2007, the Company completed the sale of substantially all of the assets of NTN Wireless for $2.4 million and recognized a gain, net of tax, of approximately $396,000. In October 2007, the Company sold certain intellectual property assets of Software Solutions pursuant to an Asset Purchase Agreement, and in a separate agreement with a customer, the Company discontinued the outsourced software development it was providing. The Company wound down the professional help desk and support and maintenance services as the Company fulfilled its obligations under existing customer agreements. The intellectual property sold constituted substantially all of the remaining operating assets of the Company’s Hospitality Division, which had originally consisted of its Software Solutions and Wireless communications businesses.

 

The operating results for the Hospitality division have been separately classified and reported as discontinued operations in the consolidated statements of operations as follows:

		Three months ended				Nine months ended
		September 30, 2008				September 30, 2008
Operating revenues		$	—			$	21,000
Operating expenses			2,000				530,000
Operating loss		$	(2,000	)		$	(509,000	)
Other income			177,000				177,000
Income (loss) before income taxes		$	175,000			$	(332,000	)
Income tax expense			—				—
Income (loss) from discontinued operations, net of tax		$	175,000			$	(332,000	)

 

The Company accounted for the dissolution of the help desk and support and maintenance operation pursuant to the provisions of ASC No. 420, “Exit or Disposal Cost Obligations.”  ASC No. 420 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to when there is a commitment to dispose of a business segment. Severance for involuntary employee terminations was expensed over the requisite service period in which it was earned as certain employees are required to continue to render service until the Company had fulfilled its obligations under existing customer contracts. Moving, relocation and other associated costs related to the dissolution were expensed as incurred. The Company did not incur severance expenses for involuntary employee terminations after the quarter ended June 30, 2008 and incurred $52,000 for 2008.  The Company concluded its wind down activities in 2008 and it does not expect to incur any additional expenses related to the help desk and support and maintenance function in subsequent periods. 

 

The Company does not have components of assets and liabilities of discontinued operations on its consolidated balance sheet as of September 30, 2009 and December 31, 2008. 

 

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(16) GEOGRAPHICAL INFORMATION

 

The Company has marketed its products in the United States, Canada, and the United Kingdom.  In the third quarter of 2008, the Company ceased its operations in the United Kingdom.  The table below contains information about these geographical areas in which the Company operates or has operated.  Total assets are based on location of domicile.  

 

		Three months ended								Nine months ended
		September 30, 2009				September 30, 2008				September 30, 2009				September 30, 2008
Revenues by geographical area:
United States		$	6,111,000			$	5,952,000			$	17,333,000			$	18,142,000
Canada			606,000				820,000				1,865,000				2,652,000
United Kingdom			—				—				—				177,000
Total revenue		$	6,717,000			$	6,772,000			$	19,198,000			$	20,971,000

 

		September 30, 2009				December 31, 2008
Assets by geographical area:
United States		$	11,485,000			$	6,936,000
Canada			2,674,000				4,726,000
Total assets		$	14,159,000			$	11,662,000

 

(17) PURCHASE COMMITMENT

 

During the quarter ended June 30, 2009, the Company entered into a material manufacturing and supply agreement with a vendor to manufacture certain equipment.  Under the terms of that agreement as amended, the Company is obligated to purchase approximately $1 million in equipment over the three year term of the agreement.   As of September 30, 2009, the Company has satisfied $38,000 of that obligation.

 

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 (18) SHAREHOLDERS’ EQUITY

 

The following table summarizes the Company’s shareholders’ equity activities for the nine months ended September 30, 2009:

		Series A Cumulative Convertible Preferred Stock				Common Stock				Additional Paid-in Capital				Treasury Stock				Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total
Balances at December 31, 2008		$	1			$	277			$	113,267			$	(456	)		$	(105,351	)		$	8			$	7,746
Issuance of stock for exercise of  options							1				27				—				—				—				28
Issuance of stock in lieu of dividends			—				—				8				—				(8	)			—				—
Issuance of common stock for the acquisition of intangible assets of iSports, Inc.			—				2				163				—				—				—				165
Issuance of warrants for the acquisition of intangible assets of iSports, Inc.			—				—				371				—				—				—				371
Issuance of common stock for the acquisition of intangible assets of  i-am TV			—				8				442				—				—				—				450
Issuance of warrants for the acquisition of intangible assets of i-am TV			—								537				—				—				—				537
Sale of common stock in private placement.			—				12				738				—				—				—				750
Non-cash stock based compensation			—				—				133				—				—				—				133
Accumulated other comprehensive income			—				—				—				—				—				497				497
Net loss			—				—				—				—				(1,305	)			—				(1,305	)
Balances at September 30, 2009		$	1			$	300			$	115,686			$	(456	)		$	(106,664	)		$	497			$	9,372

