# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Jun 30, 2016

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2016-08-04
- Accepted by EDGAR: Aug 4, 2016, 14:23 ET
- Period: 2016-06-30
- Accession: 0001493152-16-011963
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000149315216011963/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000149315216011963/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $5.4m | us-gaap:Revenues |
| Revenue | 6 months, 2016-01-01 to 2016-06-30 | $10.9m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2016-04-01 to 2016-06-30 | $4.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-01-01 to 2016-06-30 | $8.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | −$696.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-01 to 2016-06-30 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2016-04-01 to 2016-06-30 | $5.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-01 to 2016-06-30 | $24.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | −$850.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | −$1.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | −$0.46 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | −$1.03 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $13.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2016-01-01 to 2016-06-30 | $291.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-06-30 | $3.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $8.2m | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $15.0m | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $6.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-06-30 | $12.7m | us-gaap:Liabilities |
| Current portion of debt | at 2016-06-30 | $3.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-06-30 | $2.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,389 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 and six months ended June 30, 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 and six months ended June 30, 2016 to the results for the three and six months ended June 30, 2015.
- *Liquidity and Capital Resources*. This section provides an analysis of our historical cash flows, as well as our future capital requirements.

10

### 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, such as paid arcade. During the second quarter of 2015, we made a strategic change in our premium content model by making arcade available on both a free-to-consumer (in exchange for an increased subscription fee) and pay-to-play basis. This change required us to delay the general availability of pay-to-play arcade 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 began rolling out the new pay-to-play arcade during the second quarter of 2016.

Over 115 million games were played on our network during 2015, and as of June 30, 2016, approximately 50% 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

#### Reverse/forward split of our common stock

At our annual meeting of stockholders held on June 3, 2016, our stockholders approved 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. Our board of directors set the final ratio of the forward split at 2-for-1. We refer to the reverse split and to the forward split, together, as the “reverse/forward split.”

On June 16, 2016 (the “Effective Date”), we filed with the Secretary of State of Delaware the amendment to our restated certificate of incorporation to effect the reverse/forward split. The 1-100 reverse split was effective at 6:00 p.m. Eastern Time on the Effective Date and the 2-for-1 forward split was effective at 6:01 p.m. Eastern Time on the Effective Date. Any fractional share of common stock resulting from the forward split was rounded up to the nearest whole share. Any stockholder who, as of immediately prior to 6:00 p.m. Eastern Time on the Effective Date, held fewer than 100 shares of our common stock in one account and, subsequent to the reverse split, would otherwise have been entitled to less than one full share of our common stock, received, instead of the fractional share, $0.12 in cash for each such share held in that account, which was equal to the average of the closing price per share of our common stock on the NYSE MKT over the five trading days immediately before and including the Effective Date. As of immediately prior to the reverse split/forward split on the Effective Date, we had 92,439,174 of common stock outstanding, and subsequent to the reverse/forward split, we had 1,848,597 shares of common stock outstanding. Approximately $3,000 was paid to cashed-out stockholders who owned less than 100 shares immediately prior to the reverse split on the Effective Date.

#### 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 reviews 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. We have continued to make progress consistent with our plan during the plan period.

### Our Strategy and Current Highlights

Below is a discussion of our strategy and highlights of current accomplishments and milestones achieved during 2016:

*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 and are currently live at 15 sites. A successful pilot will help us deliver an enhanced guest experience and provide a national reference for other chain customers in our sales pipeline that are also looking for this same functionality.

Also during the second quarter, we launched Buffalo Wild Wing’s Fastbreak Lunch program in over 900 of its locations. The Fastbreak Lunch program is a digital timer application on our tablet to visualize the speed of service, and since its launch, lunchtime tablet usage has increased approximately 30%. This promotion not only improves the guest experience by providing quick turn-around times on delivering select menu items in under 15 minutes, but it also provides for a free lunch if those items are not delivered in the allotted time. In addition, Buffalo Wild Wings can leverage this promotion to gain important insight and data to make real-time and longer-term improvements to service and the guest experience.

