ERNA

NTN Buzztime, Inc. (NTN) - Q2 2009 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009. NTN Buzztime, Inc. operates primarily through its Entertainment division, which runs the Buzztime iTV Network, an interactive television promotional game network distributed to restaurants and sports bars in North America. The company's former Hospitality division (wireless paging and software solutions) was divested and is reported as discontinued operations, with wind-down activities completed in the third quarter of 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 10% ($0.732 million) for the three months and 12% ($1.718 million) for the six months compared to the prior year periods. Management attributes this to a strategic reduction in pricing per site.
• Improved Profitability: Despite lower revenue, the net loss improved significantly. The net loss for the three months ended June 30, 2009, was $0.282 million compared to $2.345 million in the prior year. The six-month net loss was $0.537 million compared to $4.919 million in the prior year.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 31% ($2.141 million) for the quarter and 32% ($4.574 million) for the six months. Drivers included reduced headcount, lower severance costs (no CEO resignation in 2009), reduced marketing spend, and lower consulting fees.
• Gross Margin Expansion: Gross margin percentage improved to 76% from 72% (quarterly) and 71% (six-month) in the prior year, driven by reduced depreciation on fully depreciated equipment, lower communication costs (DSL conversion), and reduced content costs.
• Acquisitions: The company completed two asset acquisitions in Q2 2009: iSports Inc. (mobile sports content) and i-am TV (hospitality venue screens). These were funded primarily through the issuance of stock and warrants.

Guidance, Outlook, Risks, and Unusual Items

• Liquidity and Capital Resources: Management believes existing cash ($3.845 million) and operating cash flows are sufficient to meet requirements for at least the next 12 months. A private placement in May 2009 raised $750,000 in working capital.
• Capital Expenditures: The company anticipates investing approximately $1.4 million for the remainder of 2009 in equipment and infrastructure. A $500,000 equipment lease facility was established, with $457,000 utilized as of June 30, 2009.
• Contingencies and Litigation:
  • Sales Tax: The company settled a Texas sales tax evaluation for approximately $450,000 payable over two years. It faces ongoing inquiries and formal assessments totaling $601,000 from other states, with a total recorded liability of $872,000.
  • Vendor Dispute: A vendor is seeking $300,000 regarding a purchase commitment dispute. NTN believes the claim lacks merit and has not recorded a reserve.
• Risk Factors: Risks include the successful integration of recent acquisitions, potential dilution from equity issuances, and the impact of the economic environment on the hospitality industry.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the 76% gross margin given the strategic price reductions and the impact of amortization from new intangible assets.
• Acquisition Integration: Assess the progress of integrating iSports and i-am TV assets and the realization of projected synergies.
• Contingent Liabilities: Monitor the resolution of the $601,000 in outstanding sales tax assessments and the $300,000 vendor dispute.
• Cash Burn vs. Generation: Confirm that the shift to positive operating cash flow ($0.804 million for six months) is sustainable without further equity dilution.
• Customer Concentration: Note that Buffalo Wild Wings and its franchisees accounted for approximately 16% of revenue for the six months ended June 30, 2009.