# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Sep 30, 2010

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2010-11-12
- Accepted by EDGAR: Nov 12, 2010, 13:15 ET
- Period: 2010-09-30
- Accession: 0001019687-10-004032
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000101968710004032/ntn_10q-093010.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000101968710004032/

## Management's discussion and analysis

As filed, 22,934 characters.

#### 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, 2009, under the section entitled “Risk Factors,” and in Item 1A of Part II of this Quarterly Report on Form 10-Q, and in other reports we file with the Securities and Exchange Commission from time to time. We undertake no obligation to revise or update publicly any forward-looking statement for any reason.*

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

### OVERVIEW

We have been in the business of social interactive entertainment for over 25 years. Our primary source of revenue is our Buzztime iTV Network, which focuses on the distribution of our interactive promotional television game network programming, primarily to over 4,000 hospitality venues such as restaurants and bars throughout North America.

The out-of-home Buzztime iTV Network has maintained a unique position in the hospitality industry for over 25 years as a promotional platform providing interactive entertainment to patrons in restaurants and bars (hospitality venues). The iTV Network distributes a wide variety of engaging interactive multi-player games, including trivia quiz shows, play-along sports programming and casino-style and casual games to our Network subscribers. Patrons use our wireless game controllers, or Playmakers, to play along with the Buzztime games which are displayed on television screens. In late 2009, we introduced an application that can be downloaded to an iPhone that enables patrons to use their iPhone in-venue instead of the Playmaker to play these Buzztime games. Buzztime players can compete with other players within their hospitality venue and also against players in other Network subscriber venues.

We target national and regional hospitality chains as well as local independent hospitality venues that desire a competitive point-of-difference to attract and retain customers. As of September 30, 2010, we had 3,730 United States Network subscribers and 285 Canadian subscribers. Approximately 30% of our Network subscribers come from national chains in the casual-dining restaurant segment such as Buffalo Wild Wings, TGI Friday’s, Hooters 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.

### CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to deferred costs and revenues, depreciation of broadcast equipment, the provision for income taxes including the valuation allowance, stock-based compensation, bad debts, investments, purchase price allocations related to acquisitions, impairment of software development costs, goodwill, broadcast equipment, intangible assets and contingencies, including the reserve for sales tax inquiries. We base our estimates on historical experience and on various other assumptions that 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 nine months ended September 30, 2010 from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2009.

### RESULTS OF OPERATIONS

### Three months ended September 30, 2010 compared to the three months ended September 30, 2009

We generated net income of $124,000 for the three months ended September 30, 2010, compared to net loss of $768,000 for the three months ended September 30, 2009.

#### Revenue

Revenue decreased $212,000 or 3%, to $6,505,000 for the three months ended September 30, 2010 from $6,717,000 for the three months ended September 30, 2009, due to a decrease in subscription revenue related to lower site count and lower average revenue generated per site, a decrease in advertising revenue of $61,000 and a decrease in certain non-recurring hardware sales we recognized for the period in 2009. Comparative site count information for Buzztime iTV Network is as follows:

|  | Network Subscribers as of September 30, 2010 | 2009 |
| --- | ---: | ---: |
| United States | 3,730 | 3,721 |
| Canada | 285 | 330 |
| Total | 4,015 | 4,051 |

#### Direct Costs and Gross Margin

The following table compares the direct costs and gross margin for the three months ended September 30, 2010 and 2009:

|  | For the three months ended September 30, 2010 | 2009 |
| --- | ---: | ---: |
| Revenues | $6,505,000 | $6,717,000 |
| Direct Costs | 1,522,000 | 1,743,000 |
| Gross Margin | $4,983,000 | $4,974,000 |
| Gross Margin Percentage | 77% | 74% |

Gross margin as a percentage of revenue increased to 77% for the three months ended September 30, 2010 from 74% for the three months ended September 30, 2009. Direct costs decreased $221,000, or 13%, from $1,743,000 for the three months ended September 30, 2009 as compared to $1,522,000 for the same period in 2010. The decrease in direct costs was primarily due to a decrease of $139,000 in communications expense as we completed the conversion of customers from satellite to broadband during 2009 and a decrease in service provider fees of $104,000 due to less service calls during the three months ended September 30, 2010 compared to the same period in 2009. These decreases were offset by increased depreciation and amortization expense of $46,000 resulting from increased equipment purchases under capital leases and intangible assets that were acquired during the second quarter of 2009.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $809,000, or 15%, to $4,665,000 for the three months ended September 30, 2010 from $5,474,000 for the three months ended September 30, 2009. Selling, general and administrative expenses decreased during the three months ended September 30, 2010 primarily due to decreased sales and marketing expenses of $258,000; decreased facilities expense of $126,000 due to reduced rent, telephone and maintenance costs; decreased software disposal costs of $135,000; decreased payroll and payroll related expense of $94,000 primarily due to a decrease in incentive compensation; decreased consulting expense of $83,000 due to reduced utilization of consultants; decreased travel expense of $60,000 and a net decrease of $55,000 in other miscellaneous expense.

