# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Jun 30, 2013

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2013-08-14
- Accepted by EDGAR: Aug 14, 2013, 17:48 ET
- Period: 2013-06-30
- Accession: 0001019687-13-003135
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000101968713003135/ntn_10q-063013.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000101968713003135/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-04-01 to 2013-06-30 | $5.5m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2013-01-01 to 2013-06-30 | $11.6m | us-gaap:SalesRevenueNet |
| Selling, general and administrative | 3 months, 2013-04-01 to 2013-06-30 | $4.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2013-01-01 to 2013-06-30 | $8.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-04-01 to 2013-06-30 | −$115.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2013-01-01 to 2013-06-30 | −$481.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2013-04-01 to 2013-06-30 | $5.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2013-01-01 to 2013-06-30 | $13.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-04-01 to 2013-06-30 | −$99.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2013-01-01 to 2013-06-30 | −$468.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-04-01 to 2013-06-30 | $0.00 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2013-01-01 to 2013-06-30 | −$0.01 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2013-01-01 to 2013-06-30 | $346.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2013-01-01 to 2013-06-30 | $285.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-06-30 | $2.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-06-30 | $3.6m | us-gaap:AssetsCurrent |
| Total assets | at 2013-06-30 | $11.4m | us-gaap:Assets |
| Current liabilities | at 2013-06-30 | $2.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-06-30 | $4.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2013-06-30 | $7.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 23,408 characters.

#### CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

*This Quarterly Report on Form 10-Q (including, but not limited to, the following discussion of our financial condition and results of operations) and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 (“we,” “us,” or the “Company”). Forward-looking statements are based on information currently available to us and our current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management. Words such as “expects,” “anticipates,” “could,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “would,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that may be difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, under the section entitled “Risk Factors,” and in other reports we file with the Securities and Exchange Commission from time to time. Readers are urged not to place undue reliance on the forward-looking statements contained in this report or incorporated by reference herein, which speak only as of the date of this report. Except as required by law, we do not undertake any obligation to revise or update any such forward-looking statement to reflect future events or circumstances.*

*You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this report.*

*Our trademarks, trade names and service marks referenced herein include Buzztime, iTV Network, Playmaker and Stump! Trivia. Each other trademark, trade name or service mark appearing in this quarterly report belongs to its owner.*

### OVERVIEW

We provide marketing services through interactive game content for hospitality venues that offer the games free to their patrons. We have evolved from a content developer and distributor to an interactive entertainment network provider that helps the hospitality venues that subscribe to our network acquire, engage and retain their patrons. Our mission is to entertain consumers in ways that create long term value for our customers. Built on an extended network platform, our entertainment system has historically allowed multiple players to interact at the venue, but it also enables competition between different venues, referred to as massively multiplayer gaming. We continue to develop a new network architecture, technology platform and player engagement paradigm, which we currently refer to as our next generation product line, or Next-Gen.

We primarily generate revenues by charging subscription fees for our service to our network subscribers and from the sale of advertising aired on in-venue screens as well as in conjunction with customized games. Our games are currently available in over 3,300 locations in the U.S. and Canada, where they are shown on approximately 10,000-15,000 screens daily. Approximately 40% of our network subscriber venues are related to national and regional restaurants and include Buffalo Wild Wings, Beef O’Brady’s , Old Chicago, Black Angus, Boston Pizza, Native New Yorker, T.G.I. Friday’s and Hooters.

In December 2012, we acquired substantially all of the assets of Interactive Hospitality. We also hired its founder, Barry Chandler, as our Chief Marketing Officer. Interactive Hospitality’s digital media business specializes in creating digital marketing strategies for the hospitality industry. The business assists clients in attracting, engaging and retaining customers through the strategic use of social media. In addition to one-on-one digital strategies that Interactive Hospitality provides its national, regional and local clients, the industry- specific blog, TheBarBlogger.com, is a source for strategies available to independent bars and restaurants. In addition, Interactive Hospitality’s proprietary subscription based management toolkit, ManageYourBar.com, has been used by more than 1,500 bars and restaurants in the U.S. since its launch in 2009.

### 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, including any earnout liability, impairment of software development costs, goodwill, broadcast equipment, intangible assets and contingencies, including the reserve for sales tax inquiries. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require management’s most subjective judgments.

