# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Jun 30, 2009

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2009-08-14
- Accepted by EDGAR: Aug 14, 2009, 15:02 ET
- Period: 2009-06-30
- Accession: 0001019687-09-002913
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000101968709002913/ntn_10q-063009.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000101968709002913/

## Management's discussion and analysis

As filed, 35,256 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, 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, 2008, 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.*

### OVERVIEW

We historically have operated principally through two operating divisions: Entertainment and Hospitality. The Entertainment division generates revenue primarily from the Buzztime iTV Network which distributes an interactive television promotional game network to restaurants, sports bars, taverns and pubs, primarily in North America. Additionally, we generate revenue by selling advertising for distribution via our interactive television network.

The Hospitality division has been discontinued. It was comprised of NTN Wireless Communications, Inc. (“NTN Wireless”) and NTN Software Solutions, Inc. (“Software Solutions”). In 2006, we determined that the operation of the Hospitality division was not a strategic fit with our core business and committed to a divestiture plan. These operations have been reclassified as discontinued operations for all periods presented. NTN Wireless provided revenues from producing and distributing guest and server paging systems to restaurants and other markets. Software Solutions developed and distributed customer management software to manage reservations and table service in restaurants. Software Solutions also provided professional help desk services and outsourced software development and support and maintenance services.

In March 2007, we completed the sale of substantially all of the assets of NTN Wireless. In October 2007, we sold certain intellectual property assets of Software Solutions pursuant to an Asset Purchase Agreement, and in a separate agreement with a customer, we discontinued the outsourced software development. Additionally, we completed the wind down of our professional help desk and support and maintenance services during the third quarter of 2008. We do not expect to incur any additional expenses related to the help desk and support and maintenance function in subsequent periods.

#### Restructuring of Operations

During the third quarter of 2008, we ceased our operations in the United Kingdom. The closure of operations involved the termination of six employees, relocation of nearly all assets to the United States and disposal of certain other assets. As of the date we ceased operations, UK operations accounted for less than 1% of the total subscriber sites.

### The Entertainment Division

The out-of-home Buzztime iTV Network has engaged in business in the hospitality industry for 25 years as a promotional platform providing interactive entertainment to patrons in restaurants and sports bars. The iTV Network distributes a wide variety of engaging interactive multi-player games, including trivia quiz shows, play-along sports programming, casino-style and casual games to our Network. Patrons use our wireless game controllers, or Playmakers, to play along with the Buzztime games which are displayed on television screens. Buzztime players can compete with other players within their hospitality venue and also against players in other Network 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 June 30, 2009, we had 3,561 United States Network subscribers and 310 Canadian subscribers. Approximately 29% of our Network subscribers come from leading national chains in the casual-dining restaurant segment such as Buffalo Wild Wings, TGI Friday’s, Old Chicago and Damon’s Grill.

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.

We also generate revenue from distributing and licensing our Buzztime-branded content and related technology to consumer platforms, with a focus on interactive networks such as cable TV, satellite TV and mobile phones. Our distribution efforts focus on licensing real-time, mass-participation games such as trivia, head-to-head multi-player games such as Texas Hold’em and single-player games such as solitaire.

Our games are available as a premium monthly subscription service to Echostar DISH and Bell ExpressVu satellite customers in the U.S. and Canada, respectively. Revenue from our distribution division is derived primarily from license fees and royalties from third-party licensees who distribute Buzztime content to end-users, as well as from third-party development and production fees.

### The Hospitality Division (Discontinued Operations)

NTN Wireless earned revenue from the sale of on-site wireless paging products primarily to restaurants but also hospitals, church and synagogue nurseries, salons, business offices and retail establishments in North America. In restaurants, these products were provided to customers while waiting for a table and activated to let them know when their table was ready, as well as to restaurant staff to alert them to certain issues, such as when hot food is ready to be served.

Software Solutions generated revenue from the licensing of proprietary seating management and reservation management systems software to restaurants, casinos and other venues. Software Solutions also provided professional help desk services and outsourced software development and support and maintenance services to Domino’s Pizza and their franchisees and other quick service restaurant locations.

In March 2007, we completed the sale of substantially all of the assets of NTN Wireless for $2.4 million and recognized a gain, net of tax, of approximately $396,000. In October 2007, we sold certain intellectual property assets of Software Solutions pursuant to an Asset Purchase Agreement, and in a separate agreement with a customer, we discontinued the outsourced software development we were providing. The intellectual property sold constituted substantially all of the remaining operating assets of our Hospitality division, which had originally consisted of our Software Solutions and Wireless businesses. We have accounted for our Hospitality division as a reportable segment but we have presented its operations as discontinued operations since the fourth quarter of 2006. We have completed the dissolution and do not anticipate any further costs related to the dissolution of the professional help desk and support and maintenance services.

