# Ernexa Therapeutics Inc.: Form 10-Q for the period ended Jun 30, 2018

- Company: [Ernexa Therapeutics Inc.](/companies/erna.md) (CIK 748592)
- Form: 10-Q
- Filed: 2018-08-06
- Accepted by EDGAR: Aug 6, 2018, 16:31 ET
- Period: 2018-06-30
- Accession: 0001493152-18-011019
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/748592/000149315218011019/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/748592/000149315218011019/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-04-01 to 2018-06-30 | $5.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2018-01-01 to 2018-06-30 | $11.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2018-04-01 to 2018-06-30 | $3.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2018-01-01 to 2018-06-30 | $7.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-04-01 to 2018-06-30 | −$27.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-01-01 to 2018-06-30 | −$340.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $24.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $26.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | −$124.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | −$533.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | −$0.05 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | −$0.21 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | $239.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-01-01 to 2018-06-30 | $280.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-06-30 | $3.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-06-30 | $9.2m | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $16.4m | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $7.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-06-30 | $9.8m | us-gaap:Liabilities |
| Current portion of debt | at 2018-06-30 | $2.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-06-30 | $6.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,843 characters.

#### CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

*This report and the documents incorporated 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 adequately protect our proprietary rights and intellectual property, (5) our ability to raise additional funds 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, (6) our ability to satisfy our payment obligations and comply with financial and other covenants under our amended and restated loan agreement with East West Bank, which lender has a first-priority security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions; (7) our ability to meet financial and other growth expectations of our investors, analysts and other market participants and commentators, including expectations relating to our site count, cash flow and EBITDA; (8) our ability to maintain an adequate supply of the tablet and related equipment used in our tablet platform, (9) 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 the tablet and related equipment used in our 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, 2017, 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 in this report or incorporated by reference herein, which speak only as of the date of this report. Except as required by law, we undertake no obligation to revise or update any such forward-looking statement to reflect future events or circumstances.*

### INTRODUCTION

Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to, and should be read with, 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. All dollar amounts in this discussion are rounded to the nearest thousand. Our discussion is organized as follows:

- *Overview and Highlights*. This section generally describes our business and significant events and transactions we believe are important in understanding our financial condition and results of operations.
- *Critical Accounting Policies*. This section lists our significant accounting policies, including any material changes in our critical accounting policies, estimates and judgments during the three months ended June 30, 2018 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, 2017.
- *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, 2018 to the results for the three and six months ended June 30, 2017.
- *Liquidity and Capital Resources*. This section provides an analysis of our historical cash flows, and 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 technology, including performance analytics and secure payment with Europay, MasterCard® and Visa® (EMV) chip card readers or with near-field communication (NFC) technology to accept Apple, Android and Samsung Pay. Most frequently used in bars and restaurants in North America our tablets and technology offer engaging solutions to establishments with guests who experience dwell time, such as casinos, senior living, and more. Casual dining venues subscribe to our customizable solution to differentiate themselves via competitive fun by offering guests trivia, card, sports and arcade games, customized menus and self-service dining features. Our platform improves operating efficiencies, creates connections among the players and venues, and amplifies guests’ positive experiences. Our tablet platform was commercially launched during 2013 and then scaled during 2014. We also continue to support our legacy network product line, which we call our Classic platform.

We generate revenue by charging subscription fees for our service to network subscribers, by leasing equipment to certain network subscribers, by selling equipment, by hosting live trivia events, by selling advertising aired on in-venue screens and as part of customized games, by licensing our content for use with third-party equipment, from providing professional services (such as developing certain functionality within our platform for customers), and from pay-to-play single player games.

Since 2015, over 115 million games have been played on our network annually, and as of June 30, 2018, approximately 55% 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, and BEOND Powered by Buzztime 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 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.

