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, 2009




Commission
file number 001-11460


NTN
Buzztime, Inc.


(Exact
name of registrant as specified in its charter)





DELAWARE
            31-1103425(State
      of incorporation)
            (I.R.S.
      Employer Identification No.)





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 such filing
requirements for the past 90 days.    YES  x    NO   ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every interactive data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈   
No    ̈




Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer
             ̈
            Accelerated
      filer
             ̈Non-accelerated
      filer
             ̈ (Do not check if
      a smaller reporting company)
            Smaller reporting company
            x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    YES   ̈    NO  x




As of
November 1, 2009 the registrant had outstanding 60,344,448 shares of common
stock, $.005 par value.








NTN
BUZZTIME, INC. AND SUBSIDIARIES


FORM
10-Q


TABLE OF
CONTENTS





Item
            
            PagePART
      I1.
            Financial
      StatementsCondensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited)
      and December 31, 2008
            1Condensed
      Consolidated Statements of Operations for the three and nine months ended
      September 30, 2009 and 2008 (unaudited)
            2Condensed
      Consolidated Statements of Comprehensive Loss for the three and nine
      months ended September 30, 2009 and 2008 (unaudited)
            3Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2009 and 2008 (unaudited)
            4Notes
      to Condensed Consolidated Financial Statements
            62.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            183.
            Quantitative
      and Qualitative Disclosures About Market Risk
            284.
            Controls
      and Procedures
            28PART II1.
            Legal
      Proceedings
            291A.
            Risk
      Factors
            292.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            303.
            Defaults
      Upon Senior Securities
            304.
            Submission
      of Matters to a Vote of Security Holders
            305.
            Other
      Information
            306.
            Exhibits
            30Signatures
            31














PART
I


ITEM 1. Financial
Statements.


NTN
BUZZTIME, INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets


(Unaudited)


(In thousands,
except share data)




September
      30,
                2009
              
              
              December
      31,
                2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              3,217
              
              
              $
              3,362Accounts
      receivable, net of allowances of $328 and $298,
    respectively
              
              
              1,106
              
              
              
              636Investments
      available-for-sale (Note 6)
              
              
              180
              
              
              
              58Prepaid
      expenses and other current assets
              
              
              719
              
              
              
              611Total
      current assets
              
              
              5,222
              
              
              
              4,667Broadcast
      equipment and fixed assets, net
              
              
              3,748
              
              
              
              3,428Software
      development costs, net
              
              
              1,001
              
              
              
              860Deferred
      costs
              
              
              1,228
              
              
              
              1,383Goodwill
      (Note 5)
              
              
              1,161
              
              
              
              1,032Intangible
      assets, net
              
              
              1,601
              
              
              
              185Other
      assets
              
              
              157
              
              
              
              107Deposits
      on broadcast equipment
              
              
              41
              
              
              
              —Total
      assets
              
              $
              14,159
              
              
              $
              11,662LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              347
              
              
              $
              219Accrued
      expenses
              
              
              1,489
              
              
              
              1,169Sales
      tax payable
              
              
              772
              
              
              
              958Accrued
      salaries
              
              
              241
              
              
              
              383Accrued
      vacation
              
              
              399
              
              
              
              381Income
      tax payable
              
              
              —
              
              
              
              18Obligations
      under capital lease
              
              
              230
              
              
              
              8Deferred
      revenue
              
              
              572
              
              
              
              657Total
      current liabilities
              
              
              4,050
              
              
              
              3,793Sales
      tax payable, excluding current portion
              
              
              181
              
              
              
              —Obligations
      under capital lease, excluding current portion
              
              
              172
              
              
              
              32Deferred
      revenue, excluding current portion
              
              
              99
              
              
              
              91Other
      long term liabilities
              
              
              285
              
              
              
              —Total
      liabilities
              
              
              4,787
              
              
              
              3,916Commitments
      and contingencies (Note 10)Shareholders’
      equity:Series
      A 10% cumulative convertible preferred stock, $.005 par value, $161
      liquidation preference, 5,000,000 shares authorized; 161,000 shares issued
      and outstanding at September 30, 2009 and December 31,
      2008
              
              
              1
              
              
              
              1Common
      stock, $.005 par value, 84,000,000 shares authorized; 60,348,000 and
      55,727,000 shares issued and outstanding at September 30, 2009 and
      December 31, 2008, respectively
              
              
              300
              
              
              
              277Treasury
      stock, at cost, 503,000 shares at September 30, 2009 and
      December 31, 2008
              
              
              (456
              )
              
              
              (456
              )Additional
      paid-in capital
              
              
              115,686
              
              
              
              113,267Accumulated
      deficit
              
              
              (106,664
              )
              
              
              (105,351
              )Accumulated
      other comprehensive income (Note 11)
              
              
              505
              
              
              
              8Total
      shareholders’ equity
              
              
              9,372
              
              
              
              7,746Total
      shareholders’ equity and liabilities
              
              $
              14,159
              
              
              $
              11,662





See
accompanying notes to unaudited condensed consolidated financial
statements.




1


NTN
BUZZTIME, INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Operations


(Unaudited)


(In
thousands, except per share data)





Three
      months ended
              
              
              Nine
      months endedSeptember
      30,
                2009
              
              
              September 30,
                2008
              
              
              September 30,
                2009
              
              
              September 30,
                2008Revenues
              
              $
              6,717
              
              
              $
              6,772
              
              
              $
              19,198
              
              
              $
              20,971Operating
      expenses:Direct
      operating costs (includes depreciation and amortization of $570 and $619
      for the three months ended September 30, 2009 and 2008, respectively,
      and depreciation and amortization of $1,573 and $2,004 for the nine months
      ended September 30, 2009 and 2008, respectively)
              
              
              1,743
              
              
              
              1,939
              
              
              
              4,769
              
              
              
              6,014Selling,
      general and administrative
              
              
              5,474
              
              
              
              5,756
              
              
              
              15,165
              
              
              
              20,022Depreciation
      and amortization (excluding depreciation and amortization included in
      direct operating costs)
              
              
              416
              
              
              
              133
              
              
              
              756
              
              
              
              400Total
      operating expenses
              
              
              7,633
              
              
              
              7,828
              
              
              
              20,690
              
              
              
              26,436Operating
      loss
              
              
              (916
              )
              
              
              (1,056
              )
              
              
              (1,492
              )
              
              
              (5,465
              )Other
      (expense) income:Interest
      income
              
              
              7
              
              
              
              27
              
              
              
              71
              
              
              
              129Interest
      expense
              
              
              (23
              )
              
              
              (4
              )
              
              
              (35
              )
              
              
              (4
              )Other
      income
              
              
              155
              
              
              
              69
              
              
              
              155
              
              
              
              69Total
      other (expense) income
              
              
              139
              
              
              
              92
              
              
              
              191
              
              
              
              194Loss
      from continuing operations before income taxes
              
              
              (777
              )
              
              
              (964
              )
              
              
              (1,301
              )
              
              
              (5,271
              )(Benefit
      from) provision for income taxes
              
              
              (9
              )
              
              
              68
              
              
              
              4
              
              
              
              173Loss
      from continuing operations
              
              
              (768
              )
              
              
              (1,032
              )
              
              
              (1,305
              )
              
              
              (5,444
              )Income
      (loss) from discontinued operations, net of tax
              
              
              —
              
              
              
              175
              
              
              
              —
              
              
              
              (332
              )Net
      loss
              
              $
              (768
              )
              
              $
              (857
              )
              
              $
              (1,305
              )
              
              $
              (5,776
              )Net
      loss per common shareLoss
      from continuing operations, basic and diluted
              
              $
              (0.01
              )
              
              $
              (0.02
              )
              
              $
              (0.02
              )
              
              $
              (0.10
              )Loss
      from discontinued operations, basic and diluted
              
              $
              —
              
              
              $
              0.00
              
              
              $
              —
              
              
              $
              (0.01
              )Net
      loss
              
              $
              (0.01
              )
              
              $
              (0.02
              )
              
              $
              (0.02
              )
              
              $
              (0.11
              )Weighted
      average shares outstandingBasic
      and diluted
              
              
              59,845
              
              
              
              55,196
              
              
              
              57,628
              
              
              
              55,195




See
accompanying notes to unaudited condensed consolidated financial
statements.


2





NTN
BUZZTIME, INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Comprehensive Loss


(Unaudited)


(In
thousands)




Three months ended
              
              
              Nine
      months endedSeptember
      30,
                2009
              
              
              September 30,
                2008
              
              
              September 30,
                2009
              
              
              September 30,
                2008Net
      loss
              
              $
              (768
              )
              
              $
              (857
              )
              
              $
              (1,305
              )
              
              $
              (5,776
              )Other
      comprehensive loss, net of tax:Foreign
      currency translation adjustment
              
              
              154
              
              
              
              (177
              )
              
              
              375
              
              
              
              (509
              )Unrealized
      holding gain (loss) on investment available-for-sale
              
              
              84
              
              
              
              (58
              )
              
              
              122
              
              
              
              (177
              )Other
      comprehensive income (loss)
              
              238
              
              
              
              (235
              )
              
              
              497
              
              
              
              (686
              )Comprehensive
      loss
              
              $
              (530
              )
              
              $
              (1,092
              )
              
              $
              (808
              )
              
              $
              (6,462
              )






See
accompanying notes to unaudited condensed consolidated financial
statements.


3


NTN
BUZZTIME, INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


(Unaudited)


(In
thousands)




Nine
      months endedSeptember
      30,
                2009
              
              
              September 30,
                2008Cash
      flows from operating activities:Net
      loss
              
              $
              (1,305
              )
              
              $
              (5,776
              )Loss
      from discontinued operations, net of tax
              
              
              —
              
              
              
              332Loss
      from continuing operations
              
              $
              (1,305
              )
              
              $
              (5,444
              )Adjustments
      to reconcile net loss to net cash  provided by (used in)
      operating activitiesDepreciation
      and amortization
              
              
              2,329
              
              
              
              2,404Provision
      for doubtful accounts
              
              
              94
              
              
              
              471Stock-based
      compensation
              
              
              133
              
              
              
              260Loss
      from disposition of equipment and capitalized software
              
              
              266
              
              
              
              378Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (556
              )
              
              
              16Prepaid
      expenses and other assets
              
              
              (106
              )
              
              
              154Accounts
      payable and accrued expenses
              
              
              235
              
              
              
              672Income
      taxes payable
              
              
              (48
              )
              
              
              25Deferred
      costs
              
              
              161
              
              
              
              (198
              )Deferred
      revenue
              
              
              (82
              )
              
              
              (162
              )Net
      cash  provided by (used in) operating activities from continuing
      operations
              
              
              1,121
              
              
              
              (1,424
              )Discontinued
      operations
              
              
              —
              
              
              
              (807
              )Net
      cash  provided by (used in) operating activities
              
              
              1,121
              
              
              
              (2,231
              )Cash
      flows from investing activities:Purchases
      of broadcast equipment and fixed assets
              
              
              (1,486
              )
              
              
              (1,759
              )Software
      development expenditures
              
              
              (660
              )
              
              
              (649
              )Deposits
      on broadcast equipment
              
              
              (41
              )
              
              
              —Proceeds
      from sale of equipment and other assets
              
              
              —
              
              
              
              13Restricted
      cash
              
              
              —
              
              
              
              16Net
      cash used in investing activities from continuing operations
              
              
              (2,187
              )
              
              
              (2,379
              )Discontinued
      operations
              
              
              —
              
              
              
              7Net
      cash used in investing activities
              
              
              (2,187
              )
              
              
              (2,372
              )Cash
      flows from financing activities:Principal
      payments on capital lease
              
              
              (94
              )
              
              
              (11
              )Proceeds
      from the exercise of stock option and warrants
              
              
              28
              
              
              
              —Proceeds
      from the sale of common stock
              
              
              750
              
              
              
              —Purchase
      of treasury stock
              
              
              —
              
              
              
              (12
              )Net
      cash provided by (used in) financing activities
              
              
              684
              
              
              
              (23
              )Net
      decrease in cash and cash equivalents
              
              
              (382
              )
              
              
              (4,626
              )Effect
      of exchange rate on cash
              
              
              237
              
              
              
              (390
              )Cash
      and cash equivalents at beginning of period
              
              
              3,362
              
              
              
              10,273Cash
      and cash equivalents at end of period
              
              $
              3,217
              
              
              $
              5,257




See accompanying notes to unaudited
condensed consolidated financial statements.