There have been no material changes in our critical accounting policies, estimates and judgments during the three and six months ended June 30, 2013 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, 2012.

### RESULTS OF OPERATIONS

### Three months ended June 30, 2013 compared to the three months ended June 30, 2012

We generated a net loss of $99,000 for the three months ended June 30, 2013 compared to a net loss of $633,000 for the three months ended June 30, 2012.

#### Revenue

Revenue decreased $483,000, or 8%, to $5,532,000 for the three months ended June 30, 2013 from $6,015,000 for the three months ended June 30, 2012 primarily due to lower average site count of our Network Subscribers, offset by a higher average revenue per unit. Comparative Network Subscriber information for the Buzztime Network is as follows:

|  | Network Subscribers as of June 30, 2013 | 2012 |
| --- | ---: | ---: |
| United States | 3,154 | 3,544 |
| Canada | 198 | 231 |
| Total | 3,352 | 3,775 |

#### Direct Costs and Gross Margin

The following table compares direct costs and gross margin for the three months ended June 30, 2013 and 2012:

|  | For the three months ended June 30, 2013 | 2012 |
| --- | ---: | ---: |
| Revenues | $5,532,000 | $6,015,000 |
| Direct Costs | 1,485,000 | 1,554,000 |
| Gross Margin | $4,047,000 | $4,461,000 |
| Gross Margin Percentage | 73% | 74% |

11

Gross margin as a percentage of revenue decreased to 73% for the three months ended June 30, 2013 from 74% for the three months ended June 30, 2012. Direct costs decreased $69,000, or 4%, to $1,485,000 for the three months ended June 30, 2013 from $1,554,000 for the three months ended June 30, 2012. The decrease in direct costs was primarily due to decreased service provider fees of $78,000 and decreased depreciation and amortization expense of $45,000 due to assets depreciating faster than replenishment of new assets. These decreases were offset by increased license fees of $26,000, increased freight expense related to our Next-Gen product of $18,000 and other miscellaneous net increases of $10,000.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $931,000, or 19%, to $3,982,000 for the three months ended June 30, 2013 from $4,913,000 for the same period in 2012. The decrease was due to decreased payroll and related expense of $842,000 primarily due to decreased headcount and incentive compensation, decreased marketing expenses of $101,000, decreased travel expense of $97,000, decreased service fees of $61,000 primarily due to no longer using a third party to operate our warehouse and decreased bad debt expense of $40,000. These decreases were offset by increased consulting fees of $205,000 for software development and other corporate initiatives.

#### Depreciation and Amortization Expense

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) decreased $11,000, or 6%, to $180,000 for the three months ended June 30, 2013 from $191,000 for the same period in 2012, primarily due to assets becoming fully depreciated.

#### Other Income (Expense), Net

Other income (expense), net, changed from $2,000 of net expense for the three months ended June 30, 2012 to $21,000 of income for the same period in 2013. This change was primarily due to income recognized from a sublease and sale of certain hardware, offset by decreased foreign currency exchange gains related to the operations of our Canadian subsidiary and lower interest expense due to fewer capital leases outstanding.

#### Income Taxes

We expect to incur state income tax liability in 2013 related to our U.S. operations. We also expect to pay income taxes in Canada due to profitability of our Canadian subsidiary. For the three months ended June 30, 2013 and 2012, we recorded a tax provision of $5,000 and a tax benefit of $12,000, respectively. We have established a full valuation allowance for substantially all deferred tax assets, including our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets.

#### EBITDA

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with 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 net income or loss calculation in accordance with GAAP.

The following table reconciles our consolidated net loss calculated in accordance with GAAP to EBITDA for the three months ended June 30, 2013 and 2012. EBITDA should not be considered as substitutes for, or superior to, net loss calculated in accordance with GAAP.

|  | For the three months ended June 30, 2013 | 2012 |
| --- | ---: | ---: |
| Net loss per GAAP | $(99,000) | $(633,000) |
| Interest expense, net | 5,000 | 11,000 |
| Income taxes | 5,000 | (12,000) |
| Depreciation and amortization | 694,000 | 750,000 |
| EBITDA | $605,000 | $116,000 |

12

### Six months ended June 30, 2013 compared to the Six months ended June 30, 2012

We generated a net loss of $468,000 for the six months ended June 30, 2013 compared to a net loss of $1,678,000 for the six months ended June 30, 2012.