### Our Strategy and Business Updates

Grow business beyond restaurant and bar industry. One of our major initiatives is to expand our business beyond the restaurant and bar industry through partnerships and product extensions. During the first quarter of 2018, we agreed to sell our tablets to a third-party who will use our tablets and operating system to deliver their services in local jails. In July 2018, we entered into a revenue share agreement with this partner, under which our partner will make our single player games available for a fee to inmates. Earlier in 2017, we began a relationship with a third-party who is licensing our trivia content for use in casino gaming machines and is leasing our tablets for use in retail settings to complete loyalty/reward program transactions.

Launch expanded product offerings. We continue to focus on bringing new experiences and promotions to our customers. We are developing new products that we believe will help differentiate our offerings from those of our competitors, and which are expected to provide an ability to scale our business beyond our traditional entertainment offering.

*New Site Hub*. A piece of the equipment we install in our customers’ venues is a personal computer that acts as a server from which our content is streamed to the tablets within the venue. We are working on a smaller form factor for the personal computer that, besides being physically smaller, would be available at a lower cost and would reduce labor-intensive installation costs. We believe that the site hub will lead to new opportunities, which could include the ability to display video, highlights, dynamic web content, and app content, in addition to delivering our historical offerings within venues. We are currently testing the first version of the site hub in-house and are working toward making it commercially available by the end of 2018 or early 2019.

#### Mobile Only Offerings.

- Mobile live trivia. We have completed a market-ready, mobile version of our live trivia product that allows customers, trivia hosts, and individuals to start their own trivia events. We released this product for select use cases and plan to have more use cases in the coming months.
- Tablet-free system. We are developing a version of our system that allows players to use their own mobile device to play our network games inside our customers’ venues.

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When these mobile offerings become available commercially, they will be our easiest to adopt, lowest cost of entry solutions, and may serve as a test for a venue contemplating a more significant investment.

*Single Player Games*. During the second quarter, we released our first internally-built single player arcade game, *Buzztime Soccer,* for our tablet platform, and we expect to release several more internally-built single player games in the coming weeks. Previously, we purchased these games from third party aggregators, sometimes at significant cost.

Buffalo Wild Wings. In March 2017, Buffalo Wild Wings chose us to be its provider of digital menu, order, and payment functionality. In November 2017, we expected to begin rolling out our improved tablet platform system at certain Buffalo Wild Wings locations during the first quarter of 2018 and, after an initial set of locations was running smoothly, throughout the rest of the Buffalo Wild Wings corporate and franchise locations with which we had partnered. Due to the acquisition of Buffalo Wild Wings by Arby’s Restaurant Group, Inc. (which renamed itself Inspire Brands Inc.) in February 2018 and to the associated changes with Buffalo Wild Wings’ operations, the rollout of our expanded functionality tablet platform system was put on hold to allow its new ownership to assess all the programs at Buffalo Wild Wings. Since that time, we have been working with Inspire Brands as it integrates Buffalo Wild Wings into its portfolio and determines its brand priorities. Our updated tablet platform system is currently live at 31 Buffalo Wild Wings locations with our order, payment and guest insights functionality. We continue to believe that a long-term relationship with Inspire Brands presents numerous opportunities as it intends to add several more brands to its portfolio, and that our discussions with Inspire Brands have been going well. At this time we are not certain to what extent or which of our offerings, if any, will fit within its updated brand strategy, or when it will make this determination. Aside from existing contractual obligations under agreements we have entered into in the ordinary course of business, Inspire Brands has no obligation to continue or to expand our current relationship. We continue to believe our player engagement and loyalty as well as expanded product offerings will offer us a way to continue supporting the Buffalo Wild Wings brand under the Inspire Brands umbrella.

Advertising Partnerships. We believe that if we lower the price of our tablet platform, we can acquire more market share. One way to lower the price is by subsidizing our costs through advertising. We are currently working with advertising sales companies to help us improve our advertisement sales and with an advertisement technology company to improve our ad loading, management, and delivery and testing capabilities.

### Recent Developments

#### Registered Direct Offerings

On June 27, 2018, we entered into a subscription agreement with certain investors relating to the issuance and sale of shares of our common stock at a purchase price of $4.50 per share. The offering closed on June 29, 2018. We sold 345,772 shares of our common stock and received net proceeds of approximately $1,381,000, after deducting approximately $175,000 in offering expenses.

