UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
Commission file number 1-11460
NTN COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1103425
(State of incorporation) (I.R.S. Employer
Identification No.)
THE CAMPUS 5966 LA PLACE COURT, CARLSBAD, CALIFORNIA 92008
(Address of principal executive offices) (Zip Code)
(760) 438-7400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
At November 4, 2005, the registrant had outstanding 53,735,000 shares of
common stock, $.005 par value.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
SEPTEMBER 30,
2005 DECEMBER 31,
ASSETS (PLEDGED) (UNAUDITED) 2004
------------- -------------
Current assets:
Cash and cash equivalents $ 4,974,000 $ 6,710,000
Restricted cash 68,000 66,000
Accounts receivable, net 3,385,000 3,405,000
Investment available-for-sale 345,000 304,000
Inventory 303,000 399,000
Deposits on broadcast equipment 662,000 534,000
Deferred costs 1,102,000 960,000
Prepaid expenses and other current assets 1,070,000 1,128,000
------------- -------------
Total current assets 11,909,000 13,506,000
Broadcast equipment and fixed assets, net 8,228,000 6,451,000
Software development costs, net 723,000 763,000
Deferred costs 1,276,000 922,000
Intangible assets, net 3,130,000 4,011,000
Goodwill 3,658,000 3,658,000
Other assets 128,000 77,000
------------- -------------
Total assets $ 29,052,000 $ 29,388,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,097,000 $ 1,590,000
Accrued expenses 1,315,000 1,125,000
Revolving line of credit 700,000 --
Accrued salaries 76,000 447,000
Accrued vacation 613,000 635,000
Taxes payable 605,000 558,000
Obligations under capital leases 384,000 148,000
Equipment note payable 78,000 620,000
Deferred revenue - Buzztime 674,000 291,000
Deferred revenue - Hospitality Technologies 2,185,000 1,448,000
------------- -------------
Total current liabilities 7,727,000 6,862,000
Obligations under capital leases, excluding current portion 490,000 123,000
Deferred revenue, excluding current portion - Hospitality Technologies 270,000 368,000
------------- -------------
Total liabilities 8,487,000 7,353,000
------------- -------------
Shareholders' equity:
Series A 10% cumulative convertible preferred stock,
$.005 par value, $161,000 liquidation preference,
5,000,000 shares authorized; 161,000 shares issued
and outstanding at September 30, 2005 and
December 31, 2004 1,000 1,000
Common stock, $.005 par value, 84,000,000 shares
authorized; 53,690,000 and 53,026,000 shares issued and
outstanding at September 30, 2005 and December 31, 2004,
respectively 267,000 264,000
Additional paid-in capital 109,650,000 109,008,000
Accumulated deficit (88,962,000) (86,769,000)
Accumulated other comprehensive loss (391,000) (469,000)
------------- -------------
Total shareholders' equity 20,565,000 22,035,000
------------- -------------
Total liabilities and shareholders' equity $ 29,052,000 $ 29,388,000
============= =============
See accompanying notes to unaudited condensed consolidated financial statements
2
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues:
Hospitality Technologies revenues $ 9,910,000 $ 8,592,000 $ 28,520,000 $ 25,883,000
Buzztime revenues 515,000 180,000 1,041,000 262,000
------------ ------------ ------------ ------------
Total revenues 10,425,000 8,772,000 29,561,000 26,145,000
------------ ------------ ------------ ------------
Operating expenses:
Direct operating costs (includes depreciation of
$821,000, $763,000, $2,386,000 and $2,218,000
for the three months ended September 30, 2005
and 2004 and for the nine months ended
September 30, 2005 and 2004, respectively) 3,249,000 3,013,000 10,107,000 9,150,000
Non-cash charge related to software product sales -- -- 276,000 --
Selling, general and administrative 6,349,000 6,010,000 19,385,000 18,333,000
Litigation, legal and professional fees 267,000 603,000 837,000 1,350,000
Stock based compensation 47,000 59,000 239,000 152,000
Depreciation and amortization 212,000 217,000 632,000 654,000
Research and development 70,000 84,000 195,000 256,000
------------ ------------ ------------ ------------
Total operating expenses 10,194,000 9,986,000 31,671,000 29,895,000
------------ ------------ ------------ ------------
Operating income (loss) 231,000 (1,214,000) (2,110,000) (3,750,000)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 20,000 24,000 71,000 66,000
Interest expense (55,000) (30,000) (128,000) (96,000)
Other income -- -- -- 225,000
------------ ------------ ------------ ------------
Total other income (expense) (35,000) (6,000) (57,000) 195,000
------------ ------------ ------------ ------------
Income (loss) before income taxes 196,000 (1,220,000) (2,167,000) (3,555,000)
Provision (benefit) for income taxes (50,000) 12,000 26,000 45,000
------------ ------------ ------------ ------------
Net income (loss) $ 246,000 $ (1,232,000) $ (2,193,000) $ (3,600,000)
============ ============ ============ ============
Net income (loss) per common share - basic $ 0.00 $ (0.02) $ (0.04) $ (0.07)
============ ============ ============ ============
Weighted average shares outstanding - basic 53,604,000 52,868,000 53,411,000 52,484,000
============ ============ ============ ============
Net income (loss) per common share - diluted $ 0.00 $ (0.02) $ (0.04) $ (0.07)
============ ============ ============ ============
Weighted average shares outstanding - diluted 60,632,000 52,868,000 53,411,000 52,484,000
============ ============ ============ ============
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income (loss) $ 246,000 $ (1,232,000) $ (2,193,000) $ (3,600,000)
------------ ------------ ------------ ------------
Other comprehensive income, net of tax:
Unrealized holding gain (loss)
in investment available for sale (77,000) 91,000 41,000 72,000
Foreign currency translation adjustment 44,000 116,000 37,000 57,000
------------ ------------ ------------ ------------
Other comprehensive income (loss) (33,000) 207,000 78,000 129,000
------------ ------------ ------------ ------------
Comprehensive net income (loss) $ 213,000 $ (1,025,000) $ (2,115,000) $ (3,471,000)
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements
3
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (2,193,000) $ (3,600,000)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 3,018,000 2,872,000
Provision for doubtful accounts 801,000 275,000
Non-cash stock-based compensation 239,000 152,000
Non-cash charge related to software product sale 343,000 --
Provision for obsolete inventory -- 4,000
Provision for warranties -- 22,000
Provision for sales returns (1,000) 5,000
Loss from disposition of equipment and
capitalized software 216,000 38,000
Changes in assets and liabilities:
Accounts receivable (791,000) (706,000)
Inventory 96,000 (54,000)
Deferred costs (498,000) (592,000)
Prepaid expenses and other assets 12,000 (230,000)
Accounts payable and accrued expenses (560,000) 71,000
Income tax payable (72,000) (8,000)
Deferred revenue 1,025,000 452,000
------------ ------------
Net cash provided by (used in) operating activities 1,635,000 (1,299,000)
------------ ------------
Cash flows from investing activities:
Capital expenditures (3,241,000) (2,276,000)
Acquisition of businesses -- (103,000)
Software development expenditures (321,000) (313,000)
Deposits on broadcast equipment (136,000) (338,000)
------------ ------------
Net cash used in investing activities (3,698,000) (3,030,000)
------------ ------------
Cash flows from financing activities:
Principal payments on capital leases (266,000) (131,000)
Principal payments on equipment notes payable (541,000) (974,000)
Borrowings from revolving line of credit 700,000 --
Principal payments on revolving line of credit -- (1,000,000)
Proceeds from issuance of common stock,
net of offering expenses -- 13,001,000
Proceeds from exercise of stock options and warrants 406,000 385,000
------------ ------------
Net cash provided by financing activities 299,000 11,281,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,764,000) 6,952,000
Effect of exchange rate on cash 28,000 9,000
Cash and cash equivalents at beginning of period 6,710,000 2,503,000
------------ ------------
Cash and cash equivalents at end of period $ 4,974,000 $ 9,464,000
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
4
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 128,000 $ 96,000
============ ============
Income taxes $ 95,000 $ 73,000
============ ============
Supplemental disclosure of non-cash investing and
financing activities:
Equipment acquired under capital leases and notes payable $ 671,000 $ 1,172,000
============ ============
Unrealized holding gain on investments $ 40,000 $ 72,000
============ ============
Issuance of common stock in payment of dividends $ 8,000 $ 8,000
============ ============
Issuance of warrants in association with equity offering $ -- $ 655,000
============ ============
Investment in limited partnership $ 69,000 $ --
============ ============
Supplemental non-cash disclosure of acquisition of
businesses:
Goodwill and Intangible assets $ -- $ 71,000
============ ============
Supplemental non-cash disclosure of warrants exercised - Allen & Company LLC exercised warrants for
approximately 433,000 shares into approximately 284,000 shares of NTN common stock on a cashless
exercise basis.
See accompanying notes to unaudited condensed consolidated financial statements
5
NTN COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2005
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
financial statements include all adjustments (consisting of only normal,
recurring adjustments) that are necessary for a fair presentation of the
financial position of NTN Communications, Inc. and its wholly-owned subsidiaries
(collectively, "we" or "NTN") and the results of operations and cash flows of
NTN for the interim periods presented. Management has elected to omit
substantially all notes to our condensed consolidated financial statements as
permitted by the rules and regulations of the Securities and Exchange
Commission. The results of operations for the interim periods are not
necessarily indicative of results to be expected for any other interim period or
for the year ending December 31, 2005.
The condensed consolidated financial statements for the three months and
nine months ended September 30, 2005 and 2004 are unaudited and should be read
in conjunction with the consolidated financial statements and notes thereto
included in our Form 10-K/A for the year ended December 31, 2004.
We have reclassified depreciation and amortization expense to direct operating
costs for certain assets and separated litigation, legal and professional fees
and stock based compensation from selling, general and administrative expenses
in the prior period condensed consolidated financial statements to conform to
the current period presentation.
2. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE-AN AMENDMENT OF FASB STATEMENT NO. 123
(SFAS No. 148). SFAS 148 amends FASB Statement No. 123; ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of SFAS No. 148 beginning with our
annual financial statements for the year ended December 31, 2002.