#### Revenue

Revenue decreased $433,000, or 4%, to $11,648,000 for the six months ended June 30, 2013 from $12,081,000 for the six months ended June 30, 2012 primarily due to lower average site count of our Network Subscribers, offset by a higher average revenue per unit and increased advertising revenue.

#### Direct Costs and Gross Margin

The following table compares direct costs and gross margin for the six months ended June 30, 2013 and 2012:

|  | For the six months ended June 30, 2013 | 2012 |
| --- | ---: | ---: |
| Revenues | $11,648,000 | $12,081,000 |
| Direct Costs | 3,485,000 | 3,171,000 |
| Gross Margin | $8,163,000 | $8,910,000 |
| Gross Margin Percentage | 70% | 74% |

Gross margin as a percentage of revenue decreased to 70% for the six months ended June 30, 2013 from 74% for the six months ended June 30, 2012. Direct costs increased $314,000, or 10%, to $3,485,000 for the six months ended June 30, 2013 from $3,171,000 for the six months ended June 30, 2012. The increase in direct costs was primarily due to increased equipment expenses, increased license fees and increased freight, offset by decreased service provider fees due to fewer installations.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1,920,000, or 19%, to $8,265,000 for the six months ended June 30, 2013 from $10,185,000 for the same period in 2012. The decrease was due to decreased payroll and related expense of $1,686,000 primarily due to decreased headcount and incentive compensation, decreased marketing expenses of $313,000, decreased travel expense of $250,000, decreased service fees of $54,000 primarily due to no longer using a third party to operate our warehouse, decreased bad debt expense of $28,000 and decreased net miscellaneous expenses of $68,000. These decreases were offset by increased consulting fees of $387,000 for software development and other corporate initiatives and increased software impairment expense of $92,000.

#### Depreciation and Amortization Expense

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) increased $14,000, or 4%, to $379,000 for the six months ended June 30, 2013 from $365,000 for the same period in 2012, primarily due to increased amortization expense of $55,000 related to acquired assets, offset by decreased expense of $41,000 due to other assets becoming fully depreciated.

#### Other Income (Expense), Net

Other income (expense), net, changed from $34,000 of net expense for the six months ended June 30, 2012 to $26,000 of income for the same period in 2013. This change was primarily due to income recognized from a sublease and sale of certain hardware, less interest expense due to fewer capital leases, and increased foreign currency exchange gains related to the operations of our Canadian subsidiary and lower interest expense due to fewer capital leases outstanding.

#### Income Taxes

For the six months ended June 30, 2013 and 2012, we recorded a net tax provision of $13,000 and $4,000, respectively.

#### EBITDA

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

The following table reconciles our consolidated net loss per GAAP to EBITDA for the six months ended June 30, 2013 and 2012.

|  | For the six months ended June 30, 2013 | 2012 |
| --- | ---: | ---: |
| Net loss per GAAP | $(468,000) | $(1,678,000) |
| Interest expense, net | 12,000 | 24,000 |
| Income taxes | 13,000 | 4,000 |
| Depreciation and amortization | 1,483,000 | 1,473,000 |
| EBITDA | $1,040,000 | $(177,000) |

### LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2013, we had cash and cash equivalents of $1,973,000 compared to cash and cash equivalents of $2,721,000 as of December 31, 2012.

In February 2012, we completed a stockholders rights offering to our stockholders of record as of February 2, 2012. We issued a total of 2,070,719 shares of our common stock at a subscription price of $0.25 per share. In connection with the rights offering, we entered into an investment agreement with Matador Capital Partners, LP, or Matador. Mr. Jeffrey A. Berg, one of our directors and also now our Interim Chief Executive Officer, is the managing member of the general partner of Matador. Under the terms of the investment agreement, upon expiration of the rights offering, Matador purchased for $0.25 per share 8,000,000 shares of our common stock not subscribed for and purchased by holders upon exercise of their subscription rights. We received gross proceeds of $2.5 million from the rights offering and under the investment agreement.

