# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Mar 31, 2016

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2016-05-09
- Accepted by EDGAR: May 9, 2016, 16:43 ET
- Period: 2016-03-31
- Accession: 0001493152-16-009551
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000149315216009551/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000149315216009551/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $5.5m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2016-01-01 to 2016-03-31 | $4.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | −$868.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | $19.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | −$1.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | −$0.01 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | −$504.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $177.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-03-31 | $3.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $9.1m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $16.3m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $6.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $13.3m | us-gaap:Liabilities |
| Current portion of debt | at 2016-03-31 | $3.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-03-31 | $3.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,782 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, (8) our ability to successfully and efficiently manage the design, manufacturing and assembly process of our BEOND tablet platform and (9) 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, 2015, 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.*

### INTRODUCTION

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying unaudited condensed consolidated financial statements and notes, included in Item 1 of this Quarterly Report on Form 10-Q, to help provide an understanding of our financial condition, the changes in our financial condition and our results of operations. Our discussion is organized as follows:

- *Overview and Highlights*. This section provides a general description of our business and significant events and transactions that we believe are important in understanding our financial condition and results of operations.
- *Critical Accounting Policies*. This section provides a listing of our significant accounting policies, including any material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2016 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, 2015.
- *Results of Operations*. This section provides an analysis of our results of operations presented in the accompanying unaudited condensed consolidated statements of operations by comparing the results for the three months ended March 31, 2016 to the results for the three months ended March 31, 2015.
- *Liquidity and Capital Resources*. This section provides an analysis of our historical cash flows, as well as our future capital requirements.

11

### OVERVIEW AND HIGHLIGHTS

### About Our Business and How We Talk About It

We deliver interactive entertainment and innovative dining technology to bars and restaurants in North America. Our customers license our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games, nationwide competitions, and self-service dining features including dynamic menus, touchscreen ordering and secure payment. Our platform can improve operating efficiencies, create connections among the players and venues and amplify guests’ positive experiences. Built on an extended network platform, our interactive 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 tablet 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 tablet 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 tablet platform and the cases and charging trays for the tablets) to certain network subscribers, by hosting live trivia events, and by selling advertising aired on in-venue screens and as part of customized games. In 2014, we began offering pay-to-play premium content to certain customers via our BEOND tablet platform, such as paid arcade. During the second quarter of 2015, we made a strategic change in our premium content model by making the arcade offering available on both a free-to-consumer and pay-to-play basis. This change required us to delay the general availability of the pay-to-play arcade offering as we retooled its content, workflow and positioning. As a result, during 2015, we generated additional subscription fee revenue from those venues offering free-to-consumer arcade. We anticipate rolling out the new pay-to-play arcade offering during the second quarter of 2016.

Over 115 million games were played on our network during 2015, and as of March 31, 2016, approximately 49% of our network subscriber venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Old Chicago, Beef O’Brady’s, Buffalo Wings & Rings, Native New Yorker, Houlihans, Boston Pizza, and Arooga’s.

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.

Unless otherwise indicated, references in this report: (a) to “Buzztime,” “NTN,” “we,” “us” and “our” refer to NTN Buzztime, Inc. and its consolidated subsidiaries; (b) to “network subscribers” or “customers” refer to hospitality venues that subscribe to our network service; (c) to “consumers” or “players” refer to the individuals that engage in our games, events, and entertainment experiences available at our customers’ venues and (d) to “venues” or “sites” refer to locations (such as a bar or restaurant) of our customers at which our games, events, and entertainment experiences are available to consumers.

### Recent Developments

#### Notice of non-compliance with NYSE MKT continued listing standard

As previously reported, in November 2015, we received a letter from the NYSE Regulation Inc. stating that we are not in compliance with Section 1003(a)(iii) of the NYSE MKT Company Guide because we reported stockholders’ equity of less than $6 million as of September 30, 2015 and had net losses in five of our most recent fiscal years ended December 31, 2014. In December 2015, we submitted a plan to NYSE Regulation advising of actions we have taken or will take to regain compliance with Section 1003(a)(iii) by May 13, 2017. In January 2016, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that extends through May 13, 2017 to regain compliance with Section 1003(a)(iii).