 

The following table summarizes the Company’s shareholders’ equity activities for the nine months ended September 30, 2008:

		Series A Cumulative Convertible Preferred Stock				Common Stock				Additional Paid-in Capital				Treasury Stock				Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total
Balances at December 31, 2007		$	1			$	277			$	112,942			$	(444	)		$	(98,870	)		$	1,662			$	15,568
Issuance of deferred stock units			—				—				(2	)			—				—				—				(2	)
Non-cash stock based compensation			—				—				260				—				—				—				260
Purchase of treasury stock			—				—				—				(12	)			—				—				(12	)
Accumulated other comprehensive income			—				—				—				—				—				(686	)			(686	)
Net loss			—				—				—				—				(5,776	)			—				(5,776	)
Balances at September 30, 2008		$	1			$	277			$	113,200			$	(456	)		$	(104,646	)		$	976			$	9,352

 

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

 

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect future events, results, performance, prospects and opportunities, including statements related to our strategic plans and targets, revenue generation, product availability and offerings, reduction in cash usage, reliance on cash on hand and cash from operations, capital needs, capital expenditures, industry trends and financial position of NTN Buzztime, Inc. and its subsidiaries. Forward-looking statements are based on information currently available to us and our current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management. Words such as “expects,” “anticipates,” “could,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “would,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that may be difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, under the section entitled “Risk Factors,” and in Item 1A of Part II of this Quarterly Report on Form 10-Q, and in other reports we file with the Securities and Exchange Commission from time to time. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

 

Our trademarks, trade names and service marks referenced herein include Buzztime, IWN, iTV Network, iSports, and i-am TV. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner.

 

OVERVIEW

 

We historically have operated principally through two operating divisions: Entertainment and Hospitality. The Entertainment division generates revenue primarily from the Buzztime iTV Network which distributes an interactive television promotional game network to restaurants, sports bars, taverns and pubs, primarily in North America.  Additionally, we generate revenue by selling advertising for distribution via our interactive television network.

 

The Hospitality division has been discontinued. It was comprised of NTN Wireless Communications, Inc. (“NTN Wireless”) and NTN Software Solutions, Inc. (“Software Solutions”). In 2006, we determined that the operation of the Hospitality division was not a strategic fit with our core business and committed to a divestiture plan. These operations have been reclassified as discontinued operations for all periods presented. NTN Wireless provided revenues from producing and distributing guest and server paging systems to restaurants and other markets. Software Solutions developed and distributed customer management software to manage reservations and table service in restaurants. Software Solutions also provided professional help desk services and outsourced software development and support and maintenance services.

 

In March 2007, we completed the sale of substantially all of the assets of NTN Wireless. In October 2007, we sold certain intellectual property assets of Software Solutions pursuant to an Asset Purchase Agreement, and in a separate agreement with a customer, we discontinued the outsourced software development.  Additionally, we completed the wind down of our professional help desk and support and maintenance services during the third quarter of 2008.  We do not expect to incur any additional expenses related to the help desk and support and maintenance function in subsequent periods.

 

Restructuring of Operations

 

            During the third quarter of 2008, we ceased our operations in the United Kingdom. The closure of operations involved the termination of six employees, relocation of nearly all assets to the United States and disposal of certain other assets.  As of the date we ceased operations, UK operations accounted for less than 1% of the total subscriber sites.

 

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The Entertainment Division

 

The out-of-home Buzztime iTV Network has engaged in business in the hospitality industry for 25 years as a promotional platform providing interactive entertainment to patrons in restaurants and sports bars. The iTV Network distributes a wide variety of engaging interactive multi-player games, including trivia quiz shows, play-along sports programming, casino-style and casual games to our Network. Patrons use our wireless game controllers, or Playmakers, to play along with the Buzztime games which are displayed on television screens. Buzztime players can compete with other players within their hospitality venue and also against players in other Network venues.

 

We target national and regional hospitality chains as well as local independent hospitality venues that desire a competitive point-of-difference to attract and retain customers. As of September 30, 2009, we had 3,721 United States Network subscribers and 330 Canadian subscribers. Approximately 29% of our Network subscribers come from leading national chains in the casual-dining restaurant segment such as Buffalo Wild Wings, TGI Friday’s, and Old Chicago.