*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. We have now entered into Season 2 of a promotional partnership centered around our game content with the Washington Redskins, and our work with other partnerships, such as FanDuel and Fandango, continue to evolve. Each of these partnerships 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.

*Refine our commercial execution.* We are focused on increasing our site count of both independent customers and chain customers. Receiving a reference from a national chain account, such as Buffalo Wild Wings, is critical to our chain efforts, and our progress with Buffalo Wild Wings is critical to receiving that reference. For our independent customers, we continue to model and test our go-to-market efforts by improving our sales processes, technology and people. Additionally, we have begun working with a distribution partner, Digital Dining. who sells primarily to hospitality venues through a dealer network. This is the first time we have embarked on an indirect sales channel.

*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 we provide to certain customers, we launched a pay-to-play premium games lobby during the second quarter and are currently in 465 sites, and we expect to continue rolling out the games lobby at 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.

### 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 and six months ended June 30, 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 and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015

We generated a net loss of $850,000 and $1,891,000 for the three and six months ended June 30, 2016, respectively, compared to a net loss of $2,625,000 and $4,888,000 for the three and six months ended June 30, 2015, respectively.

### Revenue

The tables below summarize the type of revenue we generated for the three and six months ended June 30, 2016 and 2015:

|  | Three months ended June 30, 2016 $% of Total Revenue |  | 2015 $% of Total Revenue |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 4,355,000 | 80.5% | 4,202,000 | 67.9% | 153,000 | 3.6% |
| Sales-type lease revenue | 301,000 | 5.6% | 1,251,000 | 20.2% | (950,000) | -75.9% |
| Other revenue | 751,000 | 13.9% | 740,000 | 11.9% | 11,000 | 1.5% |
| Total | 5,407,000 | 100.0% | 6,193,000 | 100.0% | (786,000) | -12.7% |

|  | Six months ended June 30, 2016 $% of Total Revenue |  | 2015 $% of Total Revenue |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 8,729,000 | 80.2% | 8,402,000 | 70.5% | 327,000 | 3.9% |
| Sales-type lease revenue | 697,000 | 6.4% | 2,091,000 | 17.5% | (1,394,000) | -66.7% |
| Other revenue | 1,463,000 | 13.4% | 1,426,000 | 12.0% | 37,000 | 2.6% |
| Total | 10,889,000 | 100.0% | 11,919,000 | 100.0% | (1,030,000) | -8.6% |

Subscription revenue increased for the three and six months ended June 30, 2016 primarily due to a higher average revenue per site (which we refer to as ARPU), offset by lower average site count when compared to the same periods in 2015. During the three and six months ended June 30, 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 periods 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 and six months ended June 30, 2016 due primarily to an increase in our live hosted trivia events and other miscellaneous revenue, offset by a decrease in our revenue from pay-to-play arcade, which we began redeploying during the second quarter of 2016.

At June 30, 2016, we had 2,859 network subscribers, compared to 2,942 at June 30, 2015 and 2,903 at March 31, 2016. The geographic breakdown of our network subscribers is as follows:

|  | Network Subscribers as of June 30, 2016 | 2015 |
| --- | ---: | ---: |
| United States | 2,697 | 2,766 |
| Canada | 162 | 176 |
| Total | 2,859 | 2,942 |

We continue to anticipate site count to fluctuate quarter-to-quarter as there are many factors affecting overall growth, including attrition on the Classic platform, shorter contract terms in the independent market and the negative impact of the hardware used in our second generation tablet platform.

