Ernexa Therapeutics Inc. quarterly report, Q2 FY2020

Business context and reporting period

This is NTN Buzztime, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020, not a filing under the supplied company name Ernexa Therapeutics Inc. Buzztime provides interactive games, entertainment and related technology to hospitality venues; its business was heavily exposed to bars and restaurants affected by COVID-19.

As of June 30, 2020, 1,219 venues subscribed to its network, compared with 2,609 a year earlier. The company had sold its live-trivia event assets in January 2020. Its Buffalo Wild Wings agreements had ended in November 2019.

Financial results and liquidity

Amounts below are in millions of dollars, except per-share data and percentages.

• Revenue fell 86% in Q2 and 69% in the first half year over year. Q2 subscription revenue was $0.727 million, down 81%; first-half subscription revenue was $2.726 million, down 64%.
• Q2 selling, general and administrative expense declined to $1.595 million from $3.422 million, mainly from lower payroll and marketing costs. The reductions did not prevent a sharp increase in operating and net losses as revenue collapsed.
• First-half EBITDA, a non-GAAP measure, was a loss of $2.110 million, compared with positive EBITDA of $1.198 million in 2019.
• Cash, cash equivalents and restricted cash totaled $2.435 million at June 30, including $2.234 million of unrestricted cash. Cash and restricted cash declined by $0.974 million during the first half.
• Current assets were $4.089 million and current liabilities $3.195 million, for working capital of $0.894 million. Total assets were $6.790 million and shareholders’ equity was $1.931 million.
• Total debt principal was $3.250 million: $1.625 million under the Avidbank term loan and $1.625 million under the Paycheck Protection Program loan. The Avidbank loan was scheduled to mature December 31, 2020, with $300,000 monthly principal payments from July through November; the PPP loan bears 1% interest and matures April 2022. PPP forgiveness was uncertain.

Material changes and unusual items

• COVID-19-related shutdowns and customer suspensions sharply reduced subscription and advertising revenue. About 70% of customers had suspended subscriptions at the peak; about 35% remained suspended as of August 5, 2020.
• Management reported that gaming activity fell from over one million hours per month before the pandemic to approximately 100,000 hours per month afterward.
• First-half other income included a $1.265 million gain on the sale of live-trivia assets. The company also recorded $0.662 million of goodwill impairment and $0.238 million of software impairment. Q2 included $0.100 million of software impairment and a reported loss related to headquarters lease termination and associated asset disposal.
• The company terminated its headquarters lease effective June 30, reporting approximately $3.5 million of estimated future cash-obligation reductions, subject to contingent payments. It recorded an approximately $8,000 gain on lease termination and a separate approximately $282,000 loss on disposal of related assets.
• Headcount fell from 74 at December 31, 2019 to 19 as of August 5, 2020. The company deferred 45% of the CEO’s base salary from May through October, substantially eliminated capital projects, and prioritized payments to mission-critical vendors.

Outlook, risks and contingencies

• Going concern: Management concluded substantial doubt existed about the company’s ability to continue as a going concern for the twelve months after the financial statements’ issuance. It estimated available cash would cover forecast outlays only through October 2020, assuming continued working-capital management and no lender foreclosure.
• Financing and covenant risk: The company was compliant with Avidbank covenants at June 30, but expected it might not meet the asset coverage ratio at July month-end absent a rapid revenue recovery or substantial capital raise. A default could make debt immediately payable and expose company assets to foreclosure. Management reported it had not completed July covenant calculations as of August 5.
• Funding and strategic process: Management was pursuing equity, alternative debt and strategic alternatives, including a potential transaction under a non-binding letter of intent. No binding financing or transaction arrangement was in place; completion was not assured. Management warned that failure to obtain funding could lead to curtailed operations or restructuring, including bankruptcy or liquidation.
• Business outlook: Management expected pandemic-related pressure on subscription revenue, advertising revenue and operating cash flows to continue, including into Q3 2020. It did not provide quantified revenue or earnings guidance. Hardware revenue under an existing jail-services contract was expected through Q3; the company was discussing termination and cancellation of remaining tablet deliveries thereafter.
• Listing risk: NYSE American had identified stockholders’ equity/listing-standard deficiencies. The company received a plan period through September 27, 2021 to regain compliance; delisting remained possible.
• The filing reported no pending material legal proceedings and no off-balance-sheet arrangements. Management said disclosure controls were effective at quarter-end.

Important facts for investors to verify

• Whether the company met Avidbank’s July and subsequent monthly covenants, and the status of any lender default, waiver or amendment.
• Actual cash runway, cash restrictions, vendor-payment deferrals and whether new financing was obtained on acceptable terms.
• Status and terms of the non-binding strategic transaction discussions, and whether any definitive agreement or alternative was completed.
• Customer subscription reactivations, venue count, revenue trends and collectability of receivables as pandemic restrictions changed.
• PPP loan forgiveness outcome and any remaining obligations under the headquarters lease termination or asset-sale arrangements.
• Progress toward NYSE American listing compliance and the potential effects of dilution or delisting on shareholders.