 

Through the transmission of interactive game content stored on a site server at each location, our Buzztime iTV Network enables single-player and multi-player participation as part of local, regional, national or international competitions supported with prizes and player recognition. Our Buzztime iTV Network also generates revenue through the sale of advertising and marketing services to companies seeking to reach the millions of consumers that visit the Buzztime iTV Network’s venues.

 

We also generate revenue from distributing and licensing our Buzztime-branded content and related technology to consumer platforms, with a focus on interactive networks such as cable TV, satellite TV and mobile phones. Our distribution efforts focus on licensing real-time, mass-participation games such as trivia, head-to-head multi-player games such as Texas Hold’em and single-player games such as solitaire.

 

Our games are available as a premium monthly subscription service to Echostar DISH and Bell ExpressVu satellite customers in the U.S. and Canada, respectively. Revenue from our distribution division is derived primarily from license fees and royalties from third-party licensees who distribute Buzztime content to end-users, as well as from third-party development and production fees.

 

In April 2009, we purchased the assets of iSports, Inc., a provider of mobile sports and entertainment content.  The purchase provided us with mobile sports and entertainment content including near real-time sports scores and news, and interactive gameplay.  In May 2009 we purchased the assets of i-am TV from Instant Access Media, LLC which included approximately 1,400 flat panel television screens located in over 360 hospitality venues.  The acquisition of these screens and other assets expanded our digital broadcast network into new locations.

 

The Hospitality Division (Discontinued Operations)

 

NTN Wireless earned revenue from the sale of on-site wireless paging products primarily to restaurants but also hospitals, church and synagogue nurseries, salons, business offices and retail establishments in North America. In restaurants, these products were provided to customers while waiting for a table and activated to let them know when their table was ready, as well as to restaurant staff to alert them to certain issues, such as when hot food is ready to be served.

 

Software Solutions generated revenue from the licensing of proprietary seating management and reservation management systems software to restaurants, casinos and other venues. Software Solutions also provided professional help desk services and outsourced software development and support and maintenance services to Domino’s Pizza and their franchisees and other quick service restaurant locations.

 

In March 2007, we completed the sale of substantially all of the assets of NTN Wireless for $2.4 million and recognized a gain, net of tax, of approximately $396,000. In October 2007, we sold certain intellectual property assets of Software Solutions pursuant to an Asset Purchase Agreement, and in a separate agreement with a customer, we discontinued the outsourced software development we were providing. The intellectual property sold constituted substantially all of the remaining operating assets of our Hospitality division, which had originally consisted of our Software Solutions and Wireless businesses. We have accounted for our Hospitality division as a reportable segment but we have presented its operations as discontinued operations since the fourth quarter of 2006. We have completed the dissolution and do not anticipate any further costs related to the dissolution of the professional help desk and support and maintenance services.

 

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CRITICAL ACCOUNTING POLICIES

 

The discussion and analysis of our financial condition and results of operations are based on our condensed 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 broadcast equipment, the provision for income taxes including the valuation allowance, bad debts, investments, purchase price allocations related to acquisitions, impairment of software development costs, goodwill and broadcast equipment and  intangible assets and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ 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 the Company’s 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 quarter ended September 30, 2009 compared to 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, 2008, except for the following addition:

 

Purchase Accounting – We have accounted for our acquisitions pursuant to ASC 805, “Business Combinations.”  We have recorded all acquired tangible and intangible assets and all assumed liabilities based upon their estimated fair values.  All estimated fair values are preliminary and subject to change.  As a result of the valuation procedures performed, we recorded $1,273,000 in customer relationship intangible assets, $599,000 in unpatented technology, $64,000 of assumed liabilities and a $285,000 earnout liability.  The majority of the customer relationship intangible asset will be amortized on a straight line basis over a period of 44 months and recorded in selling, general and administrative expenses while approximately $300,000 was amortized over the three months ended August 31, 2009 coinciding with the period that the related advertising revenue was recognized.  The unpatented technology intangible asset will be amortized on a straight line basis over a period of 60 months and recorded in direct expenses.  The useful lives and amortization methods reflect the estimated period of time by which the underlying intangible asset benefits will be realized.  We recorded $326,000 and $445,000 in amortization expense related to these intangible assets during the three and nine months ended September 30, 2009.

 

RESULTS OF OPERATIONS

 

Our Hospitality division is classified as discontinued operations in accordance with ASC No. 360, Property, Plant and Equipment. The operating results for these businesses have been separately classified and reported as discontinued operations in the condensed consolidated financial statements.

