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NTN BUZZTIME INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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 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, 2010, 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, Playmakers and i-am TV. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner. OVERVIEW We have been in the business of social interactive entertainment for over 25 years. Our primary source of revenue is our Buzztime Network, which focuses on the distribution of our interactive promotional television game network programming, primarily to over 3,900 hospitality venues such as restaurants and bars throughout North America. The out-of-home Buzztime Network has maintained a unique position in the hospitality industry for over 25 years as a promotional platform providing interactive entertainment to patrons in restaurants and bars (hospitality venues). Approximately 98% of our current consolidated revenues are derived from recurring service fees from hospitality venues (Network subscribers) that subscribe to our Buzztime Network. The Buzztime Network distributes a wide variety of engaging interactive multi-player games, including trivia quiz shows, play-along sports programming and 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. In late 2009, we introduced a downloadable application available on the iPhone that enables patrons to use their iPhone in-venue instead of the Playmaker to play these Buzztime games. In early 2011, we introduced a downloadable application now available on the Android phones, and we introduced a Buzztime trivia application for Facebook. Regardless of the device used to play, 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 June 30, 2011, we had 3,657 United States Network subscribers and 247 Canadian subscribers. Approximately 31% of our Network subscribers come from leading national chains in the casual-dining restaurant segment such as Buffalo Wild Wings, Hooters, TGI Friday's and Old Chicago. Through the transmission of interactive game content stored on a site server at each location, our Buzztime 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 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 Network's venues. 9 --------------------------------------------------------------------------------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, 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 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 three and six months ended June 30, 2011 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, 2010. RESULTS OF OPERATIONS Three months ended June 30, 2011 compared to the three months ended June 30, 2010 We generated a net loss of $984,000 for the three months ended June 30, 2011 compared to a net loss of $457,000 for the three months ended June 30, 2010. Revenue Revenue decreased $298,000, or 5%, to $5,893,000 for the three months ended June 30, 2011 from $6,191,000 for the three months ended June 30, 2010 due primarily to a decrease in subscription revenue related to lower site count and lower average revenue generated per site. Comparative site count information for the Buzztime Network is as follows: Network Subscribers as of June 30, 2011 2010 United States 3,657 3,695 Canada 247 314 Total 3,904 4,009 Direct Costs and Gross Margin The following table compares direct costs and gross margin for the three months ended June 30, 2011 and 2010: For the three months ended June 30, 2011 2010 Revenues $ 5,893,000 $ 6,191,000 Direct Costs 1,408,000 1,527,000 Gross Margin $ 4,485,000 $ 4,664,000 Gross Margin Percentage 76 % 75 % Gross margin as a percentage of revenue increased to 76% for the three months ended June 30, 2011 from 75% for the three months ended June 30, 2010. Direct costs decreased $119,000, or 8%, to $1,408,000 for the three months ended June 30, 2011 from $1,527,000 for the three months ended June 30, 2010. The decrease in direct costs was primarily due to a decrease in service provider fees of $118,000 primarily due to fewer service calls during the three months ended June 30, 2011 compared to the same period in 2010, and a decrease in direct depreciation and amortization expense of $36,000 due to assets becoming fully depreciated. These decreases were offset by increased freight expense of $22,000 due to higher fuel surcharges and an increase of $13,000 in other miscellaneous expenses. 10 --------------------------------------------------------------------------------Selling, General and Administrative Expenses Selling, general and administrative expenses increased $476,000, or 9.7%, to $5,374,000 for the three months ended June 30, 2011 from $4,898,000 for the same period in 2010. The increase in selling, general and administrative expenses was due to increased payroll and related expense of $169,000 primarily due to merit increases as well as increased incentive compensation, payroll taxes and recruiting expense; increased consulting expense of $167,000 primarily related to new playmaker development efforts; expenses incurred in connection with our corporate and warehouse relocations of $181,000 and other miscellaneous increases of $23,000. These increases were offset by lower bad debt expense of $64,000 resulting from improved collection efforts. Depreciation and