We applied Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB No. 25) and related interpretations in accounting for
our employee stock options. No compensation expense has been recognized for the
options granted under the Special Plan and the Option Plan unless the grants
were issued at exercise prices below market value. Pro forma compensation
expense is based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS No. 123. The following table represents the
effect on net loss and net loss per share if we had applied the fair value
recognition provisions of SFAS No. 123 as amended by SFAS No. 148.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income (loss) As reported .................................... $ 246,000 $(1,232,000) $(2,193,000) $(3,600,000)
Add: stock-based employee compensation expense
included in reported net loss, net of
related tax effects ....................... -- -- -- 2,000
Deduct: stock-based employee compensation
expense, net of related tax effects ....... (453,000) (454,000) (1,370,000) (1,230,000)
----------- ----------- ----------- -----------
Pro forma net loss ............................. $ (207,000) $(1,686,000) $(3,563,000) $(4,828,000)
Basic and diluted net As reported .................................... $ 0.00 $ (0.02) $ (0.04) $ (0.07
loss per share Pro forma ...................................... $ 0.00 $ (0.03) $ (0.07) $ (0.09)
The per share weighted-average fair value of stock options granted during
the three months ended September 30, 2005 and 2004 was $1.15 and $1.82,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 2005 -- dividend yield of 0%, risk-free interest
rate of 3.88%, expected volatility of 74.2%, and expected life of 4.8 years; and
2004 -- dividend yield of 0%, risk-free interest rate of 3.33%, expected
volatility of 90.4%, and expected life of 4.8 years
The per share weighted-average fair value of stock options granted during
the nine months ended September 30, 2005 and 2004 was $1.18 and $2.22,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 2005 -- dividend yield of 0%, risk-free interest
rate of 3.74%, expected volatility of 75.4%, and expected life of 4.8 years; and
2004 -- dividend yield of 0%, risk-free interest rate of 3.13%, expected
6
volatility of 90.6%, and expected life of 4.7 years. In compliance with APB No.
25, we expensed $0 and $2,000 for the nine months ended September 30, 2005 and
2004, associated with the grants of 80,000 options in 2000 below market value
pursuant to the Option Plan.
We account for options and warrants issued to non-employees in exchange for
services in accordance with SFAS No. 123 and EITF 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES. We estimate the fair value of
options and warrants using the Black-Scholes option-pricing model. For
agreements which require that achievement of specific performance criteria be
met in order for the options or warrants to vest, the measurement date is the
date at which the specific performance criteria are met. Prior to the
measurement date, options and warrants subject to vesting based on the
achievement of specific performance criteria that, based on different possible
outcomes, result in a range of aggregate fair values are measured at each
financial reporting period at their lowest aggregate then-current fair value,
while options and warrants which vest over the service period or at completion
of the service period are measured at each financial reporting period at their
then-current fair value, for purposes of recognition of costs during those
periods. For agreements which provide for services to be rendered without the
requirement of specific performance criteria, we measure the fair value of the
options and warrants at the earlier of the date the services are completed or
the date the options and warrants vest and are non-forfeitable. Generally,
services are not rendered prior to the grant date and the related agreements do
not contain performance commitments. Accordingly, the measurement date for
compensation expense occurs subsequent to the grant date. From the grant date to
the measurement date, compensation expense is estimated at each financial
reporting period and is recorded over the service period. The unvested options
and warrants continue to be remeasured at each financial reporting period until
they vest or until the services are completed. For agreements which provide
options and warrants for services already rendered, the options and warrants
immediately vest and the measurement date is the date of grant. Modifications
that increase the fair value of the warrants are treated as an exchange of the
original warrant for a new one. Additional compensation expense related to
modifications, if any, is recorded over the remaining service period.
In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT, a
revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION and
superseding APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. SFAS
No. 123R requires the Company to expense grants made under the stock option
plans. That cost will be recognized over the vesting period of the plans. SFAS
No. 123R is effective for the first annual period beginning after June 15, 2005.
Upon adoption of SFAS No. 123R, amounts previously disclosed on a pro forma
basis under SFAS No.123 will be recorded in the consolidated income statement.
We are evaluating the alternatives allowed under the standard, which we are
required to adopt beginning in the first quarter of 2006. We believe that this
new standard will increase our operating losses but we cannot currently estimate
the impact on our financial statements beyond the pro forma effect in the table
above.
3. INCOME (LOSS) PER SHARE
For the three months ended September 30, 2004, and nine months ended
September 30, 2005 and 2004, the weighted average of options, warrants, deferred
stock units and convertible preferred stock representing approximately
11,722,000, 11,948,000 and 11,707,000 potential common shares, respectively,
have been excluded from the computation of net loss per share, as their effect
was anti-dilutive. For the three months ended September 30, 2005, the weighted
average of options, warrants, deferred stock units and convertible preferred
stock representing approximately 5,482,000 potential common shares,
respectively, have been excluded from the computation of net income per share,
as their effect was anti-dilutive.
4. SEGMENT INFORMATION
We operate our businesses principally through four reportable segments: the
NTN iTV Network, NTN Wireless Communications, Inc. ("NTN Wireless" or
"Wireless") and NTN Software Solutions, Inc. ("Software Solutions"), which
combine to form the NTN Hospitality Technologies division; and our Buzztime
Entertainment, Inc. subsidiary ("Buzztime"). The NTN Hospitality Technologies
division provides entertainment, promotional services and on-site communications
and management products to the hospitality industry. Buzztime operates our live
broadcast studio, produces and licenses our trivia and live sports "Play-Along"
content to both the NTN iTV Network and consumer interactive platforms, and is
selling the Buzztime(R) Channel, an interactive television game channel, to U.S.
cable TV operators.
Our reportable segments have been determined based on the nature of the
services offered to customers, which include, but are not limited to, revenue
from the Buzztime segment and the three segments within the NTN Hospitality
Technologies division. NTN Hospitality Technologies revenue is generated
primarily from providing an interactive entertainment service which serves as a
marketing and promotional vehicle for the hospitality industry, from sale of
advertising for distribution via our interactive entertainment service, from
sale and service of our restaurant on-site paging systems and from licensing,
support and maintenance of our restaurant management and enterprise solutions
software and sale of hardware required for operation of these management
solutions. NTN Hospitality Technologies revenues comprised approximately 97% of
our total revenue for the nine months ended September 30, 2005. Buzztime's
revenue is primarily generated from the distribution and licensing of its
digital trivia game show content and "Play-Along" sports games as well as
revenue related to production services performed for third parties. Included in
the operating income (loss) for the three segments included in the NTN
Hospitality Technologies division and the Buzztime segment is an allocation of
corporate expenses, while the related corporate assets are not allocated to the
segments.
7
The following tables set forth certain information regarding our segments
and other operations:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues
NTN iTV Network $ 7,385,000 $ 6,545,000 $ 21,097,000 $ 18,890,000
NTN Wireless 1,269,000 1,041,000 4,240,000 4,131,000
Software Solutions 1,256,000 1,006,000 3,183,000 2,862,000
------------ ------------ ------------ ------------
NTN Hospitality Technologies division 9,910,000 8,592,000 28,520,000 25,883,000
Buzztime 515,000 180,000 1,041,000 262,000
------------ ------------ ------------ ------------
Total revenue $ 10,425,000 $ 8,772,000 $ 29,561,000 $ 26,145,000
============ ============ ============ ============
Operating income (loss)
NTN iTV Network $ 783,000 $ 307,000 $ 896,000 $ 801,000
NTN Wireless 78,000 (182,000) 367,000 (12,000)
Software Solutions (138,000) (504,000) (1,229,000) (1,579,000)
------------ ------------ ------------ ------------
NTN Hospitality Technologies division 723,000 (379,000) 34,000 (790,000)
Buzztime (492,000) (835,000) (2,144,000) (2,960,000)
------------ ------------ ------------ ------------
Operating income (loss) $ 231,000 $ (1,214,000) $ (2,110,000) $ (3,750,000)
============ ============ ============ ============
Net income (loss)
NTN iTV Network $ 800,000 $ 289,000 $ 819,000 $ 951,000
NTN Wireless 78,000 (182,000) 367,000 (12,000)
Software Solutions (138,000) (504,000) (1,229,000) (1,579,000)
------------ ------------ ------------ ------------
NTN Hospitality Technologies division 740,000 (397,000) (43,000) (640,000)
Buzztime (494,000) (835,000) (2,150,000) (2,960,000)
------------ ------------ ------------ ------------
Net income (loss) $ 246,000 $ (1,232,000) $ (2,193,000) $ (3,600,000)
============ ============ ============ ============
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------ ------------
Goodwill
NTN iTV Network $ 974,000 $ 974,000
NTN Wireless 449,000 449,000
Software Solutions 2,235,000 2,235,000
------------ ------------
NTN Hospitality Technologies division 3,658,000 3,658,000
Buzztime -- --
------------ ------------
Total revenue $ 3,658,000 $ 3,658,000
============ ============
5. CONTINGENCIES
From time to time, state tax authorities will make inquiries as to whether
or not a portion of our services might require the collection of sales and use
taxes from customers in those states. In the current difficult economic climate,
many states are expanding their interpretation of their sales and use tax
statutes to derive additional revenue. While in the past our sales and use tax
assessments have not been significant to our operations, it is likely that such
expenses will grow in the future.
We evaluate such inquiries on a case-by-case basis and have favorably
resolved these tax issues in the past without any material adverse consequences.
During 2003, the state of Texas, our largest state in terms of NTN iTV Network
sites, began a sales tax audit. They concluded that our services are subject to
sales taxes on an amusement services basis. On January 12, 2004, the state
assessed us for approximately $1,115,000 for the five year audit period ended
December 31, 2002. We have objected to this approach since our services are not
provided for the purpose of amusing our customers but to provide our customers
the right to use our games to provide amusement to others. The service is
designed to encourage patrons to visit our customers' establishments, stay
longer and spend more money. As such, we believe our services are tax exempt
promotional and marketing services and fall outside the definition of amusement
services as defined by the Texas tax code. We have successfully argued this
position regarding amusement services with other states. We have appealed the
assessment and the matter is currently at the administrative appeals level. We
have retained a team of sales and use tax specialists in Texas to assist us in
this matter. We are seeking to reach a mutually agreeable conclusion at the
administrative appeals level and we expect that a conclusion may be reached by
the end of 2005. In the event the matter is not resolved at administrative
appeals, we would likely take the matter before the District Court. At the
District Court level, we would anticipate a resolution no earlier than 2006.
While we believe that we have a strong position in this matter, there can be no
assurance that we will resolve this matter in our favor.
