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NTN > SEC Filings for NTN > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for NTN BUZZTIME INC


13-May-2013

Quarterly Report


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, 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. 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 ("we," "us," or the "Company"). 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 business, 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, 2012, under the section entitled "Risk Factors," and in other reports we file with the Securities and Exchange Commission from time to time. Readers are urged not to place undue reliance on the forward-looking statements contained in this report or incorporated by reference herein, which speak only as of the date of this report. Except as required by law, we do not undertake any obligation to revise or update any such forward-looking statement to reflect future events or circumstances.

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

Our trademarks, trade names and service marks referenced herein include Buzztime, iTV Network, Playmaker and Stump! Trivia. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner.

OVERVIEW

We provide marketing services through interactive game content for hospitality venues that offer the games free to their patrons. We have evolved from a content developer and distributor to an interactive entertainment network provider that helps the hospitality venues that subscribe to our network acquire, engage and retain their patrons. Built on an extended network platform, our entertainment system has historically allowed multiple players to interact at the venue, but it also enables competition between different venues, referred to as massively multiplayer gaming. We have been working 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 primarily 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 3,400 locations in the U.S. and Canada, where they are shown on approximately 10,000-15,000 screens daily. We have over 3.5 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 Buffalo Wild Wings, Black Angus, Boston Pizza, Fox and Hound, Native New Yorker and Old Chicago.

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. 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 a source for strategies available to independent bars and restaurants. 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.

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, stock-based compensation, bad debts, investments, purchase price allocations related to acquisitions, including any earnout liability, impairment of software development costs, goodwill, broadcast equipment, intangible assets and contingencies, including the reserve for sales tax inquiries. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management's most subjective judgments.

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2013 from those described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year ended December 31, 2012.

RESULTS OF OPERATIONS

Three months ended March 31, 2013 compared to the three months ended March 31, 2012

We generated a net loss of $369,000 for the three months ended March 31, 2013 compared to a net loss of $1,045,000 for the three months ended March 31, 2012.

Revenue

Revenue increased $50,000, or 1%, to $6,116,000 for the three months ended March 31, 2013 from $6,066,000 for the three months ended March 31, 2012 due to revenue generated from a sales-type lease and increased advertising revenue, offset by a decrease in subscription revenue primarily due to lower average site count at a higher average revenue per unit. Comparative site count information for the Buzztime Network is as follows:

                                         Network Subscribers
                                           as of March 31,
                                          2013           2012
                       United States        3,231         3,636
                       Canada                 205           232
                       Total                3,436         3,868

Direct Costs and Gross Margin



The following table compares direct costs and gross margin for the three months
ended March 31, 2013 and 2012:



                                          For the three months ended
                                                   March 31,
                                             2013              2012
              Revenues                  $    6,116,000      $ 6,066,000
              Direct Costs                   2,000,000        1,617,000
              Gross Margin              $    4,116,000      $ 4,449,000

              Gross Margin Percentage              67%              73%

Gross margin as a percentage of revenue decreased to 67% for the three months ended March 31, 2013 from 73% for the three months ended March 31, 2012. Direct costs increased $383,000, or 24%, to $2,000,000 for the three months ended March 31, 2013 from $1,617,000 for the three months ended March 31, 2012. The increase in direct costs was primarily due to increased expenses related to the sales-type lease, increased license fees and increased depreciation and amortization expense due to launching a software development program.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $989,000, or 19%, to $4,283,000 for the three months ended March 31, 2013 from $5,272,000 for the same period in 2012. The decrease was due to decreased payroll and related expense of $844,000 primarily due to decreased headcount and incentive compensation, decreased selling and marketing expenses of $212,000, decreased travel expense of $154,000 and other miscellaneous decreases of $26,000. These decreases were offset by increased consulting fees of $182,000 for software development and other corporate initiatives and increased software disposal expenses of $65,000.

Depreciation and Amortization Expense

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) increased $25,000, or 14%, to $199,000 for the three months ended March 31, 2013 from $174,000 for the same period in 2012, primarily due to amortization of acquired intangible assets and depreciation of tenant improvement assets.

Other Income (Expense), Net

Other income (expense), net, changed from $32,000 of net expense for the three months ended March 31, 2012 to $5,000 of income for the same period in 2013. This change was primarily due to increased foreign currency exchange gains related to the operations of our Canadian subsidiary and lower interest expense due to fewer capital leases outstanding.

Income Taxes

We expect to incur state income tax liability in 2013 related to our U.S. operations. We also expect to pay income taxes in Canada due to profitability of our Canadian subsidiary. For the three months ended March 31, 2013 and 2012, we recorded a tax provision of $8,000 and $16,000, respectively. We have established a full valuation allowance for substantially all deferred tax assets, including our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets.