### 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, bad debts, investments, purchase price allocations related to acquisitions, intangible assets and contingencies. 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 quarter ended June 30, 2009 compared to 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, 2008, except for the following addition:

**Purchase Accounting –** We have accounted for our acquisitions pursuant to SFAS No. 141R, “*Business Combinations.”* We have recorded all acquired tangible and intangible assets and all assumed liabilities based upon their estimated fair values. All estimated fair values are preliminary and subject to change. As a result of the valuation procedures performed, we recorded $1,273,000 in customer relationship intangible assets, $599,000 in unpatented technology, $64,000 of assumed liabilities and a $285,000 earnout liability. The majority of the customer relationship intangible asset will be amortized on a straight line basis over a period of 44 months and recorded in selling, general and administrative expenses while approximately, $300,000 will be amortized over the three months ending August 31, 2009. The unpatented technology intangible asset will be amortized on a straight line basis over a period of 60 months and recorded in direct expenses. The useful lives and amortization methods reflect the estimated period of time by which the underlying intangible asset benefits will be realized. We recorded $119,000 in amortization expense related to these intangible assets during the three months ended June 30, 2009.

### RESULTS OF OPERATIONS

Our Hospitality division is classified as discontinued operations in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*. The operating results for these businesses have been separately classified and reported as discontinued operations in the condensed consolidated financial statements.

### Results of Continuing Operations

### Three months ended June 30, 2009 compared to the three months ended June 30, 2008

Continuing operations, which consists of the Entertainment division, generated a net loss of $282,000 for the three months ended June 30, 2009, compared to net loss of $2,129,000 for the three months ended June 30, 2008.

#### Revenue

Revenue from continuing operations decreased $732,000 or 10%, to $6,285,000 for the three months ended June 30, 2009 from $7,017,000 for the three months ended June 30, 2008, primarily due to a decrease in average return generated per site related to a strategic reduction in pricing. Comparative site count information for Buzztime iTV Network is as follows:

|  | Network subscribers As of June 30, 2009 | 2008 |
| --- | ---: | ---: |
| United States | 3,561 | 3,402 |
| Canada | 310 | 307 |
| United Kingdom | — | 37 |
| Total | 3,871 | 3,746 |

#### Direct Costs and Gross Margin

The following table compares the direct costs and gross margin from continuing operations for 2009 and 2008:

|  | Three months ended June 30, 2009 | 2008 |
| --- | ---: | ---: |
| Revenue | $6,285,000 | $7,017,000 |
| Direct costs | 1,524,000 | 1,980,000 |
| Gross margin | $4,761,000 | $5,037,000 |
| Gross margin percentage | 76% | 72% |

Gross margin as a percentage of revenue improved to 76% for the three months ended June 30, 2009 compared to 72% in the prior year period. The increase in the gross margin percentage is primarily the result of a reduction in depreciation expense as equipment became fully depreciated, a decrease in communication costs due to the conversion of sites to DSL from satellite communications, a reduction in gaming content costs due to our reduced utilization of consultants and a decrease in direct salaries as a result of a reduced headcount. Additionally, the increase in the gross margin percentage is partially offset by the decrease in average return generated per site related to a strategic reduction in pricing.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $2,141,000 or 31%, to $4,859,000 for the three months ended June 30, 2009 from $7,000,000 for the three months ended June 30, 2008. Selling, general and administrative expenses decreased due to several factors. Salary expenses decreased $538,000 due to reductions in headcount. Severance expenses decreased $453,000 due to the resignation of the CEO in the prior year, which resulted in full recognition of his severance. Marketing expenses decreased $537,000 due to a change in our marketing strategy, including reducing direct mail campaigns, and scheduling of promotions and trade shows. Consulting services decreased $402,000 as we decreased our overall utilization of external consulting services. Bad debt expense decreased $165,000 in 2009 compared to 2008 predominately due to recoveries of certain accounts previously written off. Legal expenses decreased $140,000 due to a decrease in fees regarding corporate governance matters and a trademark infringement case.

#### Depreciation and Amortization Expense

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) increased $68,000, to $213,000 for the six months ended June 30, 2009 from $145,000 in the prior year due to the acquisition of intangible assets, which has resulted in increased amortization expense.

