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| NTN > SEC Filings for NTN > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
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, 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, 2007, 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.
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 royalty revenue by
distributing our game content and technology to other third-party consumer
platforms, including cable television, satellite television, online, retail
games and toys, airlines and books. Additional revenue is generated from
advertising revenues sold for distribution via the 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.
On March 30, 2007, we completed the sale of substantially all of the assets of NTN Wireless. On October 25, 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, the Company completed the wind down of its 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
In January 2007 we restructured our Canadian operations to reduce our costs and streamline operations. The restructuring involved a reduction of ten employees, moving the operation to a smaller facility and subleasing the previously occupied facility until the end of the original lease. Along with the restructuring, we sold certain assets and granted a license for the related licensed materials of our Interactive Events business to a former employee.
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 September 30, 2008, nearly all activities related to this closure had taken place and nearly all costs directly related to the closure of operations had been incurred. As of the date we ceased operations, UK operations accounted for less than 1% of the total subscriber sites.
The Entertainment Division
The out-of-home Buzztime iTV Network has maintained a unique and preemptive position in the hospitality industry for over 20 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 Subscribers. 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 Subscriber 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, 2008, we had 3,438 United States Network subscribers and 307 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, Applebee's and Damon's Grill.
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 earns revenue from 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 incremental licensing revenue derived from cable television, satellite television, mobile phones, home electronic games, cards and books. The game content is designed for broad audiences and includes trivia quiz shows, real-time sports prediction games that are played along with live televised sporting events, multi-player card and billiard games as well as single-player card, arcade, puzzle and board games.
Our games have been available as a two-way cable TV game service since June 2002. Currently, our games (including trivia, Texas Hold'em, Buzztime Billiards and assorted single-player games) are licensed to eight cable systems including Comcast and Blue Ridge Communications and are available to the digital cable subscribers for free. Our games are also available as a premium monthly subscription service to Echostar DISH and Bell ExpressVu satellite customers in the U.S. and Canada, respectively. We also have license arrangements with Cadaco for retail electronic and card games and Square One Publishers for the Buzztime Trivia Book Series. 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.
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 is 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.
Web Site Access to SEC Filings
We maintain an Internet website at www.buzztime.com. We make available free of charge on our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act and certain other filings as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Materials we file with the SEC may be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding our Company that we file electronically with the SEC.
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, 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.
We believe that the estimates, assumptions and judgments involved in the accounting policies described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies.
RESULTS OF OPERATIONS
Our Hospitality division is classified as discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. 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, 2008 compared to the three months ended September 30, 2007
Continuing operations, which consists of the Entertainment division, generated a net loss of $1,032,000 for the three months ended September 30, 2008, compared to net loss of $1,617,000 for the three months ended September 30, 2007.
Revenue
Revenue from continuing operations decreased $704,000 or 9%, to $6,772,000 for
the three months ended September 30, 2008 from $7,476,000 for the three months
ended September 30, 2007, due to a reduction in our site count predominately
driven by the closure of our UK operations, the Chapter 7 filing of the company
owned Bennigan's restaurant chain and changes in our pricing strategy.
Comparative site count information for Buzztime iTV Network is as follows:
Network subscribers
As of September 30,
2008 2007
United States 3,438 3,488
Canada 307 316
United Kingdom - 68
Total 3,745 3,872
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Direct Costs and Gross Margin
The following table compares the direct costs and gross margin from continuing
operations for 2008 and 2007:
Three months ended
September 30,
2008 2007
Revenue $ 6,772,000 $ 7,476,000
Direct costs 1,971,000 2,249,000
Gross margin $ 4,801,000 $ 5,227,000
Gross margin percentage 71% 70%
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Gross margin as a percentage of revenue improved to 71% for the three months ended September 30, 2008 compared to 70% in the prior year period. The one point increase in the gross margin percentage is primarily the result of a reduction in depreciation expense as equipment became fully depreciated.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $92,000 or 2%, to $5,724,000 for the three months ended September 30, 2008 from $5,816,000 for the three months ended September 30, 2007. Selling, general and administrative expenses decreased due to several factors. Marketing expenses decreased $478,000 due to an overall reduction in advertising, trade shows and outsourced marketing services. These decreases were offset by several factors. Severance expenses increased $231,000 due to severance arrangements entered into with senior management and UK employees in connection with the termination of their employment. Legal expenses increased $62,000 related to corporate governance matters as well as an ongoing trademark infringement case we initiated. Lease expenses increased $50,000 due to operating leases acquired in the current year. Bad debt expense increased $37,000 related to customer cancellations and the Chapter 7 filing of the company owned Bennigan's restaurant chain.
Interest Income and Expense
Interest income decreased $80,000, to $27,000 in 2008 from $107,000 in the prior year. The Company's average cash balance invested in interest bearing securities decreased which resulted in less interest income. Interest expense in 2008 remained consistent with the prior year period.