4


NTN
BUZZTIME, INC. AND SUBSIDIARIES


Condensed
Consolidated Statements of Cash Flows


(Unaudited)


(In
thousands)


Nine
      months endedSeptember
      30, 2009
                
                
                September
      30, 2008Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                
                $
                32
                
                
                $
                4Income
      taxes
                
                $
                177
                
                
                $
                163Supplemental
      disclosure of non-cash investing and financing activities:Unrealized
      holding gain (loss) on investments available-for-sale
                
                $
                122
                
                
                $
                (177
                )Equipment
      acquired under capital leases
                
                $
                457
                
                
                $
                43Issuance
      of common stock in payment for preferred dividends
                
                $
                8
                
                
                $
                —Assumed
      obligations in connection with the acquisition of intangible
      assets
                
                $
                64
                
                
                $
                —Issuance
      of common stock in connection with the acquisition of intangible
      assets
                
                $
                615
                
                
                $
                —Issuance
      of warrants in connection with the acquisition of intangible
      assets
                
                $
                908
                
                
                $
                —Earn-out
      obligation in connection with the acquisition of intangible
      assets
                
                $
                285
                
                
                $
                —




See
accompanying notes to unaudited condensed consolidated financial statements.


5


NTN
BUZZTIME, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




(1) BASIS
OF PRESENTATION




Description
of Business




The
Company historically has operated principally through two operating divisions:
Entertainment and Hospitality. The Entertainment division generates revenue
primarily from the Buzztime iTV Network which distributes an interactive
television promotional game network to restaurants, sports bars, taverns and
pubs in North America.  Additionally, revenue is generated through the
sale of advertising for distribution via the Buzztime iTV Network.




The
Hospitality division has been discontinued.  It was comprised of NTN
Wireless Communications, Inc. (“NTN Wireless”) and NTN Software Solutions, Inc.
(“Software Solutions”). In 2006, the Company determined that the operation of
the Hospitality division was not a strategic fit with its core business and
committed to a divestiture plan. These operations have been reclassified as
discontinued operations for all periods presented. NTN Wireless generated
revenues from producing and distributing guest and server paging systems to
restaurants and other markets. Software Solutions developed and distributed
customer management software to manage reservations and table service in
restaurants. Software Solutions also provided professional help desk services
and outsourced software development and support and maintenance
services.




On
March 30, 2007, the Company completed the sale of substantially all of the
assets of NTN Wireless. On October 25, 2007, the Company sold certain
intellectual property assets of Software Solutions pursuant to an Asset Purchase
Agreement, and in a separate agreement with a customer, the Company discontinued
the outsourced software development. Additionally, the Company completed the
wind down of its professional help desk and support and maintenance services
during the third quarter of 2008 (see Note 15).




Basis
of Accounting Presentation




In the
opinion of management, the accompanying condensed consolidated financial
statements include all adjustments that are necessary for a fair presentation
for the periods presented of the financial position, results of operations and
cash flows of NTN Buzztime, Inc. and its wholly-owned subsidiaries: IWN, Inc.,
IWN, L.P., Buzztime Entertainment, Inc., NTN Wireless Communications, Inc., NTN
Software Solutions, Inc., NTN Canada, Inc., and NTN Buzztime,
Ltd.  Unless otherwise indicated, references to “Buzztime”, “we”, “us”
and “our” include the Company and its consolidated subsidiaries.




IWN,
Inc., IWN, L.P. and Buzztime Entertainment, Inc. are dormant subsidiaries. As of
December 31, 2006, the Company’s Hospitality division was classified as
discontinued operations in accordance with the provisions of the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
No. 360, “Property, Plant, and
Equipment,” (see
Note 15). The operating results for these businesses have been separately
classified and reported as discontinued operations in the condensed consolidated
financial statements.




These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in the
Company’s annual report on Form 10-K for the fiscal year ended December 31,
2008. The results of operations for the three and nine months ended September
30, 2009 are not necessarily indicative of the results to be anticipated for the
entire year ending December 31, 2009, or any other period. The
Company has evaluated and determined that no material events took place after
our balance sheet date of September 30, 2009 through our financial statement
issuance date of November 13, 2009. 
 Reclassifications




The
Company reclassified the condensed consolidated statement of operations for the
three and nine months ended September 30, 2008 to conform to the 2009
presentation.  The Company reclassified the condensed consolidated
statement of cash flows for the nine months ended September 30, 2008 to conform
to the 2009 presentation.




6




(2) CASH
AND CASH EQUIVALENTS




As of
September 30, 2009 and December 31, 2008, the Company had
approximately $0 and $2,600,000, respectively, in Canadian dollars invested in a
Canadian Variable Rate Guaranteed Investment Contract. The contract, when
initiated, had a one year term, which could be redeemed at any time without
penalty or loss of interest; therefore, management had classified this security
as a cash equivalent since the security was highly liquid.  During the
three months ended September 30, 2009, the Canadian Variable Rate Guaranteed
Investment Contract expired and the Company elected not to reinvest the funds
into a Canadian Variable Rate Guaranteed Investment Contract.





The
remaining cash equivalents are deposited in an overnight interest-bearing sweep
depository account.




(3)
EARNINGS PER SHARE




The
Company computes basic and diluted earnings per share in accordance with the
provisions of ASC No. 260, Earnings per Share. Basic
earnings per share excludes the dilutive effects of options, warrants and other
convertible securities. Diluted earnings per share reflects the potential
dilutions of securities that could share in our earnings. Options, warrants,
convertible preferred stock and deferred stock units representing approximately
9,939,000 and 7,055,000 as of September 30, 2009 and 2008, respectively, were
excluded from the computations of diluted net loss per common share as their
effect was anti-dilutive.




(4)
ACQUISITIONS




iSports
Acquisition




On April
24, 2009, the Company entered into an asset purchase agreement with iSports
Inc., a California corporation.  iSports was a provider of mobile
sports scores, news and interactive gameplay.  Pursuant to the terms
of the agreement, in consideration for the acquired assets, the Company issued
(i) five hundred thousand (500,000) unregistered shares of the Company’s common
stock, (ii) a warrant to purchase one million (1,000,000) shares of unregistered
common stock, with an exercise price of $0.30 per share, and (iii) a warrant to
purchase five hundred thousand (500,000) shares of unregistered common stock,
with an exercise price of $0.50 per share.  In addition, if certain
business conditions are satisfied in each of calendar years 2009, 2010 and 2011,
the Company would be required to pay as additional consideration 35% of the
amount by which the Company’s net media revenues (as defined in the Asset
Purchase Agreement) for such years exceed specified threshold
amounts.  The agreement also contains customary representations,
warranties and covenants.




The total
value assigned to the transaction, including liabilities assumed, was calculated
as $599,000.  The purchase price of $599,000 was comprised of $371,000
in warrants to purchase shares of unregistered common stock of the Company,
$165,000 in unregistered shares of common stock of the Company and approximately
$63,000 in assumed liabilities.




The
acquired assets will be used by the Company to accelerate the development of its
mobile gaming platform.  Following the closing, the Company employed a
co-founder of iSports, Inc., Nick Glassman, as the Company’s Executive Vice
President of Programming and Technology.




The
Company accounted for the acquisition pursuant to ASC No. 805,Business
Combinations.  Accordingly, it recorded net assets and
liabilities acquired at their fair values.  The purchase price
allocation amounts reflected in the Company’s financial statements are
preliminary, including those amounts recorded as intangible assets and could
change as the purchase price allocation is finalized, which is expected to occur
by December 31, 2009.  The purchase price allocation was as
follows:




Intangible
      assets – acquired technology
            
            $
            599,000Total
      assets
            
            
            599,000Accounts
      payable
            
            
            (63,000
            )Total
      liabilities
            
            
            (63,000
            )Purchase
      price allocated to assets and liabilities acquired
            
            $
            536,000




The
purchase price may be increased if certain thresholds of net media revenues are
exceeded in calendar years 2009, 2010 and 2011. In that event, the purchase
price allocation will be adjusted and reflected in current earnings, in the
period that the additional purchase price amount is earned.






7





i-am
TV Acquisition





On May
11, 2009, the Company entered into an asset purchase agreement (the “i-am TV
Agreement”) through which it acquired certain assets of “i-am TV” from Instant
Access Media, LLC.  i-am TV had been in the business of providing
programming and advertising to hospitality venues located in the top 15
designated market areas throughout the United States.  The transaction
included the acquisition of approximately 1,400 flat panel television screens
installed in 368 locations as well as the related communication
equipment.  Pursuant to the terms of the i-am TV Agreement, in
consideration for the acquired assets, the Company issued (i) one million five
hundred thousand (1,500,000) unregistered shares of the Company’s common stock,
(ii) warrants to purchase one million (1,000,000) shares of unregistered common
stock with an exercise price of $0.50 per share, (iii) warrants to purchase one
million (1,000,000) shares of unregistered common stock with an exercise price
of $1.00 per share and (iv) warrants to purchase one million (1,000,000) shares
of unregistered common stock with an exercise price of $1.50 per
share.  In addition, the Company has agreed to provide future earnout
consideration (the “Earnout”) in calendar years 2010 through 2012 based on net
advertising revenues as defined in the i-am TV Agreement.  The Earnout
will be calculated as the product of the total net advertising revenues for the
Company multiplied by the percentage of qualifying venues that have converted
from i-am TV to the Company’s Buzztime iTV Network in relation to the total
population of Buzztime iTV Network subscribers.  As of September 30,
2009, the Company has converted 100 venues.  The i-am TV Agreement
also contained customary representations, warranties and
covenants.




The total
value assigned to the transaction, including liabilities assumed, was calculated
as $1,273,000.  The purchase price of $1,273,000 was comprised of
$537,000 in warrants to purchase shares of unregistered common stock of the
Company, $450,000 in unregistered shares of common stock of the Company,
$285,000 of contingent consideration in the form of an Earnout and approximately
$1,000 in assumed liabilities.





