# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Mar 31, 2017

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2017-05-04
- Accepted by EDGAR: May 4, 2017, 16:06 ET
- Period: 2017-03-31
- Accession: 0001493152-17-004743
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000149315217004743/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000149315217004743/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-01-01 to 2017-03-31 | $5.2m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2017-01-01 to 2017-03-31 | $4.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-01-01 to 2017-03-31 | −$834.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $6.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | −$90.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-01-01 to 2017-03-31 | −$0.04 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2017-01-01 to 2017-03-31 | −$466.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $97.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-03-31 | $6.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-03-31 | $11.6m | us-gaap:AssetsCurrent |
| Total assets | at 2017-03-31 | $17.5m | us-gaap:Assets |
| Current liabilities | at 2017-03-31 | $10.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-03-31 | $11.7m | us-gaap:Liabilities |
| Current portion of debt | at 2017-03-31 | $7.3m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-03-31 | $5.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,839 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 ability to maintain or improve 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 on favorable terms; we have borrowed substantially all amounts available to us under existing credit facilities and, subject to limited exceptions, our loan and security agreement with East West Bank prohibits us from borrowing additional amounts from other lenders, (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, 2016, and described in other documents we file from time to time with the Securities and Exchange Commission, or SEC, including this report and our other 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, 2017 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, 2016.
- *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, 2017 to the results for the three months ended March 31, 2016.
- *Liquidity and Capital Resources*. This section provides an analysis of our historical cash flows, as well as our future capital requirements.

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### 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. Customers license our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and single player games, nationwide competitions, and by offering 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 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, by selling advertising aired on in-venue screens and as part of customized games and by pay-to-play single player games.

Over 136 million games were played on our network during 2016, and as of March 31, 2017, approximately 54% of our network subscriber venues are affiliated with national and regional restaurant brands, including Buffalo Wild Wings, Buffalo Wings & Rings, Old Chicago, Native Grill & Wings, Houlihans, Beef O’Brady’s, 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 locations 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 hospitality locations, and (d) to “hospitality locations,” “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

#### Registered Direct Offerings

As previously reported, in a registered direct offering that closed on April 28, 2017, we sold 29,566 shares of our common stock and received net proceeds of approximately $219,000, after deducting offering expenses.

Also as previously reported, in a registered direct offering that closed on March 31, 2017, we sold 200,000 shares of our common stock and received net proceeds of approximately $1.6 million, after deducting offering expenses.

We are using and will continue to use the net proceeds of the offerings for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of our strategic priorities.

#### 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 second 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 noncompliance with Section 1003(a)(iii) of the Company Guide discussed above, we were not required to submit a new compliance plan.

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. Our stockholders’ equity at September 30, 2016 was $1.8 million, and accordingly, we were below compliance with Section 1003(a)(i), as well. However, we raised approximately $2.7 million in the offering we closed in November 2016, and our stockholders’ equity at December 31, 2016 was approximately $4.1 million.

The listing of our common stock on the NYSE MKT is being continued during the plan period. The NYSE Regulation staff reviews us periodically for compliance with initiatives outlined in our plan. If we are not in compliance with the listing requirements with which we are currently not in compliance 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—ITEM 1A. RISK FACTORS—Risks Relating to the Market for Our Common Stock—Our common stock could be delisted or suspended from trading on the NYSE MKT if we do not regain compliance with continued listing criteria with which we are currently not compliant or if we fail to meet any other continued listing criteria,” below. We have continued to make progress consistent with our plan during the plan period. Raising capital in the offerings described above is consistent with the initiatives outlined in our plan to regain compliance, and after giving effect to the offering that closed on April 28, 2017, we believe we will have regained compliance with Sections 1003 (a)(i), (ii) and (iii) of the Company Guide, however determination of whether we have regained such compliance will be made by NYSE Regulation and will be publicly disclosed by us.

#### Amendment to East West Bank Credit Facility

In February 2017, we entered into a third amendment to the loan and security agreement with EWB to extend the maturity date of the $2,000,000 sublimit from March 31, 2017 to June 15, 2017, to establish the minimum adjusted EBITDA targets for each of our 2017 fiscal quarters, to remove the monthly compliance check of churn rate targets and to amend when compliance with minimum deposit amounts is measured. For additional information regarding this credit facility, see “—Liquidity and Capital Resources,” below.