We are involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
8
6. DEFERRED REVENUE - BUZZTIME
In February 2003, we entered into a Trial Agreement with Comcast Cable
Communications Management LLC (Comcast) that involves developing the Buzztime
Channel for potential deployment within that operator's system. The Trial
Agreement was amended on March 31, 2005 to include payments of license fees and
development costs. The Trial Agreement now runs through December 2005. During
the nine months ended September 30, 2005, we recognized $253,000 of revenue
under the Trial Agreement compared to $100,000 recognized in the nine months
ended September 30, 2004. As of September 30, 2005, $668,000 of revenue has been
deferred for future license fees and software development for Comcast.
7. SALE OF SOFTWARE PRODUCTS
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. In accordance with the asset purchase transaction,
Gary Peek terminated his position as vice president and general manager of our
Software Solutions segment and immediately thereafter commenced his position
with Intura to oversee business operations.
The primary software products sold by us to Intura were Vision, Relief
Manager Plus (RMP), Store Link Plus (SLP), Sell More Pizzas and other legacy
products as well as a non-exclusive right to develop and market the Enterprise
software. We received a non-dilutable 10% partnership interest in Intura in the
transaction and will receive 20% of Intura's revenues received during the next
two years, up to a maximum of $100,000. Further, Intura will provide software
development maintenance services for the RMP and SLP software for two years (we
continue to retain the rights to the maintenance and support revenue from the
legacy products).
We engaged a third party valuation firm to assist in determining the fair
value of our 10% ownership interest in Intura. Based upon that analysis, we
concluded that the fair value of our investment in Intura was approximately
$69,000. Additionally, based on that analysis, we considered whether this
transaction resulted in any impairment of the goodwill in the Software Solutions
segment and we concluded that it did not result in any such impairment. The sale
of the software products, which we carried as part of our intangible assets,
resulted in a one-time, non-cash charge of $276,000. That amount would have been
amortized over the remaining four year life of those intangible assets if they
had been retained by the Company.
8. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is the combination of accumulated net
unrealized losses on investment available for sale and the accumulated gains or
losses from foreign currency translation adjustments. We translated the assets
and liabilities of NTN Canada and of our U.K. operations into U.S. dollars using
the period end exchange rate. Revenue and expenses were translated using the
average exchange rates for the reporting period. For the three months and nine
months ended September 30, 2005 and 2004, the components of accumulated other
comprehensive loss were as follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September30, September 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Beginning balance $ (358,000) $ (706,000) $ (469,000) $ (628,000)
Unrealized gain (loss) in investment
available-for-sale (77,000) 91,000 41,000 72,000
Foreign currency translation adjustments 44,000 116,000 37,000 57,000
------------ ------------ ------------ ------------
Ending balance $ (391,000) $ (499,000) $ (391,000) $ (499,000)
============ ============ ============ ============
The comprehensive losses for the three and nine month periods ended September 30 were as follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September30, September 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income (loss) $ 246,000 $ (1,232,000) $ (2,193,000) $ (3,600,000)
Comprehensive income (loss) (33,000) 207,000 78,000 129,000
------------ ------------ ------------ ------------
Comprehensive net income (loss) $ 213,000 $ (1,025,000) $ (2,115,000) $ (3,471,000)
============ ============ ============ ============
9
9. LINE OF CREDIT
In February 2005, we amended our $1 million line of credit with Pacific
Mercantile Bank to extend the maturity date from February 1, 2005 to February
11, 2006. As of September 30, 2005, we have borrowed $700,000 against the line
of credit and we were in compliance with our covenant. The line is secured by
all inventories, equipment, accounts receivable and various other assets.
10. MEDIA GENERAL INVESTMENT
On May 6, 2003, Media General, Inc., a communications company with
interests in newspapers, television stations, interactive media and diversified
information services, made a $3.0 million investment in NTN. In return for the
investment, we issued and sold 2,000,000 shares of unregistered NTN common stock
through a private offering to Media General. Pursuant to the terms of the
transaction, upon receipt of $3.0 million from Media General, we issued the
unregistered shares along with fully vested warrants to purchase 500,000 shares
of Buzztime common stock at $3.46 per share, exercisable through May 7, 2007. In
connection with the Buzztime common stock, the parties agreed that Media General
would have co-sale rights and NTN would have certain drag-along rights. Media
General has the right to convert each share of Buzztime common stock into two
shares of NTN common stock (subject to adjustment ) on the second and fourth
anniversaries of the transaction date, in the event of a sale of NTN, upon
certain bankruptcy and other insolvency proceedings of Buzztime, and in certain
circumstances if NTN exercises its drag-along rights. Media General has the
further right to convert the warrant to purchase 500,000 shares of Buzztime
common stock into a warrant to purchase 1,000,000 shares of NTN common stock at
$1.73 per NTN share (subject to adjustment) in the event of bankruptcy or
insolvency of Buzztime. NTN has the right to require Media General to convert
its equity interests in Buzztime into equity interests in NTN if there is a sale
of NTN. As of May 7, 2005, Media General did not exercise its right to convert
the Buzztime common shares into NTN common shares, so this right has expired
until the fourth anniversary of the transaction date.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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
COMMUNICATIONS, 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/A FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2004 UNDER THE SECTION ENTITLED "RISK FACTORS," 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
Our business is developing and distributing interactive entertainment and
wireless information and communications products. We operate our business
principally through two operating units: the NTN Hospitality Technologies
division and our Buzztime Entertainment, Inc. ("Buzztime") subsidiary. The NTN
Hospitality Technologies division includes the NTN iTV Network, NTN Wireless and
Software Solutions segments.
Our objective is to leverage our unique interactive entertainment as a
means of growing our business units--first, as a developer and distributor of
interactive entertainment for consumer markets via our NTN iTV Network and via
Buzztime licensing to other interactive platforms and second, as a leading
provider of interactive communications and software offerings to the hospitality
industry through the NTN Hospitality Technologies division.
NTN HOSPITALITY TECHNOLOGIES DIVISION
- -------------------------------------
NTN iTV Network
- ---------------
The NTN iTV Network transmits a wide variety of popular interactive games,
advertisements and informational programming delivered daily to consumers in
3,959 restaurants, sports bars and taverns throughout the United States and
Canada and to 14 pubs in the United Kingdom as of September 30, 2005.
We strive to consistently increase the number of hospitality locations
serviced by the NTN iTV Network by expanding our interactive programming content
to appeal to a broader consumer base and expanding our sales and distribution
"footprint" through both direct sales and independent dealer and reseller
channels. The Network recently expanded beyond our core Sports and Quiz Show
programming to now include NTN BlastTM, an additional programming channel
featuring six new types of entertainment that can be played on our network,
including Extreme Sports programming, irreverent word-based games and popular
card games like Blackjack and Texas Hold'em poker.
NEW DEVELOPMENTS - Our third quarter 2005 net site growth of 127
restaurant and sports bar subscribers in North America was the highest achieved
during any quarterly period since 1997. The increase brings the Company's North
America installed base to 3,959 subscriber sites at September 30, 2005, an
increase of 381 subscribers over third quarter 2004 and the highest subscriber
site count in the Company's history. During the past six quarters, we have
experienced the most significant increase in domestic iTV site sales in seven
years.
We attribute the strong site growth during the first nine months of 2005
to the continued rollout of our NTN Blast content which began in March 2004,
including the Texas Hold`em poker game launched in first quarter of 2005, as
well as the launch of a new product called Fantasy Sports Tracking produced in
conjunction with Sportsline.com. The positive growth came on third quarter sales
of 344 new subscribers, and nine-month sales of 1,080 new subscribers. The
nine-month sales number is a 41% improvement over sales in the first nine months
of 2004, when NTN Blast was announced.
11
We are also seeking to increase revenue by growing the NTN iTV Network in
the United Kingdom. July 2005 marked the first pro-active sales efforts to sell
subscriptions to the UK-based network, called in the UK "The Buzztime Network,"
following a successful trial of the system in March through June 2005 at eleven
UK pub locations. We have now begun to enter into agreements with pub owners to
install and operate our Network. We do not anticipate being able to
substantially determine our degree of success regarding this initiative until
the first quarter of 2006.
NTN Wireless and Software Solutions
- -----------------------------------
NTN Wireless offers a complete line of on-site wireless communication
management products to improve the customer experience and front-of-store
efficiencies. NTN Wireless also offers on site messaging solutions for
hospitals, church and synagogue nurseries, salons, business offices, and retail
establishments. Software Solutions designs, develops, and markets innovative
software for the restaurant and hospitality industry, with corresponding
fee-based technical support.
We seek to increase the number of hospitality locations serviced by these
segments by engineering more value-added features; expanding our sales and
distribution "footprint" through both direct sales and independent dealer and
reseller channels, as well as increasing technical support revenue. The
installed base using our Software Solutions unit's ProHost Table Management and
Reservation Management software products include Cheesecake Factory, Houston's,
J.Alexander's, MGM/Mirage, Harrah's and others. We believe our software products
are among the best in the industry and are being adopted to a greater degree now
than in past periods. We also continue to expand contracted technical support
and services revenue with Domino's Pizza.
NEW DEVELOPMENTS - During the quarter, we installed several major software
accounts, including a ProHost reservation system with Wynn resorts and our
ProHost Table Management System in flagship installations with Hard Rock Cafes
in Times Square New York and Orlando, Florida. We are now integrating sales and
marketing of new Wireless products with our Software Solutions segment under a
unique "Speed of Service" initiative. Our newest wireless pager product, called
SmartCallTM, uses an LCD display to inform the guest of his/her expected
wait-time, as calculated by our ProHost(R) Table Management System. We believe
that this integrated initiative will increase future revenues of both product
lines.
In our Software Solutions segment, we signed an exclusive reseller
agreement with Radiant Systems for distribution of our ProHost software
products. With this agreement, we are aggressively seeking to increase points of
distribution of our hospitality products via Radiant's software resellers, and
have increased reseller relationships with a goal of growing this number in
coming quarters. We believe sales of these products can lead to substantial
future earnings for the Company.
BUZZTIME ENTERTAINMENT SUBSIDIARY
- ---------------------------------
Buzztime is a developer and distributor of multiplayer interactive games
and technology for numerous interactive consumer platforms, including the NTN
iTV Hospitality Network, interactive cable television, satellite television,
mobile phones, airline in-flight entertainment systems, retail games and books.