Amortization Expense Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) decreased $9,000 to $164,000 for the three months ended June 30, 2011 from $173,000 for the same period in 2010 primarily due to fully amortizing certain assets in prior periods. Other Income (Expense), Net Other income (expense), net increased in income by $132,000 to $69,000 of other income for the three months ended June 30, 2011 from $63,000 of other expense for the same period in 2010. The majority of this increase in other income is due to a $59,000 reduction of an earnout liability related to an asset acquisition that we completed in 2009 and a $49,000 sales tax refund that we are due as a result of having over paid sales tax, offset by a reduction of income related to an insurance settlement of $17,000 recognized in 2010. Additionally, we recognized $15,000 less in interest expense due to reduced capital lease obligations, $20,000 less in loss on disposal of assets and $6,000 less in foreign currency exchanges losses related to our foreign operations for the three months ended June 30, 2011 when compared to the same period in 2010. Income Taxes We expect to incur state income tax liability in 2011 related to our U.S. operations. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. For the three months ended June 30, 2010, we recorded a net tax provision of $13,000. It was not necessary to record a tax provision during the three months ended June 30, 2011. 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 GAAP earnings or loss. The following table reconciles our consolidated net loss per GAAP to EBITDA for the three months ended June 30, 2011 and 2010: 11 -------------------------------------------------------------------------------- For the three months ended June 30, 2011 2010 Net loss per GAAP $ (984,000 ) $ (457,000 ) Interest expense, net 12,000 28,000 Depreciation and amortization 775,000 819,000 Income taxes - (13,000 ) EBITDA $ (197,000 ) $ 377,000 Six months ended June 30, 2011 compared to the six months ended June 30, 2010 We generated a net loss of $1,543,000 for the six months ended June 30, 2011 compared to net loss of $846,000 for the six months ended June 30, 2010. Revenue Revenue decreased $568,000, or 5%, to $11,894,000 for the six months ended June 30, 2011 from $12,462,000 for the six months ended June 30, 2010 due primarily to a decrease in subscription revenue related to lower site count and lower average revenue generated per site, offset by an increase in advertising revenue of $38,000. Direct Costs and Gross Margin The following table compares direct costs and gross margin for the six months ended June 30, 2011 and 2010: For the six months ended June 30, 2011 2010 Revenues $ 11,894,000 $ 12,462,000 Direct Costs 2,932,000 3,067,000 Gross Margin $ 8,962,000 $ 9,395,000 Gross Margin Percentage 75 % 75 % Gross margin as a percentage of revenue remained flat at 75% for the six months ended June 30, 2011 and 2010. Direct costs decreased $135,000, or 4%, to $2,932,000 for the six months ended June 30, 2011 from $3,067,000 for the six months ended June 30, 2010. The decrease in direct costs was primarily attributable to a decrease in service provider fees of $212,000 primarily due to fewer service calls during the six months ended June 30, 2011 compared to the same period in 2010. This decrease was offset by increased freight expense of $44,000 due to higher fuel surcharges and an increase of $33,000 in other miscellaneous expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $390,000, or 4%, to $10,206,000 for the six months ended June 30, 2011 from $9,816,000 for the same period in 2010. The increase in selling, general and administrative expenses was due to increased payroll and related expense of $465,000 primarily due to merit increases as well as increased severance expense, increased recruiting and relocation expense for executive officers and increased incentive compensation. Additionally, we recognized $194,000 of moving expenses in connection with our corporate and warehouse relocations during the six months ended June 30, 2011. These increases were offset by lower bad debt expense of $174,000 resulting from improved collection efforts; lower travel and entertainment expense of $29,000; a reduction in occupancy expense of $25,000 due to lower rent and telephone costs; a decrease in software and hardware expense of $20,000 primarily due to lower software disposals and a decrease of $21,000 in other miscellaneous expenses. 12 --------------------------------------------------------------------------------Depreciation and Amortization Expense Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) decreased $16,000 to $329,000 for the six months ended June 30, 2011 from $345,000 for the same period in 2010 primarily due to fully amortizing certain assets in prior periods. Other Income (Expense), Net Other income (expense), net increased in income by $98,000 to $41,000 of other income for the six months ended June 30, 2011 from $57,000 of other expense for the same period in 2010. The majority of this increase in other income is due to a $59,000 reduction of an earnout liability related to our 2009 asset acquisition and a $49,000 sales tax refund that we are, offset by a reduction of income related to an insurance settlement of $17,000 recognized in 2010. Additionally, we