#### Interest Income and Expense

Interest income decreased $22,000, to $21,000 for the three months ended June 30, 2009 from $43,000 in the prior year. The decrease was due to lower rate of return as well as a decrease in our average cash balance invested in interest bearing securities.

Interest expense for the three months ended June 30, 2009 is $10,000 and we did not incur interest expense during the three months ended June 30, 2008. The increase in interest expense is the result of equipment leases we entered into.

#### Income Taxes

We expect to incur minimal federal and state income tax liability in 2009 related to our U.S. operations. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. Our tax provision for the three months ended June 30, 2009 decreased $82,000 compared to the $64,000 provision for income taxes recorded for the three months ended June 30, 2008. 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.

### Results of Discontinued Operations

### Three months ended June 30, 2009 compared to the three months ended June 30, 2008

The wind down of our discontinued operations was completed in the third quarter of 2008; therefore, there is no activity to report for the three months ended June 30, 2009. The operating results of the discontinued operations are as follows for the three months ended June 30, 2008:

|  | June 30, 2008 |
| --- | ---: |
| Operating revenues | $4,000 |
| Operating expenses | 220,000 |
| Operating loss | $(216,000) |
| Other | — |
| Loss from discontinued operations, net of tax | $(216,000) |

### EBITDA – Consolidated Operations

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with accounting principles generally accepted in the United States (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:

|  | Three months ended June 30, 2009 | June 30, 2008 |
| --- | ---: | ---: |
| Net loss per GAAP | $(282,000) | $(2,345,000) |
| Interest income, net | (11,000) | (43,000) |
| Depreciation and amortization | 723,000 | 818,000 |
| Income taxes | (18,000) | 64,000 |
| EBITDA | $412,000 | $(1,506,000) |

Our operations generated EBITDA levels as presented below:

|  | Three months ended June 30, 2009 Entertainment | Discontinued operations | Total |
| --- | ---: | ---: | ---: |
| Net loss per GAAP | $(282,000) | $— | $(282,000) |
| Interest income, net | (11,000) | — | (11,000) |
| Depreciation and amortization | 723,000 | — | 723,000 |
| Income taxes | (18,000) | — | (18,000) |
| EBITDA | $412,000 | $— | $412,000 |

|  | Three months ended June 30, 2008 Entertainment | Discontinued operations | Total |
| --- | ---: | ---: | ---: |
| Net loss per GAAP | $(2,129,000) | $(216,000) | $(2,345,000) |
| Interest income, net | (43,000) | — | (43,000) |
| Depreciation and amortization | 818,000 | — | 818,000 |
| Income taxes | 64,000 | — | 64,000 |
| EBITDA | $(1,290,000) | $(216,000) | $(1,506,000) |

### Six months ended June 30, 2009 compared to the six months ended June 30, 2008

Continuing operations, which consists of the Entertainment division, generated a net loss of $537,000 for the six months ended June 30, 2009, compared to net loss of $4,412,000 for the six months ended June 30, 2008.

#### Revenue

Revenue from continuing operations decreased $1,718,000 or 12%, to $12,481,000 for the six months ended June 30, 2009 from $14,199,000 for the six months ended June 30, 2008, primarily due to a decrease in average revenue generated per site related to a strategic reduction in pricing.

#### Direct Costs and Gross Margin

The following table compares the direct costs and gross margin from continuing operations for 2009 and 2008:

|  | Six months ended June 30, 2009 | 2008 |
| --- | ---: | ---: |
| Revenue | $12,481,000 | $14,199,000 |
| Direct costs | 3,026,000 | 4,076,000 |
| Gross margin | $9,455,000 | $10,123,000 |
| Gross margin percentage | 76% | 71% |