Our Buzztime(R) Channel is the first continuous multiplayer, game service
launched for U.S. digital cable TV audiences. Buzztime features play-along
trivia game shows for players of all interests and ability levels with real-time
competition and rankings among households and across cable TV systems and other
popular single-player games. Buzztime's revenue is primarily generated from the
distribution and licensing of its interactive trivia games, live "Play-Along"
sports games and other games to emerging consumer platforms, as well as revenue
related to development and production services for third parties.
To accomplish our objectives we are primarily pursuing business strategies
to develop and distribute the Buzztime Channel and other games to cable TV and
satellite TV operators with the intent to remain a leading North American
multi-player interactive television game channel. We have adapted or are
planning to adapt our interactive game content and technology to the leading
interactive television platforms and have developed new content and licensed
additional game content for deployment into the U.S. digital cable interactive
television market. As Buzztime gains distribution with cable television
operators, our objective is to increase revenue through three sources: license
fees paid by local cable television operators, fees paid by interactive
television home subscribers for premium services or pay-per-play transactions
and advertising revenue.
Buzztime also licenses Buzztime games to other consumer platforms with the
intent of realizing new sources of licensing revenue, enhancing the value of the
Buzztime brand and improving the value of our brand to the cable TV operators.
To that end, Buzztime trivia is available in the form of player cards and an
electronic plug-and-play TV game under a license agreement with Cadaco, Inc., a
retail game and toy company. We have also licensed certain Buzztime-branded
trivia games to a mobile entertainment production company for distribution to
North American wireless carriers as a consumer subscription game service for
certain mobile phones. Furthermore, we have entered into an agreement with a
provider of airline in-flight entertainment to provide trivia game content to
passengers on iTV-enabled airlines.
12
NEW DEVELOPMENTS - In the third quarter, we received increased royalty
payments from our licensee, Cadaco Inc., from the sale of Cadaco's new "Buzztime
Home Trivia System" plug-and-play electronic game. Cadaco has achieved broad
distribution of this new game in stores across the U.S. These initial revenues
were generated from initial stocking orders in approximately 9,000 North America
retail outlets including Borders, Best Buy, Kohl's, Kmart, Target, Toys R Us,
Wal-Mart and others by September 30, 2005 in preparation for holiday sales.
Sell-through of the Buzztime Home Trivia System to consumers will determine
license revenues from this segment in the fourth quarter. Buzztime also had an
increase in recurring revenues from our cable TV, satellite TV and mobile
licensing partners, which we believe will continue to grow in future periods.
In addition, Buzztime signed a licensing deal with Square One Publishers to
publish a set of celebrity-driven Buzztime branded trivia books for distribution
through book retail locations. The books will be marketed by Square One
Publishers as well as by Buzztime on the NTN iTV Network.
There can be no assurance, however, that we will be successful in executing
any of the strategies described above.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
Operations for the three months ended September 30, 2005 resulted in net
income of $246,000 compared to a net loss of $1,232,000 for the three months
ended September 30, 2004, an improvement of $1,478,000.
REVENUES
Consolidated revenues increased $1,653,000, or 19%, to $10,425,000 in the
three months ended September 30, 2005 from $8,772,000 in the three months ended
September 30, 2004.
The revenues of the NTN Hospitality Technologies division increased by
$1,318,000, or 15%, to $9,910,000 from $8,592,000 for the three months ended
September 30, 2004. The revenue contribution from the three operating segments
of the division for the three months ended September 30, 2005 and 2004 are shown
in the following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Three Months Ended September 30,
-----------------------------------------
2005 2004 Change
----------- ----------- -----------
NTN iTV Network $ 7,385,000 $ 6,545,000 $ 840,000
NTN Wireless 1,269,000 1,041,000 228,000
Software Solutions 1,256,000 1,006,000 250,000
----------- ----------- -----------
Total Revenue of Division $ 9,910,000 $ 8,592,000 $ 1,318,000
=========== =========== ===========
Within the NTN iTV Network segment there are several revenue contributors,
including our subscription revenue from core hospitality operations, revenue
from our Canadian operations, advertising revenue and installation revenue. The
primary revenue components are broken out in the following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
Three Months Ended September 30,
-----------------------------------------
2005 2004 Change
----------- ----------- -----------
U.S. Subscription Revenues $ 6,003,000 $ 5,360,000 $ 643,000
Subscription and Installation Revenue from Canadian Operations 986,000 832,000 154,000
Advertising and Special Events Revenue - United States 166,000 121,000 45,000
Advertising Revenue and Special Events - Canada 47,000 89,000 (42,000)
U.S. Installation Revenue 183,000 143,000 40,000
----------- ----------- -----------
Total NTN iTV Network $ 7,385,000 $ 6,545,000 $ 840,000
=========== =========== ===========
As noted in the above table, our subscription revenue from core domestic
hospitality operations increased by $643,000, or 12%, in the third quarter of
2005 due to an increase in net site count. Additionally, our Canadian
subscription and installation revenue increased by $154,000, or 19%, in the
third quarter of 2005.
In the three months ended September 30, 2005, we added a net number of 104
new sites in the United States compared to a net increase of 95 new domestic
sites in the three months ended September 30, 2004. The NTN iTV Network customer
site count in the United States at September 30, 2005 was 3,558. This was an
increase of 333 sites over September 30, 2004. In the three months ended
September 30, 2005, we added a net number of 23 new sites in Canada. This was an
increase of 48 sites over September 30, 2004. Our Canadian site count at
September 30, 2005 was 401, bringing total North America sites to 3,959, the
highest in the Company's history.
13
Revenues from NTN Wireless increased by $228,000 from $1,041,000 in the
three months ended September 30, 2004 to $1,269,000 in the three months ended
September 30, 2005.
Revenues from Software Solutions increased by $250,000 from $1,006,000 in
the three months ended September 30, 2004 to $1,256,000 in the three months
ended September 30, 2005 due to the recognition of deferred revenue from 2004
and an increase in customer support revenue.
Buzztime revenues increased $335,000 to $515,000 in the three months ended
September 30, 2005 from $180,000 in the three months ended September 30, 2004.
The primary components in the $335,000 revenue increase were subscription
revenues and royalties on game products.
OPERATING EXPENSES
Consolidated direct operating costs increased $236,000, or 8%, to
$3,249,000 in the three months ended September 30, 2005 from $3,013,000 in the
three months ended September 30, 2004. The following table compares the direct
costs for each of our operating segments between the three months ended
September 30, 2005 and 2004:
DIRECT OPERATING COSTS
Three Months Ended September 30,
-----------------------------------------
2005 2004 Change
----------- ----------- -----------
NTN iTV Network $ 2,080,000 $ 1,902,000 $ 178,000
NTN Wireless 717,000 631,000 86,000
Software Solutions 143,000 157,000 (14,000)
----------- ----------- -----------
Hospitality Technologies division 2,940,000 2,690,000 250,000
Buzztime 309,000 323,000 (14,000)
----------- ----------- -----------
Consolidated $ 3,249,000 $ 3,013,000 $ 236,000
=========== =========== ===========
The primary drivers in the $236,000 or 8% increase in our direct operating
costs was the $178,000 increase in the direct operating costs in the NTN iTV
Network and the $86,000 increase in the direct operating costs of NTN Wireless.
The reductions in direct operating costs in the Software Solutions and Buzztime
segments helped partially offset the increase in the NTN iTV Network segment.
The $178,000 increase in the NTN iTV Network's direct operating costs came
from a variety of factors, including:
o $54,000 of the increase came from NTN Canada. The largest single
component of the increase in NTN Canada was an increase in direct
depreciation of $63,000 due to installation of new site equipment at
new and existing sites. Prior to our acquisition of that operation,
the site equipment in Canada was largely fully depreciated;
o $50,000 of direct expenses related to our trial in the UK without any
corresponding expenses in the three months ended September 30, 2004;
o $60,000 of the increase came from increased freight costs. The
increase in this expense is directly related to the shipment of
equipment to new sites as well as the to sites that are converting to
our NTN Blast channel.
The $86,000 increase in the direct operating costs of NTN Wireless was
directly related to the increase in revenue. Our gross margin as a percentage of
revenue in the NTN Wireless segment in the three months ended September 30, 2005
was 43%, a 4% increase over the 39% gross margin we recorded in the three months
ended September 30, 2004.
The $14,000 decrease in the direct operating costs of Software Solutions
was related to a decreased level of costs of goods sold of hardware shipments
resulting in an increase in gross margin for the three months ended September
30, 2005 compared to the three months ended September 30, 2004. Our gross margin
in the Software Solutions segment in the three months ended September 30, 2005
was 89%, which represented a 5% increase over the 84% gross margin we recorded
in the three months ended September 30, 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses (SG&A) increased
$339,000 or 6%, to $6,349,000 in the three months ended September 30, 2005 from
$6,010,000 in the three months ended September 30, 2004. The following table
compares the selling, general and administrative expenses for each of our
operating segments between the three months ended September 30, 2005 and 2004:
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Three Months Ended September 30,
-----------------------------------------
2005 2004 Change
----------- ----------- -----------
NTN iTV Network $ 4,000,000 $ 3,620,000 $ 380,000
NTN Wireless 461,000 387,000 74,000
Software Solutions 1,229,000 1,342,000 (113,000)
----------- ----------- -----------
Hospitality Technologies division 5,690,000 5,349,000 341,000
Buzztime 659,000 661,000 (2,000)
----------- ----------- -----------
Consolidated $ 6,349,000 $ 6,010,000 $ 339,000
=========== =========== ===========
The $380,000 SG&A increase in the NTN iTV Network segment came from a
variety of factors, including:
o $109,000 of SG&A expenses related to our trial in the UK without any
corresponding expenses in the three months ended September 30, 2004;
o Increased estimate for bad debts of $237,000;
o Increased marketing and travel and entertainment expenses of $109,000
associated with the launch of NTN BlastTM content and the new iTV
dual-channel technology platform and rollout of an independent dealer
network.
The $74,000 increase in the SG&A expenses of NTN Wireless was primarily due
to an increase in personnel and to an office move.
The $113,000 reduction in the SG&A expenses of Software Solutions was
primarily due to personnel reductions and travel and marketing related expenses.
The $2,000 reduction in the SG&A expenses of Buzztime was primarily due to
personnel reductions which are offset by an increase in marketing related
expenses.
