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NTN > SEC Filings for NTN > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for NTN BUZZTIME INC


29-Mar-2013

Annual Report


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

This report (including, but not limited to, the following discussion of our financial condition and results of operations) and the documents incorporated herein by reference contain "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as "believes," "anticipates," "estimates," "expects," "projections," "may," "potential," "plan," "continue" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including but not limited to statements regarding our future financial performance or position, our business strategy, plans or expectations, and our objectives for future operations, including relating to our products and services. Forward-looking statements contained herein are inherently subject to risks and uncertainties and our actual results and outcomes may be materially different from those expressed or implied by the forward-looking statements. Our actual results and outcomes may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in our operations, development efforts and business environment, including those set forth under the Section entitled "Risk Factors" in Item 1A, and other documents we file with the Securities and Exchange Commission. We cannot guarantee future results, levels of activity, performance or achievements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not undertake any obligation to revise or update any such forward-looking statement to reflect future events or circumstances.

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

Overview

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

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

Recent Acquisitions and Developments

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

In October 2011, we acquired certain assets from Trailside Entertainment Corporation, also known as Stump! Trivia, which are used in providing live hosted trivia events at hospitality venues. We are using these acquired assets to complement our existing social entertainment offerings.

Results of Operations

Year Ended December 31, 2012 compared to the Year Ended December 31, 2011

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

Revenue

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

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

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

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

Direct Costs and Gross Margin



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



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

               Gross Margin Percentage            74%              76%

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

Selling, General and Administrative Expenses

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

Depreciation and Amortization

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

Other (Expense) Income, Net

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

Income Taxes

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

At December 31, 2012, we had net operating loss, or NOL, carryforwards of approximately $54,371,000 and $20,708,000 for federal and state income tax purposes, respectively. Section 382 of the Internal Revenue Code ("IRC") imposes limits on the ability to use NOL carryforwards that existed prior to a change in control to offset future taxable income. We have not yet performed an analysis through December 31, 2012 due to the complexity and cost associated with the study, and the fact that there may be additional ownership changes in the future. Such limitations would reduce, potentially significantly, gross deferred tax assets related to net operation loss carryforwards. We continue to disclose the net operating loss carryforwards at their original amount as no potential limitation has been quantified. We have also established a full valuation allowance for substantially all deferred tax assets, including the NOL carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets.

EBITDA-Consolidated Operations

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

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

                                   For the three months ended             For the years ended
                                          December 31,                       December 31,
                                      2012              2011             2012             2011
Net income (loss) per GAAP       $      629,000     $ (1,039,000 )   $   (995,000 )   $ (3,419,000 )
Interest expense, net                     7,000           13,000           41,000           49,000
Depreciation and amortization           689,000          947,000        2,879,000        3,260,000
Income tax (benefit) provision         (109,000 )        115,000          (83,000 )        163,000
EBITDA                           $    1,216,000     $     36,000     $  1,842,000     $     53,000

Liquidity and Capital Resources

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

In February 2012, we completed a stockholders rights offering to our stockholders of record as of February 2, 2012. We issued a total of 2,070,719 shares of our common stock at a subscription price of $0.25 per share. In connection with the rights offering, we entered into an investment agreement with Matador Capital Partners, LP, or Matador. Mr. Jeffrey A. Berg, one of our directors and also now our Interim Chief Executive Officer, is the managing member of the general partner of Matador. Under the terms of the investment agreement, upon expiration of the rights offering, Matador purchased for $0.25 per share 8,000,000 shares of our common stock not subscribed for and purchased by holders upon exercise of their subscription rights. We received gross proceeds of $2.5 million from the rights offering and under the investment agreement.

We believe existing cash and cash equivalents, funds generated from operations and the proceeds received from the rights offering completed in February 2012 (see Note 10) will be sufficient to meet our operating cash requirements for at least the next twelve months. We have no debt obligations other than capital leases and a note payable for certain equipment purchases. It is our intention to continue entering into capital lease or financing facilities for certain equipment requirements when economically advantageous. In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce operational cash uses, sell assets or seek financing. Any actions we may undertake to reduce planned capital purchases, reduce expenses, or generate proceeds from the sale of assets may be insufficient to cover shortfalls in available funds. If we require additional capital, we may be unable to secure additional financing on terms that are acceptable to us, or at all.

Working Capital

As of December 31, 2012, we had working capital (current assets in excess of current liabilities) of $841,000 compared to negative working capital (current liabilities in excess of current assets) of $1,070,000 as of December 31, 2011. The following table shows our change in working capital from December 31, 2011 to December 31, 2012.

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

Cash Flows



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



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

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

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

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

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

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to deferred costs and revenues, depreciation of broadcast equipment, allowance for doubtful accounts, investments, intangible assets and contingencies. We base our estimates on a combination of historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management's most subjective judgments.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Allowance for Doubtful Accounts-We maintain allowances for doubtful accounts for estimated losses resulting from nonpayment by our customers. We reserve for all accounts that have been suspended or terminated from our Buzztime network services and for customers with balances that are greater than a predetermined number of days past due. We analyze historical collection trends, customer concentrations and creditworthiness, economic trends and anticipated changes in customer payment patterns when evaluating the adequacy of our allowance for doubtful accounts for specific and general risks. Additional reserves may also be established if specific customers' balances are identified as potentially uncollectible. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Broadcast Equipment and Fixed Assets-Broadcast equipment and fixed assets are recorded at cost. Equipment under capital leases is recorded at the present value of future minimum lease payments. Depreciation of broadcast equipment and fixed assets is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements and fixed assets under capital leases is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the lease period.

We incur a relatively significant level of depreciation expense in relation to our operating income. The amount of depreciation expense in any fiscal year is largely related to the estimated life of handheld wireless Playmaker devices and associated electronics and the computers located at our customer's sites. The Playmakers are depreciated over a five-year life and the associated electronics and computers are depreciated over two to four years. The depreciable life of these assets was determined based on the shorter of the contractual capital lease period or their estimated useful life, which considers anticipated technology changes. We determined that the useful life of our Playmakers we purchased after September 2011 decreased from seven to five years, and any existing Playmaker prior to October 2011 was deemed to have a remaining useful life of five years as of December 31, 2011. We based this determination on our expectation of the current version Playmakers' usefulness in the marketplace. As a result, we recognized approximately $21,000 in accelerated depreciation expense associated with reducing the remaining useful lives of the existing Playmakers to five years as of December 31, 2011. If our Playmakers and associated electronics and the computers turn out to have longer lives, on average, than estimated, our depreciation expense would be significantly reduced in those future periods. Conversely, if the Playmakers and associated electronics and the computers turn out to have shorter lives, on average, than estimated, our depreciation expense would be significantly increased in those future periods.

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

ASC No. 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC No. 360, Property, Plant and Equipment. In accordance with ASC No. 360, we assess potential impairments of our long-lived assets whenever events or changes in circumstances indicate the asset's carrying value may not be recoverable. An impairment loss would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. We performed our annual review of our other intangible assets and determined that there were no indications of impairment for the year ended December 31, 2012. During the year ended December 31, 2011, we determined that the underlying customer base of the subscription customer intangible asset related to our asset acquisition in 2009 of substantially all of the assets of i-am TV had diminished to such a level that the future cash flow of the remaining customers did not substantially equal the remaining net book value of the asset. As a result, we accelerated the amortization expense of approximately $187,000 for those customers who . . .

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