We intend to use the net proceeds of the offering for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities.

#### Non-compliance with NYSE American continued listing standard

As previously reported, in March 2018, we received a letter from the NYSE Regulation Inc. stating that we were not in compliance with NYSE American LLC listing standards, specifically, Section 1003(a)(iii) of the Company Guide, because we reported stockholders’ equity of less than $6 million as of December 31, 2017 and had net losses in five of our most recent fiscal years ended December 31, 2017. In April 2018, 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 March 20, 2019. In April 2018, NYSE Regulation notified us that it has accepted our plan and granted us a plan period that extends through March 20, 2019 to regain compliance with Section 1003(a)(iii).

The listing of our common stock on the NYSE American 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 Section 1003(a)(iii) by March 20, 2019 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—”Our common stock could be delisted or suspended from trading on the NYSE American 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. Raising capital in the offering described above is consistent with the initiatives outlined in our plan to regain compliance, and after giving effect to that offering, we believe we are on the path to regaining compliance with Section 1003(a)(iii). NYSE Regulation will determine if and when we have regained compliance. In order for it to determine that we have regained compliance, we must have stockholders’ equity of $6 million or more for two consecutive quarters.

#### East West Bank Credit Facility

In March 2018, we entered into an amendment to the amended and restated loan and security agreement we entered into with East West Bank on November 29, 2017. In accordance with the terms of the amended and restated loan and security agreement, beginning with the payment due on June 30, 2018, our payments under this credit facility became principal and interest, whereas they have historically been interest only.

### 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 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, 2018 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, 2017, except for *Revenue from Contracts with Customers (Topic 606)*. We have completed the process of evaluating the effect of adopting Topic 606 and have determined that the timing and amount of revenue recognized based on Topic 606 is consistent with our revenue recognition policy under previous guidance, and accordingly, there was no transition adoption adjustment necessary upon the adoption of the Topic 606 guidance. (See Note 2 to the accompanying unaudited condensed consolidated financial statements.)

### RESULTS OF OPERATIONS

### Three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017

We incurred a net loss of $124,000 and $533,000 for the three and six months ended June 30, 2018, respectively, compared to a net loss of $164,000 and $254,000 for the three and six months ended June 30, 2017.

### Revenue

The table below summarizes our revenue by type for the period indicated:

|  | Three months ended June 30, 2018 $% of Total Revenue |  | 2017 $% of Total Revenue |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 4,041,000 | 72% | 4,232,000 | 76% | (191,000) | (5)% |
| Hardware revenue | 590,000 | 10% | 223,000 | 4% | 367,000 | 165% |
| Other revenue | 1,020,000 | 18% | 1,094,000 | 20% | (74,000) | (7)% |
| Total | 5,651,000 | 100% | 5,549,000 | 100% | 102,000 | 2% |

|  | Six months ended June 30, 2018 $% of Total Revenue |  | 2017 $% of Total Revenue |  | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 8,106,000 | 71% | 8,458,000 | 78% | (352,000) | (4)% |
| Hardware revenue | 1,269,000 | 11% | 408,000 | 4% | 861,000 | 211% |
| Other revenue | 2,037,000 | 18% | 1,914,000 | 18% | 123,000 | 6% |
| Total | 11,412,000 | 100% | 10,780,000 | 100% | 632,000 | 6% |

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Subscription revenue decreased for the three and six months ended June 30, 2018 primarily due to lower average site count and lower average revenue per site when compared to the same periods in 2017. During the three and six months ended June 30, 2018, hardware revenue increased primarily due to more installations of our tablet platform for certain customers under sales-type lease arrangements when compared to the same periods in 2017. Additionally, we began selling equipment during the three months ended June 30, 2018, which accounts for $39,000 of the increase in hardware revenue when compared to the same period in 2017. We expect the amount of hardware revenue to continue fluctuating in correlation with customer contracts under sales-type lease arrangements and with other equipment sale contracts. Other revenue increased for the three and six months ended June 30, 2018 due primarily to an increase in professional services when compared to the same periods in 2017.