### Our Strategy and Current Highlights

Below is a discussion of our strategy and highlights of accomplishments and milestones achieved during 2017:

*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. This expanded functionality will help us deliver an enhanced guest experience. Rolling out this functionality will be a key focus for us in 2017. In March 2017, we announced that we have expanded our relations with Buffalo Wild Wings, who chose us to be its provider of digital menu, order, and payment functionality. We expect our expenses to increase due to initiatives we implement as we prepare to expand and support this relationship.

*Improve value and price for our “independent” customers.* During 2017, we are continuing to focus on, entertainment, which is a key source of value to our independent customers. During the first quarter of 2017, we launched Spaceteam, an award-winning multi-player game that creates social engagement between guests at the table and between guests and venues, which is a key value driver for independent bars and restaurants.

We also continued to make progress on our hardware design and quality in order to reduce expense, while expanding capabilities, retaining consistency in the design and giving 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 ability to demonstrate Buffalo Wild Wings as a strategic user of the menu, order and pay functionality 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.

*Expand revenue opportunities.* 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 we have been researching and testing our services within adjacent markets, such as senior centers, car dealerships and casinos. We also continue to monetize the network through local and national advertising revenue streams.

### 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, 2017 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, 2016.

### RESULTS OF OPERATIONS

### Three months ended March 31, 2017 compared to the three months ended March 31, 2016

We generated a net loss of $90,000 for the three months ended March 31, 2017 compared to a net loss of $1,041,000 for the three months ended March 31, 2016.

### Revenue

The table below summarizes the type of revenue we generated for the three months ended March 31, 2017 and 2016:

|  | Three months ended March 31, 2017 $% of Total Revenue |  | 2016 $% of Total Revenue |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 4,226,000 | 80.8% | 4,374,000 | 79.8% | (148,000) | (3.4)% |
| Sales-type lease revenue | 185,000 | 3.5% | 396,000 | 7.2% | (211,000) | (53.3)% |
| Other revenue | 820,000 | 15.7% | 712,000 | 13.0% | 108,000 | 15.2% |
| Total | 5,231,000 | 100.0% | 5,482,000 | 100.0% | (251,000) | (4.6)% |

Subscription revenue decreased for the three months ended March 31, 2017 primarily due to lower average site count when compared to the same period in 2016. During the three months ended March 31, 2017, 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 2016. 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 the 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 fluctuating in correlation with customer contracts under sales-type lease arrangements. Other revenue increased for the three months ended March 31, 2017 due primarily to an increase in our live hosted events and professional services when compared to the same period in 2016.

Geographic breakdown of our network subscribers is as follows:

|  | Network Subscribers as of March 31, 2017 | 2016 |
| --- | ---: | ---: |
| United States | 2,643 | 2,742 |
| Canada | 145 | 161 |
| Total | 2,788 | 2,903 |

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### Direct Costs and Gross Margin

A comparison of direct costs and gross margin for the three months ended March 31, 2017 and 2016 is shown in the table below:

|  | For the three months ended March 31, 2017 | 2016 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $5,231,000 | $5,482,000 | $(251,000) | (4.6)% |
| Direct Costs | 1,843,000 | 2,036,000 | (193,000) | (9.5)% |
| Gross Margin | $3,388,000 | $3,446,000 | $(58,000) | (1.7)% |
| Gross Margin Percentage | 64.8% | 62.9% |  |  |

The decrease in direct costs for the three months ended March 31, 2017 compared to the same period in 2016 was primarily due to decreased equipment expense of approximately $261,000 related to lower sale-type lease revenue, decreased depreciation expense for capitalized site equipment and software development programs of $151,000 and decreased service provider fees of $70,000. These decreases were offset by an increase of approximately $288,000 in repair expense related to our second generation tablet cases. We expect such repair expense to decrease in future quarters because we anticipate that our second generation tablet cases will be phased out of locations by mid-2017.

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, 2017 | 2016 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $4,134,000 | $4,200,000 | $(66,000) | (1.6)% |
| Depreciation and amortization (non-direct) | $88,000 | $114,000 | $(26,000) | (22.8)% |

#### 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 less marketing expense of approximately $56,000 and decreased payroll and related expense of $34,000, offset by increased professional fees of $31,000 when compared to the same period in 2016.

We expect selling, general and administrative expenses in the second and third quarters of 2017 to increase from first quarter 2017 as we continue to make decisions for efficiency as well as investments that can impact our growth, including as we implement initiatives to prepare to expand our relationship with Buffalo Wild Wings and to support that expansion. For the full year 2017, we anticipate selling, general and administrative expenses to be approximately $17.0 million.

#### Depreciation and Amortization Expense

The decrease in depreciation and amortization expense for the three months ended March 31, 2017 compared to the same period in 2016 is primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.