LITIGATION, LEGAL AND PROFESSIONAL FEES
Litigation, legal and professional fees decreased $336,000 to $267,000 in
the three months ended September 30, 2005 compared to $603,000 in the three
months ended September 30, 2004. The litigation, legal and professional fees in
the three months ended September 30, 2004 included $185,000 of legal expenses to
defend the litigation against NTN Wireless with no comparable expense in the
three months ended September 30, 2005. The three months ended September 30, 2004
included $168,000 of Sarbanes-Oxley-related expenses compared to $101,000 in the
three months ended September 30, 2005.
STOCK BASED COMPENSATION
Stock based compensation expense decreased by $12,000 to $47,000 in the
three months ended September 30, 2005 compared to $59,000 in the three months
ended September 30, 2004. This decrease largely arises from recognition of
non-cash expense associated with the grants of certain deferred stock units to
our executives in third quarter 2004 under the 2004 Performance Incentive Plan.
Some of these deferred stock units have become fully vested in 2005 and will
have no related expense once fully vested.
15
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
decreased by $5,000, or 2%, to $212,000 in the three months ended September 30,
2005 from $217,000 in the three months ended September 30, 2004 due to certain
assets becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $14,000 to $70,000 in the three
months ended September 30, 2005 from $84,000 in the three months ended September
30, 2004, due primarily to the completion of certain projects for the iTV
network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the three months ended September 30, 2005 was $20,000
compared to $24,000 in the three months ended September 30, 2004.
Interest expense increased $25,000 to $55,000 in the three months ended
September 30, 2005, compared to $30,000 in the three months ended September 30,
2004, due to borrowing on our line of credit and additional leases entered into
in 2005.
INCOME TAXES
The NTN Hospitality Technologies division is expected to report taxable
income for the year ended December 31, 2005. For federal income tax reporting
purposes and in unitary states where NTN may file on a combined basis, taxable
losses incurred by Buzztime should be sufficient to offset the division's
taxable income. In states where separate filing is required, the division 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, NTN Hospitality
Technologies recorded a tax provision of $1,000 in the three months ended
September 30, 2005 which was offset by a $51,000 tax refund on the 2004 Canadian
income taxes. The provision for income taxes was $12,000 in the three months
ended September 30, 2004.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is not intended to represent a measure of performance in accordance with
accounting principles generally accepted in the United States of America
("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 NTN that carry significant levels of non-cash
depreciation and amortization charges in comparison to their GAAP earnings.
Our EBITDA improved by $1,498,000 to $1,264,000 in the three months ended
September 30, 2005 from EBITDA of negative $234,000 in the three months ended
September 30, 2004. This EBITDA improvement was primarily due to the increase in
income in the three months ended September 30, 2005.
The improvement in EBITDA was achieved despite incurring $157,000 in costs
during 2005 for the launch of our iTV Hospitality Network in the UK. Without
these items, consolidated Q3 EBITDA would have improved by an additional
$157,000 to $1,421,000.
The following table reconciles our net income (loss) per GAAP to EBITDA:
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2005 2004 CHANGE
----------- ----------- -----------
EBITDA CALCULATION
Net income (loss) per GAAP $ 246,000 $(1,232,000) $ 1,478,000
Interest expense (net) 35,000 6,000 29,000
Depreciation and amortization 1,033,000 980,000 53,000
Income taxes (50,000) 12,000 (62,000)
----------- ----------- -----------
EBITDA $ 1,264,000 $ (234,000) $ 1,498,000
=========== =========== ===========
On a segment basis, our segments generated EBITDA levels as presented below:
16
($000) THREE MONTHS ENDED
SEPTEMBER 30, 2005
-------------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $800 $78 $(138) $740 $(494) $246
Interest expense (net) 33 -- -- 33 2 35
Depreciation and amortization 807 14 83 904 129 1,033
Income taxes (50) -- -- (50) -- (50)
-------- -------- -------- -------- -------- --------
EBITDA $1,590 $92 $(55) $1,627 $(363) $1,264
======== ======== ======== ======== ======== ========
($000) THREE MONTHS ENDED
SEPTEMBER 30, 2004
-------------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
-------- -------- -------- -------- -------- --------
Net income (loss) $289 $(182) $(504) $(397) $(835) $(1,232)
Interest expense (net) 6 -- -- 6 -- 6
Depreciation and amortization 725 20 98 843 137 980
Income taxes 12 -- -- 12 -- 12
-------- -------- -------- -------- -------- --------
EBITDA $1,032 $(162) $(406) $464 $(698) $(234)
======== ======== ======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
Operations for the nine months ended September 30, 2005 resulted in a net
loss of $2,193,000 compared to a net loss of $3,600,000 for the nine months
ended September 30, 2004.
REVENUES
Consolidated revenues increased $3,416,000, or 13%, to $29,561,000 in the
nine months ended September 30, 2005 from $26,145,000 in the nine months ended
September 30, 2004.
The revenues of the NTN Hospitality Technologies division increased by
$2,637,000, or 10%, to $28,520,000 for the nine months ended September 30, 2005
from $25,883,000 for the nine months ended September 30, 2004. The revenue
contribution from each operating segment of the division for the nine months
ended September 30, 2005 and 2004 are shown in the following table:
COMPONENTS OF HOSPITALITY TECHNOLOGIES DIVISION REVENUE
Nine Months Ended September 30,
-----------------------------------------
2005 2004 Change
----------- ----------- -----------
NTN iTV Network $21,097,000 $18,890,000 $ 2,207,000
NTN Wireless 4,240,000 4,131,000 109,000
Software Solutions 3,183,000 2,862,000 321,000
----------- ----------- -----------
Total Revenue of Division $28,520,000 $25,883,000 $ 2,637,000
=========== =========== ===========
Within the NTN iTV Network segment there are several revenue contributors,
including our subscription revenue from core hospitality operations, revenue
from our Canadian operations, advertising revenue and installation revenue. The
primary revenue components are broken out in the following table:
COMPONENTS OF NTN ITV NETWORK REVENUE
Nine Months Ended September 30,
-----------------------------------------
2005 2004 Change
----------- ----------- -----------
U.S. Subscription Revenues $17,266,000 $15,463,000 $ 1,803,000
Subscription and Installation Revenue from Canadian Operations 2,770,000 2,342,000 428,000
Advertising and Special Events Revenue - United States 314,000 351,000 (37,000)
Advertising Revenue and Special Events - Canada 223,000 272,000 (49,000)
U.S. Installation Revenue 524,000 462,000 62,000
----------- ----------- -----------
NTN iTV Network $21,097,000 $18,890,000 $ 2,207,000
=========== =========== ===========
17
As noted in the above table, our subscription revenue from core domestic
hospitality operations increased by $1,803,000, or 12%, in the nine months ended
September 30, 2005 due to an increase in net site count. Additionally, our
Canadian subscription and installation revenue increased by $428,000, or 18%, in
the nine months ended September 30, 2005.
In the nine months ended September 30, 2005, we added a net number of 249
new sites in the United States compared compared to a net increase of 100 new
domestic sites in the nine months ended September 30, 2004. The NTN iTV Network
customer site count in the United States at September 30, 2005 was 3,558. This
was an increase of 333 sites over September 30, 2004.
In the nine months ended September 30, 2005, we added a net number of 50
new sites in Canada. Our Canadian site count at September 30, 2005 was 401.
At September 30, 2005, our combined North America site count of 3,959
subscribing sites is the highest in Company history.
Revenues from NTN Wireless increased by $109,000 from $4,131,000 in the
nine months ended September 30, 2004 to $4,240,000 in the nine months ended
September 30, 2005.
Revenues from Software Solutions increased by $321,000 from $2,862,000 in
the nine months ended September 30, 2004 to $3,183,000 in the nine months ended
September 30, 2005 due to the recognition of deferred revenue from 2004 and an
increase in customer support revenue.
Buzztime revenues increased $779,000 to $1,041,000 in the nine months ended
September 30, 2005 from $262,000 in the nine months ended September 30, 2004.
The primary components in the $779,000 revenue increase were $253,000 under the
Trial Agreement with Comcast Cable that related to a combination of technology
development work, equipment installations and license fees and $526,000 in
consumer subscription fees via our distribution through wireless/mobile phones
and satellite television companies and royalties on game products.
OPERATING EXPENSES
Consolidated direct operating costs increased $957,000, or 10%, to
$10,107,000 in the nine months ended September 30, 2005 from $9,150,000 in the
nine months ended September 30, 2004. The following table compares the direct
costs for each of our operating segments between the nine months ended September
30, 2005 and 2004:
DIRECT OPERATING COSTS
Nine Months Ended September 30,
---------------------------------------
2005 2004 Change
----------- ----------- -----------
NTN iTV Network $ 6,185,000 $ 5,219,000 $ 966,000
NTN Wireless 2,425,000 2,524,000 (99,000)
Software Solutions 413,000 502,000 (89,000)
----------- ----------- -----------
Hospitality Technologies division 9,023,000 8,245,000 778,000
Buzztime 1,084,000 905,000 179,000
----------- ----------- -----------
Consolidated $10,107,000 $ 9,150,000 $ 957,000
=========== =========== ===========
The primary drivers in the $957,000 increase in our direct operating costs
were the $966,000 increase in the direct operating costs in the NTN iTV Network
and the $179,000 increase in the direct operating costs of Buzztime. The
reductions in direct operating costs in the NTN Wireless and Software Solutions
segments helped partially offset the increase in the NTN iTV Network segment.
The $966,000 increase in the NTN iTV Network's direct operating costs came
from a variety of factors, including:
o $332,000 of the increase came from NTN Canada. The largest single
component of the increase in NTN Canada was an increase in direct
depreciation of $219,000 due to installation of new site equipment at
new and existing sites. Prior to our acquisition of that operation,
the site equipment in Canada was largely fully depreciated. Another
$126,000 of the increase in NTN Canada was from a combination of
increased installation and technical site service expenses associated
with the installation and conversion to iTV and NTN Blast of a
significant percentage of the Canadian installed base;
o $133,000 of direct expenses related to our trial in the UK without any
corresponding expenses in the nine months ended September 30, 2004;
18
o $220,000 of the increase came from communication costs due to the
higher costs of the satellite service in accordance with a new
agreement signed in December 2004 and acquisition of increased
bandwidth;
o $152,000 of the increase came from increased technical site service
expense. This expense was due to an increase in the number of
technical service visits to our sites due to new software releases;
o $135,000 of the increase came from increased domestic installation
expense. This expense was due to our continued site count growth.