 

Results of Continuing Operations

 

Three months ended September 30, 2009 compared to the three months ended September 30, 2008

 

Continuing operations, which consists of the Entertainment division, generated a net loss of $768,000 for the three months ended September 30, 2009, compared to net loss of $1,032,000 for the three months ended September 30, 2008.

 

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Revenue

 

Revenue from continuing operations decreased $55,000 or 1%, to $6,717,000 for the three months ended September 30, 2009 from $6,772,000 for the three months ended September 30, 2008, primarily due to a decrease in average revenue generated per site related to a strategic reduction in pricing, which was partially offset by increases in site count, an increase in advertising revenues and certain nonrecurring hardware sales. Comparative site count information for Buzztime iTV Network is as follows:

 

		Network subscribers As of September 30,
		2009				2008
United States			3,721				3,438
Canada			330				307
United Kingdom			—				—
Total			4,051				3,745

 

Direct Costs and Gross Margin

 

The following table compares the direct costs and gross margin from continuing operations for 2009 and 2008:

 

		Three months ended September 30,
		2009				2008
Revenue		$	6,717,000			$	6,772,000
Direct costs			1,743,000				1,939,000
Gross margin		$	4,974,000			$	4,833,000
Gross margin percentage			74%				71%

 

Gross margin as a percentage of revenue improved by 3 percentage points to 74% for the three months ended September 30, 2009 compared to 71% in the prior year period. The increase in the gross margin percentage is primarily the result of a reduction in depreciation expense as equipment became fully depreciated, a decrease in communication costs due to the conversion of sites from satellite to DSL communications, a reduction in content costs, a decrease in direct salaries as a result of a reduced headcount and a decrease in average revenue generated per site related to a strategic reduction in pricing.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased $282,000 or 5%, to $5,474,000 for the three months ended September 30, 2009 from $5,756,000 for the three months ended September 30, 2008.  Selling, general and administrative expenses decreased due to several factors. Salary expenses decreased $109,000 due to a reduction in headcount that occurred in January 2009.  Severance expenses decreased $167,000 due to severance expenses in the prior year associated with the departure of senior management and of employees located in the UK in connection with the closing of that office.  Consulting services decreased $151,000 as we decreased our overall utilization of external consulting services.  Other taxes decreased $72,000 primarily due to the finalization of the sales settlement with the state of Texas.

 

The above decreases were offset by a $222,000 impairment charge related to the abandonment of software development projects.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) increased $283,000, to $416,000 for the three months ended September 30, 2009 from $133,000 in the prior year primarily due to the acquisition of intangible assets, which has resulted in increased amortization expense.

 

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Interest Income and Expense

 

Interest income decreased $20,000, to $7,000 for the three months ended September 30, 2009 from $27,000 in the prior year. The decrease was due to a decrease in our average cash balance invested in interest bearing securities.

 

Interest expense increased $19,000 to $23,000 for the three months ended September 30, 2009 from $4,000 in the prior year.  The increase in interest expense is the result of equipment leases we entered into.

 

Other Income

 

Other income increased $86,000 to $155,000 for the three months ended September 30, 2009 from $69,000 for the three months ended September 30, 2008 due to a foreign currency exchange gain related to intercompany transactions with our Canadian subsidiary.

 

Income Taxes

 

We expect to incur minimal federal and state income tax liability in 2009 related to our U.S. operations.  We also expect to pay income taxes in Canada due to the profitability of NTN Canada.  Our tax provision for the three months ended September 30, 2009 decreased $77,000 compared to the $68,000 provision for income taxes recorded for the three months ended September 30, 2008.  We continue to provide a 100% valuation allowance against our deferred tax assets related to certain net operating losses as realization of such tax benefits is not assessed as more likely than not.

 

Results of Discontinued Operations

 

Three months ended September 30, 2009 compared to the three months ended September 30, 2008

 

The wind down of our discontinued operations was completed in the third quarter of 2008; therefore, there is no activity to report for the three months ended September 30, 2009. The operating results of the discontinued operations are as follows for the three months ended September 30, 2008:

 

		September 30, 2008
Operating revenues		$	—
Operating expenses			2,000
Operating loss		$	(2,000	)
Other income			177,000
Income from discontinued operations, net of tax		$	175,000

 

EBITDA – Consolidated Operations

 

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with U.S. GAAP. Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation and amortization charges in comparison to their GAAP earnings or loss.