In April 2016, as previously reported, we received a letter from NYSE Regulation stating that we are not in compliance with Section 1003(a)(ii) of the Company Guide because we reported stockholders’ equity of less than $4 million as of December 31, 2015 and had net losses in three of our four most recent fiscal years ended December 31, 2015. As a result, we continue to be subject to the procedures and requirements of Section 1009 of the Company Guide. Because this instance of noncompliance is in addition to our current noncompliance with Section 1003(a)(iii) of the Company Guide, we are not required to submit a new compliance plan.

The listing of our common stock on the NYSE MKT is being continued during the plan period pursuant to an extension. The NYSE Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with Sections 1003(a)(iii) and 1003(a)(ii) by May 13, 2017 or if we do not make progress consistent with our plan during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate. See “PART II – OTHER INFORMATION ———— ITEM 1A. RISK FACTORS—Our common stock could be delisted or suspended from trading on the NYSE MKT if we fail to maintain compliance with continued listing criteria,” below.

#### East West Bank Credit Facility

In April 2015, we entered into a loan and security agreement with East West Bank, or the lender, pursuant to which, we could 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. In March 2016, we entered into an amendment (the “Amendment”) to the loan and security agreement. The loan and security agreement as amended by the Amendment is referred to as the “Amended Loan Agreement.”

Under the Amended Loan Agreement, through March 31, 2017, we may request advances in an aggregate outstanding amount at any time up to the lesser of (a) the revolving line or (b) the sum of $2,000,000 (which we refer to as the “sublimit”) plus the amount equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. On March 31, 2017, the sublimit becomes zero. If the aggregate amount of advances as of March 31, 2017 exceeds the lesser of the revolving line or the amount equal to our borrowing base, then we must pay the lender the amount of such excess.

Other changes to the original terms of the loan and security agreement made under the Amendment are:

- Under the original terms of the loan and security agreement, our borrowing base was, 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 our average churn rate for the immediately preceding three months (not to exceed zero); times (c) 300%. The manner in which our borrowing base is determined is unchanged under the Amendment, except that our monthly recurring revenue is limited to all recurring subscription revenue attributable to software that we sold or licensed and all recurring revenue relating to services we delivered and 50% of all revenue attributable to our “Stump” product line.
- All advances under the revolving line are due on December 31, 2017 as opposed to April 14, 2018 as was the case under the original terms.
- On or before March 31, 2017, advances will bear interest, at our option, at the rate of either (A) a variable rate per annum equal to the prime rate as set forth in The Wall Street Journal plus 2.75%, up from 1.25% under the original terms, or (B) at a fixed rate per annum equal to the LIBOR rate for the interest period for the advance plus 5.50%, up from 4.00% under the original terms. After March 31, 2017, the interest rates will revert to their original terms.
- Our financial covenants with respect to our minimum adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, changed from a six-month measurement period to a three-month measurement period, beginning with the three-month period ending March 31, 2016, and, accordingly, the minimum adjusted EBITDA targets we are required to achieve over each of the three-month measurement periods were changed.
- The Amendment provides for two additional financial covenants: (a) that we maintain a balance on deposit with the lender equal to (i) on March 31, 2017, 100% of the aggregate outstanding principal amount of the advances at such time, and (ii) at all times after March 31, 2017, an amount determined by the lender based on our 2017 financial projections; and (b) that the sum of the following be not less than $2,000,000: (i) the aggregate amount of unrestricted cash that we hold in accounts maintained with the lender and (ii) the amount available to us under the Amended Loan Agreement.
- The aggregate amount that we owe under our current credit facility with our equipment lender at any time is no longer limited to $2,500,000.
- With the lender’s consent, we may incur additional indebtedness with other equipment lenders of up to $2,000,000 in the aggregate for equipment financing.

Under the Amendment, the lender also waived an event of default that occurred because we did not achieve the specified churn rate required under the loan and security agreement for the month ended January 31, 2016.