21

Gross margin as a percentage of revenue improved to 76% for the six months ended June 30, 2009 compared to 71% in the prior year period. The increase in the gross margin percentage is primarily the result of a reduction in depreciation expense as equipment became fully depreciated, a decrease in communication costs due to the conversion of sites to DSL from satellite communications, a reduction in gaming content costs due to our reduced utilization of consultants and a decrease in direct salaries as a result of a reduced headcount. Additionally, the increase in the gross margin percentage is partially offset by the decrease in average return generated per site related to a strategic reduction in pricing.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $4,574,000 or 32%, to $9,691,000 for the six months ended June 30, 2009 from $14,265,000 for the six months ended June 30, 2008. Selling, general and administrative expenses decreased due to several factors. Salary expenses decreased $1,254,000 due to a reduction in headcount. Severance expenses decreased $444,000 due to the resignation of the CEO in the prior year, which resulted in full recognition of his severance. Marketing expenses decreased $924,000 due to a change in our marketing strategy, including reducing direct mail campaigns, and scheduling of promotions and trade shows. Consulting services decreased $784,000 as we decreased our overall utilization of external consulting services. Software disposal expenses decreased $258,000 as the first quarter of 2008 included a $292,000 impairment charge. Other taxes decreased $148,000 primarily due to the finalization of the sales settlement with the state of Texas. Bad debt expense decreased $315,000 in 2009 compared to 2008 predominately due to recoveries of certain accounts previously written off and an increased recovery rate. Commission expense decreased $66,000 due to decrease of the commission rate paid per sale. Research and development expenses decreased $64,000 because we did not expend any funds towards R&D during the six months ended June 30, 2009. Legal expenses decreased $122,000 due to a decrease in fees regarding corporate governance matters and a trademark infringement case.

General expenditures related to seminars, supplies, telephone, professional tax services and payroll processing fees decreased approximately $162,000.

#### Depreciation and Amortization Expense

Depreciation and amortization expense (excluding depreciation and amortization included in direct operating costs) increased $73,000, to $340,000 for the six months ended June 30, 2009 from $267,000 in the prior year due to the acquisition of intangible assets, which has resulted in increased amortization expense.

#### Interest Income and Expense

Interest income decreased $38,000, to $64,000 for the six months ended June 30, 2009 from $102,000 in the prior year. The Company’s average cash balance invested in interest bearing securities decreased which resulted in less interest income.

Interest expense increased $12,000 to $12,000 for the six months ended June 30, 2009 from $0 for the six months ended June 30, 2008. The increase in interest expense is the result of equipment leases we entered into.

#### Income Taxes

We expect to incur minimal federal and state tax liability in 2009 related to our U.S. operations. We also expect to pay income taxes in Canada due to the profitability of NTN Canada. As a result, we recorded a tax provision of $13,000 for the six months ended June 30, 2009. Our tax provision decreased $92,000 for the six months ended June 30, 2009 compared to the $105,000 provision for income taxes recorded for the six months ended June 30, 2008. 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.

### Results of Discontinued Operations

### Six months ended June 30, 2009 compared to the six months ended June 30, 2008

The wind down of our discontinued operations was completed in the third quarter of 2008; therefore, there is no activity to report for the six months ended June 30, 2009. The operating results of the discontinued operations are as follows for the six months ended June 30, 2008:

|  | June 30, 2008 |
| --- | ---: |
| Operating revenues | $21,000 |
| Operating expenses | 528,000 |
| Operating loss | $(507,000) |
| Other | — |
| Loss from discontinued operations, net of tax | $(507,000) |

### EBITDA – Consolidated Operations

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with accounting principles generally accepted in the United States (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:

|  | Six months ended June 30, 2009 | June 30, 2008 |
| --- | ---: | ---: |
| Net loss per GAAP | $(537,000) | $(4,919,000) |
| Interest income, net | (52,000) | (102,000) |
| Depreciation and amortization | 1,343,000 | 1,659,000 |
| Income taxes | 13,000 | 105,000 |
| EBITDA | $767,000 | $(3,257,000) |

Our operations generated EBITDA levels as presented below:

|  | Six months ended June 30, 2009 Entertainment | Discontinued operations | Total |
| --- | ---: | ---: | ---: |
| Net loss per GAAP | $(537,000) | $— | $(537,000) |
| Interest income, net | (52,000) | — | (52,000) |
| Depreciation and amortization | 1,343,000 | — | 1,343,000 |
| Income taxes | 13,000 | — | 13,000 |
| EBITDA | $767,000 | $— | $767,000 |

|  | Six months ended June 30, 2008 Entertainment | Discontinued operations | Total |
| --- | ---: | ---: | ---: |
| Net loss per GAAP | $(4,412,000) | $(507,000) | $(4,919,000) |
| Interest income, net | (102,000) | — | (102,000) |
| Depreciation and amortization | 1,659,000 | — | 1,659,000 |
| Income taxes | 105,000 | — | 105,000 |
| EBITDA | $(2,750,000) | $(507,000) | $(3,257,000) |

23

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2009, we had cash and cash equivalents of $3,845,000 compared to cash and cash equivalents of $3,362,000 as of December 31, 2008. Including the effect of exchange rates on cash, we generated $483,000 in cash in the six months ended June 30, 2009 compared to cash used of $3,657,000 in the six months ended June 30, 2008. The $4,140,000 increase of cash generated in the six months ended June 30, 2009 compared to the prior year period was driven predominately by the $4,382,000 decrease of net loss. We have taken strong measures to reduce our use of cash. Those measures included reducing headcount through strategic reductions in our work force, renegotiated pricing with numerous vendors, a decrease in the use of consultants where practical and a revision of our marketing plan designed to reduce costs while continuing to support our business plan.