### Other Income (Expense), Net

|  | For the three months ended March 31, 2017 | 2016 | Increase in other income, net |
| --- | ---: | ---: | ---: |
| Total other income (expense), net | $750,000 | $(154,000) | $904,000 |

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The increase in total other income, net is primarily due to a one-time payment from a supplier, offset by increased interest expense from higher long-term debt balances for the three months ended March 31, 2017 compared to the same period in 2016. The one-time payment related to a supply chain matter that was resolved in exchange for such payment and which we do not expect to receive again.

### Income Taxes

|  | For the three months ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Provision for income taxes | $(6,000) | $(19,000) |

We expect to incur state income tax liability in 2017 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 months ended March 31, 2017 and 2016 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 March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Net loss per GAAP | $(90,000) | $(1,041,000) |
| Interest expense, net | 159,000 | 127,000 |
| Income tax provision | 6,000 | 19,000 |
| Depreciation and amortization | 579,000 | 757,000 |
| EBITDA | $654,000 | $(138,000) |

### LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2017, we had cash and cash equivalents of $6,113,000 compared to $5,686,000 as of December 31, 2016.

In a registered direct offering that closed on April 28, 2017, we sold 29,566 shares of our common stock and received net proceeds of approximately $219,000, after deducting offering expenses. Also, in a registered direct offering that closed on March 31, 2017, we sold 200,000 shares of our common stock and received net proceeds of approximately $1.6 million, after deducting offering expenses. We are using and will continue to use the net proceeds of the offerings for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of our strategic priorities.

As of March 31, 2017, we borrowed $6,500,000 in the aggregate under the EWB credit facility, of which $6,450,000 remained outstanding. As of that date and based on our borrowing base calculated as of that date, approximately $20,000 was available to borrow. In April 2017, we paid in full the $2,000,000 outstanding under the sublimit, leaving $4,450,000 outstanding. If the aggregate amount of advances as of June 15, 2017 exceeds the lesser of the revolving line ($7,500,000) or the amount equal to our borrowing base (which was $20,000 as of March 31, 2017), then we must pay EWB the amount of such excess. All advances are due on January 15, 2018. Under the EWB credit facility, we are required to meet a minimum adjusted EBITDA target and churn rate targets. We were in compliance with these covenants as of March 31, 2017. As a result of paying the sublimit in full in April 2017, we were required to have a balance on deposit with EWB equal to 100% of the aggregate outstanding principal amount of the advances at that time. We complied with this covenant. For other information regarding the EWB credit facility, including how our borrowing base is determined, see “Note 4—Debt” to the Notes to Condensed Consolidated Financial Statements included in this report.

We have another financing arrangement with an equipment lender under which we may request funds to finance the purchase of certain capital equipment. The lender determines whether to extend such funds on a case-by-case basis, taking into account such factors as the lender considers relevant, including the amount outstanding under this financing arrangement. Through March 31, 2017, we borrowed $9,690,000 under this financing arrangement, and as of March 31, 2017, $1,302,000 remained outstanding. We currently do not expect the lender to lend any additional funds under this financing arrangement, and other than the EWB credit facility, we currently do not have any other source of debt financing. In addition, other than up to $2,000,000 in the aggregate that we may borrow for equipment financing with EWB’s consent, the EWB credit facility prohibits us from borrowing additional amounts from other lenders.

In connection with preparing the financial statement as of and for the three months ended March 31, 2017, we evaluated whether there are conditions and events, considered in the aggregate, that are known and reasonably knowable that would raise substantial doubt about our ability to continue as a going concern within one year after the date that such financial statements are issued. As a result of such evaluation, we believe we will have sufficient cash to meet our operating cash requirements and to fulfill our debt obligations for at least the next twelve months from the issuance date of such financial statements. To increase the likelihood that we will be able to successfully execute our operating and strategic plan and to position us to better take advantage of market opportunities for growth, we are continuing to evaluate additional financing alternatives, including additional equity financings and alternative sources of debt. 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 raise capital on terms that are not as favorable to us as they otherwise might be. 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, 2017, we had working capital (current assets in excess of current liabilities) of $1,113,000 compared to working capital of $4,019,000 as of December 31, 2016. The following table shows our change in working capital from December 31, 2016 to March 31, 2017.