The $99,000 decrease in the direct operating costs of NTN Wireless was
related to lower costs for products sold resulting in higher gross margins. Our
gross margin in the NTN Wireless segment in the nine months ended September 30,
2005 was 43%, a 4% increase over the 39% gross margin we recorded in the nine
months ended September 30, 2004.
The $89,000 decrease in the direct operating costs of Software Solutions
was related to a decreased level of costs of goods sold of hardware shipments
and a decrease in depreciation after the sale of software products to Intura.
Our gross margin in the Software Solutions segment in the nine months ended
September 30, 2005 was 87%, which represented a 5% increase over the 82% gross
margin we recorded in the nine months ended September 30, 2004.
The $179,000 increase in the direct operating costs of Buzztime was
primarily due to a $134,000 of salary production costs that were directly
associated with the increase in production revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses (SG&A) increased
$1,052,000 or 6%, to $19,385,000 in the nine months ended September 30, 2005
from $18,333,000 in the nine months ended September 30, 2004. The following
table compares the selling, general and administrative expenses for each of our
operating segments between the nine months ended September 30, 2005 and 2004:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Nine Months Ended September 30,
---------------------------------------
2005 2004 Change
----------- ----------- -----------
NTN iTV Network $12,414,000 $11,085,000 $ 1,329,000
NTN Wireless 1,341,000 1,172,000 169,000
Software Solutions 3,651,000 3,874,000 (223,000)
----------- ----------- -----------
Hospitality Technologies division 17,406,000 16,131,000 1,275,000
Buzztime 1,979,000 2,202,000 (223,000)
----------- ----------- -----------
Consolidated $19,385,000 $18,333,000 $ 1,052,000
=========== =========== ===========
The $1,329,000 SG&A increase in the NTN iTV Network segment came from a
variety of factors, including:
o $484,000 of SG&A expenses related to our trial in the UK without any
corresponding expenses in the nine months ended September 30, 2004;
o Increased domestic sales commissions of $201,000 relating to the
increase in new site sales;
o Increased estimate for bad debts of $501,000;
o Increased marketing and travel and entertainment expenses of $274,000
associated with the launch of NTN BlastTM content and the new iTV
dual-channel technology platform and rollout of an independent dealer
network.
The $169,000 increase in the SG&A expenses of NTN Wireless was primarily
due to an increase in personnel and an increase in commissions directly related
to the increase in sales.
The $223,000 reduction in the SG&A expenses of Software Solutions was
primarily due to personnel reductions.
The $223,000 reduction in the SG&A expenses of Buzztime was primarily due
to personnel reductions.
19
NON-CASH CHARGE RELATED TO SOFTWARE PRODUCT SALE
On February 4, 2005, we entered into an Asset Purchase Agreement with
Intura Solutions LP (Intura), a Texas limited partnership, pursuant to which we
sold the point of sale software products developed and maintained by our
Software Solutions segment. The primary software products sold by us to Intura
were Vision, Relief Manager Plus (RMP), Store Link Plus (SLP), Sell More Pizzas
and other legacy products as well as a non-exclusive right to develop and market
the Enterprise software. We received a non-dilutable 10% partnership interest in
Intura in the transaction and will receive 20% of Intura's revenues received
during the next two years, up to a maximum of $100,000. Further, Intura will
provide software development maintenance services for the RMP and SLP software
for two years (we continue to retain the rights to the maintenance and support
revenue from the legacy products).
We engaged a third party valuation firm to estimate the value of our 10%
ownership interest in Intura. Based upon that analysis, we concluded that the
fair value of our investment in Intura was approximately $69,000. Additionally,
based on that analysis, we concluded that there was no impairment of the
goodwill in the Software Solutions segment as a result of this transaction. The
transfer of the software products, which we carried as part of our intangible
assets, resulted in a one-time, non-cash charge of $276,000.
LITIGATION, LEGAL AND PROFESSIONAL FEES
Litigation, legal and professional fees decreased $513,000 to $837,000 in
the nine months ended September 30, 2005 compared to $1,350,000 in the nine
months ended September 30, 2004. Legal fees in the nine months ended September
30, 2005 decreased $525,000 which was primarily related to $361,000 of legal
expenses to defend the litigation against NTN Wireless in the nine months ended
September 30, 2004 with no comparable expense in 2005.
STOCK BASED COMPENSATION
Stock based compensation expense increased by $87,000 to $239,000 in the
nine months ended September 30, 2005 compared to $152,000 in the nine months
ended September 30, 2004. This increase largely arises from recognition of
non-cash expense associated with the grants of certain deferred stock units to
our executives in third quarter 2004 under the 2004 Performance Incentive Plan.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization not related to direct operating costs
decreased by $22,000, or 3%, to $632,000 in the nine months ended September 30,
2005 from $654,000 in the nine months ended September 30, 2004 due to certain
assets becoming fully depreciated.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $61,000 to $195,000 in the nine
months ended September 30, 2005 from $256,000 in the nine months ended September
30, 2004, due primarily to the completion of certain projects for the iTV
network.
OTHER INCOME (EXPENSE)
INTEREST INCOME AND EXPENSE
Interest income in the nine months ended September 30, 2005 was $71,000
compared to $66,000 in the nine months ended September 30, 2004.
Interest expense increased $32,000 to $128,000 in the nine months ended
September 30, 2005, compared to $96,000 in the nine months ended September 30,
2004, due to borrowing on our line of credit and additional leases entered into
in 2005.
INCOME TAXES
The NTN Hospitality Technologies division is expected to report taxable
income for the year ended December 31, 2005. For federal income tax reporting
purposes and in unitary states where NTN may file on a combined basis, taxable
losses incurred by Buzztime should be sufficient to offset the division's
taxable income. In states where separate filing is required, the division 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, NTN Hospitality
Technologies recorded a tax provision of $77,000 in the nine months ended
September 30, 2005 which was offset by a $51,000 tax refund on the 2004 Canadian
income taxes. The provision for income taxes was $45,000 in the nine months
ended September 30, 2004.
20
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is not intended to represent a measure of performance in accordance with
accounting principles generally accepted in the United States of America
("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 NTN that carry significant levels of non-cash
depreciation and amortization charges in comparison to their GAAP earnings.
Our EBITDA improved by $1,561,000 to $908,000 in the nine months ended
September 30, 2005 from EBITDA of negative $653,000 in the nine months ended
September 30, 2004. This EBITDA improvement was due to the increase in income in
the nine months ended September 30, 2005.
The improvement in EBITDA resulted despite last year's first nine months
benefiting from a one-time legal settlement of $225,000 and despite this year
incurring $653,000 in costs for the launch of our iTV Hospitality Network in the
UK. Without these items, consolidated nine month EBITDA would have improved by a
combined total $2,439,000 to EBITDA of $1,561,000.
The following table reconciles our net loss per GAAP to EBITDA:
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2005 2004 CHANGE
----------- ----------- -----------
EBITDA CALCULATION:
Net loss per GAAP $(2,193,000) $(3,600,000) $ 1,407,000
Interest expense (net) 57,000 30,000 27,000
Depreciation and amortization 3,018,000 2,872,000 146,000
Income taxes 26,000 45,000 (19,000)
----------- ----------- -----------
EBITDA $ 908,000 $ (653,000) $ 1,561,000
=========== =========== ===========
On a segment basis, our segments generated EBITDA levels as presented below:
($000) NINE MONTHS ENDED
SEPTEMBER 30, 2005
------------------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 819 $ 367 $ (1,229) $ (43) $ (2,150) $ (2,193)
Interest expense (net) 52 -- -- 52 5 57
Depreciation and amortization 2,259 53 261 2,573 445 3,018
Income taxes 26 -- -- 26 -- 26
--------- --------- --------- --------- --------- ---------
EBITDA $ 3,156 $ 420 $ (968) $ 2,608 $ (1,700) $ 908
========= ========= ========= ========= ========= =========
($000) NINE MONTHS ENDED
SEPTEMBER 30, 2004
------------------------------------------------------------------------------
EBITDA CALCULATION:
NTN ITV NTN SOFTWARE HOSP.
NETWORK WIRELESS SOLUTIONS TECH. DIV. BUZZTIME TOTAL
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 951 $ (12) $ (1,579) $ (640) $ (2,960) $ (3,600)
Interest expense (net) 30 -- -- 30 -- 30
Depreciation and amortization 2,114 75 290 2,479 393 2,872
Income taxes 45 -- -- 45 -- 45
--------- --------- --------- --------- --------- ---------
EBITDA $ 3,140 $ 63 $ (1,289) $ 1,914 $ (2,567) $ (653)
========= ========= ========= ========= ========= =========
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, we had cash and cash equivalents of $4,974,000 and
working capital (current assets in excess of current liabilities) of $4,182,000,
compared to cash and cash equivalents of $6,710,000 and working capital of
$6,644,000 at December 31, 2004. Net cash provided by (used in) operating
activities was $1,635,000 for the nine months ended September 30, 2005 compared
to $(1,299,000) for the nine months ended September 30, 2004, or a $2,934,000
increase in cash provided by operating activities. Net loss for the nine months
ended September 30, 2005 was offset by non cash charges which included the
$343,000 charge to the Intura transaction, the $3,018,000 in depreciation and
amortization, the $801,000 in the provision for doubtful accounts, the $239,000
increase in stock-based compensation charges, and the $216,000 loss on
disposition of equipment and capitalized software. The primary components of net
cash provided by operating activities for the nine months ended September 30,
2005 included an increase in deferred revenue of $1,025,000 which was offset by
the use of cash associated accounts receivable of $791,000, accounts payable and
accrued expenses of $560,000 and deferred costs of $498,000.
21
Net cash used in investing activities was $3,698,000 for the nine months
ended September 30, 2005 compared with $3,030,000 for the nine months ended
September 30, 2004. Included in net cash used in investing activities for the
nine months ended September 30, 2005 were $3,241,000 in capital expenditures
largely related to the increase in our NTN iTV Network sites, $136,000 of
deposits on broadcast equipment and $321,000 of capitalized software development
expenditures. The primary components of net cash used in investing activities
for the nine months ended September 30, 2004 were $2,276,000 of capital
expenditures, $103,000 of incremental cash usage relating to our acquisitions,
$338,000 in deposits on broadcast equipment and $313,000 of capitalized software
development expenditures.