 

The following table reconciles our consolidated net loss per GAAP to EBITDA:

 

		Three months ended
		September 30, 2009				September 30, 2008
Net loss per GAAP		$	(768,000	)		$	(857,000	)
Interest expense (income), net			16,000				(23,000	)
Depreciation and amortization			986,000				752,000
Income taxes			(9,000	)			68,000
EBITDA		$	225,000			$	(60,000	)

 

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Our operations generated EBITDA levels as presented below:

 

		Three months ended September 30, 2009
		Entertainment				Discontinued operations				Total
Net loss per GAAP		$	(768,000	)		$	—			$	(768,000	)
Interest expense, net			16,000				—				16,000
Depreciation and amortization			986,000				—				986,000
Income taxes			(9,000	)			—				(9,000	)
EBITDA		$	225,000			$	—			$	225,000

 

		Three months ended September 30, 2008
		Entertainment				Discontinued operations				Total
Net loss per GAAP		$	(1,032,000	)		$	175,000			$	(857,000	)
Interest income, net			(23,000	)			—				(23,000	)
Depreciation and amortization			752,000				—				752,000
Income taxes			68,000				—				68,000
EBITDA		$	(235,000	)		$	175,000			$	(60,000	)

 

Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008

 

Continuing operations, which consists of the Entertainment division, generated a net loss of $1,305,000 for the nine months ended September 30, 2009, compared to net loss of $5,444,000 for the nine months ended September 30, 2008.

 

Revenue

 

Revenue from continuing operations decreased $1,773,000 or 8%, to $19,198,000 for the nine months ended September 30, 2009 from $20,971,000 for the nine months ended September 30, 2008, primarily due to a decrease in average revenue generated per site related to a strategic reduction in pricing partially offset by increases in site count, an increase in advertising revenues and certain nonrecurring hardware sales.

 

Direct Costs and Gross Margin

 

The following table compares the direct costs and gross margin from continuing operations for 2009 and 2008:

 

		Nine months ended September 30,
		2009				2008
Revenue		$	19,198,000			$	20,971,000
Direct costs			4,769,000				6,014,000
Gross margin		$	14,429,000			$	14,957,000
Gross margin percentage			75%				71%

 

Gross margin as a percentage of revenue improved to 75% for the nine months ended September 30, 2009 compared to 71% in the prior year period. The increase in the gross margin percentage is primarily the result of a reduction in depreciation expense as equipment became fully depreciated, a decrease in communication costs due to the conversion of sites from satellite to DSL communications, a reduction in content costs and a decrease in direct salaries as a result of reduced headcount.  Additionally, the increase in the gross margin percentage is partially offset by the decrease in average revenue generated per site related to a strategic reduction in pricing.

 

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Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased $4,857,000 or 24%, to $15,165,000 for the nine months ended September 30, 2009 from $20,022,000 for the nine months ended September 30, 2008.  Selling, general and administrative expenses decreased due to several factors.  Salary expenses decreased $1,223,000 due to a reduction in headcount that occurred in January 2009.  Severance expenses decreased $682,000 due to severance expenses in the prior year associated with the departure of senior personnel including the CEO and the closing of our UK office.   Marketing expenses decreased $901,000 due to a change in our marketing strategy, including reducing direct mail campaigns and reduced participation in promotions and trade shows.  Consulting expenses decreased $936,000 as we decreased our overall utilization of external consulting services.  Other taxes decreased $220,000 primarily due to the finalization of the sales tax settlement with the state of Texas in the second quarter of 2009.  Bad debt expense decreased $366,000 predominately due to recoveries of certain accounts previously written off and an increased recovery rate.  Legal expenses decreased $197,000 due to a reduction in legal activity regarding corporate governance matters and a trademark infringement case.  Expenses related to seminars, subscriptions and memberships decreased $94,000.  General spend related to payroll processing fees, professional tax services and supplies decreased $193,000.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) increased $356,000, to $756,000 for the nine months ended September 30, 2009 from $400,000 in the prior year due to the acquisition of intangible assets, which has resulted in increased amortization expense.

 

Interest Income and Expense

 

Interest income decreased $58,000, to $71,000 for the nine months ended September 30, 2009 from $129,000 in the prior year. The Company’s average cash balance invested in interest bearing securities decreased which resulted in less interest income.

 

Interest expense increased $31,000 to $35,000 for the nine months ended September 30, 2009 from $4,000 for the nine months ended September 30, 2008.  The increase in interest expense is the result of additional equipment leases we entered into.

 

Other Income

 

Other income increased $86,000 to $155,000 for the nine months ended September 30, 2009 from $69,000 for the nine months ended September 30, 2008 due to a foreign currency exchange gain related to intercompany transactions with our Canadian subsidiary.