Geographic breakdown of our site count for network subscribers was:

|  | Network Subscribers as of June 30, 2018 | 2017 |
| --- | ---: | ---: |
| United States | 2,561 | 2,628 |
| Canada | 142 | 140 |
| Total | 2,703 | 2,768 |

### Direct Costs and Gross Margin

A comparison of direct costs and gross margin for the period indicated is shown in the table below:

|  | Three months ended June 30,% 2018 | 2017 | Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $5,651,000 | $5,549,000 | $102,000 | 2% |
| Direct Costs | 1,937,000 | 1,631,000 | 306,000 | 19% |
| Gross Margin | $3,714,000 | $3,918,000 | $(204,000) | (5)% |
| Gross Margin Percentage | 66% | 71% |  |  |

|  | Six months ended June 30,% 2018 | 2017 | Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $11,412,000 | $10,780,000 | $632,000 | 6% |
| Direct Costs | 3,904,000 | 3,474,000 | 430,000 | 12% |
| Gross Margin | $7,508,000 | $7,306,000 | $202,000 | 3% |
| Gross Margin Percentage | 66% | 68% |  |  |

For the three months ended June 30, 2018, the increase in direct costs was primarily due to increased equipment expense of $311,000 related to higher sale-type lease revenue and equipment sales, increased depreciation expense of $149,000 for capitalized site equipment and software development programs and increased service provider fees of $14,000, offset by decreases in freight expense of $47,000, direct wages of $62,000 and license fees of $53,000 when compared to the same period in 2017.

For the six months ended June 30, 2018, the increase in direct costs was primarily due to increased equipment expense of $376,000 related to higher sale-type lease revenue and equipment sales, increased depreciation expense of $211,000 for capitalized site equipment and software development programs and increased service provider fees of $35,000, offset by decreases in freight expense of $111,000, direct wages of $56,000 and license fees of $34,000 when compared to the same period in 2017.

### Operating Expenses

|  | Three months ended June 30,% 2018 | 2017 | Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $3,658,000 | $3,858,000 | $(200,000) | (5)% |
| Depreciation and amortization (non-direct) | $83,000 | $86,000 | $(3,000) | (3)% |

|  | Six months ended June 30,% 2018 | 2017 | Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative | $7,679,000 | $7,992,000 | $(313,000) | (4)% |
| Depreciation and amortization (non-direct) | $169,000 | $174,000 | $(5,000) | (3)% |

#### Selling, General and Administrative Expenses

The decrease in selling, general and administrative expenses for the three months ended June 30, 2018 was primarily due to decreased payroll and related expense of $213,000, decreased hardware and software expenses of $46,000 and decreased marketing expense of $33,000, offset by increased professional fees of $94,000, in each case, when compared to the same period in 2017.

The decrease in selling, general and administrative expenses for the six months ended June 30, 2018 was primarily due to decreased payroll and related expense of $379,000, decreased marketing expense of $100,000 and decreased operating supplies expenses of $37,000, offset by increased professional fees of $252,000, in each case, when compared to the same period in 2017.

#### Depreciation and Amortization Expense

The decrease in depreciation and amortization expense for the three and six months ended June 30, 2018 compared to the same periods in 2017 was primarily due to assets becoming fully depreciated or amortized sooner than we are replenishing with new assets.

### Other (Expense) Income, Net

|  | Three months ended June 30, 2018 | 2017 | Decrease in other expense, net |
| --- | ---: | ---: | ---: |
| Total other (expense) income, net | $(73,000) | $(132,000) | $59,000 |

|  | Six months ended June 30, 2018 | 2017 | Increase in other expense, net |
| --- | ---: | ---: | ---: |
| Total other (expense) income, net | $(167,000) | $618,000 | $(785,000) |

For the three months ended June 30, 2018, the decrease in other expense, net was primarily related to decreased interest expense resulting from lower debt balances and increased foreign currency exchange gains related to the operations of our Canadian subsidiary.