The
Company also entered into an agreement with certain investors in Instant Access
Media, LLC whereby they purchased 2,419,355 shares of the Company’s common stock
in a private placement raising $750,000 in additional working
capital.





The
Company accounted for the acquisition pursuant to ASC No.
805.  Accordingly, it recorded net assets and liabilities acquired at
their fair values.  The fair value calculations are based on certain
assumptions, including the number of i-am TV sites that will
be converted to Buzztime customers and the incremental cash flows to the
Company from those sites.  The purchase price allocation amounts
reflected in the Company’s financial statements are preliminary, including those
amounts recorded as intangible assets and could change as the purchase price
allocation is finalized, which is expected to occur by December 31,
2009.  The purchase price allocation was as follows:





Intangible
      assets – customer relationships – advertising
            
            $
            302,000Intangible
      assets – customer relationships – subscription
            
            
            971,000Total
      assets
            
            
            1,273,000Accounts
      payable
            
            
            (1,000
            )i-am
      TV earnout – long term liabilities
            
            
            (285,000
            )Total
      liabilities
            
            
            (286,000
            )Purchase
      price allocated to assets and liabilities acquired
            
            $
            987,000




The
purchase price may be increased or decreased if net advertising revenues for the
Company deviate from estimations in calendar years 2010, 2011 and 2012. In that
event, the purchase price allocation will be adjusted, and reflected in current
earnings, in the period that the adjustment becomes necessary.




8




(5)
GOODWILL AND OTHER INTANGIBLE ASSETS




As
discussed in Note 4, during the quarter ended June 30, 2009, the Company
acquired certain assets of iSports Inc. and Instant Access Media,
LLC.  As a result of those transactions, the Company recorded
$1,273,000 in customer relationship intangible assets and $599,000 in unpatented
technology.  The majority of the customer relationship intangible
asset will be amortized on a straight line basis over a period of 44 months and
recorded in selling, general and administrative expenses while approximately,
$300,000 was amortized over the three months ended August 31, 2009 coinciding
with the period that the related advertising revenue was
recognized.  The unpatented technology intangible asset will be
amortized on a straight line basis over a period of 60 months and recorded in
direct expenses.  The useful lives reflect the estimated period of
time and method by which the underlying intangible asset benefits will be
realized.  The Company recorded $326,000 and $445,000 in amortization
expense related to these intangible assets during the three and nine months
ended September 30, 2009, respectively.




The
Company’s goodwill balance relates to the purchase of NTN Canada. The Company
performed its annual test for goodwill impairment for NTN Canada as of
September 30, 2009.  The Company has determined that there were
no indications of impairment as of September 30, 2009.




(6)
INVESTMENTS AVAILABLE-FOR-SALE




Investment
securities consist of equity securities, which are classified as
available-for-sale securities. Available-for-sale securities are recorded at
fair value and unrealized holding gains and losses are excluded from earnings
and are reported as a separate component of comprehensive income until realized.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific-identification basis. A decline in the market value of
any available-for-sale security below cost that is deemed to be
other-than-temporary results in a reduction in the carrying amount to fair
value. Any resulting impairment is charged to other income (expense) and a new
cost basis for the security is established.




The one
investment available-for-sale that the Company holds is 2,518,000 shares of its
Australian licensee eBet Limited (eBet), an Australian gaming technology
corporation. The Company’s holding in eBet represents less than 1% of the
current outstanding shares.  The value of the investment increased
$84,000 for the three months ended September 30, 2009 compared to a $58,000
decrease for the three months ended September 30, 2008 and increased $122,000
for the nine months ended September 30, 2009 compared to a $177,000 decrease for
the nine months ended September 30, 2008.  The unrealized gains and
losses of this investment are recorded as other comprehensive income (loss) in
the Company’s consolidated balance sheet (see Note 11).  As of
September 30, 2009, the cumulative gain of the eBet investment was
$16,000.  The Company will continue to monitor this investment for any
decline in value that could be deemed other-than-temporary ultimately resulting
in future impairments.




(7) FAIR
VALUE OF FINANCIAL INSTRUMENTS




The
Company adopted ASC No. 820, Fair Value Measurements and
Disclosures,prospectively effective January 1, 2008, with respect
to fair value measurements of (a)nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the Company’s financial statements on a recurring basis (at least
annually) and (b) all financial assets and liabilities. The Company adopted
the remaining aspects of ASC No. 820 relative tononfinancial assets and liabilities that are measured at fair
value, but are recognized and disclosed at fair value on a nonrecurring basis,
prospectively effective January 1, 2009.




ASC 820
applies to certain assets and liabilities that are being measured and reported
on a fair value basis.  ASC No. 820 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosure about fair value
measurements.  Broadly, the ASC No. 820 framework requires fair value to be
determined based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants.  This Statement enables the reader of the financial
statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. The Statement requires that assets
and liabilities carried at fair value will be classified and disclosed in one of
the following three categories:




Level 1:
Quoted market prices in active markets for identical assets or
liabilities.




Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data.




Level 3:
Unobservable inputs that are not corroborated by market data.




9





Assets
and Liabilities that are Measured at Fair Value on a Recurring
Basis:





The fair
value of the Company’s investment in eBet Limited is determined based on quoted
market prices, which is a Level 1 classification. The Company records the
investment on the balance sheet at fair value with changes in fair value
recorded as a component of other comprehensive income (loss) in the consolidated
balance sheet (see Note 11).





Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring
Basis:





Certain
assets are measured at fair value on a non-recurring basis. These assets are not
measured at fair value on an ongoing basis but are subject to fair value
adjustments only in certain circumstances. Included in this category are
goodwill written down to fair value when determined to be impaired, assets and
liabilities with respect to the business combinations closed during 2009, and
long-lived assets including capitalized software that are written down to fair
value when they are held for sale or determined to be impaired.  The
valuation methods for goodwill, assets and liabilities resulting from business
combinations, and long-lived assets involve assumptions concerning interest and
discount rates, growth projections, and/or other assumptions of future business
conditions.  As all of the assumptions employed to measure these assets and
liabilities on a nonrecurring basis are based on management’s judgment using
internal and external data, these fair value determinations are classified in
Level 3 of the valuation hierarchy.





(8)
SOFTWARE DEVELOPMENT COSTS




The
Company capitalizes costs related to the development of certain software
products for the Entertainment division in accordance with ASC No. 350-40, Intangibles – Goodwill and Other –
Internal-Use Software. Amortization of costs related to interactive
programs is recognized on a straight-line basis over three years. Amortization
expense relating to capitalized software development costs totaled $115,000 and
$87,000 for the three months ended September 30, 2009 and 2008,
respectively, and $264,000 and $267,000 for the nine months ended September 30,
2009 and 2008, respectively.  As of September 30, 2009 and
December 31, 2008, approximately $231,000 and $404,000, respectively, of
capitalized software costs was not subject to amortization as the development of
various software projects was not complete.




The
Company performed its quarterly review of software development projects for the
three and nine months ended September 30, 2009 to determine if any impairment
exists.  In September 2009, the Company decided to abandon a software
development project that was determined to no longer fit with the current
strategy or for which it was determined that the marketability of the content
had decreased. As a result, an impairment of $256,000 was recognized which was
included in selling, general, and administrative expenses for the nine months
ended September 30, 2009 compared to a $292,000 impairment recognized for
the nine months ended September 30, 2008.  An impairment of $222,000
was recognized which was included in selling, general, and administrative
expenses for the three months ended September 30, 2009 and there was no
impairment recognized for the three months ended September 30,
2008.




(9)
STOCK-BASED COMPENSATION




The
Company records stock-based compensation in accordance with ASC No. 718, Compensation – Stock
Compensation.  The Company estimates the fair value of stock options
using the Black-Scholes option pricing model. The fair value of stock
options granted is recognized as expense over the requisite service period.
Stock-based compensation expense for all share-based payment awards is
recognized using the straight-line single-option method.




The
Company uses the historical stock price volatility as an input to value its
stock options under ASC No. 718. The expected term of stock options represents
the period of time options are expected to be outstanding and is based on
observed historical exercise patterns of the Company, which the Company believes
are indicative of future exercise behavior. For the risk-free interest rate, the
Company uses the observed interest rates appropriate for the term of time
options are expected to be outstanding. The dividend yield assumption is based
on the Company’s history and expectation of dividend payouts.




10


Stock
Option Activity




The
following table summarizes stock option activity for the nine months ended
September 30, 2009:





Shares
            
            
            Weighted average
              exercise
      priceOutstanding as of
      December 31, 2008
            
            
            5,249,000
            
            
            $
            1.22Granted
            
            
            3,250,000Exercised
            
            
            (176,000
            )Forfeited
      or expired
            
            
            (3,173,000
            )Outstanding
      as of September 30, 2009
            
            
            5,150,000
            
            
            $
            0.65




The
weighted-average fair values per share of the options granted during the three
months ended September 30, 2009 and 2008 and nine months ended September
30, 2009 and 2008, as computed using the Black-Scholes pricing models were
$0.26, $0.18, $0.18 and $0.20, respectively. The following weighted-average
assumptions were used for grants issued for the three and nine months ended
September 30, 2009 and 2008 under the ASC No. 718
requirements:







Three
      months ended
              September 30,
            
            
            Nine
      months ended
              September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Weighted
      average risk-free interest rate
            
            
            2.14%
            
            
            
            2.94%
            
            
            
            1.72%
            
            
            
            3.21%Weighted
      average volatility
            
            
            91.67%
            
            
            
            67.12%
            
            
            
            88.55%
            
            
            
            60.58%Forfeiture
      rate
            
            
            17.63%
            
            
            
            17.63%
            
            
            
            17.63%
            
            
            
            17.63%Expected
      life
            
            7.18
      years
            
            
            4.61
      years
            
            
            6.05
      years
            
            
            4.49 yearsDividend
      yield
            
            
            0.00%
            
            
            
            0.00%
            
            
            
            0.00%
            
            
            
            0.00%




ASC No.
718 requires forfeitures to be estimated at the time of grant and revised if
necessary in subsequent periods if actual forfeiture rates differ from those
estimates. Forfeitures were estimated based on historical activity for the
Company. Stock-based compensation expense for employees was $48,000 and $41,000
for the three months ended September 30, 2009 and 2008, respectively, and
$133,000 and $260,000 for the nine months ended September 30, 2009 and 2008,
respectively, and is recorded in selling, general and administrative
expenses.




As of
September 30, 2009, the Company had $641,000 of unrecognized compensation
expense related to outstanding unvested options, net of estimated forfeitures,
to be recognized over a weighted-average period of 3.33 years.




Deferred
Stock Unit Activity




The
Company has outstanding 128,000 deferred stock units with performance based
accelerated vesting provisions as of September 30, 2009.  Those provisions
are based on certain revenue targets for the Company which could result in
accelerated vesting of up to 50% of the total award.  The Company has
evaluated the likelihood of attaining the performance based targets and they are
not considered probable, therefore, accelerated expense has not been
recorded.  The Company will continue to monitor its revenue results and
should any estimates made regarding the satisfaction of those performance based
conditions change at any time during the estimated requisite period, an
adjustment will be calculated and recorded in accordance with ASC No.
718.