recognized $26,000 less in interest expense due to reduced capital lease balances and $5,000 less in loss on disposal of assets for the six months ended June 30, 2011 when compared to the same period in 2010. These increases in other income were offset by an increase in foreign currency exchanges losses of $27,000 related to our foreign operations for the six months ended June 30, 2011 when compared to the same period in 2010. Income Taxes For the six months ended June 30, 2011 and 2010, we recorded a net tax provision of $11,000 and $23,000, respectively, relating to state tax liabilities. EBITDA 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 for the six months ended June 30, 2011 and 2010: For the six months ended June 30, 2011 2010 Net loss per GAAP $ (1,543,000 ) $ (846,000 ) Interest expense, net 28,000 55,000 Depreciation and amortization 1,588,000 1,599,000 Income taxes 11,000 23,000 EBITDA $ 84,000 $ 831,000 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2011, we had cash and cash equivalents of $3,085,000 compared to cash and cash equivalents of $3,906,000 as of December 31, 2010. 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. It is our intention to continue entering into capital lease 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. 13 --------------------------------------------------------------------------------Working Capital As of June 30, 2011, we had working capital (current assets in excess of current liabilities) of $220,000 compared to $1,891,000 as of December 31, 2010. The following table shows our change in working capital from December 31, 2010 to June 30, 2011: Increase (Decrease) Working capital as of December 31, 2010 $ 1,891,000 Changes in current assets: Cash and cash equivalents (821,000 ) Accounts receivable, net of allowance (74,000 ) Investment available-for-sale (139,000 ) Prepaid expenses and other current assets (53,000 ) Total current assets (1,087,000 ) Changes in current liabilities: Accounts payable and accrued liabilities 682,000 Accrued compensation 101,000 Sales taxes payable (98,000 ) Income taxes payable (8,000 ) Obligations under capital lease - current portion (85,000 ) Deferred revenue 47,000 Other current liabilities (55,000 ) Total current liabilities 584,000 Net change in working capital (1,671,000 ) Working capital as of June 30, 2011 $ 220,000 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 six months ended June 30, 2011 2010 Cash provided by (used in): Operating activities $ 819,000 $ 868,000 Investing activities (1,430,000 ) (1,090,000 ) Financing activities (207,000 ) (134,000 ) Effect of exchange rates (3,000 ) (13,000 )Net decrease in cash and cash equivalents $ (821,000 ) $ (369,000 ) 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 $819,000 for the six months ended June 30, 2011 compared to net cash generated from operating activities of $868,000 for the same period in 2010. The $49,000 decrease in cash provided by operations was primarily due to an increase in net loss of $810,000, after giving effect to adjustments made for non-cash transactions, offset by an increase of $761,000 in cash provided by operating assets and liabilities during the six months ended June 30, 2011 compared to the same period in 2010. Our largest use of cash is payroll and related costs. Cash used related to payroll decreased $432,000 to $5,151,000 for the six months ended June 30, 2011 from $5,583,000 during the same period in 2010. This decrease was primarily the result of the payout of bonuses during the first quarter of 2010, which did not occur in the same period of 2011. Our primary source of cash is cash we generate from customers. Cash received from customers decreased $507,000 to $12,282,000 for the six months ended June 30, 2011 from $12,789,000 during the same period in 2010 primarily due to lower revenue generated during the six months ended June 30, 2011 as compared to the same period in 2010. Net cash used in investing activities. We used $1,430,000 in cash for investing activities for the six months ended June 30, 2011 compared to $1,090,000 used in cash for investing activities during the same period in 2010. The $340,000 increase in cash used in investing activities was primarily due to an increase in capital expenditures of $527,000 due primarily to increased broadcast equipment purchases, offset by decreases in cash used of $62,000 for software development initiatives and $35,000 related to a trademark license. In addition, cash provided by investing activities increased $90,000 due to proceeds received from the sale of securities available-for-sale during the six months ended June 30, 2011 compared to the same period in 2010. 14 --------------------------------------------------------------------------------Net cash used in financing activities. Net cash used in financing activities increased $73,000 to $207,000 for the six months ended June 30, 2011 compared to net cash used in financing activities of $134,000 for the same period in 2010. The increase in cash used in financing activities was due to a $51,000 increase in principal payments on capital leases and a $22,000 decrease in proceeds received from the exercise of stock options. RECENT ACCOUNTING PRONOUNCEMENTS Refer to Note 10 of the condensed consolidated financial statements, "Recent Accounting Pronouncements." |