# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Mar 31, 2015

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2015-05-08
- Accepted by EDGAR: May 8, 2015, 15:11 ET
- Period: 2015-03-31
- Accession: 0001019687-15-001815
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000101968715001815/ntn_10q-033115.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000101968715001815/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-01-01 to 2015-03-31 | $5.7m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2015-01-01 to 2015-03-31 | $5.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-01-01 to 2015-03-31 | −$2.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2015-01-01 to 2015-03-31 | $14.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-01-01 to 2015-03-31 | −$2.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-01-01 to 2015-03-31 | −$0.02 | us-gaap:EarningsPerShareBasicAndDiluted |
| Capital expenditure | 3 months, 2015-01-01 to 2015-03-31 | $215.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2015-03-31 | $7.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-03-31 | $12.6m | us-gaap:AssetsCurrent |
| Total assets | at 2015-03-31 | $20.2m | us-gaap:Assets |
| Current liabilities | at 2015-03-31 | $7.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-03-31 | $11.5m | us-gaap:Liabilities |
| Current portion of debt | at 2015-03-31 | $2.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2015-03-31 | $8.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 21,328 characters.

#### CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

*This report and the documents incorporated herein by reference, if any, contain “forward-looking statements” – that is statements related to future events, results, performance, prospects and opportunities, including statements related to our strategic plans and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry trends and our financial position. Forward-looking statements are based on information currently available to us, on our current expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions of management. Forward looking statements often contain words such as “expects,” “anticipates,” “could,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “would,” and similar expressions. In addition, any statements that 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. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or contribute to such differences include (1) our ability to compete effectively within the highly competitive interactive games, entertainment and marketing services industries, (2) the impact of new products and technological change, especially in the mobile and wireless markets, on our operations and competitiveness, (3) our relationship with Buffalo Wild Wings, who together with its franchisees accounted for a significant portion of our revenues, (4) our ability to maintain an adequate supply of the tablet and related equipment used in our BEOND product line, (5) our ability to adequately protect our proprietary rights and intellectual property, (6) our ability to raise additional funds in the future, if necessary, on favorable terms, (7) our ability to significantly grow our subscription revenue and implement our other business strategies, and (8) the other risks and uncertainties described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and described in other documents we file from time to time with the Securities and Exchange Commission, or SEC, including our Quarterly Reports on Form 10-Q.* 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.*

### OVERVIEW

We provide an entertainment and marketing services platform for hospitality venues that offers games, events, and entertainment experiences to their patrons. Our interactive entertainment network helps our network subscribers to acquire, engage and retain patrons. Built on an extended network platform, this entertainment system has historically allowed multiple players to interact at the venue, and now also enables competition between venues, referred to as massively multiplayer gaming. Our current platform, which we refer to as Buzztime Entertainment On Demand, or BEOND, was first introduced as a pilot program in December 2012, was expanded commercially during 2013, and the expansion was scaled during 2014. We continue to enhance our network architecture and the BEOND technology platform and player engagement paradigms. We also continue to support our legacy network product line, which we refer to as Classic.

We currently generate revenue by charging subscription fees for our service to our network subscribers, by leasing equipment (including tablets used in our BEOND platform and the cases and charging trays for the tablets) to certain network subscribers, by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games and directly from consumers who pay to play or use the premium products we began offering via our BEOND platform in 2014. These premium products currently include an arcade and a digital music jukebox.

Currently, over 2,900 venues in the U.S. and Canada subscribe to our interactive entertainment network, of which approximately 43% are using our BEOND platform. We currently have over seven million player registrations, and over 80 million games were played during 2014. Additionally, our mobile application has been installed on over one million consumer mobile devices. Approximately 47% of our network subscriber venues are related to national and regional restaurants and include Buffalo Wild Wings, Old Chicago, Aroogas, Buffalo Wings & Rings, Native New Yorker, and Boston Pizza.

We own several trademarks and consider the Buzztime®, Playmaker®, Mobile Playmaker, BEOND Powered by Buzztime and Play Along trademarks to be among our most valuable assets. These and our other registered and unregistered trademarks used in this document are our property. Other trademarks are the property of their respective owners.

### RECENT DEVELOPMENTS

On April 14, 2015, we entered into a loan and security agreement with East West Bank, pursuant to which, we may request advances in an aggregate outstanding amount at any time up to the lesser of $7,500,000, which we refer to as the revolving line, or an amount equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. Our borrowing base is, as of the date of determination, an amount equal to the product of: (a) the average monthly recurring revenue for the immediately preceding three months; times (b) one plus the average churn rate for the immediately preceding three months (not to exceed zero); times (c) 300%. The churn rate, with respect to any month, is the quotient of our monthly net revenue change calculated with respect to such month, divided by our monthly revenue from subscriptions for the month. So long as there is no event of default, we may make a one-time request to increase the revolving line by up to $2,500,000, which the lender may accept or decline. All advances are due on April 14, 2018. In April 2015, we borrowed $3,500,000 under this credit facility. We will use the proceeds received under this credit facility to pay down existing indebtedness, to fund strategic growth initiatives and as general working capital.

### CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based on our 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 fixed assets, 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, fixed assets, 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 months ended March 31, 2015 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, 2014.

### RESULTS OF OPERATIONS

### Three months ended March 31, 2015 compared to the three months ended March 31, 2014

We generated a net loss of $2,263,000 for the three months ended March 31, 2015 compared to a net loss of $649,000 for the three months ended March 31, 2014.

#### Revenue

We currently generate revenue by charging subscription fees for our service to our network subscriber, by leasing equipment (including tablets used in our BEOND line and the cases and charging trays for such tablets) to certain network subscribers, by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games and directly from consumers who pay to play or use the premium products we began offering via our BEOND platform in 2014. The table below summarizes the type of revenue we generated for the three months ended March 31, 2015 and 2014:

|  | Three months ended March 31, 2015 $% of Total Revenue |  | 2014 $% of Total Revenue |  |
| --- | ---: | ---: | ---: | ---: |
| Subscription revenue | 4,200,000 | 73.3% | 4,619,000 | 72.0% |
| Sales-type lease revenue | 840,000 | 14.7% | 1,113,000 | 17.3% |
| Other revenue | 686,000 | 12.0% | 686,000 | 10.7% |
| Total | 5,726,000 | 100.0% | 6,418,000 | 100.0% |

The $692,000, or 11%, decrease in total revenue was primarily due to decreased subscription revenue of $419,000 resulting from lower average site count of our Buzztime network subscribers as well as lower average revenue per unit and decreased equipment lease revenue under sales-type lease arrangements of $273,000. Equipment lease revenue (which has lower margins due to the cost we incur to purchase the equipment that we lease) is recognized when we lease BEOND equipment. The equipment lease revenue is a one-time payment that covers the lease of the equipment for three-years, after which the lessee may purchase the equipment for a nominal fee or lease new equipment. Accordingly, we expect this type of revenue to fluctuate from period to period as certain network subscribers convert their venues from using the Classic playmakers to the BEOND tablets, and to decrease thereafter.

Geographic breakdown of our ending site count for the Buzztime network is as follows:

|  | Network Subscribers as of March 31, 2015 | 2014 |
| --- | ---: | ---: |
| United States | 2,733 | 2,966 |
| Canada | 175 | 179 |
| Total | 2,908 | 3,145 |

#### Direct Costs and Gross Margin

A comparison of direct costs and gross margin for the three months ended March 31, 2015 and 2014 is show in the table below:

|  | For the three months ended March 31, 2015 | 2014 |
| --- | ---: | ---: |
| Revenues | $5,726,000 | $6,418,000 |
| Direct Costs | 2,649,000 | 2,530,000 |
| Gross Margin | $3,077,000 | $3,888,000 |
| Gross Margin Percentage | 54% | 61% |

The approximately 700 basis point decrease in gross margin was primarily related to increased equipment and production costs of the BEOND tablet and approximately $162,000 related to scrap of materials. The decline in gross margin was, to a lesser extent, also attributable to a lower average revenue per unit for certain network subscribers, which we expected and anticipate will be offset by premium revenue services in the future.

The $119,000, or 5%, increase in direct costs was primarily due to increased equipment expense, revenue share expense, service provider fees and depreciation and amortization expense. Equipment expense primarily relates to the BEOND tablet equipment, which is recognized as a one-time expense that we purchased to lease to certain network subscribers for approximately three years. We expect this type of equipment expense to fluctuate from period to period as certain network subscribers convert their sites from using the Classic playmakers to the BEOND tablets, and to decrease thereafter.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $772,000, or 18%, to $5,162,000 for the three months ended March 31, 2015 from $4,390,000 for the three months ended March 31, 2014. The increase was due to higher payroll and related expense of $684,000 resulting from increased headcount and increased marketing expense of $486,000, offset by decreased professional fees of $403,000 due primarily to using fewer consultants during the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

#### Depreciation and Amortization Expense

Depreciation and amortization expense (excluding depreciation and amortization included in direct costs) decreased $31,000, or 20%, to $121,000 for the three months ended March 31, 2015 from $152,000 for the three months ended March 31, 2014, primarily due to assets becoming fully depreciated or amortized.

#### Other (Expense) Income, Net

We had $43,000 of other expense, net for the three months ended March 31, 2015, compared to other income, net of $15,000 for the three months ended March 31, 2014. This $58,000 increase in expense was primarily due to increased interest expense due to higher notes payable balances outstanding, offset by increased foreign currency exchange gains related to the operations of our Canadian subsidiary and decreased losses from disposals of long-lived assets.

