Business context and reporting period
This is NTN Buzztime, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013—not a filing identified in its text as Ernexa Therapeutics Inc. NTN Buzztime provides interactive games and marketing services to hospitality venues, principally through subscriptions and advertising. Its network covered 3,352 locations in the U.S. and Canada at quarter-end, down from 3,775 a year earlier.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $5.532 million | $6.015 million | $11.648 million | $12.081 million |
| Gross margin | $4.047 million; 73% | $4.461 million; 74% | $8.163 million; 70% | $8.910 million; 74% |
| Operating loss | $115,000 | $643,000 | $481,000 | $1.640 million |
| Net loss | $99,000 | $633,000 | $468,000 | $1.678 million |
| Operating cash flow | Not separately presented for the quarter | $346,000 | $597,000 |
Six-month EBITDA, a non-GAAP measure, was $1.040 million versus negative $177,000 in 2012; Q2 EBITDA was $605,000 versus $116,000. Management cautions that EBITDA is not a substitute for GAAP results or cash flow.
Cash and cash equivalents were $1.973 million at June 30, 2013, down $748,000 from year-end 2012. Working capital was $944,000, compared with $841,000 at December 31, 2012. Six-month investing cash use was $1.079 million, including $794,000 of software development expenditures and $285,000 of capital expenditures. Financing provided $29,000. Debt consisted primarily of approximately $178,000 of equipment notes payable and $88,000 of capital lease obligations. The May 2013 equipment financing agreement permitted borrowing up to $500,000; its maximum was increased to $1.0 million in August 2013.
Material changes and management commentary
- Q2 revenue declined 8% year over year; six-month revenue declined 4%. Management attributed the decreases primarily to lower average subscriber site counts, partly offset by higher average revenue per unit and, for the six-month period, increased advertising revenue.
- Six-month gross margin fell to 70% from 74%, as direct costs rose 10%, primarily due to equipment expenses, license fees and freight. Q2 direct costs decreased 4%, but gross margin percentage still slipped one point.
- SG&A decreased 19% in both comparison periods, mainly because of lower payroll and related costs, marketing and travel. These savings were partly offset by higher consulting costs for software development and corporate initiatives.
- The company recognized software development impairment charges of $27,000 for Q2 and $92,000 for the six months after abandoning projects no longer considered strategically suitable or sufficiently marketable.
- Management said existing cash and operating cash generation should be sufficient for at least the next 12 months, while also evaluating additional equity or debt financing. It warned that financing may not be available on acceptable terms or at all, and that spending reductions or asset sales may not cover a cash shortfall. No specific revenue or earnings guidance was provided.
Risks, contingencies and other notable items
- Buffalo Wild Wings and its franchisees generated 27% of Q2 revenue and 25% of six-month revenue, creating customer concentration risk.
- The company reported no alternative current sources for its Classic or Next-Gen playmakers and related equipment; changing manufacturers could delay supply and adversely affect operations.
- Ongoing sales-tax inquiries resulted in a recorded net liability of $29,000 at June 30, 2013. Management considered payment of all or part of the assessments reasonably possible.
- Management reported a full valuation allowance for substantially all deferred tax assets, including net operating loss carryforwards, because future taxable income was not considered more likely than not.
- The company had no legal proceedings reported and said it identified no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
- Stockholders approved an increase in authorized common shares to 168 million in June 2013. The company reported 71.604 million shares outstanding at June 30 and 71.725 million as of August 14, 2013.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for NTN Buzztime, Inc., while the request metadata names Ernexa Therapeutics Inc.
- Assess whether subscriber losses and lower revenue can be reversed, and whether cost reductions can be sustained without impairing product development or growth.
- Monitor cash use, software and equipment investment needs, and the availability and terms of any additional financing.
- Evaluate customer concentration, dependence on equipment suppliers, and the outcome of outstanding sales-tax inquiries.
- Review the dilution implications of the increased authorized share count and subsequent share issuance.