Warrant
Activity




The
following table summarizes warrant activity for the nine months ended
September 30, 2009:





Shares
            
            
            Weighted average
              exercise
      priceOutstanding as of
      December 31, 2008
            
            
            403,000
            
            
            $
            2.71Granted
            
            
            4,500,000Exercised
            
            
            —Expired
            
            
            (403,000
            )Outstanding
      as of September 30, 2009
            
            
            4,500,000
            
            
            $
            0.79




The
warrants granted during the nine months ended September 30, 2009 relate to the
acquisitions discussed in Note 4.




11




(10)
CONTINGENCIES




The
Company is subject to litigation from time to time in the ordinary course of
business. There can be no assurance that any or all of the following claims will
be decided in the Company’s favor and the Company is not insured against all
claims made. During the pendency of such claims, the Company may continue to
incur the costs for its legal defense.




Purchase
Commitment Dispute




The
Company had a commitment, under a long-term agreement, to purchase equipment
from a vendor.  Under the original terms of the agreement, the Company
was obligated to purchase $835,000 and $76,000 of equipment in 2008 and 2009,
respectively, after the Company’s acceptance of certain milestones. Issues arose
under the terms of the agreement, which still remain unresolved as of September
30, 2009.  In early 2008, the Company informed the vendor that
numerous defects existed with the equipment.  The vendor failed to
remedy the defects in a timely manner and the Company was forced to purchase
equipment from a different manufacturer.  Due to the vendor's failure
to cure the defects in accordance with the provisions in the agreement, the
Company does not believe the required milestones were met.





On April
15, 2009, the Company received a letter from the vendor requesting $300,000 to
cover certain costs incurred citing breach of the agreement.  The Company
responded to the letter, indicating that certain contract milestones had not
been met by the vendor and therefore, the Company was not obligated to purchase
equipment under the contract.  The Company ultimately requested a mutual
release to the agreement without any cash payment by either party.  The
vendor responded to the Company's rebuttal indicating that it disagreed with the
Company's assertions, however, was willing to resolve the matter
amicably.  The last communication was on May 19, 2009, whereby the
Company sent a letter which reaffirmed its desire to bring closure to this issue
amicably and with no payment by either party.  The Company believes the
vendor's claim lacks merit and does not plan to make any payments.  The
Company has not recorded a reserve as it has assessed the likelihood that it
would have to pay any amounts as less than probable.




Sales
and Use Tax




From time
to time, state tax authorities will make inquiries as to whether or not a
portion of our services require the collection of sales and use taxes from
customers in those states. Many states have expanded their interpretation of
their sales and use tax statutes to derive additional revenue.  The
Company evaluates such inquiries on a case-by-case basis and has favorably
resolved the majority of these tax issues in the past without any material
adverse consequences.  During the quarter ended March 31, 2009, the
Company settled a long on-going sales tax evaluation with the state of
Texas.  The Company and the State of Texas executed an Audit
Resolution Agreement and Joint Motion to Dismiss pursuant to which the Company
will pay the state approximately $450,000 over a 2 year period.  As
part of those agreements, both parties agreed to waive all rights to any
redetermination or refund hearings.  In February 2009, the Company
began collecting and remitting sales tax in the state of Texas in accordance
with the state tax statutes.  As of September 30, 2009, $386,000 is
due to the State of Texas under this settlement agreement.




The
Company is involved in ongoing sales tax inquiries, including certain
formal assessments which total $601,000, with other states.  As a
result of those inquiries and the Texas liability discussed above, the Company
recorded a total liability of $829,000 and $867,000 as of September 30, 2009 and
December 31, 2008, respectively.  Based on the guidance set forth by
ASC No. 450, Contingencies, management has
deemed the likelihood that it will be forced to pay all or part of these
assessments with other states as reasonably possible.




(11)
ACCUMULATED OTHER COMPREHENSIVE INCOME




Accumulated
other comprehensive income (loss) is the combination of accumulated net
unrealized gains or losses on investments available-for-sale and the accumulated
gains or losses from foreign currency translation adjustments. The Company
translated the assets and liabilities of its Canadian statement of financial
position into U.S. dollars using the period end exchange rate. Revenue and
expenses were translated using the average exchange rate for the reporting
period.




For the
three and nine months ended September 30, 2009 and 2008, the components of
accumulated other comprehensive income were as follows:





Three months
      ended
            
            
            Nine months
      endedSeptember 30,
              2009
            
            
            September 30,
              2008
            
            
            September 30,
              2009
            
            
            September 30,
              2008Beginning
      balance
            
            $
            267,000
            
            
            $
            1,211,000
            
            
            $
            8,000
            
            
            $
            1,662,000Foreign
      currency translation adjustment
            
            
            154,000
            
            
            
            (177,000
            )
            
            
            375,000
            
            
            
            (509,000
            )Unrealized
      gain (loss) during period in investment
      available-for-sale
            
            
            84,000
            
            
            
            (58,000
            )
            
            
            122,000
            
            
            
            (177,000
            )Ending
      balance
            
            $
            505,000
            
            
            $
            976,000
            
            
            $
            505,000
            
            
            $
            976,000





12




(12)
RECENT ACCOUNTING PRONOUNCEMENTS




In June
2009, the FASB issued transition guidance ASC No. 105-10-65-1,Transition Related to SFAS
No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of
Generally Accepted Accounting Principles, the guidance of which was
incorporated in ASC No. 105Generally Accepted
Accounting Principles (“GAAP”). The FASB Accounting Standards
CodificationTM  (Codification) will become the source of authoritative U.S.
GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this guidance, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. This guidance is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Company adopted this standard effective
July 1, 2009, and has incorporated the current codification in this
report.




In May
2009, the FASB issued ASC No. 855,Subsequent Events. The
objective of this guidance is to establish general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
this guidance sets forth:





1.
            The
      period after the balance sheet date during which management of a reporting
      entity should evaluate events or transactions that may occur for potential
      recognition or disclosure in the financial
  statements;





2.
            The
      circumstances under which an entity should recognize events or
      transactions occurring after the balance sheet date in its financial
      statements; and





3.
            The
      disclosures that an entity should make about events or transactions that
      occurred after the balance sheet
date.




In
accordance with this guidance, an entity should apply the requirements to
interim or annual financial periods ending after June 15, 2009. The Company
adopted this standard effective April 1, 2009 and has and will make the
appropriate disclosures, as required.




In
December 2007, the FASB issued transition guidance ASC 805-10-65-1Business Combinations – Overall –
Transition Related to SFAS No. 141 (revised 2007),Business
Combinations  (SFAS 141(R)) and SFAS No. 160,Noncontrolling Interests
in Consolidated Financial Statements – an amendment of Accounting Review
Bulletin (“ARB”) No. 51  (SFAS 160), the provisions of
which have been incorporated in ASC 805-10Business Combinations –
Overall  and ASC 805-20Business Combinations –
Identifiable Assets and Liabilities, and Any Noncontrolling Interest .
ASC 805-10 will significantly change current practices regarding business
combinations. Among the more significant changes, ASC 805-10 expands the
definition of a business and a business combination; requires the acquirer to
recognize the assets acquired, liabilities assumed and noncontrolling interests
(including goodwill), measured at fair value at the acquisition date; requires
acquisition-related expenses and restructuring costs to be recognized separately
from the business combination; requires assets acquired and liabilities assumed
from contractual and non-contractual contingencies to be recognized at their
acquisition -date fair values with subsequent changes recognized in earnings;
and requires in-process research and development to be capitalized at fair value
as an indefinite-lived intangible asset. ASC 805-20 will change the accounting
and reporting for minority interests, reporting them as equity separate from the
parent entity’s equity, as well as requiring expanded disclosures. ASC 805-10
and ASC 805-20 are effective for financial statements issued for fiscal years
beginning after December 15, 2008. The adoption of ASC 805-10 and ASC
805-20 did not have a significant impact on the Company’s consolidated financial
statements or financial position, but the nature and magnitude of the specific
effects will depend upon the nature, terms and size of the acquisitions, if any,
the Company consummates after the effective date.







13






In April
2009, the FASB issued transition guidance ASC 820-10-65-4,Fair Value Measurement and
Disclosure – Overall – Transition Related to FASB FSP SFAS
No. 157-4,  Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly,  the provisions of which
have been incorporated in ASC 820-10-35-51,Fair Value Measurement
and Disclosure – Overall – Subsequent Measurement – Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly.  ASC 820-10-35-51 provides additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased and includes guidance on identifying
circumstances that indicate a transaction is not orderly. ASC 820-10-35-51
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. This guidance is effective for interim and
annual periods ending after June 15, 2009. The Company adopted this
standard effective April 1, 2009.





In April
2009, the FASB issued transition guidance ASC 320-10-65-1,Transition Related to FASB Staff
Position (“FSP”)SFAS
No. 115-2 and SFAS No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments,  the provisions of which have
been incorporated in ASC 320-10-35,Investments – Debt and
Equity Securities – Overall – Subsequent Measurement  and ASC
320-10-50,Investments – Debt and
Equity Securities – Overall – Disclosure. The objective of an
other-than-temporary impairment analysis under existing U.S. generally accepted
accounting principles (GAAP) is to determine whether the holder of an investment
in a debt or equity security for which changes in fair value are not regularly
recognized in earnings (such as securities classified as held-to-maturity or
available-for-sale) should recognize a loss in earnings when the investment is
impaired. An investment is impaired if the fair value of the investment is less
than its amortized cost basis. ASC 320-10-35 and ASC 320-10-50 amend the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. ASC 320-10-35 and ASC 320-10-50 do not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. This guidance is effective for interim and annual periods
ending after June 15, 2009. In response to this guidance, in April 2009,
the SEC published ASC 320-10-S99-1,Investments – Debt and
Equity Securities – Overall – SEC Materials – Staff Accounting Bulletin (“SAB”)
Topic 5M, Other than Temporary Impairment of Certain Investments in Equity
Securities.  ASC 320-10-S99-1 maintains the staff’s previous
views related to equity securities and excludes debt securities from its scope.
The Company adopted this standard effective April 1, 2009, the results of
which are disclosed in Note 7 Fair Value Measurements.




FASB ASC
350,Intangibles – Goodwill
and Other, ASC 350-30-65,Transition and Open Effective Date
Information (“ASC 350-30-65” and formerly referred to as FSP FAS 142-3)
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible. ASC
350-30-65 is effective for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The guidance in this ASC
350-30-65 for determining the useful life of a recognized intangible is to be
applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements of ASC 350-30-65, however, will be applied
prospectively to all intangible assets recognized in the Company’s financial
statements as of the effective date. The application of ASC 350-30-65 is not
expected to have a material impact on the Company’s earnings or the financial
position.


(13)
SIGNIFICANT CUSTOMER




For the
three months ended September 30, 2009 and 2008, the Company generated
approximately 15% and 11%, respectively, of total revenue from a national chain,
Buffalo Wild Wings together with its franchisees.  For the nine months
ended September 30, 2009 and 2008, the Company generated approximately 15% and
12%, respectively, of revenue from that chain.  As of
September 30, 2009 and 2008, approximately $71,000 and $158,000,
respectively, were included in accounts receivable from this
customer.