For the six months ended June 30, 2018, the increase in other expense, net was primarily related to the receipt of a one-time payment from a supplier during the 2017 period related to a supply chain matter that was resolved in exchange for such payment and the absence of a similar event during the 2018 period.

### Income Taxes

|  | Three months ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Provision for income taxes | $(24,000) | $(6,000) |

|  | Six months ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Provision for income taxes | $(26,000) | $(12,000) |

During 2018, we expect to incur state income tax liability related to our U.S. operations and income tax liability in Canada related to our operations in Canada. 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. The effective tax rate differs from the statutory tax rate due primarily to our full valuation allowance.

### 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 compared to their net income or loss calculation in accordance with GAAP.

The table below shows a reconciliation of our consolidated net loss calculated in accordance with GAAP to EBITDA for the period indicated. EBITDA should not be considered a substitute for, or superior to, net loss calculated in accordance with GAAP.

|  | Three months ended June 30, 2018 | 2017 | Six months ended June 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net loss per GAAP | $(124,000) | $(164,000) | $(533,000) | $(254,000) |
| Interest expense, net | 94,000 | 123,000 | 187,000 | 282,000 |
| Income tax provision | 24,000 | 6,000 | 26,000 | 12,000 |
| Depreciation and amortization | 697,000 | 551,000 | 1,336,000 | 1,130,000 |
| EBITDA | $691,000 | $516,000 | $1,016,000 | $1,170,000 |

### LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2018, we had cash and cash equivalents of $3,785,000 compared to cash and cash equivalents of $3,378,000 as of December 31, 2017.

In November 2017, we entered into an amended and restated loan and security agreement with East West Bank (“EWB”), under which we borrowed $4,500,000 in the form of a 36-month term loan, which matures on November 29, 2020. EWB has a first-priority security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions. We have no more borrowing availability under this credit facility.

As of June 30, 2018, $4,500,000 was outstanding under this credit facility, of which $1,950,000 was recorded in current portion of long-term debt and $2,550,000 was recorded in long-term debt on the accompanying consolidated balance sheet. Our monthly payments were interest only until June 30, 2018, at which time such payments became principal and interest. EWB automatically withdraws the applicable payment from our bank account when due. The first principal payment was due June 30, 2018, a Saturday. EWB debited our bank account in July for such payment. As a result, the amount of long-term debt on the accompanying consolidated balance sheet as of June 30, 2018 includes the amount of the principal due on such date.

We must satisfy financial covenants under this credit facility, including minimum liquidity, maximum senior leverage ratio and minimum Adjusted EBITDA (as defined below) set forth below for the period indicated:

| Six Month Period Ending | Minimum Adjusted EBITDA |
| --- | ---: |
| March 31, 2018 | $600,000 |
| June 30, 2018 | $1,200,000 |
| September 30, 2018 | $1,600,000 |
| December 31, 2018 | $1,500,000 |

As of June 30, 2018, we were in compliance with all covenants. Beginning with the quarter ending March 31, 2019, we must satisfy a minimum fixed charge coverage ratio in lieu of the minimum Adjusted EBITDA covenant.

“Adjusted EBITDA” means (a) EBITDA (which is net income, plus interest expense, plus, to the extent deducted in the calculation of net income, depreciation expense and amortization expense, plus income tax expense) plus (b) other noncash expenses and charges, plus (c) to the extent approved by EWB, other onetime charges, plus (d) to the extent approved by EWB, any losses arising from the sale, exchange, transfer or other disposition of assets not in the ordinary course of business.

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 case-by-case, considering such factors as it considers relevant, including the amount outstanding under this financing arrangement. Through June 30, 2018, we borrowed $9,690,000. As of June 30, 2018, $260,000 was outstanding, all of which is recorded in current portion of long-term debt on the accompanying consolidated balance sheet. We do not expect the lender to lend any additional funds under this financing arrangement.