### Our Strategy and Current Highlights

During 2016, we continued to make progress on our 2016 priorities. Below are some highlights of current accomplishments and milestones achieved:

- *Scale digital menu and payment functionality.* We are heavily focused on delivering digital menu and payment functionality on the tablet platform, which we believe will improve the operational and marketing value of our product offering. After ensuring our tablet met the Payment Card Industry, or PCI, compliance standards applicable to our platform, we officially launched digital menu and payment functionality in a pilot test at Buffalo Wild Wings. A successful pilot will help provide a national reference for other chain customers in our sales pipeline that are also looking for this same functionality.
- *Improve value and price for our “independent” customers.* We are focused on increasing the value of our offering by improving game content and reducing the BEOND tablet platform cost to attract and retain quality independent customers. To help improve our value, we entered into promotional partnerships centered around our game content with the Washington Redskins, FanDuel, and Fandango that are each tied to driving guest traffic at our customer’s venues, increasing the guest community and improving loyalty. With respect to price, we continued to make progress on our hardware design and quality in order to reduce expense and to give us the ability to offer flexibility in our pricing for quality independent customers.
- *Monetize the network.* We intend to grow the consumer audience by engaging them more with improved entertainment experiences and providing premium content that we can monetize through direct payment. In addition to the free-to-consumer arcade offering we provide to certain customers, we launched a pay-to-play premium games lobby at a few of these sites, and we expect to scale to additional sites throughout 2016, which we expect to result in accretive revenue from the consumers who play on a pay-to-play basis. Additionally, we continued to leverage our network with on-tablet local and national advertising campaigns.

13

### 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, 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, 2016 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, 2015.

### RESULTS OF OPERATIONS

### Three months ended March 31, 2016 compared to the three months ended March 31, 2015

We generated a net loss of $1,041,000 for the three months ended March 31, 2016 compared to a net loss of $2,263,000 for the three months ended March 31, 2015.

### Revenue

The tables below summarize the type of revenue we generated for the three months ended March 31, 2016 and 2015:

|  | Three months ended March 31, 2016 $% of Total Revenue |  | 2015 $% of Total Revenue |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 4,374,000 | 79.8% | 4,200,000 | 73.3% | 174,000 | 4.1% |
| Sales-type lease revenue | 396,000 | 7.2% | 840,000 | 14.7% | (444,000) | -52.9% |
| Other revenue | 712,000 | 13.0% | 686,000 | 12.0% | 26,000 | 3.8% |
| Total | 5,482,000 | 100.0% | 5,726,000 | 100.0% | (244,000) | -4.3% |

Subscription revenue increased for the three months ended March 31, 2016 primarily due to a higher average revenue per site (which we refer to as ARPU) when compared to the same period in 2015. During the three months ended March 31, 2016, equipment lease revenue recognized under sales-type lease arrangements decreased due to fewer installations of our BEOND platform for certain customers under sales-type lease arrangements when compared to the same period in 2015. 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. We expect the amount of equipment lease revenue to continue to decrease because the number of customers that have not converted from our legacy product line to the BEOND tablet platform with which we enter into sales-type lease arrangements has decreased. Other revenue increased for the three months ended March 31, 2016 due primarily to an increase in our live hosted trivia events.

Geographic breakdown of our network subscribers is as follows:

|  | Network Subscribers as of March 31, 2016 | 2015 |
| --- | ---: | ---: |
| United States | 2,742 | 2,733 |
| Canada | 161 | 175 |
| Total | 2,903 | 2,908 |

14

### Direct Costs and Gross Margin

A comparison of direct costs and gross margin for the three months ended March 31, 2016 and 2015 is shown in the table below:

|  | For the three months ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Revenues | $5,482,000 | $5,726,000 |
| Direct Costs | 2,036,000 | 2,649,000 |
| Gross Margin | $3,446,000 | $3,077,000 |
| Gross Margin Percentage | 63% | 54% |

The $613,000, or 23%, decrease in direct costs for the three months ended March 31, 2016 compared to the same period in 2015 was primarily due to decreased equipment expense of approximately $634,000 as a result of fewer installations of our BEOND platform for certain customers under sales-type lease arrangements as well as less scrap expense and repair expense related to the BEOND platform when compared to the same period in 2015.

The approximately 17% increase in gross margin for the three months ended March 31, 2016 was primarily related to the decreased equipment expense discussed above.