 

Income Taxes

 

We expect to incur minimal federal and state tax liability in 2009 related to our U.S. operations. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. As a result, we recorded a tax provision of $4,000 for the nine months ended September 30, 2009. Our tax provision decreased $169,000 for the nine months ended September 30, 2009 compared to the $173,000 provision for income taxes recorded for the nine months ended September 30, 2008. We continue to provide a 100% valuation allowance against our deferred tax assets related to certain net operating losses as realization of such tax benefits is not assessed as more likely than not.

 

Results of Discontinued Operations

 

Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008

 

The wind down of our discontinued operations was completed in the third quarter of 2008; therefore, there is no activity to report for the nine months ended September 30, 2009. The operating results of the discontinued operations are as follows for the nine months ended September 30, 2008:

 

		September 30, 2008
Operating revenues		$	21,000
Operating expenses			530,000
Operating loss		$	(509,000	)
Other income			177,000
Loss from discontinued operations, net of tax		$	(332,000	)

 

 

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EBITDA – Consolidated Operations

 

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with accounting principles generally accepted in the United States (GAAP). Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation and amortization charges in comparison to their GAAP earnings or loss.

 

The following table reconciles our consolidated net loss per GAAP to EBITDA:

 

		Nine months ended
		September 30, 2009				September 30, 2008
Net loss per GAAP		$	(1,305,000	)		$	(5,776,000	)
Interest income, net			(36,000	)			(125,000	)
Depreciation and amortization			2,329,000				2,404,000
Income taxes			4,000				173,000
EBITDA		$	992,000			$	(3,324,000	)

 

Our operations generated EBITDA levels as presented below:

 

		Nine months ended September 30, 2009
		Entertainment				Discontinued operations				Total
Net loss per GAAP		$	(1,305,000	)		$	—			$	(1,305,000	)
Interest income, net			(36,000	)			—				(36,000	)
Depreciation and amortization			2,329,000				—				2,329,000
Income taxes			4,000				—				4,000
EBITDA		$	992,000			$	—			$	992,000

 

		Nine months ended September 30, 2008
		Entertainment				Discontinued operations				Total
Net loss per GAAP		$	(5,444,000	)		$	(332,000	)		$	(5,776,000	)
Interest income, net			(125,000	)			—				(125,000	)
Depreciation and amortization			2,404,000				—				2,404,000
Income taxes			173,000				—				173,000
EBITDA		$	(2,992,000	)		$	(332,000	)		$	(3,324,000	)

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2009, we had cash and cash equivalents of $3,217,000 compared to cash and cash equivalents of $3,362,000 as of December 31, 2008.  Including the effect of exchange rates on cash, we used $145,000 in cash in the nine months ended September 30, 2009 compared to cash used of $5,016,000 in the nine months ended September 30, 2008.  The $4,871,000 decrease of cash used in the nine months ended September 30, 2009 compared to the prior year period was driven predominately by the $4,471,000 decrease of net loss.  We have taken strong measures to reduce our use of cash.  Those measures included reducing headcount through strategic reductions in our work force, renegotiated pricing with numerous vendors, a decrease in the use of consultants where practical and a revision of our marketing plan designed to reduce costs while continuing to support our business plan. 

 

During 2009, we intend to continue to rely upon our cash on hand and cash flow from operations to meet our liquidity needs. While we believe that the actions taken in 2008 and the first three quarters of 2009 to reduce our operating costs, improve our gross profit margin and manage our working capital should benefit us in 2009 and beyond, in these uncertain economic times there can be no assurance that those actions will be sufficient.

 

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On May 11, 2009, we entered into an agreement with certain investors in Instant Access Media, LLC whereby they purchased 2,419,355 shares of our Common Stock in a private placement raising $750,000 in additional working capital. That cash has been used to fund general working capital requirements as well as certain capital expenditures.

We believe existing cash and cash equivalents, together with funds generated from operations, will be sufficient to meet our operating cash requirements for at least the next 12 months. We have no debt obligations other than capital leases.  In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, further reduce operational cash uses, sell assets or seek financing. Any actions we may undertake to reduce planned capital purchases, further reduce expenses, or generate proceeds from the sale of assets may be insufficient to cover shortfalls in available funds.  If we require additional capital, we may be unable to secure additional financing on terms that are acceptable to us, or at all.

Working Capital

 

As of September 30, 2009, we had working capital (current assets in excess of current liabilities) of $1,172,000 compared to $874,000 as of December 31, 2008.  The following table shows our change in working capital from December 31, 2008 to September 30, 2009.