### Direct Costs and Gross Margin

A comparison of direct costs and gross margin for the three and six months ended June 30, 2016 and 2015 is shown in the table below:

|  | For the three months ended June 30, 2016 | 2015 | For the six months ended June 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $5,407,000 | $6,193,000 | $10,889,000 | $11,919,000 |
| Direct Costs | 1,840,000 | 3,379,000 | 3,876,000 | 6,028,000 |
| Gross Margin | $3,567,000 | $2,814,000 | $7,013,000 | $5,891,000 |
| Gross Margin Percentage | 66% | 45% | 64% | 49% |

Direct costs decreased 46% and 36% for the three and six months ended June 30, 2016, respectively, primarily due to decreased equipment expense of $1,418,000 and $2,116,000 for the three and six months ended June 30, 2016, respectively, as a result of fewer installations of our BEOND platform for certain customers under sales-type lease arrangements as well as less scrap and repair expense related to the BEOND platform when compared to the same periods in 2015.

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 cost and 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, and during the three and six months ended June 30, 2016, we are recognizing a direct positive impact to our gross margins.

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

### Operating Expenses

|  | For the three months ended June 30, 2016 | 2015 | Change | For the six months ended June 30, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $4,153,000 | $4,868,000 | $(715,000) | $8,353,000 | $10,030,000 | $(1,677,000) |
| Impairment of capitalized software | $- | $295,000 | $(295,000) | $- | $295,000 | $(295,000) |
| Depreciation and amortization (non-direct) | $110,000 | $123,000 | $(13,000) | $224,000 | $244,000 | $(20,000) |

#### Selling, General and Administrative Expenses

The decrease in selling, general and administrative expenses for the three and six months ended June 30, 2016 was primarily due to lower headcount when compared to the same periods in 2015, reflecting a reduction of approximately $785,000 and $1,390,000 in payroll and related expenses, respectively. The decrease was also due to a reduction in marketing expenses of approximately $49,000 and $379,000 for the three and six months ended June 30, 2016, respectively, primarily related to market research activities that occurred during the 2015 periods, which were not repeated during the 2016 periods. These decreases were offset by increased hardware and software expenses of $102,000 and $120,000 for the three and six months ended June 30, 2016, respectively, when compared to the same periods in 2015.

#### Impairment of Capitalized software

Impairment of capitalized software for the three and six months ended June 30, 2015 was the result of abandoning certain capitalized software development projects that we concluded were no longer a current strategic fit or for which we determined that the marketability of the content had decreased due to obtaining additional information regarding the specific purpose for which the content was intended. There were no such impairment charges recognized for the three and six months ended June 30, 2016.

#### Depreciation and Amortization Expense

The decrease in depreciation and amortization expense for the three and six months ended June 30, 2016 compared to the same periods 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 June 30, 2016 | 2015 | Increase in expense, net | For the six months ended June 30, 2016 | 2015 | Increase in expense, net |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Total other expense, net | $(149,000) | $(139,000) | $(10,000) | $(303,000) | $(182,000) | $(121,000) |

The increase in total other expense, net for the three and six months ended June 30, 2016 compared to the same period in 2015 is primarily due to changes in foreign currency exchange gains and losses related to the operations of our Canadian subsidiary, as well as reductions in miscellaneous other income when compared to the same periods in 2015.

### Income Taxes

|  | For the three months ended June 30, 2016 | 2015 | For the six months ended June 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Provision for income taxes | $(5,000) | $(14,000) | $(24,000) | $(28,000) |

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.

### EBITDA—Consolidated Operations

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not intended to represent a measure of performance in accordance with GAAP. Nor should EBITDA be considered as an alternative to statements of cash flows as a measure of liquidity. EBITDA is included herein because we believe it is a measure of operating performance that financial analysts, lenders, investors and other interested parties find to be a useful tool for analyzing companies like us that carry significant levels of non-cash depreciation and amortization charges in comparison to their net income or loss calculation in accordance with GAAP.