In connection with preparing the financial statement as of and for the period ended June 30, 2018, 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 twelve months after the date that such financial statements are issued. 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 date that such financial statements are issued. During the three months ended June 30, 2018, we issued 345,772 shares of our common stock in a registered direct offering and received net proceeds of approximately $1,381,000. To increase the likelihood that we will be able to successfully execute our operating and strategic plan and to better position the company 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 do not meet our future cash requirements, we may have 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 might not cover shortfalls in available funds. If we require additional capital, we may not secure additional financing on terms acceptable to us, or at all.

#### Working Capital

As of June 30, 2018, we had working capital (current assets in excess of current liabilities) of $2,076,000 compared to negative working capital (current liabilities in excess of current assets) of $1,109,000 as of December 31, 2017. The following table shows our change in working capital from December 31, 2017 to June 30, 2018:

|  | Increase (Decrease) |
| --- | ---: |
| Working capital as of December 31, 2017 | $(1,109,000) |
| Changes in current assets: |  |
| Cash and cash equivalents | 407,000 |
| Accounts receivable, net of allowance | 73,000 |
| Site equipment to be installed | (1,068,000) |
| Prepaid expenses and other current assets | 163,000 |
| Change in total current assets | (425,000) |
| Changes in current liabilities: |  |
| Accounts payable | 37,000 |
| Accrued compensation | (60,000) |
| Accrued expenses | 163,000 |
| Sales taxes payable | 3,000 |
| Income taxes payable | 13,000 |
| Current portion of long-term debt | (2,849,000) |
| Current portion of obligations under capital leases | (9,000) |
| Deferred revenue | (715,000) |
| Deferred rent | (99,000) |
| Other current liabilities | (94,000) |
| Change in total current liabilities | (3,610,000) |
| Net change in working capital | 3,185,000 |
| Working capital as of June 30, 2018 | $2,076,000 |

#### 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): | Six months ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Operating activities | $239,000 | $2,806,000 |
| Investing activities | (704,000) | (701,000) |
| Financing activities | 921,000 | (985,000) |
| Effect of exchange rates | (49,000) | 28,000 |
| Net increase in cash and cash equivalents | $407,000 | $427,000 |

*Net cash provided by operations.* The decrease in cash provided by operating activities was primarily due to receiving a prepayment during the 2017 period from Buffalo Wild Wings for equipment and services to be delivered in the future. We did not receive a similar prepayment during the same period in 2018.

Our largest use of cash is payroll and related costs. Cash used for payroll and related costs decreased $398,000 to $5,301,000 for the six month months ended June 30, 2018 from $5,699,000 for the same period in 2017, primarily due to a reduction in incentive compensation and headcount.

Our primary source of cash is cash we generate from customers. Cash received from customers decreased $4,088,000 to $11,185,000 for the six months ended June 30, 2018 from $15,274,000 for the same period in 2017. This decrease was primarily related to the prepayment from Buffalo Wild Wings described above.

*Net cash used in investing activities.* Our net cash used in investing activities for the six months ended June 30, 2018, which is related to capitalized software development expenditures and capital expenditures, was flat compared to the same period in 2017.

*Net cash provided by (used in) financing activities.* The $1,906,000 increase in cash provided by financing activities was primarily attributable to a decrease of $2,287,000 in principal payments on our long-term debt for the six months ended June 30, 2018 compared to the same period in 2017, offset by a $392,000 reduction in net proceeds received from common stock offerings. We received $1,381,000 in net proceeds from our common stock offering that closed in June 2018, and we received an aggregate of $1,773,000 in net proceeds from our common stock offerings that closed in March and April 2017.

### RECENT ACCOUNTING PRONOUNCEMENTS

In June 2018, the FASB issued ASU No. 2018-07 (Topic 718), *Improvements to Nonemployee Share-Based Payment Accounting.* This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The guidance is effective for fiscal years beginning after December 15, 2018 (which is January 1, 2019 for us), including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. We do not expect that the adoption of this ASU will have a significant impact 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, 13,496 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, 2017 together with all other information contained or incorporated by reference in this report before you 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 there have been any material changes to the risk factors disclosed in our annual report other than as stated below.