 

		Working Capital Increase (Decrease)
		(In thousands)
Working capital as of December 31, 2008		$	874
Changes in current assets:
Cash and cash equivalents			(145	)
Accounts receivable, net of allowances			470
Investment available-for-sale			122
Prepaid expenses and other current assets			108
Total current assets			555
Changes in current liabilities:
Accounts payable			(128	)
Accrued expenses			(320	)
Sales tax payable			186
Accrued salaries			142
Accrued vacation			(18	)
Income tax payable			18
Obligations under capital lease			(222	)
Deferred revenue			85
Total current liabilities			(257	)
Net change in working capital			298
Working capital as of September 30, 2009		$	1,172

 

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Cash Flows

 

Cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized as follows: 

		(In thousands) For the nine months ended
		September 30, 2009				September 30, 2008
Cash provided by (used in):
Operating activities		$	1,121			$	(2,231	)
Investing activities			(2,187	)			(2,372	)
Financing activities			684				(23	)
Effect of exchange rates			237				(390	)
Net decrease in cash and cash equivalents		$	(145	)		$	(5,016	)

Net cash from operating activities.  We are dependent on cash flows from operations to meet our cash requirements.  Net cash provided by operating activities was $1,121,000 during the nine months ended September 30, 2009 compared to net cash used in operating activities of $2,231,000 for the nine months ended September 30, 2008.  The $3,352,000 change in cash provided by operations was primarily due to a $4,471,000 decrease in our net loss, a decrease in non-cash charges of $691,000 and a $903,000 decrease in cash used by operating assets and liabilities.  The significant decrease of our net loss was primarily the result of a $5,746,000 reduction of operating expenses. Our largest use of cash is payroll and related costs.  Payroll and related costs decreased $1,536,000 to $9,846,000 for the nine months ended September 30, 2009 from $11,382,000 for the same period in 2008.  This decrease is the result of our strategic reductions in work force in 2008 and the first quarter of 2009.  Our primary source of cash is cash we generate from customers.  Cash received from customers decreased $2,115,000 to $19,062,000 for the nine months ended September 30, 2009 from $21,177,000 in 2008 for the same period.   That decrease in cash from customers is due to our strategic decrease in pricing offset by an increase in site count.   The principal changes in non-cash items that affected operating cash flow for the nine months ended September 30, 2009 when compared to the same period in 2008 included a $75,000 decrease in depreciation and amortization as assets become fully depreciated, a $112,000  reduction in loss from disposition of equipment  and capitalized software and  a  $377,000 decrease of the provision for doubtful accounts due  to recoveries of certain accounts previously written off and an increased recovery rate.

Cash used in discontinued operations was $807,000 for the nine months ended September 30, 2008 compared to $0 cash used for discontinued operations for the same period in 2009.  

 

Net cash from investing activities.  For the nine months ended September 30, 2009, we used $2,187,000 in cash for investing activities, which represents a reduction of $185,000 from the prior year period when we used $2,372,000 in cash from investing activities.  The change in cash flows from investing activities when comparing the nine months ended September 30, 2009 to the same period in 2008 was due primarily to the following:

 

·

Cash used for capital expenditures decreased $273,000,

·

Cash used for software development initiatives increased $11,000, and

·

Cash used for deposits on equipment increased $41,000.

 

Net cash from financing activities.  Net cash provided by financing activities increased $707,000 to $684,000 for the nine months ended September 30, 2009 compared to net cash used of $23,000 for the same period in 2008. Included in net cash provided by financing activities for the nine months ended September 30, 2009, was $750,000 in proceeds from the sale of common stock in the aforementioned private placement transaction.  The sources of cash were offset by $94,000 in principal payments on capital leases.  

 

Other information.   In 2009, we entered into a $500,000 equipment lease facility with an equipment leasing company.  The terms of that agreement allow for use of the facility in multiple tranches with each individual tranche having a 24 month term.  As of September 30, 2009, we utilized $457,000 of that facility which has been accounted for as a capital lease.  We expect to utilize the full $500,000 facility before the end of 2009. 

 

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On October 1, 2009, we entered into a $1,000,000 equipment lease facility with an equipment leasing company.  The terms of that agreement allow for use of the facility for 24 months and for use of the facility in multiple tranches with each individual tranche having 24 month terms. 

 

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 12 of the condensed consolidated financial statements, “Recent Accounting Pronouncements.”