#### Depreciation and Amortization Expense

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) decreased $253,000 to $163,000 for the three months ended September 30, 2010 from $416,000 for the three months ended September 30, 2009 primarily due to fully amortizing an intangible asset we acquired in 2009.

#### Other (Expense) Income, Net

Other (expense) income, net increased in expense by $155,000 to $16,000 of expense for the three months ended September 30, 2010 from $139,000 of other income for the three months ended September 30, 2009. During the three months ended September 30, 2010, we recorded a foreign currency exchange loss of $7,000 related to intercompany activity with our Canadian subsidiary compared to gain of $155,000 for the three months ended September 30, 2009.

#### Income Taxes

We expect to incur federal alternative minimum tax, or AMT, and minimum state income tax liability in 2010 related to our U.S. operations. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. For the three months ended September 30, 2010, we recorded a net tax provision of $15,000 and a tax benefit of $9,000 for the three months ended September 30, 2009. 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.

#### EBITDA

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

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

|  | For the three months ended September 30, 2010 | 2009 |
| --- | ---: | ---: |
| Net income (loss) per GAAP | $124,000 | $(768,000) |
| Interest expense, net | 24,000 | 16,000 |
| Depreciation and amortization | 807,000 | 986,000 |
| Income tax provision (benefit) | 15,000 | (9,000) |
| EBITDA | $970,000 | $225,000 |

### Nine months ended September 30, 2010 compared to the nine months ended September 30, 2009

We generated a net loss of $722,000 for the nine months ended September 30, 2010, compared to net loss of $1,305,000 for the nine months ended September 30, 2009.

#### Revenue

Revenue decreased $231,000, or 1%, to $18,967,000 for the nine months ended September 30, 2010 from $19,198,000 for the nine months ended September 30, 2009. The decrease was primarily due to a decrease in advertising revenue of $160,000 and a decrease in certain non-recurring hardware sales of $68,000 that we recognized for the period in 2009.

#### Direct Costs and Gross Margin

The following table compares the direct costs and gross margin for the nine months ended September 30, 2010 and 2009:

|  | For the nine months ended September 30, 2010 | 2009 |
| --- | ---: | ---: |
| Revenues | $18,967,000 | $19,198,000 |
| Direct Costs | 4,589,000 | 4,769,000 |
| Gross Margin | $14,378,000 | $14,429,000 |
| Gross Margin Percentage | 76% | 75% |

Gross margin as a percentage of revenue increased to 76% for the nine months ended September 30, 2010 from 75% for the nine months ended September 30, 2009. Direct costs decreased $180,000 to $4,589,000 for the nine months ended September 30, 2010 as compared to $4,769,000 for the same period in 2009. The decrease in direct costs was due to a decrease of $385,000 in communications expense as we completed the conversion of customers from satellite to broadband during 2009, a decrease in Playmaker repair and other equipment costs of $51,000 and a decrease of approximately $52,000 in other direct expenses primarily due to reduced license fees. These decreases were offset by an increase in depreciation and amortization expense of $299,000 resulting from increased equipment purchases under capital leases and intangible assets that were acquired during the second quarter of 2009.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $684,000, or 5%, to $14,481,000 for the nine months ended September 30, 2010 from $15,165,000 for the nine months ended September 30, 2009. Selling, general and administrative expenses decreased due to decreased professional fees of $427,000 due to less consulting expense, legal fees related to the asset acquisitions in 2009 and lower auditing fees; decreased selling and marketing expense of $254,000 due to reduced trade show attendance and market research costs; decreased facilities expense of $232,000 due to reduced rent, maintenance and telephone costs; decreased severance and related payroll taxes of $222,000; decreased recruiting expense of $74,000; decreased training and development expense of $21,000; decreased investor relations expense of $24,000; decreased travel expense of $13,000; decreased tax filing fees of $35,000 due to reduced costs for tax filings and other tax projects and decreased miscellaneous expenses of $64,000. These decreases were offset by increased personnel and related expenses of $546,000 resulting from increased headcount, heath insurance expenses, temporary labor, stock compensation and annual merit increases as well as increased bad debt expense of $136,000 as a result of lower recoveries in 2010 compared to 2009.

#### Depreciation and Amortization Expense

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) decreased $248,000 to $508,000 for the nine months ended September 30, 2010 from $756,000 for the nine months ended September 30, 2009 primarily due to fully amortizing an intangible asset we acquired in 2009.

#### Other (Expense) Income, Net

Other (expense) income, net increased in expense by $264,000 to $73,000 of expense for the nine months ended September 30, 2010 from $191,000 of other income for the nine months ended September 30, 2009. The increase in expense was primarily due to a $137,000 reduction in the amount of gain relating to foreign currency exchange activity of $18,000 for the three months ended September 30, 2010 compared to a $155,000 gain for the nine months ended September 30, 2009. Additionally, we recognized increased interest expense of $46,000 related to capital equipment leases and lower interest income of $69,000 resulting from a decrease in our average cash balance invested in interest bearing securities.