14




(14)
OBLIGATIONS UNDER CAPITAL LEASE





In 2009,
the Company entered into a $500,000 equipment lease facility with an
equipment leasing company.  The terms of that agreement allow for use
of the facility in multiple tranches with each individual tranche having 24
month terms.  Additionally, the equipment leasehas a collateral
obligation whereby the Company has pledged certain equipment located at the
Carlsbad, California location to satisfy the equipment leasing company’s
requirements.   As of September 30, 2009, the Company had
utilized $457,000 of that facility which has been accounted for as a capital
lease.




As of
September 30, 2009 and December 31, 2008, in aggregate, the Company had
obligations under capital leases of $402,000 and $40,000,
respectively.




On
October 1, 2009, the Company entered into a $1,000,000 equipment lease facility
with an equipment leasing company.  The terms of that agreement allow
for use of the facility for 24 months and for use of the facility in multiple
tranches with each individual tranche having 24 month terms.




(15)
DISCONTINUED OPERATIONS




In
November 2006, the Company began to actively pursue the sale of its Hospitality
division comprised of NTN Wireless and Software Solutions. In the fourth quarter
of 2006, the Company applied the provisions of ASC No. 360,“Property, Plant and
Equipment,” to certain of its assets which were held for sale. ASC No.
360 requires that a long-lived asset classified as held for sale, be measured at
the lower of its carrying amount or fair value, less costs to sell, and that the
Company ceases depreciation, depletion and amortization. As of December 31,
2006, the Hospitality division’s assets were classified as held for sale and the
respective assets were revalued as of December 31, 2006. Depreciation on
these assets ceased effective December 31, 2006. Additionally, corporate
expenses previously allocated to the discontinued operations have been
reclassified to Buzztime iTV in accordance with ASC No. 360.




In March
2007, the Company completed the sale of substantially all of the assets of NTN
Wireless for $2.4 million and recognized a gain, net of tax, of approximately
$396,000. In October 2007, the Company sold certain intellectual property assets
of Software Solutions pursuant to an Asset Purchase Agreement, and in a separate
agreement with a customer, the Company discontinued the outsourced software
development it was providing. The Company wound down the professional help desk
and support and maintenance services as the Company fulfilled its obligations
under existing customer agreements. The intellectual property sold constituted
substantially all of the remaining operating assets of the Company’s Hospitality
Division, which had originally consisted of its Software Solutions and Wireless
communications businesses.





The
operating results for the Hospitality division have been separately classified
and reported as discontinued operations in the consolidated statements of
operations as follows:





Three months
      ended
            
            
            Nine months
              endedSeptember
      30,
              2008
            
            
            September
      30,
              2008Operating
      revenues
            
            $
            —
            
            
            $
            21,000Operating
      expenses
            
            
            2,000
            
            
            
            530,000Operating
      loss
            
            $
            (2,000
            )
            
            $
            (509,000
            )Other
      income
            
            
            177,000
            
            
            
            177,000Income
      (loss) before income taxes
            
            $
            175,000
            
            
            $
            (332,000
            )Income
      tax expense
            
            
            —
            
            
            
            —Income
      (loss) from discontinued operations, net of tax
            
            $
            175,000
            
            
            $
            (332,000
            )




The
Company accounted for the dissolution of the help desk and support and
maintenance operation pursuant to the provisions of ASC No. 420,“Exit or Disposal Cost
Obligations.”  ASC No. 420 requires that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred, as opposed to when there is a commitment to dispose of a business
segment. Severance for involuntary employee terminations was expensed over the
requisite service period in which it was earned as certain employees are
required to continue to render service until the Company had fulfilled its
obligations under existing customer contracts. Moving, relocation and other
associated costs related to the dissolution were expensed as incurred. The
Company did not incur severance expenses for involuntary employee terminations
after the quarter ended June 30, 2008 and incurred $52,000 for
2008.  The Company concluded its wind down activities in 2008 and it
does not expect to incur any additional expenses related to the help desk and
support and maintenance function in subsequent periods.




The
Company does not have components of assets and liabilities of discontinued
operations on its consolidated balance sheet as of September 30, 2009 and
December 31, 2008.




15





(16)
GEOGRAPHICAL INFORMATION




The
Company has marketed its products in the United States, Canada, and the United
Kingdom.  In the third quarter of 2008, the Company ceased its
operations in the United Kingdom.  The table below contains
information about these geographical areas in which the Company operates or has
operated.  Total assets are based on location of
domicile.




Three months
      ended
              
              
              Nine
      months endedSeptember
      30,
                2009
              
              
              September
      30,
                2008
              
              
              September
      30,
                2009
              
              
              September
      30,
                2008Revenues
      by geographical area:United
      States
              
              $
              6,111,000
              
              
              $
              5,952,000
              
              
              $
              17,333,000
              
              
              $
              18,142,000Canada
              
              
              606,000
              
              
              
              820,000
              
              
              
              1,865,000
              
              
              
              2,652,000United
      Kingdom
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              177,000Total
      revenue
              
              $
              6,717,000
              
              
              $
              6,772,000
              
              
              $
              19,198,000
              
              
              $
              20,971,000










September 30,
              2009
            
            
            December 31,
              2008Assets
      by geographical area:United
      States
            
            $
            11,485,000
            
            
            $
            6,936,000Canada
            
            
            2,674,000
            
            
            
            4,726,000Total
      assets
            
            $
            14,159,000
            
            
            $
            11,662,000




(17)
PURCHASE COMMITMENT




During
the quarter ended June 30, 2009, the Company entered into a material
manufacturing and supply agreement with a vendor to manufacture certain
equipment.  Under the terms of that agreement as amended, the Company
is obligated to purchase approximately $1 million in equipment over the three
year term of the agreement.   As of September 30, 2009, the
Company has satisfied $38,000 of that obligation.




16




(18)
SHAREHOLDERS’ EQUITY




The
following table summarizes the Company’s shareholders’ equity activities for the
nine months ended September 30, 2009:





Series
      A
                Cumulative
                Convertible
                Preferred
      Stock
              
              
              Common
      Stock
              
              
              Additional
                Paid-in
                Capital
              
              
              Treasury
                Stock
              
              
              Accumulated
                Deficit
              
              
              Accumulated
                Other
                Comprehensive
                Income
      (Loss)
              
              
              TotalBalances
      at December 31, 2008
              
              $
              1
              
              
              $
              277
              
              
              $
              113,267
              
              
              $
              (456
              )
              
              $
              (105,351
              )
              
              $
              8
              
              
              $
              7,746Issuance
      of stock for exercise of  options
              
              
              
              
              
              
              1
              
              
              
              27
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              28Issuance
      of stock in lieu of dividends
              
              
              —
              
              
              
              —
              
              
              
              8
              
              
              
              —
              
              
              
              (8
              )
              
              
              —
              
              
              
              —Issuance
      of common stock for the acquisition of intangible assets of iSports,
      Inc.
              
              
              —
              
              
              
              2
              
              
              
              163
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              165Issuance
      of warrants for the acquisition of intangible assets of iSports,
      Inc.
              
              
              —
              
              
              
              —
              
              
              
              371
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              371Issuance
      of common stock for the acquisition of intangible assets
      of  i-am TV
              
              
              —
              
              
              
              8
              
              
              
              442
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              450Issuance
      of warrants for the acquisition of intangible assets of i-am
      TV
              
              
              —
              
              
              
              
              
              
              
              537
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              537Sale
      of common stock in private placement.
              
              
              —
              
              
              
              12
              
              
              
              738
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              750Non-cash
      stock based compensation
              
              
              —
              
              
              
              —
              
              
              
              133
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              133Accumulated
      other comprehensive income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              497
              
              
              
              497Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,305
              )
              
              
              —
              
              
              
              (1,305
              )Balances
      at September 30, 2009
              
              $
              1
              
              
              $
              300
              
              
              $
              115,686
              
              
              $
              (456
              )
              
              $
              (106,664
              )
              
              $
              497
              
              
              $
              9,372




The
following table summarizes the Company’s shareholders’ equity activities for the
nine months ended September 30, 2008:





Series
      A
              Cumulative
              Convertible
              Preferred
      Stock
            
            
            Common
      Stock
            
            
            Additional
              Paid-in
              Capital
            
            
            Treasury
              Stock
            
            
            Accumulated
              Deficit
            
            
            Accumulated
              Other
              Comprehensive
              Income
      (Loss)
            
            
            TotalBalances
      at December 31, 2007
            
            $
            1
            
            
            $
            277
            
            
            $
            112,942
            
            
            $
            (444
            )
            
            $
            (98,870
            )
            
            $
            1,662
            
            
            $
            15,568Issuance
      of deferred stock units
            
            
            —
            
            
            
            —
            
            
            
            (2
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2
            )Non-cash
      stock based compensation
            
            
            —
            
            
            
            —
            
            
            
            260
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            260Purchase
      of treasury stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (12
            )
            
            
            —
            
            
            
            —
            
            
            
            (12
            )Accumulated
      other comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (686
            )
            
            
            (686
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,776
            )
            
            
            —
            
            
            
            (5,776
            )Balances
      at September 30, 2008
            
            $
            1
            
            
            $
            277
            
            
            $
            113,200
            
            
            $
            (456
            )
            
            $
            (104,646
            )
            
            $
            976
            
            
            $
            9,352




17





Item 2.  Management’s Discussion and Analysis
of Financial Condition and Results of Operations.




CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS




This
Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements reflect future events, results, performance,
prospects and opportunities, including statements related to our strategic plans
and targets, revenue generation, product availability and offerings, reduction
in cash usage, reliance on cash on hand and cash from operations, capital needs,
capital expenditures, industry trends and financial position of NTN Buzztime,
Inc. and its subsidiaries. Forward-looking statements are based on information
currently available to us and our current expectations, estimates, forecasts,
and projections about the industries in which we operate and the beliefs and
assumptions of management. Words such as “expects,” “anticipates,” “could,”
“targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
“may,” “will,” “would,” variations of such words, and similar expressions are
intended to identify such forward-looking statements. In addition, any
statements which refer to projections of our future financial performance, our
anticipated growth and trends in our 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 for the fiscal year ended December 31,
2008, under the section entitled “Risk Factors,” and in Item 1A of Part II
of this Quarterly Report on Form 10-Q, and in other reports we file with the
Securities and Exchange Commission from time to time. We undertake no obligation
to revise or update publicly any forward-looking statement for any
reason.




Our
trademarks, trade names and service marks referenced herein include Buzztime,
IWN, iTV Network, iSports, and i-am TV. Each other trademark, trade name or
service mark appearing in this quarterly report belongs to its
owner.




OVERVIEW




We
historically have operated principally through two operating divisions:
Entertainment and Hospitality. The Entertainment division generates revenue
primarily from the Buzztime iTV Network which distributes an interactive
television promotional game network to restaurants, sports bars, taverns and
pubs, primarily in North America.  Additionally, we generate revenue
by selling advertising for distribution via our interactive television
network.




The
Hospitality division has been discontinued. It was comprised of NTN Wireless
Communications, Inc. (“NTN Wireless”) and NTN Software Solutions, Inc.
(“Software Solutions”). In 2006, we determined that the operation of the
Hospitality division was not a strategic fit with our core business and
committed to a divestiture plan. These operations have been reclassified as
discontinued operations for all periods presented. NTN Wireless provided
revenues from producing and distributing guest and server paging systems to
restaurants and other markets. Software Solutions developed and distributed
customer management software to manage reservations and table service in
restaurants. Software Solutions also provided professional help desk services
and outsourced software development and support and maintenance
services.