During 2015, due to our design and manufacturing process problems with the second generation tablet platform, we re-evaluated the strategy of managing the manufacture, design and supply chain in-house. Also during 2015, and as part of our re-evaluation, we out-sourced the supply-chain management and manufacturing of certain equipment related to our third generation BEOND tablet platform. The primary reasons for doing so were to reduce exposure to repair and maintenance expense related to, and to increase the long-term stability of the quality of, such equipment. In the fourth quarter of 2015, we began deploying the third generation platform, which includes EMV functionality for secure payment.

We may continue to experience challenges with our tablet platform equipment, and as a result, we may be required to recognize additional repair expense in the future.

### Operating Expenses

|  | For the three months ended March 31, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Selling, general and administrative | $4,200,000 | $5,162,000 | $(962,000) |
| Depreciation and amortization (non-direct) | $114,000 | $121,000 | $(7,000) |

#### Selling, General and Administrative Expenses

The decrease in selling, general and administrative expenses for the three months ended March 31, 2016 was primarily due to lower headcount as a result of the restructuring that took place at the end of the second quarter of 2015, reflecting a reduction of approximately $573,000 in payroll and related expenses, as well as a reduction in marketing expenses of approximately $329,000 primarily related to market research activities that occurred during the first quarter of 2015, which were not repeated during the first quarter of 2016.

#### Depreciation and Amortization Expense

The decrease in depreciation and amortization expense for the three months ended March 31, 2016 compared to the same period in 2015 is primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.

### Other Expense, Net

|  | For the three months ended March 31, 2016 | 2015 | Increase in expense, net |
| --- | ---: | ---: | ---: |
| Total other expense, net | $(154,000) | $(43,000) | $(111,000) |

The increase in total other expense, net for the three months ended March 31, 2016 compared to the same period in 2015 is primarily due to higher long-term debt balances, resulting in an increase in interest expense, and increased foreign currency exchange losses related to the operations of our Canadian subsidiary.

### Income Taxes

|  | For the three months ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Provision for income taxes | $(19,000) | $(14,000) |

We expect to incur state income tax liability in 2016 related to our U.S. operations. We also expect to pay income taxes in Canada due to profitability of our Canadian subsidiary. 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.

### Adjusted EBITDA—Consolidated Operations

To supplement our consolidated financial disclosures and statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States (GAAP), we use certain non-GAAP financial measures, including adjusted earnings before interest, taxes, depreciation and amortization, or Adjusted EBITDA. We compute Adjusted EBITDA by excluding from net profit (or loss) the impact of the following: (a) depreciation and amortization expense; (b) interest expense, net; (c) provision for income taxes; (d) non-cash stock-based compensation expense; (e) other non-cash expenses and charges; and (f) to the extent approved by our lender, other one-time charges and any losses arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business. We use this non-GAAP financial measure when evaluating our financial results as well as for internal resource management, planning and forecasting purposes. This non-GAAP financial measure is not intended to represent a measure of performance in accordance with GAAP. Nor should this non-GAAP financial measure be considered as an alternative to statements of cash flows as a measure of liquidity. This non-GAAP financial measure 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 following table reconciles our consolidated net loss per GAAP to Adjusted EBITDA:

|  | For the three months ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Net loss per GAAP | $(1,041,000) | $(2,263,000) |
| Interest expense, net | 127,000 | 102,000 |
| Income tax provision | 19,000 | 14,000 |
| Depreciation and amortization | 757,000 | 701,000 |
| EBITDA | (138,000) | (1,446,000) |
| Adjustments to EBITDA: |  |  |
| Non-cash stock based compensation | 113,000 | 99,000 |
| Excess and obsolete site equipment to be installed expense | 25,000 | 163,000 |
| Other one-time charges | 73,000 | 52,000 |
| Adjusted EBITDA | $73,000 | $(1,132,000) |

### LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2016, we had cash and cash equivalents of $3,549,000 compared to cash and cash equivalents of $3,223,000 as of December 31, 2015.