***If we fail to satisfy our financial covenants to our primary lender, the lender may declare a default, which could lead to all payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business.***

Our amended and restated loan and security agreement with East West Bank contains certain financial covenants with which we must comply, including minimum adjusted EBITDA, minimum liquidity and a maximum senior leverage ratio, and beginning with the quarter ending March 31, 2019, a minimum fixed charge coverage ratio, which will replace the minimum adjusted EBITDA covenant. If we fail to satisfy these covenants, East West Bank may declare a default, which could lead to all payment obligations becoming immediately due and payable and have a material adverse effect on our financial condition and business. East West Bank has a first-priority security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions. Accordingly, in an event of a default, East West Bank could dispose of such assets to satisfy our payment obligations.

As of June 30, 2018, we were in compliance with all covenants. However, there can be no assurance we will be in compliance with all covenants in the future, including due to including due to events or conditions outside of our control. For example, fluctuations in our operating results, such as may result from delays in or failure on the part of Inspire Brands Inc. to maintain or expand our relationship with Buffalo Wild Wings as was anticipated before its acquisition, could result in violation of the adjusted EBITDA covenant. Even though it has done so previously, East West Bank may not be willing to waive future incidences of covenant default.

***Our cash flow may not cover our capital needs and we may need to raise additional funds in the future. Such funds may not be available when needed, on acceptable terms or at all and, if available, may dilute current stockholders.***

As of June 30, 2018, we had cash and cash equivalents of $3,785,000. 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. As of June 30, 2018, $4,500,000 was outstanding under that loan agreement, of which $1,950,000 was recorded in current portion of long-term debt and $2,550,000 was recorded in long-term debt on our consolidated balance sheet. The loan matures on November 29, 2020. Beginning with the payment due on June 30, 2018, our payments under this credit facility became principal and interest, whereas they have historically been interest only. In addition, as of June 30, 2018, $260,000 was outstanding under a financing arrangement with an equipment lender and recorded in current portion of long-term debt on our consolidated balance sheet.

Our ability to meet our debt service obligations and to fund working capital, capital expenditures and investments in our business, will depend upon our future performance, which will depend on many factors, including:

- our ability to generate cash from operating activities;
- acceptance of, and demand for, our interactive games and entertainment;
- the costs of continuing to develop and implement our tablet platform and product line;

20

- the costs of developing new entertainment content, products, or technology or expanding our offering to new media platforms such as the internet and mobile phones;
- the extent to which we invest in the creation of new entertainment content and new technology; and
- the number and timing of acquisitions and other strategic transactions, if any.

In addition, in order to fully execute on our long-term strategic initiatives, we believe we will likely require additional funding in the future.

We cannot ensure that we will generate cash flow from operations in an amount sufficient to enable us to meet our debt service obligations or to fund our working capital needs, capital expenditures and investments in our business. East West Bank has a first-priority security interest in all our existing and future personal property, including our intellectual property, subject to limited exceptions, and our equipment lender has a first-priority security interest in the equipment we purchased with the funds borrowed, subject to a subordination agreement with East West Bank. If we default on our monthly payment obligations to our lenders, and our debt obligations become immediately due and payable in full, our lenders may dispose of our personal property to satisfy our payment obligations. If we need to raise additional funds in the future, such funds may not be available when needed, on acceptable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences, and privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, or at all, we may not be able to continue to develop and implement our platform and product line, develop or enhance our other products and services, successfully execute our business plan or any or all of our strategic initiatives, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.

***We receive a significant portion of our revenues from Buffalo Wild Wings, and any decrease in the amount of their business could materially and adversely affect our cash flow and revenue.***

For the year ended December 31, 2017, Buffalo Wild Wings corporate-owned restaurants and its franchisees accounted for approximately 41%, or $8,678,000, of our total revenue. For the six months ended June 31, 2018, Buffalo Wild Wings corporate-owned restaurants and its franchisees accounted for approximately 46%, or $5,273,000, of our total revenue. As of June 30, 2018 and December 31, 2017, approximately $159,000 and $191,000, respectively, was included in accounts receivable from Buffalo Wild Wings corporate-owned restaurants and its franchisees.