Net cash provided by financing activities was $299,000 for the nine months
ended September 30, 2005 compared to $11,281,000 for the nine months ended
September 30, 2004. The cash provided by financing activities for the nine
months ended September 30, 2005 included $700,000 in borrowings on our revolving
line of credit and $406,000 in cash generated from the exercise of stock options
and warrants. Those cash inflows were partially offset by $541,000 in principal
payments on equipment note payable and $266,000 in principal payments on capital
leases. The $11,281,000 in cash provided by financing activities in the nine
months ended September 30, 2004 included $13,001,000 of net proceeds from our
equity offering in January 2004 and $385,000 from the exercise of stock options
and warrants. These proceeds were partially offset by $1,000,000 of principal
payments on the revolving line of credit, $974,000 of principal payments on
equipment notes payable and $131,000 of principal payments on capital leases.
FUTURE FINANCING NEEDS
We anticipate that operating results in the fourth quarter 2005, and into
2006, will allow the cash on hand, along with cash from operations, to be
sufficient to operate the Company's business. Cash reserves increased by
$327,000 in the third quarter of 2005 as income from operations offset
investments and capital expenditures, including significant capital expenditures
for new site installations due to higher-than-average growth of NTN iTV Network
site installations, along with continued investment in growth initiatives for
our Buzztime Licensing efforts, new investment for distribution of our products
in the United Kingdom, and operating losses in our Software Solutions segment.
While there is currently no plan to raise capital, continued investment in high
growth initiatives and significantly lower than expected results from operations
could require us to raise capital at some future period.
In 2004 and during the first quarter of 2005, in addition to capital
expenditures to support the record sales of new iTV Network sites, our iTV
Network has required a substantial capital investment due to the one-time
conversion of older installations to VSAT connectivity. Each new site
installation in 2004 and during the first quarter of 2005 required approximately
$5,000 in capital investment and equipment. A move to predominantly DSL
connectivity in the second quarter of 2005 has lowered this amount to
approximately $3,500 per site. This savings has significantly improved the
business model for site profits versus invested capital. Despite this savings,
total capital expenditures do remain substantial as sales are running well ahead
of prior years and show no signs of abating, thus offsetting what would
otherwise be lower total capital expenditures.
Additionally, we have in 2005 invested capital to convert our approximately
350 Canadian iTV Network sites to our newest iTV2 technology, which allows the
play of Texas Hold `Em, as well as other new game content. We acquired the NTN
Canada Network assets of our Canadian licensee in December 2003. The previous
owner had not converted the Canadian customer base to DITV during the 1999 to
2001 period when our domestic sites were converted, and the Canadian Network had
become antiquated and was rapidly losing customers. Following the purchase, we
have been in the process of upgrading the technology for all 350 active sites
there. Through September 30, 2005, approximately 77% of the Canadian sites had
been converted to iTV2, our newest technology platform, and connected via either
VSAT or DSL communication platforms. Over the next 6 months we plan to convert
the remainder of our current customer base at a cost of approximately $280,000.
Capital requirements in the coming 12 months will additionally depend upon
two other initiatives. The first is the launch of our iTV Network in the UK,
which began with an initial trial of eleven iTV Network sites on March 1, 2005.
We believe that a significant growth opportunity exists in the UK for our iTV
product, and each new site will require capital expenditures of about $3,500,
which is commensurate with U.S. sites. We are continuing to invest approximately
$200,000 per quarter in this initiative, with a target breakeven of
approximately 200 sites which we believe can come by the end of 2006. The second
initiative is the operations of our Software Solutions segment, for which we
have invested over the past two years with a goal that stronger sales can be
obtained in late 2005 and in 2006. Sales in third quarter 2005 were stronger
than any in the past six quarters for this segment.
The capital necessary to support a third initiative, the development and
distribution of the Buzztime Channel to the major U.S. cable TV systems, has
declined substantially in the last half of 2005 as operating costs have been
reduced to a lower run-rate of approximately $3 million from its historic loss
of approximate $4 million per year. This is because the Company has been able to
reduce its investment in technology and applications for deployment to digital
cable television systems while still maintaining the market requirements to
support current operations and sales orders. We do anticipate that costs could
go up substantially if we succeed as planned and enter into broader national
agreements with the major cable operators, as this may prompt us to aggressively
increase Buzztime development, sales and marketing efforts to more quickly
advance our distribution within the U.S. market. Offsetting cash usage in this
22
segment will be license revenues from sales of the new Buzztime plug-and-play TV
game to North American toy retailers, which could be significant, along with
increased satellite TV and mobile licensing revenue. In 2006, continuing
Buzztime losses, if incurred, will be due primarily to the approximately $1.5
million in annual costs to produce the trivia and live sports game content that
is used in all of our interactive game businesses, including distribution to the
NTN iTV Network, cable TV, mobile, satellite TV and retail toy markets. All of
this expense is currently borne by the Buzztime subsidiary.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. 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 on-going basis, we evaluate our estimates, including those
related to deferred costs and revenues, depreciation of broadcast equipment, bad
debts, investments, intangible assets, financing operations, and contingencies
and litigation. 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.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o We record deferred costs and revenues related to the costs and related
installation revenue associated with installing iTV customer sites.
Based on Staff Accounting Bulletin 104 (SAB 104), we amortize these
amounts over an estimated average life of a customer relationship.
Currently, we estimate that the average customer life is three years.
o We incur a relatively significant level of depreciation expense in
relationship 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, VSAT satellite dishes and
associated electronics and the computers located at our customer
sites. The Playmakers are depreciated over a four-year life, VSAT
dishes and associated electronics over a four-year life and the
computers over a three-year life. The depreciable life of these assets
was determined based upon their estimated useful life which considers
anticipated technology changes. If our Playmakers, VSAT dishes 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, VSAT dishes 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.
o We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. During the three months ended March 31, 2005, we modified
our methodology for determining our allowance for doubtful accounts
based upon an increasing number of our customers that pay us under
electronic payment methods such as credit cards and direct debits to
their checking accounts and by segment. We estimate our allowance
based on:
o For iTV customers that pay under credit terms, we fully reserve
for all the customers that have terminated our iTV Network
service or had their service suspended. Additionally, we reserve
three percent of outstanding balances for all unreserved customer
balances.
o For iTV customers that pay under electronic payment arrangements,
we fully reserve for all the customers that have terminated our
iTV Network service or had their service suspended. Additionally,
we fully reserve for all receivables over 60 days past due. We
then reserve three percent of outstanding balances for all
unreserved customer balances.
o For Software Solutions and NTN Wireless customers, we reserve
five percent of outstanding balances for all unreserved customer
balances.
Beyond the above allowance parameters, we also may increase the
reserve based on our business judgment.
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.
o We assess our inventory for estimated obsolescence or unmarketable
inventory and write down the difference between the cost of inventory
and the estimated market value based upon assumptions about future
sales and supply on-hand. If actual market conditions are less
favorable than those projected by management, additional inventory
write-downs may be required.
23
o Revenues from Software Solutions are recognized in accordance with
Statement of Position (SOP) No. 97-2, SOFTWARE REVENUE RECOGNITION, as
amended. Software license fee revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product has
occurred at our customer's location, the fee is fixed or determinable
and collection is probable, provided that vendor specific evidence
exists for any undelivered elements, namely annual support and
maintenance. Along with the basic software license, our customers are
provided post contract support (PCS) for an additional fee, which is
based on a stipulated percentage of the license fee. PCS consists of
technical support as well as unspecified software upgrades and
releases when and if made available by us during the term of the
support period.
If at the outset of an arrangement we determine that the arrangement
fee is not fixed or determinable, revenue is deferred until the
arrangement fee becomes due. If at the outset of an arrangement we
determine that collectibility is not probable, revenue is deferred
until the earlier of when collectibility becomes probable or the
receipt of payment. If an arrangement allows for customer acceptance,
revenue is not recognized until the earlier of receipt of customer
acceptance or expiration of the acceptance period.
Additionally, we provide consulting and training services under both
hourly-based time and materials and fixed-priced contracts. Revenues
from these services are generally recognized as the services are
performed.
o We have a significant amount of goodwill and intangible assets on our
balance sheet related to acquisitions. At September 30, 2005 the net
amount of $6,788,000 of goodwill and intangible assets represented 23%
of total assets. Goodwill represents the excess of costs over fair
value of assets of businesses acquired. We adopted the provisions of
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, as of January 1,
2002. Goodwill and intangible assets acquired in a purchase
combination determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 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 SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS.
We performed our annual test for goodwill impairment as required by
SFAS 142 for our Software Solutions segment and our NTN Canada unit
subsequent to the end of the third quarter in conjunction with the
preparation of the September 30, 2005 financial statements. We
retained a third-party valuation firm to assist in calculating the
fair values of Software Solutions and NTN Canada. The analysis was
based upon consideration of (1) the market value of comparable
publicly traded companies, (2) the market value of similar companies
involved in business combinations, and (3) an income approach of
discounting the projected cash flows of operations. The projections of
those units involved a number of assumptions and estimates, including
revenue growth and operating margins, which management believes are
reasonable based upon existing operations and prospective business
opportunities. We completed our evaluation and concluded that goodwill
was not impaired as the fair value of Software Solutions and NTN
Canada exceeded their carrying value, including goodwill. The amount
of goodwill as of September 30, 2005 was $3,658,000. Future events
could cause us to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired
businesses are impaired.
We continually monitor for any potential indicators of impairment of
goodwill and intangible assets and we have determined that no such
indicators have arisen during 2005 to date. Any impairment loss could
have a material adverse impact on our financial condition and results
of operations.
o In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT,
a revision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
and superseding APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. SFAS No. 123R requires the Company to expense grants made
under the stock option and employee stock purchase plan programs. That
cost will be recognized over the vesting period of the plans. SFAS No.
123R is effective for the first annual period beginning after
September 15, 2005. Upon adoption of SFAS No. 123R, amounts previously
disclosed under SFAS No.123 will be recorded in the consolidated
income statement. We are evaluating the alternatives allowed under the
standard, which we are required to adopt beginning in the first
quarter of 2006. We believe that this new standard will increase our
operating losses in the future but that increase will be of a non-cash
nature.
We do not have any of the following:
o Off-balance sheet arrangements except for purchase orders and
commitments, and operating leases;
o Certain trading activities that include non-exchange traded contracts
accounted for at fair value or speculative or hedging instruments; or
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o Relationships and transactions with persons or entities that derive
benefits from any non-independent relationship other than the related
party transactions discussed in Note 16 - Related Parties or in Note
21 - Subsequent Events in our Form 10-K/A for the year ended December
31, 2004, ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(which item is incorporated by reference to our definitive proxy
statement) or which are so non-material to fall below the materiality
threshold of such item.