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

We are exposed to risks related to currency exchange rates, stock market fluctuations, and interest rates. As of September 30, 2009, we owned common stock of an Australian company, eBet, that is subject to market risk.  The value of the investment has increased $84,000 and $122,000 during the three and nine months ended September 30, 2009, respectively, and is recorded as other comprehensive income on our consolidated balance sheet.  

 

This investment is exposed to further market risk in the future based on the operating results of the Australian company and stock market fluctuations. Additionally, the value of the investment is further subject to changes in Australian currency exchange rates which would impact the value of the investment.

 

During the nine months ended September 30, 2009, we recognized a $155,000 foreign currency exchange gain related to intercompany transactions with our Canadian subsidiary

 

We do not believe that inflation has had a material impact on our business or operating results during the periods presented.

 

We do not have any derivative financial instruments, nor do we have any speculative or hedging instruments.

 

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 Securities Exchange Act Rule 13a-15(e)) 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 Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission 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 the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on our evaluation, our Chief Executive Officer and Chief 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

 

During the period covered by this report, we have had no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

Sales and Use Tax

 

 From time to time, state tax authorities will make inquiries as to whether or not a portion of our services require the collection of sales and use taxes from customers in those states. Many states have expanded their interpretation of their sales and use tax statutes to derive additional revenue.  We evaluate such inquiries on a case-by-case basis and have favorably resolved the majority of these tax issues in the past without any material adverse consequences.  During the quarter ended March 31, 2009, we settled a long on-going sales tax evaluation with the state of Texas.  We entered into an Audit Resolution Agreement and Joint Motion to Dismiss with the State of Texas pursuant to which we will pay the state approximately $450,000 over a 2 year period.  As part of those agreements, both parties agreed to waive all rights to any redetermination or refund hearings.  In February 2009, the Company began collecting and remitting sales tax in the state of Texas in accordance with the state tax statutes.  As of September 30, 2009, $386,000 is due to the State of Texas under this settlement agreement.

 

We are involved in ongoing sales tax inquiries, including certain formal assessments of $601,000, with other states.  As a result of those inquiries and the Texas liability discussed above, we recorded a total liability of $829,000 and $867,000 as of September 30, 2009 and December 31, 2008, respectively.  Based on the guidance set forth by ASC No. 450, Contingencies, we deemed the likelihood that we will be forced to pay all or part of these assessments with other states as reasonably possible.

 

Item 1A.

Risk Factors.

 

Risk Factors That May Affect Future Results

 

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, 2008 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 our annual report actually occurs, 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.

 

The following risk factor is in addition to 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, 2008:

 

We may not successfully address problems encountered in connection with any acquisitions.

 

During the second quarter of 2009, we acquired assets from two businesses and we expect to consider opportunities to acquire or make investments in other technologies, products, and businesses that could complement our current products and services, expand the breadth of our markets or enhance our technical capabilities.  We have a limited history of acquiring and integrating businesses.  Acquisitions and strategic investments involve numerous risks, including:

 

·

problems assimilating employees, or the purchased products, business operations or technologies;

·

unanticipated costs associated with the acquisition, including accounting and legal charges, capital expenditures, and transaction expenses;

·

diversion of management's attention from our core business;

·

adverse effects on existing business relationships with customers and suppliers;

·

risks associated with entering markets in which we have no or limited prior experience;

·

unanticipated or unknown liabilities relating to the acquired businesses;

·

the need to integrate accounting, management information, manufacturing, human resources and other administrative systems to permit effective management; and

·

potential loss of key employees of acquired organizations.

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer.  In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders may be diluted.  Also, the anticipated benefit of our acquisitions may not materialize.  Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our operating results or financial condition.  Future acquisitions may also require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all. 

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3.

Defaults Upon Senior Securities.

 

None

 

Item 4.

Submission of Matters to a Vote of Security Holders.

 

None

 

 

Item 5.

Other Information.

 

None

 

Item 6.

Exhibits.

 

Exhibit No.			Description
	31.1#		Certification of principal executive officer pursuant to Rule 13a-14(a)*
	31.2#		Certification of principal financial officer pursuant to Rule 13a-14(a)*
	32.1#		Certification of principal executive officer pursuant to Rule 13a-14(b) / 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
	32.2#		Certification of principal financial officer pursuant to 13a-14(b) / 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

#

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 registrant whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

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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: November 13, 2009	By:	/s/ Kendra Berger
		Kendra Berger
		Chief Financial Officer
		(on behalf of the Registrant, and as its Principal Financial and Accounting Officer)

 

 

 

 

 

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