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2016 | $4,019,000 |
| Changes in current assets: |  |
| Cash and cash equivalents | 427,000 |
| Accounts receivable, net of allowance | 837,000 |
| Site equipment to be installed | (430,000) |
| Prepaid expenses and other current assets | 139,000 |
| Change in total current assets | 973,000 |
| Changes in current liabilities: |  |
| Accounts payable | 266,000 |
| Accrued compensation | (541,000) |
| Accrued expenses | (136,000) |
| Sales taxes payable | (41,000) |
| Income taxes payable | (21,000) |
| Current portion of long-term debt | 4,318,000 |
| Current portion of obligations under capital leases | - |
| Deferred revenue | (22,000) |
| Other current liabilities | 56,000 |
| Change in total current liabilities | 3,879,000 |
| Net change in working capital | (2,906,000) |
| Working capital as of March 31, 2017 | $1,113,000 |

#### 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, 2017 | 2016 |
| --- | ---: | ---: |
| Operating activities | $(466,000) | $(504,000) |
| Investing activities | (249,000) | (276,000) |
| Financing activities | 1,135,000 | 1,053,000 |
| Effect of exchange rates | 7,000 | 53,000 |
| Net increase in cash and cash equivalents | $427,000 | $326,000 |

*Net cash used in operating activities.* The $38,000 decrease in cash used in operating activities was due to a net decrease in net loss of $915,000, after giving effect to adjustments made for non-cash transactions, offset by an increase in operating assets and liabilities of $877,000 primarily due to an increase in accounts receivable during the three months ended March 31, 2017 compared to the same period in 2016. The increase in accounts receivable is primarily due to a one-time payment related to a supply chain matter that was resolved in exchange for such payment and which we do not expect to receive again

We expect site equipment to be installed to increase in the second and third quarters of 2017 from the first quarter 2017 as we invest in inventory to prepare to expand our relationship with Buffalo Wild Wings and to support that expansion.

Our largest use of cash is payroll and related costs. Cash used for payroll and related costs increased $227,000 to $2,964,000 for the three months ended March 31, 2017 from $2,737,000 during the same period in 2016.

Our primary source of cash is cash we generate from customers. Cash received from customers decreased $280,000 to $5,669,000 for the three months ended March 31, 2017 from $5,949,000 during the same period in 2016. This decrease was primarily a result of decreased revenue during the three months ended March 31, 2017 when compared to the same period in 2016.

*Net cash used in investing activities.* The $27,000 decrease in cash used in investing activities was primarily due to a decrease in capital expenditures offset by increased software development expenditures.

*Net cash provided by financing activities.* The $82,000 increase in cash provided by financing activities is primarily attributable to the following:

- During the three months ended March 31, 2017, we received net proceeds of $1,554,000 from our common stock offering in March 2017; there was no similar event during the same period in 2016; and
- During the three months ended March 31, 2017, our payments on long-term debt decreased by $676,000 compared to the same period in 2016.

### RECENT ACCOUNTING PRONOUNCEMENTS

We have considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements, and believe that these recent pronouncements will not have a material effect on our consolidated financial statements.

### 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, 6,300 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, 2016 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 stated below.

***Our common stock could be delisted or suspended from trading on the NYSE MKT if we do not regain compliance with continued listing criteria with which we are currently not compliant or if we fail to meet any other continued listing criteria.***

As previously reported in November 2015, we are not in compliance with the continued listing standards of the NYSE MKT. 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 was in addition to our noncompliance with Section 1003(a)(iii) of the Company Guide, we were not required to submit a new compliance plan.

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. Our stockholders’ equity at September 30, 2016 was $1.8 million, and accordingly, we were below compliance with Section 1003(a)(i), as well. However, we raised approximately $2.7 million in the offering we closed in November 2016, and our stockholders’ equity at December 31, 2016 was approximately $4.1 million.

The listing of our common stock on the NYSE MKT is being continued during the plan period. The NYSE Regulation staff reviews us periodically for compliance with initiatives outlined in our plan. We have continued to make progress consistent with our plan during the plan period, however, our stockholders’ equity was less than $6.0 million at March 31, 2017. If we are not in compliance with the listing requirements with which we are currently not in compliance 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. After giving effect to the offering that closed on April 28, 2017, we believe we will have regained compliance with Sections 1003 (a)(i), (ii) and (iii) of the Company Guide, however determination of whether we have regained such compliance will be made by NYSE Regulation and will be publicly disclosed by us. If it is determined that we have not regained such compliance, we will continue to explore options to address our non-compliance, including by raising additional capital through additional equity financings. 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 by May 13, 2017, or because we fall below compliance with other NYSE MKT listing standards. 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 4, 2017.
Source: SEC EDGAR, the filing index for accession 0001493152-17-004743. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.