We believe existing cash and cash equivalents, funds generated from operations and the proceeds received from the rights offering completed in February 2012 (see Note 13) will be sufficient to meet our operating cash requirements for at least the next twelve months. We have no debt other than capital leases with aggregate outstanding balances of approximately $88,000 and notes payable with outstanding balances of approximately $178,000 for certain equipment purchases. We intend to continue entering into capital lease or financing facilities for certain equipment requirements when economically advantageous. In order to execute our operating and strategic plan and to position the Company to better take advantage of market opportunities and opportunities for growth, we are evaluating additional financing alternatives, including raising additional capital through public or private equity or debt financing. If net cash provided by operating activities and our cash and cash equivalents 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 June 30, 2013, we had working capital (current assets in excess of current liabilities) of $944,000 compared to working capital of $841,000 as of December 31, 2012. The following table shows the change in our working capital from December 31, 2012 to June 30, 2013.

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2012 | $841,000 |
| Changes in current assets: |  |
| Cash and cash equivalents | (748,000) |
| Accounts receivable, net of allowance | (132,000) |
| Prepaid expenses and other current assets | 237,000 |
| Total current assets | (643,000) |
| Changes in current liabilities: |  |
| Accounts payable and accrued expenses | (191,000) |
| Accrued compensation | 18,000 |
| Sales taxes payable | (52,000) |
| Income taxes payable | (14,000) |
| Obligations under capital lease | (66,000) |
| Deferred revenue | (373,000) |
| Other current liabilities | (68,000) |
| Total current liabilities | (746,000) |
| Net change in working capital | 103,000 |
| Working capital as of June 30, 2013 | $944,000 |

#### 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 six months ended June 30, 2013 | 2012 |
| --- | ---: | ---: |
| Operating activities | $346,000 | $597,000 |
| Investing activities | (1,079,000) | (1,537,000) |
| Financing activities | 29,000 | 2,119,000 |
| Effect of exchange rates | (44,000) | (4,000) |
| Net (decrease) increase in cash and cash equivalents | $(748,000) | $1,175,000 |

*Net cash provided by operating activities.* We primarily depend on cash flows from operations to meet our cash requirements. Net cash generated from operating activities was $346,000 for the six months ended June 30, 2013 compared to $597,000 for the same period in 2012. The $251,000 decrease in cash provided by operations was primarily due to a decrease of $1,450,000 in cash provided by operating assets and liabilities during the six months ended June 30, 2013 compared to the same period in 2012, offset by a decrease in net loss of $1,199,000, after giving effect to adjustments made for non-cash transactions.

Our largest use of cash is payroll and related costs. Cash used for payroll and other related costs decreased $1,056,000 to $5,066,000 for the six months ended June 30, 2013 from $6,122,000 during the same period in 2012 due primarily to decreased headcount and incentive compensation. Our primary source of cash is cash we generate from customers. Cash received from customers decreased $685,000 to $11,790,000 for the six months ended June 30, 2013 from $12,475,000 during the same period in 2012 primarily due to a decrease in the number of Network Subscribers.

*Net cash used in investing activities.* We used $1,079,000 in cash for investing activities for the six months ended June 30, 2013 compared to a use of $1,537,000 during the same period in 2012. The $458,000 decrease was primarily due to a decrease in capital expenditures of $534,000 due primarily to decreased field equipment purchases, offset by an increase in capitalized software development activities of $76,000.

*Net cash (used in) provided by financing activities.* Net cash provided by financing activities decreased $2,090,000 to $29,000 for the six months ended June 30, 2013 compared to $2,119,000 for the same period in 2012. The change is primarily attributable to the fact that during the prior year period, we received $2,310,000 of net proceeds from the rights offering and related investment agreement. To a lesser extent, the change is attributed to an increase in tax withholdings of $7,000 related to net-share settlements of restricted stock units during the current year period, offset by proceeds received from notes payable of $128,000 and decreased payments on our capital leases of $100,000.

### RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 10 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, 1,408 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 Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, or the Exchange Act) 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 Exchange Act 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 interim 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, 841 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, 2012 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.

Filed Aug 14, 2013.
Source: SEC EDGAR, the filing index for accession 0001019687-13-003135. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.