During 2009, we intend to continue to rely upon our cash on hand and cash flow from operations to meet our liquidity needs. While we believe that the actions taken in 2008 and the first half of 2009 to reduce our operating costs, improve our gross profit margin and manage our working capital should benefit us in 2009 and beyond, in these uncertain economic times there can be no assurance that those actions will be sufficient.

On May 11, 2009, we entered into an agreement with certain investors in Instant Access Media, LLC whereby they purchased 2,419,355 shares of our Common Stock in a private placement raising $750,000 in additional working capital. That cash will be used to fund general working capital requirements as well as certain capital expenditures.

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. 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, further reduce operational cash uses, sell assets or seek financing. Any actions we may undertake to reduce planned capital purchases, further 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, 2009, we had working capital (current assets in excess of current liabilities) of $1,516,000 compared to $874,000 as of December 31, 2008. The following table shows our change in working capital from December 31, 2008 to June 30, 2009.

*(In thousands)*

|  | Working Capital Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2008 | $874 |
| Changes in current assets: |  |
| Cash and cash equivalents | 483 |
| Accounts receivable, net of allowances | 138 |
| Investment available-for-sale | 38 |
| Prepaid expenses and other current assets | 233 |
| Total current assets | 892 |
| Changes in current liabilities: |  |
| Accounts payable | (503) |
| Accrued expenses | 233 |
| Sales tax payable | 188 |
| Accrued salaries | 28 |
| Accrued vacation | (25) |
| Income tax payable | 18 |
| Obligations under capital lease | (215) |
| Deferred revenue | 26 |
| Total current liabilities | (250) |
| Net change in working capital | 642 |
| Working capital as of June 30, 2009 | $1,516 |

24

Cash and cash equivalents increased $483,000 as a result of $804,000 of cash provided by operating activities, $1,229,000 used in investing activities, $737,000 of cash provided by financing activities and a $171,000 effect of changes in exchange rates from converting Canadian Dollars to U.S. Dollars.

#### Cash Flows

Cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized as follows (in thousands):

| Cash provided by (used in): | (In thousands) For the six months ended June 30, 2009 | June 30, 2008 |
| --- | ---: | ---: |
| Operating activities | $804 | $(1,791) |
| Investing activities | (1,229) | (1,595) |
| Financing activities | 737 | (4) |
| Effect of exchange rates | 171 | (267) |
| Net increase (decrease) in cash and cash equivalents | $483 | $(3,657) |

*Net cash from operating activities.* We are dependent on cash flows from operations to meet our cash requirements. Net cash provided by operating activities was $804,000 during the six months ended June 30, 2009 compared to net cash used in operating activities of $1,791,000 for the six months ended June 30, 2008. The $2,595,000 change in cash provided by operations was primarily due to a $4,382,000 decrease in our net loss, a decrease in non-cash charges of $1,094,000 and a $975,000 decrease in cash used by operating assets and liabilities. The significant decrease of our net loss was the primarily the result a $5,551,000 reduction of operating expenses. Our largest use of cash is payroll and related costs. Payroll and related costs decreased $1,860,000 to $6,021,000 for the six months ended June 30, 2009 from $7,881,000 for the same period in 2008. This decrease is the result of our strategic reductions in work force in 2008 and the first quarter of 2009. Our primary source of cash is cash we generate from customers. Cash received from customers decreased $3,363,000 to $12,038,000 for the six months ended June 30, 2009 from $15,401,000 in 2008 for the same period. That decrease in cash from customers is due to our strategic decrease in pricing. The principal changes in non-cash items that affected operating cash flow for the six months ended June 30, 2009 when compared to the same period in 2008 included a $309,000 decrease in depreciation and amortization as assets become fully depreciated, a $336,000 reduction in loss from disposition of equipment and capitalized software and a $315,000 decrease of the provision for doubtful accounts due to recoveries of certain accounts previously written off and an increased recovery rate.

Cash used in discontinued operations was $789,000 for the six months ended June 30, 2008 compared to $0 cash used for discontinued operations for the same period in 2009.