In March 2017, Buffalo Wild Wings chose us to be its provider of digital menu, order, and payment functionality. In November 2017, we expected to begin rolling out our improved tablet platform system at certain Buffalo Wild Wings locations during the first quarter of 2018 and, after an initial set of locations was running smoothly, throughout the rest of the Buffalo Wild Wings corporate and franchise locations with which we had partnered. Due to the acquisition of Buffalo Wild Wings by Arby’s Restaurant Group, Inc. (which renamed itself Inspire Brands Inc.) in February 2018 and to the associated changes with Buffalo Wild Wings’ operations, the rollout of our expanded functionality tablet platform system was put on hold to allow its new ownership to assess all the programs at Buffalo Wild Wings. Since that time, we have been working with Inspire Brands as it integrates Buffalo Wild Wings into its portfolio and determines its brand priorities. Our updated tablet platform system is currently live at 31 Buffalo Wild Wings locations with our order, payment and guest insights functionality. We continue to believe that a long-term relationship with Inspire Brands presents numerous opportunities as it intends to add several more brands to its portfolio, and that our discussions with Inspire Brands have been going well. At this time we are not certain to what extent or which of our offerings, if any, will fit within its updated brand strategy, or when it will make this determination. Aside from existing contractual obligations under agreements we have entered into in the ordinary course of business, Inspire Brands has no obligation to continue or to expand our current relationship. We continue to believe our player engagement and loyalty as well as expanded product offerings will offer us a way to continue supporting the Buffalo Wild Wings brand under the Inspire Brands umbrella.

If we are unable to maintain or expand our current relationship with Buffalo Wild Wings (now under the Inspire Brands umbrella) or its franchisees, we could lose a significant portion of our revenues, which could materially and adversely affect our operating results and cash flows. In addition, inability to demonstrate Buffalo Wild Wings as a strategic user of our expanded functionality tablet platform system could negatively impact achievement of our chain customer site growth goals. Likewise, if any other customer who may in the future represent a significant portion of our revenue were to breach or terminate their subscriptions or otherwise decrease the amount of business they transact with us, we could lose a significant portion of our revenues and cash flow.

***Our common stock could be delisted or suspended from trading on the NYSE American 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 reported, in March 2018, we received a letter from the NYSE Regulation Inc. stating that we are not in compliance with NYSE American LLC continued listing standards. Specifically, we are not in compliance with Section 1003(a)(iii) of the Company Guide because we reported stockholders’ equity of less than $6 million as of December 31, 2017 and had net losses in five of our most recent fiscal years ended December 31, 2017. Our stockholders’ equity was $5.5 million as of December 31, 2017. As a result, we are now subject to the procedures and requirements of Section 1009 of the Company Guide.

On April 26, 2018, the NYSE Regulation Inc. notified us that it has accepted our plan to regain compliance with Section 1003(a)(iii) of the Company Guide and granted us a plan period that extends through March 20, 2019 to regain compliance. The listing of our common stock on the NYSE American 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 Section 1003(a)(iii) by March 20, 2019 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 June 29, 2018, we believe we are on the path to regaining compliance with Section 1003(a)(iii) of the Company Guide. NYSE Regulation will determine if and when we have regained compliance. In order for it to determine that we have regained compliance, we must have stockholders’ equity of $6 million or more for two consecutive quarters.

We can give no assurances that we will be able to address our non-compliance with the NYSE American continued listing standards or, even if we do, that we will be able to maintain the listing of our common stock on the NYSE American. 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 March 20, 2019, or because we fall below compliance with other NYSE American 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 American 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 in 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 Aug 6, 2018.
Source: SEC EDGAR, the filing index for accession 0001493152-18-011019. Last ingested by Listed: Nov 6, 2026, 17:52 ET. No prices; not investment advice.