In March
2007, we completed the sale of substantially all of the assets of NTN Wireless.
In October 2007, we sold certain intellectual property assets of Software
Solutions pursuant to an Asset Purchase Agreement, and in a separate agreement
with a customer, we discontinued the outsourced software
development.  Additionally, we completed the wind down of our
professional help desk and support and maintenance services during the third
quarter of 2008.  We do not expect to incur any additional expenses
related to the help desk and support and maintenance function in subsequent
periods.





Restructuring
of Operations




During
the third quarter of 2008, we ceased our operations in the United Kingdom. The
closure of operations involved the termination of six employees, relocation of
nearly all assets to the United States and disposal of certain other
assets.  As of the date we ceased operations, UK operations accounted
for less than 1% of the total subscriber sites.




18


The
Entertainment Division




The
out-of-home Buzztime iTV Network has engaged in business in the hospitality
industry for 25 years as a promotional platform providing interactive
entertainment to patrons in restaurants and sports bars. The iTV Network
distributes a wide variety of engaging interactive multi-player games, including
trivia quiz shows, play-along sports programming, casino-style and casual games
to our Network. Patrons use our wireless game controllers, or Playmakers, to
play along with the Buzztime games which are displayed on television screens.
Buzztime players can compete with other players within their hospitality venue
and also against players in other Network venues.





We target
national and regional hospitality chains as well as local independent
hospitality venues that desire a competitive point-of-difference to attract and
retain customers. As of September 30, 2009, we had 3,721 United States
Network subscribers and 330 Canadian subscribers. Approximately 29% of our
Network subscribers come from leading national chains in the casual-dining
restaurant segment such as Buffalo Wild Wings, TGI Friday’s, and Old
Chicago.





Through
the transmission of interactive game content stored on a site server at each
location, our Buzztime iTV Network enables single-player and multi-player
participation as part of local, regional, national or international competitions
supported with prizes and player recognition. Our Buzztime iTV Network also
generates revenue through the sale of advertising and marketing services to
companies seeking to reach the millions of consumers that visit the Buzztime iTV
Network’s venues.





We also
generate revenue from distributing and licensing our Buzztime-branded content
and related technology to consumer platforms, with a focus on interactive
networks such as cable TV, satellite TV and mobile phones. Our distribution
efforts focus on licensing real-time, mass-participation games such as trivia,
head-to-head multi-player games such as Texas Hold’em and single-player games
such as solitaire.





Our games
are available as a premium monthly subscription service to Echostar DISH and
Bell ExpressVu satellite customers in the U.S. and Canada, respectively. Revenue
from our distribution division is derived primarily from license fees and
royalties from third-party licensees who distribute Buzztime content to
end-users, as well as from third-party development and production
fees.




In April
2009, we purchased the assets of iSports, Inc., a provider of mobile sports and
entertainment content.  The purchase provided us with mobile sports
and entertainment content including near real-time sports scores and news, and
interactive gameplay.  In May 2009 we purchased the assets of i-am TV
from Instant Access Media, LLC which included approximately 1,400 flat panel
television screens located in over 360 hospitality venues.  The
acquisition of these screens and other assets expanded our digital broadcast
network into new locations.




The
Hospitality Division (Discontinued Operations)




NTN
Wireless earned revenue from the sale of on-site wireless paging products
primarily to restaurants but also hospitals, church and synagogue nurseries,
salons, business offices and retail establishments in North America. In
restaurants, these products were provided to customers while waiting for a table
and activated to let them know when their table was ready, as well as to
restaurant staff to alert them to certain issues, such as when hot food is ready
to be served.





Software
Solutions generated revenue from the licensing of proprietary seating management
and reservation management systems software to restaurants, casinos and other
venues. Software Solutions also provided professional help desk services and
outsourced software development and support and maintenance services to Domino’s
Pizza and their franchisees and other quick service restaurant
locations.




In March
2007, we completed the sale of substantially all of the assets of NTN Wireless
for $2.4 million and recognized a gain, net of tax, of approximately $396,000.
In October 2007, we sold certain intellectual property assets of Software
Solutions pursuant to an Asset Purchase Agreement, and in a separate agreement
with a customer, we discontinued the outsourced software development we were
providing. The intellectual property sold constituted substantially all of the
remaining operating assets of our Hospitality division, which had originally
consisted of our Software Solutions and Wireless businesses. We have accounted
for our Hospitality division as a reportable segment but we have presented its
operations as discontinued operations since the fourth quarter of 2006. We have
completed the dissolution and do not anticipate any further costs related to the
dissolution of the professional help desk and support and maintenance
services.





19




CRITICAL
ACCOUNTING POLICIES




The
discussion and analysis of our financial condition and results of operations are
based on our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP). The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to deferred costs and revenues, depreciation of broadcast equipment, the
provision for income taxes including the valuation allowance, bad debts,
investments, purchase price allocations related to acquisitions, impairment of
software development costs, goodwill and broadcast equipment
and  intangible assets and contingencies. 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. Critical accounting
policies and estimates are defined as those that are both most important to the
portrayal of the Company’s financial condition and results and require
management’s most subjective judgments.




There
have been no material changes in our critical accounting policies, estimates and
judgments during the quarter ended September 30, 2009 compared to the
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of our Annual Report on Form 10-K for the year ended
December 31, 2008, except for the following addition:




Purchase Accounting – We have
accounted for our acquisitions pursuant to ASC 805, “Business
Combinations.”  We have recorded all acquired tangible and
intangible assets and all assumed liabilities based upon their estimated fair
values.  All estimated fair values are preliminary and subject to
change.  As a result of the valuation procedures performed, we
recorded $1,273,000 in customer relationship intangible assets, $599,000 in
unpatented technology, $64,000 of assumed liabilities and a $285,000 earnout
liability.  The majority of the customer relationship intangible asset
will be amortized on a straight line basis over a period of 44 months and
recorded in selling, general and administrative expenses while approximately
$300,000 was amortized over the three months ended August 31, 2009 coinciding
with the period that the related advertising revenue was
recognized.  The unpatented technology intangible asset will be
amortized on a straight line basis over a period of 60 months and recorded in
direct expenses.  The useful lives and amortization methods reflect
the estimated period of time by which the underlying intangible asset benefits
will be realized.  We recorded $326,000 and $445,000 in amortization
expense related to these intangible assets during the three and nine months
ended September 30, 2009.




RESULTS
OF OPERATIONS




Our
Hospitality division is classified as discontinued operations in accordance with
ASC No. 360, Property, Plant
and Equipment. The operating results for these businesses have been
separately classified and reported as discontinued operations in the condensed
consolidated financial statements.




Results
of Continuing Operations




Three
months ended September 30, 2009 compared to the three months ended
September 30, 2008




Continuing
operations, which consists of the Entertainment division, generated a net loss
of $768,000 for the three months ended September 30, 2009, compared to net
loss of $1,032,000 for the three months ended September 30,
2008.




20




Revenue




Revenue
from continuing operations decreased $55,000 or 1%, to $6,717,000 for the three
months ended September 30, 2009 from $6,772,000 for the three months ended
September 30, 2008, primarily due to a decrease in average revenue generated per
site related to a strategic reduction in pricing, which was partially offset by
increases in site count, an increase in advertising revenues and certain
nonrecurring hardware sales. Comparative site count information for Buzztime iTV
Network is as follows:





Network subscribers
              As of September 30,2009
            
            
            2008United
      States
            
            
            3,721
            
            
            
            3,438Canada
            
            
            330
            
            
            
            307United
      Kingdom
            
            
            —
            
            
            
            —Total
            
            
            4,051
            
            
            
            3,745





Direct
Costs and Gross Margin




The
following table compares the direct costs and gross margin from continuing
operations for 2009 and 2008:





Three
      months ended
              September 30,2009
            
            
            2008Revenue
            
            $
            6,717,000
            
            
            $
            6,772,000Direct
      costs
            
            
            1,743,000
            
            
            
            1,939,000Gross
      margin
            
            $
            4,974,000
            
            
            $
            4,833,000Gross
      margin percentage
            
            
            74%
            
            
            
            71%




Gross
margin as a percentage of revenue improved by 3 percentage points to 74% for the
three months ended September 30, 2009 compared to 71% in the prior year
period. The increase in the gross margin percentage is primarily the result
of a reduction in depreciation expense as equipment became fully depreciated, a
decrease in communication costs due to the conversion of sites from satellite to
DSL communications, a reduction in content costs, a decrease in direct salaries
as a result of a reduced headcount and a decrease in average revenue generated
per site related to a strategic reduction in pricing.




Selling,
General and Administrative Expenses




Selling,
general and administrative expenses decreased $282,000 or 5%, to $5,474,000 for
the three months ended September 30, 2009 from $5,756,000 for the three months
ended September 30, 2008.  Selling, general and administrative expenses
decreased due to several factors. Salary expenses decreased $109,000 due to a
reduction in headcount that occurred in January 2009.  Severance
expenses decreased $167,000 due to severance expenses in the prior year
associated with the departure of senior management and of employees located in
the UK in connection with the closing of that office.  Consulting
services decreased $151,000 as we decreased our overall utilization of external
consulting services.  Other taxes decreased $72,000 primarily due to
the finalization of the sales settlement with the state of Texas.




The above
decreases were offset by a $222,000 impairment charge related to the abandonment
of software development projects.




Depreciation
and Amortization Expense




Depreciation
and amortization expense (excluding depreciation and amortization included in
direct operating costs) increased $283,000, to $416,000 for the three months
ended September 30, 2009 from $133,000 in the prior year primarily due to the
acquisition of intangible assets, which has resulted in increased amortization
expense.




21


Interest
Income and Expense




Interest
income decreased $20,000, to $7,000 for the three months ended September 30,
2009 from $27,000 in the prior year. The decrease was due to a decrease in our
average cash balance invested in interest bearing securities.




Interest
expense increased $19,000 to $23,000 for the three months ended September 30,
2009 from $4,000 in the prior year.  The increase in interest expense
is the result of equipment leases we entered into.




Other
Income
 
 Other
income increased $86,000 to $155,000 for the three months ended September 30,
2009 from $69,000 for the three months ended September 30, 2008 due to a foreign
currency exchange gain related to intercompany transactions with our Canadian
subsidiary.


Income
Taxes




We expect
to incur minimal federal and state income tax liability in 2009 related to our
U.S. operations.  We also expect to pay income taxes in Canada due to
the profitability of NTN Canada.  Our tax provision for the three
months ended September 30, 2009 decreased $77,000 compared to the $68,000
provision for income taxes recorded for the three months ended September 30,
2008.  We continue to provide a 100% valuation allowance against our
deferred tax assets related to certain net operating losses as realization of
such tax benefits is not assessed as more likely than not.