The reconciliation of our consolidated net loss calculated in accordance with GAAP to EBITDA for the three and six months ended June 30, 2016 and 2015 is shown in the table below. EBITDA should not be considered as substitutes for, or superior to, net loss calculated in accordance with GAAP.

|  | For the three months ended June 30, 2016 | 2015 | For the Six months ended June 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Net loss per GAAP | $(850,000) | $(2,625,000) | $(1,891,000) | $(4,888,000) |
| Interest expense, net | 153,000 | 182,000 | 280,000 | 284,000 |
| Income tax provision | 5,000 | 14,000 | 24,000 | 28,000 |
| Depreciation and amortization | 730,000 | 720,000 | 1,487,000 | 1,421,000 |
| EBITDA | 38,000 | (1,709,000) | (100,000) | (3,155,000) |

### LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2016, we had cash and cash equivalents of $3,571,000 compared to cash and cash equivalents of $3,223,000 as of December 31, 2015.

We believe our existing cash and cash equivalents and the availability on our credit facilities will be sufficient to meet our operating cash requirements and to fulfill our debt obligations for at least the next twelve months. 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 June 30, 2016, we had working capital (current assets in excess of current liabilities) of $1,642,000 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 June 30, 2016.

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2015 | $3,988,000 |
| Changes in current assets: |  |
| Cash and cash equivalents | 348,000 |
| Accounts receivable, net of allowance | (278,000) |
| Site equipment to be installed | (1,005,000) |
| Prepaid expenses and other current assets | 49,000 |
| Change in total current assets | (886,000) |
| Changes in current liabilities: |  |
| Accounts payable | 168,000 |
| Accrued compensation | (203,000) |
| Accrued expenses | (141,000) |
| Sales taxes payable | (78,000) |
| Income taxes payable | (9,000) |
| Current portion of long-term debt | 1,942,000 |
| Current portion of obligations under capital leases | (3,000) |
| Deferred revenue | 139,000 |
| Other current liabilities | (355,000) |
| Change in total current liabilities | 1,460,000 |
| Net change in working capital | (2,346,000) |
| Working capital as of June 30, 2016 | $1,642,000 |

#### 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 six months ended June 30, 2016 | 2015 |
| --- | ---: | ---: |
| Operating activities | $13,000 | $(1,135,000) |
| Investing activities | (466,000) | (815,000) |
| Financing activities | 748,000 | 204,000 |
| Effect of exchange rates | 53,000 | (48,000) |
| Net increase (decrease) in cash and cash equivalents | $348,000 | $(1,794,000) |

*Net cash provided by (used in) operating activities.* The $1,148,000 change in cash provided by operating activities was due to a decrease in net loss of $2,219,000, after giving effect to adjustments made for non-cash transactions, offset by a decrease in cash provided by operating assets and liabilities of $1,071,000 during the six months ended June, 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.

Our inventory levels of site equipment to be installed decreased to $2,985,000 as of June 30, 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 $827,000 to $5,376,000 for the three months ended June 30, 2016 from $6,203,000 during the same period in 2015 due to lower headcount.

Our primary source of cash is cash we generate from customers. Cash received from customers decreased $2,037,000 to $11,831,000 for the six months ended June 30, 2016 from $13,868,000 during the same period in 2015. This decrease was primarily a result of receiving a large past-due receivable during the six months ended June 30, 2015, and to a lesser extent, decreased revenue during the six months ended June 30, 2016 when compared to the same period in 2015.

*Net cash used in investing activities.* The $349,000 decrease in cash used in investing activities was primarily due to a decrease in capital expenditures and software development expenditures.

*Net cash provided by financing activities.* Cash provided by financing activities increased by approximately $544,000. During 2016, we made fewer payments on our long-term debt, but also received fewer proceeds from long-term debt when compared to the same period in the prior year.

### RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 7 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, 1,078 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, Item IA of Part II of our Quarterly Report on Form 10-Q for the three months ended March 31, 2016, and 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 on Form 10-K for the year ended December 31, 2015 or our Quarterly Report on form 10-Q for the three months ended March 31, 2016.

Filed Aug 4, 2016.
Source: SEC EDGAR, the filing index for accession 0001493152-16-011963. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.