Income Taxes
We expect to report a U.S. tax loss for the year ending December 31, 2008. We expect that we will not incur a federal tax liability, however; we will likely incur a state tax liability. 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 $68,000 for the three months ended September 30, 2008. This was a $33,000 increase compared to the $35,000 provision for income taxes recorded for the three months ended September 30, 2007. 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, 2008 compared to the three months ended
September 30, 2007
Discontinued operations generated net income of $175,000 for the three months
ended September 30, 2008 compared to a net loss of $168,000 for the three months
ended September 30, 2007. The operating results of the discontinued operations
are as follows for 2008 and 2007:
Three months ended
September 30, September 30,
2008 2007
Operating revenues $ - $ 910,000
Operating expenses 2,000 1,078,000
Operating loss $ (2,000 ) $ (168,000 )
Other 177,000 -
Income (loss) from discontinued operations, net of tax $ 175,000 $ (168,000 )
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On March 30, 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. On October 25, 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 it was 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. 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 do not anticipate any further costs related to the dissolution of the professional help desk and support and maintenance services.
The Company recorded income from discontinued operations, net of tax, of approximately $175,000 during the three months ended September 30, 2008. That income was substantially due to the reversal of certain customer and warranty related reserves that management deemed no longer necessary, based largely on historical claim activity indicating that the probability of the Company realizing these reserves in future periods is remote.
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:
Three months ended
September 30, September 30,
2008 2007
Net loss per GAAP $ (857,000 ) $ (1,785,000 )
Interest income, net (23,000 ) (102,000 )
Depreciation and amortization 752,000 1,008,000
Income taxes 68,000 35,000
EBITDA $ (60,000 ) $ (844,000 )
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Our operations generated EBITDA levels as presented below:
Three months ended September 30, 2008
Discontinued
Entertainment operations Total
Net loss (income) 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 )
Three months ended September 30, 2007
Discontinued
Entertainment operations Total
Net loss per GAAP $ (1,617,000 ) $ (168,000 ) $ (1,785,000 )
Interest income, net (102,000 ) - (102,000 )
Depreciation and amortization 1,008,000 - 1,008,000
Income taxes 35,000 - 35,000
EBITDA $ (676,000 ) $ (168,000 ) $ (844,000 )
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Nine months ended September 30, 2008 compared to the nine months ended September 30, 2007
Continuing operations, which consists of the Entertainment division, generated a net loss of $5,444,000 for the nine months ended September 30, 2008 compared to net loss of $2,757,000 for the nine months ended September 30, 2007.
Revenue
Revenue from continuing operations decreased $1,878,000 or 8%, to $20,971,000
for the nine months ended September 30, 2008 from $22,849,000 for the nine
months ended September 30, 2007, due to a reduction in our site count
predominately driven by the closure of our UK operations, the Chapter 7 filing
of the company owned Bennigan's restaurant chain and changes in our pricing
strategy. Comparative site count information for the Buzztime iTV Network is as
follows:
Network subscribers
As of September 30,
2008 2007
United States 3,438 3,488
Canada 307 316
United Kingdom - 68
Total 3,745 3,872
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Direct Costs and Gross Margin
The following table compares the direct costs and gross margin from continuing
operations for 2008 and 2007:
Nine months ended
September 30,
2008 2007
Revenue $ 20,971,000 $ 22,849,000
Direct costs 6,095,000 6,675,000
Gross margin $ 14,876,000 $ 16,174,000
Gross margin percentage 71% 71%
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Gross margin as a percentage remained stable at 71% for the nine months ended September 30, 2008 and 2007.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2,755,000 or 16%, to $19,941,000 for the nine months ended September 30, 2008 from $17,186,000 for the nine months ended September 30, 2008. Selling, general and administrative expenses increased due to several factors. Consulting expenses increased $1,010,000 as the company utilized the services of external consultants on a number of initiatives. Severance expense increased $996,000 as a result of the elimination of 22 positions, closing of the UK office and the departure of the former CEO. Salary expense increased $368,000 due to changes in the employee mix and related compensation levels. Legal expenses increased $224,000 related to corporate governance matters as well as an ongoing trademark infringement case we initiated. Additionally, bad debt expense increased $178,000 related to customer cancellations and bankruptcies. Software disposal expenses increased $152,000 due to impairments on certain projects that were deemed to no longer fit with our current strategy.
The above increases were offset by a $275,000 decrease in marketing expenses due to an overall reduction in advertising, trade shows, and outsourced marketing services.
Restructuring Costs
We recorded restructuring charges totaling $478,000 during the nine months ended September 30, 2007 in connection with the restructuring of the Canadian operation to reduce costs and streamline operations. Of this amount, approximately $337,000 was for one-time termination benefits, $99,000 related to costs to exit certain contractual and lease obligations and $42,000 for moving and relocation costs. The restructuring involved a reduction of 10 employees and leased space.
Depreciation and amortization
Depreciation and amortization not related to direct operating costs decreased $21,000 or 5%, to 400,000 for the nine months ended September 30, 2008 from $421,000 in 2007 due to various fixed assets becoming fully depreciated, thereby reducing our depreciation in 2008.
Interest Income and Expense
Interest income decreased $124,000, to $129,000 for the nine months ended September 30, 2008 from $253,000 in the prior year due to a decrease in our average cash balance invested. Interest expense decreased $22,000 to $4,000 in 2008 from $26,000 in 2007 due to a decrease in unamortized capitalized leases.
Income Taxes
We expect to report a U.S. tax loss for the year ending December 31, 2008. We expect that we will not incur a federal tax liability, however; we will likely incur a state tax liability. 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 $173,000 for the nine months ended September 30, 2008. This was a $15,000 decrease compared to the $188,000 provision for income taxes recorded for the nine months ended September 30, 2007. We continue to provide a 100% valuation allowance against our deferred tax assets related to certain net operating . . .
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