EBITDA

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 net income or loss calculation in accordance with GAAP.

The following table reconciles our consolidated net loss calculated in accordance with GAAP to EBITDA for the three months ended March 31, 2013 and 2012. EBITDA should not be considered as substitutes for, or superior to, net loss calculated in accordance with GAAP.

                                             For the three months ended
                                                      March 31,
                                               2013               2012
           Net loss per GAAP               $    (369,000 )    $ (1,045,000 )
           Interest expense, net                   7,000            13,000
           Income taxes                            8,000            16,000
           Depreciation and amortization         789,000           723,000
           EBITDA                          $     435,000      $   (293,000 )

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2013, we had cash and cash equivalents of $2,324,000 compared to cash and cash equivalents of $2,721,000 as of December 31, 2012.

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 14) will be sufficient to meet our operating cash requirements for at least the next twelve months. We have no debt other than capital leases with aggregate outstanding balances of approximately $119,000 and a note payable with an outstanding balance of approximately $60,000 for certain equipment purchases. We intend to continue entering into capital lease or financing facilities for certain equipment requirements when economically advantageous. If net cash provided by operating activities and our cash and cash equivalents 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 March 31, 2013, we had working capital (current assets in excess of current liabilities) of $809,000 compared to working capital of $841,000 as of December 31, 2012. The following table shows the change in our working capital from December 31, 2012 to March 31, 2013.

                                                          Increase
                                                         (Decrease)
             Working capital as of December 31, 2012     $   841,000
             Changes in current assets:
             Cash and cash equivalents                      (397,000 )
             Accounts receivable, net of allowance           (37,000 )
             Prepaid expenses and other current assets        16,000
             Total current assets                           (418,000 )
             Changes in current liabilities:
             Accounts payable and accrued expenses           (93,000 )
             Accrued compensation                            234,000
             Sales taxes payable                             (45,000 )
             Income taxes payable                                  -
             Obligations under capital lease                 (43,000 )
             Deferred revenue                               (377,000 )
             Other current liabilities                       (62,000 )
             Total current liabilities                      (386,000 )
             Net change in working capital                   (32,000 )
             Working capital as of March 31, 2013        $   809,000

Cash Flows



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



                                                          For the three months ended
                                                                  March 31,
                                                           2013                2012
Cash provided by (used in):
Operating activities                                   $     166,000       $    255,000
Investing activities                                        (484,000 )         (712,000 )
Financing activities                                         (61,000 )        2,205,000
Effect of exchange rates                                     (18,000 )           21,000
Net (decrease) increase in cash and cash equivalents   $    (397,000 )     $  1,769,000

Net cash provided by operating activities. We primarily depend on cash flows from operations to meet our cash requirements. Net cash generated from operating activities was $166,000 for the three months ended March 31, 2013 compared to $255,000 for the same period in 2012. The $89,000 decrease in cash provided by operations was primarily due to a decrease of $856,000 in cash provided by operating assets and liabilities during the three months ended March 31, 2013 compared to the same period in 2012, offset by a decrease in net loss of $767,000, after giving effect to adjustments made for non-cash transactions.

Our largest use of cash is payroll and related costs. Cash used related to payroll decreased $602,000 to $2,406,000 for the three months ended March 31, 2013 from $3,008,000 during the same period in 2012 due primarily to decreased headcount. Our primary source of cash is cash we generate from customers. Cash received from customers decreased $278,000 to $5,972,000 for the three months ended March 31, 2013 from $6,250,000 during the same period in 2012.

Net cash used in investing activities. We used $484,000 in cash for investing activities for the three months ended March 31, 2013 compared to a use of $712,000 during the same period in 2012. The $228,000 decrease was primarily due to a decrease in capital expenditures of $282,000 due primarily to decreased field equipment purchases, offset by an increase in capitalized software development activities of $54,000.

Net cash (used in) provided by financing activities. Net cash used in financing activities increased $2,266,000 to $61,000 for the three months ended March 31, 2013 compared to net cash provided by financing activities of $2,205,000 for the same period in 2012. The change is primarily attributable to the fact that during the prior year period, we received $2,310,000 of net proceeds from the rights offering and related investment agreement. To a lesser extent, the change is attributed to an increase in tax withholdings of $4,000 related to net-share settlements of restricted stock units during the current year period, offset by decreased payments on our capital leases of $48,000.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 10 of the condensed consolidated financial statements, "Recent Accounting Pronouncements."

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