*Net cash from investing activities.* For the six months ended June 30, 2009, we used $1,229,000 in cash for investing activities. That was a reduction of $366,000 from the prior year period when we used $1,595,000 in cash from investing activities. The change in cash flows from investing activities when comparing the six months ended June 30, 2009 to the same period in 2008 was due primarily to the following:

- Cash used for capital expenditures decreased $418,000,
- Cash used for software development initiatives decreased $121,000, and
- Cash used for deposits on equipment increased $137,000.

We currently anticipate investing approximately $1.4 million during the remainder of 2009 for capital expenditures in the form of equipment purchases and infrastructure improvements. Our actual future capital requirements will depend on a number of factors, including our cash availability, success in increasing sales, industry competition and technological developments.

*Net cash from financing activities.* Net cash provided by financing activities increased $741,000 to $737,000 for the six months ended June 30, 2009 compared to net cash used of $4,000 for the same period in 2008. Included in net cash provided by financing activities for the six months ended June 30, 2009 was cash provided by the exercise of stock options and warrants, which increased $28,000 for the six months ended June 30, 2009 compared to no activity in 2008 for the same period, and cash provided by proceeds from the sale of common stock increased $750,000 due to the aforementioned common stock private placement by Instant Access Media, LLC. These sources of cash were partially offset by $41,000 in principal payments on capital leases.

*Other information.* In 2009, we entered into a $500,000 equipment lease facility with an equipment leasing company. The terms of that agreement allow for use of the facility in multiple tranches with each individual tranche having 24 month terms. As of June 30, 2009, we utilized $457,000 of that facility which has been accounted for as a capital lease. We expect to utilize the full $500,000 facility before the end of 2009.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 12 of the condensed consolidated financial statements, “Recent Accounting Pronouncements.”

## Market risk

As filed, 1,794 characters.

We are exposed to risks related to currency exchange rates, stock market fluctuations, and interest rates. As of June 30, 2009, we owned common stock of an Australian company, eBet, that is subject to market risk. The value of the investment has increased $20,000 and $38,000 during the three and six months ended June 30, 2009, respectively, and is recorded as other comprehensive income on our consolidated balance sheet. We have reviewed the eBet investment in accordance with SFAS No. 115 to determine if the accumulated loss is more than temporary in nature. We have determined that the loss is temporary based on the fact that the investment appreciated in value in the three and six months ended June 30, 2009.

This investment is exposed to further market risk in the future based on the operating results of the Australian company and stock market fluctuations. Additionally, the value of the investment is further subject to changes in Australian currency exchange rates which would impact the value of the investment.

Our interest income is sensitive to changes in the general level of U.S. and Canadian interest rates, particularly since a significant portion of our investments are and will be in short-term marketable securities. Due to the nature and maturity of our short-term investments, we have concluded that there is no material market risk exposure to our principal. The average redemption period of our investment portfolio is 30 days. A 1% change in interest rates would have an effect of approximately $27,000 for a one year period.

We do not believe that inflation has had a material impact on our business or operating results during the periods presented.

We do not have any derivative financial instruments, nor do we have any speculative or hedging instruments.

## Controls and procedures

As filed, 1,397 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 Securities and Exchange Commission 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 the 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

During the period covered by this report, we have had no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 3,094 characters.

### Risk Factors That May Affect Future Results

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, 2008 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 actually occurs, 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.

The following risk factor is in addition to 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, 2008:

***We may not successfully address problems encountered in connection with any acquisitions.***

During the second quarter of 2009, we acquired assets from two businesses and we expect to consider opportunities to acquire or make investments in other technologies, products, and businesses that could complement our current products and services, expand the breadth of our markets or enhance our technical capabilities. We have a limited history of acquiring and integrating businesses. Acquisitions and strategic investments involve numerous risks, including:

- problems assimilating employees, or the purchased products, business operations or technologies;
- unanticipated costs associated with the acquisition, including accounting and legal charges, capital expenditures, and transaction expenses;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with customers and suppliers;
- risks associated with entering markets in which we have no or limited prior experience;
- unanticipated or unknown liabilities relating to the acquired businesses;
- the need to integrate accounting, management information, manufacturing, human resources and other administrative systems to permit effective management; and
- potential loss of key employees of acquired organizations.

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders may be diluted. Also, the anticipated benefit of our acquisitions may not materialize. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our operating results or financial condition. Future acquisitions may also require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.

Filed Aug 14, 2009.
Source: SEC EDGAR, the filing index for accession 0001019687-09-002913. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.