In April 2015, we entered into a loan and security agreement with East West Bank, which was amended in March 2016. We refer to the loan and security agreement, as amended, as the “Amended Loan Agreement.” Under the original terms of this agreement, we could 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. Under the Amended Loan Agreement, through March 31, 2017, we may request advances in an aggregate outstanding amount at any time up to the lesser of (a) the revolving line or (b) the sum of $2,000,000 (which we refer to as the “sublimit”) plus the amount equal to our borrowing base, in each case, less the aggregate outstanding principal amount of prior advances. On March 31, 2017, the sublimit becomes zero. If the aggregate amount of advances as of March 31, 2017 exceeds the lesser of the revolving line or the amount equal to our borrowing base, then we must pay the lender the amount of such excess. The manner in which our borrowing base is determined is unchanged under the Amended Loan Agreement, except that our monthly recurring revenue is limited to all recurring subscription revenue attributable to software that we sold or licensed and all recurring revenue relating to services we delivered and 50% of all revenue attributable to our “Stump” product line. 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 under this credit facility are due on December 31, 2017 as opposed to April 14, 2018 as was the case under the original terms.

Also under the Amended Loan Agreement, the aggregate amount that we owe under our current credit facility with our equipment lender at any time is no longer limited to $2,500,000, and with the lender’s consent, we may incur additional indebtedness with other equipment lenders of up to $2,000,000 in the aggregate for equipment financing.

Under the Amended Loan Agreement, the amount of our borrowing base is calculated, in part, based on our monthly recurring revenue from all recurring subscription revenue attributable to software that we sold or licensed and all recurring revenue relating to services we delivered and 50% of all revenue attributable to our “Stump” product line. Because the amount of our monthly recurring revenue and how much each source contributes to it will change from month to month, our borrowing base will fluctuate accordingly. As of March 31, 2016, we had borrowed $6,500,000 under this credit facility, and we had approximately $103,000 available to borrow as of that date based on our borrowing base calculated as of that date.

We have another financing arrangement under which we may borrow up to $9,853,000 for the purchase of certain capital equipment. Through March 31, 2016, we borrowed approximately $9,188,000. In April 2015, we used approximately $3,381,000 of the proceeds received from the East West Bank credit facility to pay down a portion of the principal amount we borrowed under this financing arrangement, accrued interest and a prepayment fee. As of March 31, 2016, approximately $2,017,000 of principal remained outstanding under this financing arrangement, and approximately $551,000 was available for borrowing.

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. In order to increase the likelihood that we will be able to successfully execute our operating and strategic plan and to position the company to better take advantage of market opportunities for growth, we are evaluating additional financing alternatives. 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, 2016, we had working capital (current assets in excess of current liabilities) of $2,292,000 compared to working capital of $3,988,000 as of December 31, 2015. The following table shows the change in our working capital from December 31, 2015 to March 31, 2016.

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2015 | $3,988,000 |
| Changes in current assets: |  |
| Cash and cash equivalents | 326,000 |
| Accounts receivable, net of allowance | (150,000) |
| Site equipment to be installed | (227,000) |
| Prepaid expenses and other current assets | 76,000 |
| Change in total current assets | 25,000 |
| Changes in current liabilities: |  |
| Accounts payable | (40,000) |
| Accrued compensation | (83,000) |
| Accrued expenses | (23,000) |
| Sales taxes payable | (63,000) |
| Income taxes payable | 1,000 |
| Current portion of long-term debt | 1,972,000 |
| Current portion of obligations under capital leases | 1,000 |
| Deferred revenue | 61,000 |
| Other current liabilities | (105,000) |
| Change in total current liabilities | 1,721,000 |
| Net change in working capital | (1,696,000) |
| Working capital as of March 31, 2016 | $2,292,000 |

#### 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, 2016 | 2015 |
| --- | ---: | ---: |
| Operating activities | $(504,000) | $995,000 |
| Investing activities | (276,000) | (437,000) |
| Financing activities | 1,053,000 | (632,000) |
| Effect of exchange rates | 53,000 | 52,000 |
| Net increase (decrease) in cash and cash equivalents | $326,000 | $(22,000) |

*Net cash (used in) provided by operating activities.* The $1,499,000 increase in cash used in operating activities was due to a net decrease in assets and liabilities of $2,747,000 during the three months ended March 31, 2016 compared to the same period in 2015, primarily related to a large past-due receivable payment being received in the first quarter of 2015, offset by decreased net loss of $1,248,000, after giving effect to adjustments made for non-cash transactions.