#### Income Taxes

We expect to incur state income tax liability in 2015 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 March 31, 2015 and 2014, we recorded a tax provision of $14,000 and $10,000, 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 calculated in accordance with GAAP.

The reconciliation of our consolidated net loss calculated in accordance with GAAP to EBITDA for the three months ended March 31, 2015 and 2014 is shown in the table below. EBITDA should not be considered as substitutes for, or superior to, net loss calculated in accordance with GAAP.

|  | For the three months ended March 31, 2015 | 2014 |
| --- | ---: | ---: |
| Net loss per GAAP | $(2,263,000) | $(649,000) |
| Interest expense, net | 102,000 | 24,000 |
| Income tax provision | 14,000 | 10,000 |
| Depreciation and amortization | 701,000 | 685,000 |
| EBITDA | $(1,446,000) | $70,000 |

### LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2015, we had cash and cash equivalents of $7,163,000 compared to cash and cash equivalents of $7,185,000 as of December 31, 2014.

On April 14, 2015, we entered into a loan and security agreement with East West Bank, pursuant to which, we may request advances in an aggregate outstanding amount at any time up to the lesser of $7,500,000, which we refer to as the revolving line, or an amount equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. So long as there is no event of default, we may make a one-time request to increase the revolving line by up to $2,500,000, which the lender may accept or decline. All advances are due on April 14, 2018. In April 2015, we borrowed $3,500,000 under this credit facility. We will use the proceeds received under this credit facility to pay down existing indebtedness, to fund strategic growth initiatives and as general working capital.

We have a credit facility under which we may borrow up to $9,853,000 for the purchase of certain capital equipment. Through March 31, 2015, we borrowed approximately $7,726,000. As of March 31, 2015, $4,695,000 remained outstanding, which reflects payments made through March 31, 2015.

We believe our existing cash and cash equivalents and the availability on our credit facilities will be sufficient to meet our operating cash requirements and to fulfill our debt obligations for at least the next twelve months. If our cash and cash equivalents are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce operational cash uses or seek financing. Any actions we may undertake to reduce planned capital purchases or reduce expenses 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 March 31, 2015, we had working capital (current assets in excess of current liabilities) of $4,981,000 compared to working capital of $7,779,000 as of December 31, 2014. The following table shows the change in our working capital from December 31, 2014 to March 31, 2015.

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2014 | $7,779,000 |
| Changes in current assets: |  |
| Cash and cash equivalents | (22,000) |
| Accounts receivable, net of allowance | (1,545,000) |
| Site equipment to be installed | (557,000) |
| Prepaid expenses and other current assets | (100,000) |
| Change in total current assets | (2,224,000) |
| Changes in current liabilities: |  |
| Accounts payable | (40,000) |
| Accrued compensation | 313,000 |
| Accrued expenses | 35,000 |
| Sales taxes payable | 7,000 |
| Income taxes payable | (20,000) |
| Notes payable | (151,000) |
| Obligations under capital lease | 40,000 |
| Deferred revenue | 484,000 |
| Other current liabilities | (94,000) |
| Change in total current liabilities | 574,000 |
| Net change in working capital | (2,798,000) |
| Working capital as of March 31, 2015 | $4,981,000 |

#### 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 three months ended March 31, 2015 | 2014 |
| --- | ---: | ---: |
| Operating activities | $995,000 | $(453,000) |
| Investing activities | (437,000) | (520,000) |
| Financing activities | (632,000) | 310,000 |
| Effect of exchange rates | 52,000 | (31,000) |
| Net decrease in cash and cash equivalents | $(22,000) | $(694,000) |

14

*Net cash provided by (used in) operating activities.* The $1,448,000 increase in cash provided by operations was due to an increase in cash provided by operating assets and liabilities of $3,084,000 primarily related to accounts receivable amounts paid and fewer purchases of our BEOND site equipment to be installed, offset by increased net loss of $1,636,000, 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 related costs increased $466,000 to $2,801,000 for the three months ended March 31, 2015 from $2,335,000 during the three months ended March 31, 2014, due primarily to increased headcount.

Our primary source of cash is cash we generate from customers. Cash received from customers increased $1,720,000 to $7,960,000 for the three months ended March 31, 2015 from $6,240,000 during the three months ended March 31, 2014, primarily as a result of receiving approximately $1,558,000 during the three months ended March 31, 2015 that was due during the fourth quarter of 2014.

*Net cash used in investing activities.* The $83,000 decrease in cash used in investing activities was primarily due to a decrease in capital expenditures related to field equipment purchases.

*Net cash (used in) provided by financing activities.* The $942,000 increase in cash used in financing activities is primarily attributable to a decrease in proceeds received from notes payable of $690,000 and increased payments on our notes payable of $260,000.

### RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 6 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, 1,416 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 principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on our evaluation, our principal executive officer and principal 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, 2014 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 May 8, 2015.
Source: SEC EDGAR, the filing index for accession 0001019687-15-001815. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.