Results
of Discontinued Operations




Three
months ended September 30, 2009 compared to the three months ended
September 30, 2008




The wind
down of our discontinued operations was completed in the third quarter of 2008;
therefore, there is no activity to report for the three months ended September
30, 2009. The operating results of the discontinued operations are as follows
for the three months ended September 30, 2008:





September
      30,
              2008Operating
      revenues
            
            $
            —Operating
      expenses
            
            
            2,000Operating
      loss
            
            $
            (2,000
            )Other
      income
            
            
            177,000Income
      from discontinued operations, net of tax
            
            $
            175,000




EBITDA
– Consolidated Operations




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




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





Three months
      endedSeptember
      30,
              2009
            
            
            September
      30,
              2008Net
      loss per GAAP
            
            $
            (768,000
            )
            
            $
            (857,000
            )Interest
      expense (income), net
            
            
            16,000
            
            
            
            (23,000
            )Depreciation
      and amortization
            
            
            986,000
            
            
            
            752,000Income
      taxes
            
            
            (9,000
            )
            
            
            68,000EBITDA
            
            $
            225,000
            
            
            $
            (60,000
            )







22




Our
operations generated EBITDA levels as presented below:





Three months
      ended September 30, 2009Entertainment
              
              
              Discontinued
                operations
              
              
              TotalNet
      loss per GAAP
              
              $
              (768,000
              )
              
              $
              —
              
              
              $
              (768,000
              )Interest
      expense, net
              
              
              16,000
              
              
              
              —
              
              
              
              16,000Depreciation
      and amortization
              
              
              986,000
              
              
              
              —
              
              
              
              986,000Income
      taxes
              
              
              (9,000
              )
              
              
              —
              
              
              
              (9,000
              )EBITDA
              
              $
              225,000
              
              
              $
              —
              
              
              $
              225,000
  Three months
      ended September 30, 2008Entertainment
              
              
              Discontinued
                operations
              
              
              TotalNet
      loss per GAAP
              
              $
              (1,032,000
              )
              
              $
              175,000
              
              
              $
              (857,000
              )Interest
      income, net
              
              
              (23,000
              )
              
              
              —
              
              
              
              (23,000
              )Depreciation
      and amortization
              
              
              752,000
              
              
              
              —
              
              
              
              752,000Income
      taxes
              
              
              68,000
              
              
              
              —
              
              
              
              68,000EBITDA
              
              $
              (235,000
              )
              
              $
              175,000
              
              
              $
              (60,000
              )




Nine
months ended September 30, 2009 compared to the nine months ended
September 30, 2008




Continuing
operations, which consists of the Entertainment division, generated a net loss
of $1,305,000 for the nine months ended September 30, 2009, compared to net loss
of $5,444,000 for the nine months ended September 30, 2008.




Revenue




Revenue
from continuing operations decreased $1,773,000 or 8%, to $19,198,000 for the
nine months ended September 30, 2009 from $20,971,000 for the nine months ended
September 30, 2008, primarily due to a decrease in average revenue generated per
site related to a strategic reduction in pricing partially offset by increases
in site count, an increase in advertising revenues and certain nonrecurring
hardware sales.





Direct
Costs and Gross Margin




The
following table compares the direct costs and gross margin from continuing
operations for 2009 and 2008:





Nine
      months ended September 30,2009
            
            
            2008Revenue
            
            $
            19,198,000
            
            
            $
            20,971,000Direct
      costs
            
            
            4,769,000
            
            
            
            6,014,000Gross
      margin
            
            $
            14,429,000
            
            
            $
            14,957,000Gross
      margin percentage
            
            
            75%
            
            
            
            71%




Gross
margin as a percentage of revenue improved to 75% for the nine months ended
September 30, 2009 compared to 71% in the prior year period. The increase
in the gross margin percentage is primarily the result of a reduction in
depreciation expense as equipment became fully depreciated, a decrease in
communication costs due to the conversion of sites from satellite to DSL
communications, a reduction in content costs and a decrease in direct salaries
as a result of reduced headcount.  Additionally, the increase in the
gross margin percentage is partially offset by the decrease in average revenue
generated per site related to a strategic reduction in pricing.




23


Selling,
General and Administrative Expenses




Selling,
general and administrative expenses decreased $4,857,000 or 24%, to $15,165,000
for the nine months ended September 30, 2009 from $20,022,000 for the nine
months ended September 30, 2008.  Selling, general and administrative
expenses decreased due to several factors.  Salary expenses decreased
$1,223,000 due to a reduction in headcount that occurred in January
2009.  Severance expenses decreased $682,000 due to severance expenses
in the prior year associated with the departure of senior personnel including
the CEO and the closing of our UK office.   Marketing expenses
decreased $901,000 due to a change in our marketing strategy, including reducing
direct mail campaigns and reduced participation in promotions and trade
shows.  Consulting expenses decreased $936,000 as we decreased our
overall utilization of external consulting services.  Other taxes
decreased $220,000 primarily due to the finalization of the sales tax settlement
with the state of Texas in the second quarter of 2009.  Bad debt
expense decreased $366,000 predominately due to recoveries of certain accounts
previously written off and an increased recovery rate.  Legal expenses
decreased $197,000 due to a reduction in legal activity regarding corporate
governance matters and a trademark infringement case.  Expenses
related to seminars, subscriptions and memberships decreased
$94,000.  General spend related to payroll processing fees,
professional tax services and supplies decreased $193,000.




Depreciation
and Amortization Expense




Depreciation
and amortization expense (excluding depreciation and amortization included in
direct operating costs) increased $356,000, to $756,000 for the nine months
ended September 30, 2009 from $400,000 in the prior year due to the acquisition
of intangible assets, which has resulted in increased amortization
expense.




Interest
Income and Expense




Interest
income decreased $58,000, to $71,000 for the nine months ended September 30,
2009 from $129,000 in the prior year. The Company’s average cash balance
invested in interest bearing securities decreased which resulted in less
interest income.




Interest
expense increased $31,000 to $35,000 for the nine months ended September 30,
2009 from $4,000 for the nine months ended September 30, 2008.  The
increase in interest expense is the result of additional equipment leases we
entered into.




Other
Income
  Other
income increased $86,000 to $155,000 for the nine months ended September 30,
2009 from $69,000 for the nine months ended September 30, 2008 due to a foreign
currency exchange gain related to intercompany transactions with our Canadian
subsidiary.





Income
Taxes




We expect
to incur minimal federal and state tax liability in 2009 related to our U.S.
operations. We also expect to pay income taxes in Canada due to the
profitability of NTN Canada. As a result, we recorded a tax provision of $4,000
for the nine months ended September 30, 2009. Our tax provision decreased
$169,000 for the nine months ended September 30, 2009 compared to the $173,000
provision for income taxes recorded for the nine months ended September 30,
2008. We continue to provide a 100% valuation allowance against our deferred tax
assets related to certain net operating losses as realization of such tax
benefits is not assessed as more likely than not.




Results
of Discontinued Operations




Nine
months ended September 30, 2009 compared to the nine months ended
September 30, 2008




The wind
down of our discontinued operations was completed in the third quarter of 2008;
therefore, there is no activity to report for the nine months ended September
30, 2009. The operating results of the discontinued operations are as follows
for the nine months ended September 30, 2008:





September
      30,
              2008Operating
      revenues
            
            $
            21,000Operating
      expenses
            
            
            530,000Operating
      loss
            
            $
            (509,000
            )Other
      income
            
            
            177,000Loss
      from discontinued operations, net of tax
            
            $
            (332,000
            )






24


EBITDA
– Consolidated Operations




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




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





Nine months
      endedSeptember
      30,
              2009
            
            
            September
      30,
              2008Net
      loss per GAAP
            
            $
            (1,305,000
            )
            
            $
            (5,776,000
            )Interest
      income, net
            
            
            (36,000
            )
            
            
            (125,000
            )Depreciation
      and amortization
            
            
            2,329,000
            
            
            
            2,404,000Income
      taxes
            
            
            4,000
            
            
            
            173,000EBITDA
            
            $
            992,000
            
            
            $
            (3,324,000
            )




Our
operations generated EBITDA levels as presented below:





Nine months
      ended September 30, 2009Entertainment
              
              
              Discontinued
                operations
              
              
              TotalNet
      loss per GAAP
              
              $
              (1,305,000
              )
              
              $
              —
              
              
              $
              (1,305,000
              )Interest
      income, net
              
              
              (36,000
              )
              
              
              —
              
              
              
              (36,000
              )Depreciation
      and amortization
              
              
              2,329,000
              
              
              
              —
              
              
              
              2,329,000Income
      taxes
              
              
              4,000
              
              
              
              —
              
              
              
              4,000EBITDA
              
              $
              992,000
              
              
              $
              —
              
              
              $
              992,000
  Nine months
      ended September 30, 2008Entertainment
              
              
              Discontinued
                operations
              
              
              TotalNet
      loss per GAAP
              
              $
              (5,444,000
              )
              
              $
              (332,000
              )
              
              $
              (5,776,000
              )Interest
      income, net
              
              
              (125,000
              )
              
              
              —
              
              
              
              (125,000
              )Depreciation
      and amortization
              
              
              2,404,000
              
              
              
              —
              
              
              
              2,404,000Income
      taxes
              
              
              173,000
              
              
              
              —
              
              
              
              173,000EBITDA
              
              $
              (2,992,000
              )
              
              $
              (332,000
              )
              
              $
              (3,324,000
              )




LIQUIDITY
AND CAPITAL RESOURCES




As of
September 30, 2009, we had cash and cash equivalents of $3,217,000 compared to
cash and cash equivalents of $3,362,000 as of December 31,
2008.  Including the effect of exchange rates on cash, we used
$145,000 in cash in the nine months ended September 30, 2009 compared to cash
used of $5,016,000 in the nine months ended September 30, 2008.  The
$4,871,000 decrease of cash used in the nine months ended September 30, 2009
compared to the prior year period was driven predominately by the $4,471,000
decrease of net loss.  We have taken strong measures to reduce our use
of cash.  Those measures included reducing headcount through strategic
reductions in our work force, renegotiated pricing with numerous vendors, a
decrease in the use of consultants where practical and a revision of our
marketing plan designed to reduce costs while continuing to support our
business plan.





During
2009, we intend to continue to rely upon our cash on hand and cash flow from
operations to meet our liquidity needs. While we believe that the actions taken
in 2008 and the first three quarters of 2009 to reduce our operating costs,
improve our gross profit margin and manage our working capital should benefit us
in 2009 and beyond, in these uncertain economic times there can be no assurance
that those actions will be sufficient.





25


On May
11, 2009, we entered into an agreement with certain investors in Instant Access
Media, LLC whereby they purchased 2,419,355 shares of our Common Stock in a
private placement raising $750,000 in additional working capital. That cash
has been used to fund general working capital requirements as well as certain
capital expenditures.





We
believe existing cash and cash equivalents, together with funds generated from
operations, will be sufficient to meet our operating cash requirements for at
least the next 12 months. We have no debt obligations other than capital
leases.  In the event that net cash provided by operating activities
and cash on hand are not sufficient to meet future cash requirements, we may be
required to reduce planned capital expenses, further reduce operational cash
uses, sell assets or seek financing. Any actions we may undertake to reduce
planned capital purchases, further reduce expenses, or generate proceeds from
the sale of assets may be insufficient to cover shortfalls in available
funds.  If we require additional capital, we may be unable to secure
additional financing on terms that are acceptable to us, or at all.