Our inventory levels of site equipment to be installed decreased to $3,763,000 as of March 31, 2016, from $3,990,000 as of December 31, 2015, reflecting released product as part of our conversion of existing sites to the BEOND platform. Since we are supporting multiple generations of the BEOND tablet platforms, we have seen an increase in the complexity of our supply chain. We anticipate this complexity will remain with us for the 2016 fiscal year and thus will affect retaining a higher level of inventory for site equipment to be installed.

Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $64,000 to $2,737,000 for the three months ended March 31, 2016 from $2,801,000 during the same period in 2015.

Our primary source of cash is cash we generate from customers. Cash received from customers decreased $2,011,000 to $5,949,000 for the three months ended March 31, 2016 from $7,960,000 during the same period in 2015. This decrease was primarily a result of receiving a large past-due receivable during the three months ended March 31, 2015, and to a lesser extent, decreased revenue during the three months ended March 31, 2016 when compared to the same period in 2015.

*Net cash used in investing activities.* The $161,000 decrease in cash used in investing activities was primarily due to a decrease in capital expenditures and software development expenditures.

*Net cash provided by (used in) financing activities.* The $1,685,000 increase in cash provided by financing activities is primarily attributable borrowing an additional $2,040,000 of long-term debt compared to the amount of long-term debt borrowed during the same period in 2015, offset by paying an additional $336,000 of long-term debt compared to the amount of long-term debt payments made during the same period in 2015.

### RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 6 of the condensed consolidated financial statements, “Recent Accounting Pronouncements.”

### OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in our financial condition, expenses, results of operations, liquidity, capital expenditures or capital resources.

## Market risk

As filed, 183 characters.

Under Securities and Exchange Commission, or 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, 10,033 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, 2015 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 this report or 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 other than as follows:

***Our common stock could be delisted or suspended from trading on the NYSE MKT if we fail to maintain compliance with continued listing criteria.***

As previously reported in November 2015, we are not in compliance with NYSE MKTS LLC’s (“NYSE MKT”) continued listing standards. Specifically, we are not in compliance with Section 1003(a)(iii) of the NYSE MKT Company Guide (the “Company Guide”) because we reported stockholders’ equity of less than $6 million as of September 30, 2015 and had net losses in five of our most recent fiscal years ended December 31, 2014. As a result, we became subject to the procedures and requirements of Section 1009 of the Company Guide. We were required to submit a plan to NYSE Regulation, Inc. advising of actions we have taken or will take to regain compliance with Section 1003(a)(iii) of the Company Guide by May 13, 2017. We submitted such a plan in December 2015. In January 2016, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that extends through May 13, 2017 to regain compliance with Section 1003(a)(iii).

In April 2016, we received a letter from NYSE Regulation stating that we are not in compliance with Section 1003(a)(ii) of the Company Guide because we reported stockholders’ equity of less than $4 million as of December 31, 2015 and had net losses in three of our four most recent fiscal years ended December 31, 2015. As a result, we continue to be subject to the procedures and requirements of Section 1009 of the Company Guide. Because this instance of noncompliance is in addition to our current noncompliance with Section 1003(a)(iii) of the Company Guide, we are not required to submit a new compliance plan.

The listing of our common stock on the NYSE MKT is being continued during the plan period pursuant to an extension. The NYSE Regulation staff will review us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with Sections 1003(a)(ii) and 1003(a)(iii) by May 13, 2017 or if we do not make progress consistent with our plan during the plan period, NYSE Regulation staff will initiate delisting proceedings as appropriate.

Under Section 1003(a)(i) of the Company Guide, the NYSE MKT will normally consider suspending dealings in, or removing from the list, securities of an issuer which has stockholders’ equity of less than $2 million if such issuer has sustained losses from continuing operations and/or net losses in two of its three most recent fiscal years. We had net losses in two of our three most recent fiscal years ended December 31, 2015. While our stockholders’ equity as of March 31, 2016 is greater than $2 million, if we continue to recognize losses and do not take other measures that would increase our stockholders’ equity, we could potentially have less than $2 million of stockholders’ equity and become out of compliance with Section 1003(a)(i), as well.