ASSESSMENTS OF FUNCTIONAL CURRENCIES. The U.S. dollar is the functional
currency of all of the Company's operations except for the Canadian and United
Kingdom operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks related to stock market fluctuations, interest
rates and currency exchange rates. As of September 30, 2005, we owned common
stock of an Australian company that is subject to market risk. At September 30,
2005, the carrying value of this investment was $345,000, which is net of a
$472,000 unrealized loss. This investment is exposed to further market risk in
the future based on the operating results of the Australian company and stock
market fluctuations. Additionally, the value of the investment is further
subject to changes in Australian currency exchange rates. At September 30, 2005,
a hypothetical 10% decline in the value of the Australian dollar would result in
a reduction of $35,000 in the carrying value of the investment.
As of September 30, 2005 we also had cash equivalents of approximately
$2.77 million invested primarily in short-term government bonds that is subject
to market risk. A hypothetical 1% change in interest rates would have an effect
of approximately $28,000 on the value of our cash equivalents.
We have outstanding line of credit borrowings of $700,000 at September 30,
2005 which bear a rate of interest equal to the prime rate plus 2% per annum. A
hypothetical one-percentage point increase in the prime rate would result in an
increase of $7,000 in annual interest expense.
We also face currency exchange risk with our operations in Canada. NTN
Canada earned approximately Canadian $1,347,000 (or U.S. $1,105,000) before
corporate overhead and taxes in the nine months ended September 30, 2005. A
hypothetical 10% decline in the value of the Canadian dollar versus the United
States dollar would reduce the stated contribution from that unit to the NTN iTV
Network segment by that same 10%.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, our management
evaluated our disclosure controls and procedures (as defined in Securities
Exchange Act Rules 13a-15(e) and 15d-15(e)) as to whether such disclosure
controls and procedures were effective in providing reasonable assurance that
the information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms and ensuring that information required to be disclosed in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including the chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure. Based on that evaluation, management has concluded that our efforts
to remediate the material weakness described below have not been yet been
completed and therefore the Company's disclosure controls and procedures are not
effective as of the end of the period covered by this report. However, as also
described below, we believe that we have made significant progress in
remediating such material weakness.
Under Auditing Standard No. 2 as defined by the PCAOB, a material weakness
is a significant deficiency, or a combination of significant deficiencies, that
result in more than likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. We identified
that, as of December 31, 2004, there was inadequate documentation of the design
and testing of controls over relevant assertions related to certain significant
accounts and disclosures. This pertains to documenting to the degree appropriate
how certain controls were initiated, authorized, recorded, processed, tested or
reported. Our review found no material deficiencies in the functioning of the
underlying control activities themselves. We also did not have any audit
adjustments to the consolidated financial statements as of and for the year
ended December 31, 2004. We have made significant progress in designing and
implementing improved controls and processes to address the weakness described
above. We have redrafted our internal control policies and related test scripts
to allow a more precise understanding of our processes and controls. We have
also expanded and redefined our testing methodologies to reflect that greater
level of detail in our documentation.
We currently are unable to conclusively determine when the above noted
material weakness will be fully remediated. However, we believe we have designed
a plan and secured the necessary resources that will enable us to continue to
make significant progress toward full remediation; specifically, we have:
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o appointed a vice president to oversee internal controls;
o established a compliance team consisting of managers of key areas of
responsibility;
o established a timeline and schedule of documentation tasks to be
completed by members of the compliance team with input and
verification from process owners;
o established regularly scheduled status conferences with our
independent accountants; and
o developed and implemented a strategy that has resulted in the thorough
documentation of internal control policies and test scripts that will
be used in monitoring and testing of internal controls in subsequent
years.
We cannot be certain at this time that our effort will result in complete
remediation by fiscal year-end 2005. Therefore we are currently unable to
provide assurance that the material weakness described above will not be
reported in our Annual Report on Form 10-K for the fiscal year-end 2005.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company recently eliminated several key executive positions, therefore
we are currently evaluating the possible effects, if any, these changes may have
on our internal control structure. Based on our evaluation, other than as
described in EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES, we have had no
significant changes in our internal controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to litigation from time to time in the ordinary course of
our business. There can be no assurance that any or all claims will be decided
in our favor and we are not insured against all claims made. During the pendency
of any such claims, we will incur the costs of our legal defense.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended (4)
3.2 Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (7)
3.3 Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 22, 2000 (8)
3.4 Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated March 24, 2000 (8)
3.5 By-laws of the Company (2)
3.6 Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated May 27, 2003 (15)
4.1 Specimen Common Stock Certificate (10)
4.2* Stock Option Agreement, dated October 7, 1998, by and between
NTN Communications, Inc. and Stanley B. Kinsey (5)
4.3* Stock Option Agreement, dated October 7, 1999, by and between
NTN Communications, Inc. and Stanley B. Kinsey (6)
4.4* Stock Option Agreement, dated January 26, 2001, by and between
NTN Communications, Inc. and Stanley B. Kinsey (12)
4.5 Warrant Certificate issued January 13, 2003 by NTN
Communications, Inc. to Robert M. and Marjie Bennett, Trustees
The Bennett Family Trust dated 11-17-86 (18)
4.6 NTN Investor Rights Agreement, dated May 7, 2003, by and between
NTN Communications, Inc. and Media General, Inc. (17)
4.7 Buzztime Investor Rights Agreement, dated May 7, 2003, by and
among NTN Communications, Inc., Buzztime Entertainment, Inc. and
Media General, Inc. (17)
4.8 Common Stock Purchase Warrant dated May 7, 2003 issued to Media
General, Inc. exercisable for 500,000 shares of common stock of
Buzztime Entertainment, Inc. (17)
4.9 Form of Common Stock Purchase Warrant issued to Roth Capital
Partners (13)
4.10* Stock Option Agreement, dated June 28, 2005 by and between NTN
Communications, Inc. and Stanley B. Kinsey(1)
10.1 License Agreement with NTN Canada (3)
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10.2* Employment Agreement, dated June 28, 2005, by and between NTN
Communications, Inc. and Stanley B. Kinsey (1)
10.3 Subscription Agreement dated January 13, 2003 between NTN
Communications, Inc. and Robert M. and Marjie Bennett, Trustees
The Bennett Family Trust dated 11-17-86 (18)
10.4 Scientific-Atlanta Strategic Investments, L.L.C. Notice of
Exchange of Buzztime Preferred Stock for NTN Common Stock, dated
January 16, 2003 (18)
10.5 Securities Purchase Agreement dated May 5, 2003 by and among NTN
Communications, Inc., Buzztime Entertainment, Inc. and Media
General, Inc. (17)
10.6 Placement Agency Agreement dated January 26, 2004 by and between
Roth Capital Partners and NTN Communications, Inc. (13)
10.7 Manufacturing Agreement, dated November 25, 1997, by and between
NTN Communications, Inc. and Climax Technology Co., Ltd. (9)
10.8 Office Lease, dated July 17, 2000, between Prentiss Properties
Acquisition Partners, L.P. and NTN Communications, Inc. (11)
10.9 Asset Purchase Agreement dated July 30, 2003 by and among NTN
Software Solutions, Inc., NTN Communications, Inc., Breakaway
International, Inc. and the Seller Shareholders (15)
10.10 Asset Purchase Agreement dated December 15, 2003 by and among
NTN Canada, Inc., NTN Communications, Inc., NTN Interactive
Network, Inc. and Chell Group Corporation (14)
10.11 Settlement Agreement, effective as of February 28, 2005, between
Long Range Systems, Inc. and NTN Communications, Inc. (19)
31 Rule 13a-14(a) Certifications (1)
32 Section 1350 Certifications (20)
- ----------------
* Management Contract or Compensatory Plan.
(1) Filed herewith.
(2) Previously filed as an exhibit to NTN's registration statement
on Form S-8, File No. 33-75732, and incorporated by reference.
(3) Previously filed as an exhibit to NTN's report on Form 10-K for
the year ended December 31, 1990, and incorporated by reference.
(4) Previously filed as an exhibit to NTN's report on Form 10-K, for
the year ended December 31, 1997, and incorporated by reference.
(5) Previously filed as an exhibit to NTN's report on Form 10-K
dated December 31, 1998 and incorporated by reference.
(6) Previously filed as an exhibit to NTN's report on Form 10-K
dated December 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to NTN's report on Form 8-K dated
November 7, 1997 and incorporated herein by reference.
(8) Previously filed as an exhibit to NTN's report on Form 10-K/A
filed on April 5, 2000 and incorporated herein by reference.
(9) Previously filed as an exhibit to NTN's report on Form 10-K/A
dated March 5, 2001 and incorporated herein by reference.
(10) Previously filed as an exhibit to NTN's registration statement
on Form 8-A, File No. 0-19383, and incorporated by reference.
(11) Previously filed as an exhibit to NTN's report on Form 10-K
dated December 31, 2000 and incorporated by reference.
(12) Previously filed as an exhibit to NTN's report on Form 10-Q
dated March 31, 2001 and incorporated by reference.
(13) Previously filed as an exhibit to NTN's report on Form 8-K dated
January 29, 2004 and incorporated herein by reference.
(14) Previously filed as an exhibit to NTN's registration statement
on Form S-3, File No. 333-111538, filed on December 24, 2003 and
incorporated herein by reference.
(15) Previously filed as an exhibit to NTN's Form 10-Q dated August
14, 2003 and incorporated herein by reference.
(16) Previously filed as an exhibit to NTN's report on Form 10-Q
dated September 30, 2004 and incorporated herein by reference.
(17) Previously filed as an exhibit to NTN's registration statement
on Form S-3, File No. 333-105429, filed on May 21, 2003 and
incorporated herein by reference.
(18) Previously filed as an exhibit to NTN's Form 10-Q dated May 15,
2003 and incorporated herein by reference.
(19) Previously filed as an exhibit to NTN's Form 8-K dated March 18,
2005, and incorporated herein by reference.
(20) Furnished concurrently herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NTN COMMUNICATIONS, INC.
Date: November 8, 2005 By: /s/ Andy Wrobel
------------------------------------
Andy Wrobel
Authorized Signatory and Chief
Financial Officer
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