Working
Capital





As of
September 30, 2009, we had working capital (current assets in excess of current
liabilities) of $1,172,000 compared to $874,000 as of December 31,
2008.  The following table shows our change in working capital from
December 31, 2008 to September 30, 2009.





Working
      Capital
              Increase
              (Decrease)(In
      thousands)Working
      capital as of December 31, 2008
            
            $
            874Changes
      in current assets:Cash
      and cash equivalents
            
            
            (145
            )Accounts
      receivable, net of allowances
            
            
            470Investment
      available-for-sale
            
            
            122Prepaid
      expenses and other current assets
            
            
            108Total
      current assets
            
            
            555Changes
      in current liabilities:Accounts
      payable
            
            
            (128
            )Accrued
      expenses
            
            
            (320
            )Sales
      tax payable
            
            
            186Accrued
      salaries
            
            
            142Accrued
      vacation
            
            
            (18
            )Income
      tax payable
            
            
            18Obligations
      under capital lease
            
            
            (222
            )Deferred
      revenue
            
            
            85Total
      current liabilities
            
            
            (257
            )Net
      change in working capital
            
            
            298Working
      capital as of September 30, 2009
            
            $
            1,172











26





Cash
Flows





Cash
flows from operating, investing and financing activities, as reflected in the
accompanying Consolidated Statements of Cash Flows, are summarized as
follows:





(In
      thousands)
              For
      the nine months endedSeptember
      30,
              2009
            
            
            September
      30,
              2008Cash
      provided by (used in):Operating
      activities
            
            $
            1,121
            
            
            $
            (2,231
            )Investing
      activities
            
            
            (2,187
            )
            
            
            (2,372
            )Financing
      activities
            
            
            684
            
            
            
            (23
            )Effect
      of exchange rates
            
            
            237
            
            
            
            (390
            )Net
      decrease in cash and cash equivalents
            
            $
            (145
            )
            
            $
            (5,016
            )





Net cash from operating
activities.  We are dependent on cash flows from operations to
meet our cash requirements.  Net cash provided by operating activities
was $1,121,000
during the nine months ended September 30, 2009 compared to net cash used in
operating activities of $2,231,000 for the nine months ended September 30,
2008.  The $3,352,000 change in cash provided by operations was
primarily due to a $4,471,000 decrease in our net loss, a decrease in non-cash
charges of $691,000 and a $903,000 decrease in cash used by operating assets and
liabilities.  The significant decrease of our net loss was primarily
the result of a $5,746,000 reduction of operating expenses. Our largest use of
cash is payroll and related costs.  Payroll and related costs
decreased $1,536,000 to $9,846,000 for the nine months ended September 30, 2009
from $11,382,000 for the same period in 2008.  This decrease is the
result of our strategic reductions in work force in 2008 and the first quarter
of 2009.  Our primary source of cash is cash we generate from
customers.  Cash received from customers decreased $2,115,000 to
$19,062,000 for the nine months ended September 30, 2009 from $21,177,000 in
2008 for the same period.   That decrease in cash from
customers is due to our strategic decrease in pricing offset by an increase in
site count.   The principal changes in non-cash items that affected
operating cash flow for the nine months ended September 30, 2009 when compared
to the same period in 2008 included a $75,000 decrease in depreciation and
amortization as assets become fully depreciated, a $112,000  reduction
in loss from disposition of equipment  and capitalized software
and  a  $377,000 decrease of the provision for doubtful accounts
due  to recoveries of certain accounts previously written off and an
increased recovery rate.





Cash used
in discontinued operations was $807,000 for the nine months ended September 30,
2008 compared to $0 cash used for discontinued operations for the same period in
2009.





Net cash from investing
activities.  For the nine months ended September 30, 2009, we
used $2,187,000 in cash for investing activities, which represents a reduction
of $185,000 from the prior year period when we used $2,372,000 in cash from
investing activities.  The change in cash flows from investing
activities when comparing the nine months ended September 30, 2009 to the same
period in 2008 was due primarily to the following:




·
              Cash
      used for capital expenditures decreased
  $273,000,
 
 ·
              Cash
      used for software development initiatives increased $11,000,
      and
 
 ·
              Cash
      used for deposits on equipment increased
  $41,000.





Net cash from financing
activities.  Net cash provided by financing activities
increased $707,000 to $684,000 for the nine months ended September 30, 2009
compared to net cash used of $23,000 for the same period in 2008. Included in
net cash provided by financing activities for the nine months ended September
30, 2009, was $750,000 in proceeds from the sale of common stock in the
aforementioned private placement transaction.  The sources of cash
were offset by $94,000 in principal payments on capital
leases.




Other
information. In 2009, we entered into a
$500,000 equipment lease facility with an equipment leasing
company.  The terms of that agreement allow for use of the facility in
multiple tranches with each individual tranche having a 24 month
term.  As of September 30, 2009, we utilized $457,000 of that facility
which has been accounted for as a capital lease.  We expect to utilize the
full $500,000 facility before the end of 2009.




27




On
October 1, 2009, we entered into a $1,000,000 equipment lease facility with an
equipment leasing company.  The terms of that agreement allow for use
of the facility for 24 months and for use of the facility in multiple tranches
with each individual tranche having 24 month terms.




RECENT
ACCOUNTING PRONOUNCEMENTS





Refer to
Note 12 of the condensed consolidated financial statements, “Recent Accounting
Pronouncements.”




Item 3.
            Quantitative and Qualitative
      Disclosures About Market
Risk.




We are
exposed to risks related to currency exchange rates, stock market fluctuations,
and interest rates. As of September 30, 2009, we owned common stock of an
Australian company, eBet, that is subject to market risk.  The value
of the investment has increased $84,000 and $122,000 during the three and nine
months ended September 30, 2009, respectively, and is recorded as other
comprehensive income on our consolidated balance sheet.




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 which would impact the value of the
investment.




During
the nine months ended September 30, 2009, we recognized a $155,000 foreign
currency exchange gain related to intercompany transactions with our Canadian
subsidiary




We do not
believe that inflation has had a material impact on our business or operating
results during the periods presented.




We do not
have any derivative financial instruments, nor do we have any speculative or
hedging instruments.




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 Rule
13a-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
our evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that such disclosure controls and procedures were effective as of the
end of the period covered by this report.




Changes
in Internal Control Over Financial Reporting




During
the period covered by this report, we have had no changes in our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





28


PART
II — OTHER INFORMATION




Item 1.
            Legal
      Proceedings.




Sales
and Use Tax




From time to time, state
tax authorities will make inquiries as to whether or not a portion of our
services require the collection of sales and use taxes from customers in those
states. Many states have expanded their interpretation of their sales and use
tax statutes to derive additional revenue.  We evaluate such inquiries
on a case-by-case basis and have favorably resolved the majority of these tax
issues in the past without any material adverse consequences.  During
the quarter ended March 31, 2009, we settled a long on-going sales tax
evaluation with the state of Texas.  We entered into an Audit
Resolution Agreement and Joint Motion to Dismiss with the State of Texas
pursuant to which we will pay the state approximately $450,000 over a 2 year
period.  As part of those agreements, both parties agreed to waive all
rights to any redetermination or refund hearings.  In February 2009,
the Company began collecting and remitting sales tax in the state of Texas in
accordance with the state tax statutes.  As of September 30, 2009,
$386,000 is due to the State of Texas under this settlement
agreement.




We are
involved in ongoing sales tax inquiries, including certain formal assessments of
$601,000, with other states.  As a result of those inquiries and the
Texas liability discussed above, we recorded a total liability of $829,000 and
$867,000 as of September 30, 2009 and December 31, 2008,
respectively.  Based on the guidance set forth by ASC No. 450, Contingencies, we deemed the
likelihood that we will be forced to pay all or part of these assessments with
other states as reasonably possible.




Item 1A.
            Risk
      Factors.




Risk
Factors That May Affect Future Results




An
investment in our common stock involves a high degree of risk. You should
consider carefully the risks and uncertainties described under Item 1A of
Part I of our Annual Report on Form 10-K for the year ended
December 31, 2008 together with all other information contained or
incorporated by reference in this report before you decide to invest in our
common stock.  If any of the risks described in our annual report
actually occurs, our business, financial condition, results of operations and
our future growth prospects could be materially and adversely affected. Under
these circumstances, the trading price of our common stock could decline, and
you may lose all or part of your investment.




The
following risk factor is in addition to the risks and uncertainties described
under Item 1A of Part I of our Annual Report on Form 10-K for the year
ended December 31, 2008:




We
may not successfully address problems encountered in connection with any
acquisitions.




During
the second quarter of 2009, we acquired assets from two businesses and we expect
to consider opportunities to acquire or make investments in other technologies,
products, and businesses that could complement our current products and
services, expand the breadth of our markets or enhance our technical
capabilities.  We have a limited history of acquiring and integrating
businesses.  Acquisitions and strategic investments involve numerous
risks, including:




·
              problems
      assimilating employees, or the purchased products, business operations or
      technologies;
 ·
              unanticipated
      costs associated with the acquisition, including accounting and legal
      charges, capital expenditures, and transaction
  expenses;
 ·
              diversion
      of management's attention from our core
  business;
 ·
              adverse
      effects on existing business relationships with customers and
      suppliers;
 ·
              risks
      associated with entering markets in which we have no or limited prior
      experience;
 ·
              unanticipated
      or unknown liabilities relating to the acquired
  businesses;
 ·
              the
      need to integrate accounting, management information, manufacturing, human
      resources and other administrative systems to permit effective management;
      and
 ·
              potential
      loss of key employees of acquired
organizations.


If we fail to properly evaluate and
execute acquisitions and strategic investments, our management team may be
distracted from our day-to-day operations, our business may be disrupted, and
our operating results may suffer.  In addition, if we finance
acquisitions by issuing equity or convertible debt securities, our existing
stockholders may be diluted.  Also, the anticipated benefit of our
acquisitions may not materialize.  Future acquisitions could result in
potentially dilutive issuances of our equity securities, the incurrence of debt,
contingent liabilities or amortization expenses, or write-offs of goodwill, any
of which could harm our operating results or financial
condition.  Future acquisitions may also require us to obtain
additional equity or debt financing, which may not be available on favorable
terms or at all.




29




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.




Exhibit No.
              
              Description31.1#
              
              Certification
      of principal executive officer pursuant to Rule
  13a-14(a)*31.2#
              
              Certification
      of principal financial officer pursuant to Rule
  13a-14(a)*32.1#
              
              Certification
      of principal executive officer pursuant to Rule 13a-14(b) / 18 U.S.C.
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*32.2#
              
              Certification
      of principal financial officer pursuant to 13a-14(b) / 18 U.S.C. 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*





#
              This
      certification is being furnished solely to accompany this report pursuant
      to U.S.C. § 1350, and is not being filed for purposes of Section 18 of the
      Securities Exchange Act of 1934, as amended, and is not to be incorporated
      herein by reference into any filing of the registrant whether made before
      or after the date hereof, regardless of any general incorporation language
      in such filing.




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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
      BUZZTIME, INC.Date:
      November 13, 2009
            By:
            /s/
      Kendra BergerKendra
      BergerChief
      Financial Officer(on
      behalf of the Registrant, and as its Principal Financial and Accounting
      Officer)












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