#### Income Taxes

For the nine months ended September 30, 2010 and 2009, we recorded a net tax provision of $38,000 and $4,000, respectively.

#### EBITDA

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

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

|  | For the nine months ended September 30, 2010 | 2009 |
| --- | ---: | ---: |
| Net loss per GAAP | $(722,000) | $(1,305,000) |
| Interest expense (income), net | 79,000 | (36,000) |
| Depreciation and amortization | 2,406,000 | 2,329,000 |
| Income tax provision | 38,000 | 4,000 |
| EBITDA | $1,801,000 | $992,000 |

### LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2010, we had cash and cash equivalents of $3,855,000 compared to cash and cash equivalents of $3,637,000 as of December 31, 2009. We believe existing cash and cash equivalents, together with funds generated from operations, will be sufficient to meet our operating cash requirements for at least the next 12 months. We have no debt obligations other than capital leases. It is our intention to continue entering into capital lease facilities for certain equipment requirements when economically advantageous. In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce operational cash uses, sell assets or seek financing. Any actions we may undertake to reduce planned capital purchases, reduce expenses, or generate proceeds from the sale of assets may be insufficient to cover shortfalls in available funds. If we require additional capital, we may be unable to secure additional financing on terms that are acceptable to us, or at all.

#### Working Capital

As of September 30, 2010, we had working capital (current assets in excess of current liabilities) of $1,077,000 compared to $800,000 as of December 31, 2009. The following table shows our change in working capital from December 31, 2009 to September 30, 2010.

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2009 | $800,000 |
| Changes in current assets: |  |
| Cash and cash equivalents | 218,000 |
| Accounts receivable, net of allowance | (155,000) |
| Investment available-for-sale | 15,000 |
| Prepaid expenses and other current assets | 82,000 |
| Total current assets | 160,000 |
| Changes in current liabilities: |  |
| Accounts payable and accrued liabilities | (232,000) |
| Sales taxes payable | 56,000 |
| Obligations under capital lease - current portion | 107,000 |
| Deferred revenue | 157,000 |
| Other current liabilities | (205,000) |
| Total current liabilities | (117,000) |
| Net change in working capital | 277,000 |
| Working capital as of September 30, 2010 | $1,077,000 |

#### Cash Flows

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

| Cash provided by (used in): | For the nine months ended September 30, 2010 | 2009 |
| --- | ---: | ---: |
| Operating activities | $2,203,000 | $1,121,000 |
| Investing activities | (1,734,000) | (2,187,000) |
| Financing activities | (241,000) | 684,000 |
| Effect of exchange rates | (10,000) | 237,000 |
| Net (decrease) increase in cash and cash equivalents | $218,000 | $(145,000) |

*Net cash provided by operating activities.* We are dependent on cash flows from operations to meet our cash requirements. Net cash generated from operating activities was $2,203,000 for the nine months ended September 30, 2010 compared to net cash generated from operating activities of $1,121,000 for the same period in 2009. The $1,082,000 increase in cash provided by operations was primarily due to a decrease in net loss of $583,000, an increase of $279,000 in non-cash charges and an increase of $220,000 in cash provided by operating assets and liabilities during the nine months ended September 30, 2010 compared to the same period in 2009.

Our largest use of cash is payroll and related costs. Cash used related to payroll increased $275,000 to $8,358,000 for the nine months ended September 30, 2010 from $8,083,000 during the same period in 2009. This increase is primarily the result of merit increases that were given during 2010. No merit increases were given during 2009. Our primary source of cash is cash we generate from customers. Cash received from customers increased $703,000 to $19,765,000 for the nine months ended September 30, 2010 from $19,062,000 during the same period in 2009.

*Net cash used in investing activities.* We used $1,734,000 in cash for investing activities for the nine months ended September 30, 2010 compared to $2,187,000 used in cash for investing activities during the same period in 2009. The $453,000 decrease in cash used in investing activities was primarily due to a decrease in capital expenditures, including deposits, of $535,000, offset by increases of $47,000 in cash used for software development initiatives and $35,000 related to a trademark license.

*Net cash (used in) provided by financing activities.* Net cash used in financing activities increased $925,000 to $241,000 for the nine months ended September 30, 2010 compared to net cash provided by financing activities of $684,000 for the same period in 2009. The increase in cash used in financing activities was due to a $208,000 increase in principal payments on capital leases and a $750,000 decrease in proceeds from the sale of common stock in 2009, offset by a $33,000 increase in proceeds received from the exercise of stock options.

### RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 14 of the condensed consolidated financial statements, “Recent Accounting Pronouncements.”

## Market risk

As filed, 143 characters.

Under SEC rules and regulations, as a smaller reporting company we are not required to provide the information otherwise required by this item.

## Controls and procedures

As filed, 1,368 characters.

#### 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 SEC 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 our 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

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 898 characters.

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, 2009 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 occur, 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. As of the date of this report, we do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Filed Nov 12, 2010.
Source: SEC EDGAR, the filing index for accession 0001019687-10-004032. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.