Under Section 1003(f)(v) of the Company Guide, the NYSE MKT will normally consider suspending dealings in, or delisting, common stock from the exchange if the common stock is selling for a substantial period of time at a low price per share and if the issuer fails to effect a reverse split of such stock within a reasonable time after being notified that NYSE MKT deems such action to be appropriate under all the circumstances. NYSE Regulation has informed us that it deems it appropriate for us to effect a reverse stock split or other action within a reasonable amount of time, or become subject to the continued listing evaluation and follow-up procedures set forth in Section 1009 of the Company Guide, which could, among other things, result in the initiation of delisting proceedings. Moreover, the NYSE MKT can take accelerated delisting action if our common stock trades at levels viewed to be abnormally low. In light of the foregoing, at our 2016 annual meeting of stockholders, we expect to ask that our stockholders approve an amendment to our restated certificate of incorporation to give effect to, first, a reverse split of our outstanding common stock at an exchange ratio of 1-for-100 and, then, immediately following such reverse split, a forward split of our outstanding common stock at a ratio that is not less than 2-for-1 nor greater than 4-for-1, with the final ratio to be selected by our board of directors in its sole discretion (“Reverse/Forward Split”). Our board of directors believes that effecting the Reverse/Forward Split, could, in certain circumstances, be an effective means of addressing the concern of NYSE Regulation regarding the low trading price of our common stock.

If our stockholders approve the amendment to our restated certificate of incorporation described above, and if we were to effect the Reverse/Forward Split, there can be no assurance that it will result in an increase in the trading price of our common stock above the price that the NYSE MKT views as a low trading price per share, or that even if the trading price of our common stock does increase above such price, that the increased trading price will be sustained for any period of time, all of which depends on many factors, including our performance, prospects and other factors that may be unrelated to the number of shares outstanding. Moreover, even if the trading price of our common stock does increase above the price that the NYSE MKT views as a low price per share, there can be no assurance that we will continue to meet the other NYSE MKT listing requirements. Immediately following the effective date of the Reverse/Forward Split, if effected, we will have fewer outstanding shares, which may reduce the trading liquidity of our common stock. Accordingly, the total market capitalization of our common stock after the Reverse/Forward Split may be lower than it was before the Reverse/Forward Split. In addition, if effected, the Reverse/Forward Split may result in some stockholders owning “odd lots” of less than 100 shares of common stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in “round lots” of even multiples of 100 shares. The Reverse/Forward Split, if effected, will not change the number of authorized shares of our common stock. However, upon the effectiveness of the Reverse/Forward Split, the number of authorized shares of our common stock that are not issued or outstanding would increase due to the reduction in the number of shares of our common stock issued and outstanding as a result of the Reverse/Forward Split. Our board of directors can issue the authorized shares of our common stock (or equity securities convertible into or exchangeable or exercisable for such shares) from time to time as it may deem advisable and without stockholder approval. Future issuances of our common stock would have a dilutive effect on the earnings or loss per share, book value per share, voting power and percentage interest of the holders of our then-outstanding shares of capital stock.

We are exploring options to address our non-compliance with the NYSE MKT continued listing standards, in particular, options to address our low stockholders’ equity. We can give no assurances that we will be able to address our non-compliance with the NYSE MKT continued listing standards or, even if we do, that we will be able to maintain the listing of our common stock on the NYSE MKT. Our common stock could be delisted because we do not make progress consistent with our plan during the plan period, because we do not regain compliance with Sections 1003(a)(ii) and 1003(a)(iii) by May 13, 2017, because we cannot successfully resolve our low trading price within a reasonable time, or because we fall below compliance with other NYSE MKT listing standards, including those described above. In addition, we may determine to pursue business opportunities or grow our business at levels or on timelines that reduces our stockholders’ equity below the level required to maintain compliance with NYSE MKT continued listing standards. The delisting of our common stock for whatever reason could, among other things, substantially impair our ability to raise additional capital; result in a loss of institutional investor interest and fewer financing opportunities for us; and/or result in potential breaches of representations or covenants of our warrants or other agreements pursuant to which we made representations or covenants relating to our compliance with applicable listing requirements. Claims related to any such breaches, with or without merit, could result in costly litigation, significant liabilities and diversion of our management’s time and attention and could have a material adverse effect on our financial condition, business and results of operations. In addition, the delisting of our common stock for whatever reason may materially impair our stockholders’ ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock.

Filed May 9, 2016.
Source: SEC EDGAR, the filing index for accession 0001493152-16-009551. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.