STRATEGIC
INITIATIVES

Cost
of MediaCost of
Media increased by $45.5 million to $74.5 million in 2008 from $29 million in
2007. For 2008, Cost of Media – 3rd party
includes media purchased for monetization of both transactional and subscription
revenues. The increase was principally attributed to the media necessary to
source the revenue acquired with the acquisition of Traffix, Inc. which took
place February 4, 2008.Product and
DistributionProduct
and distribution increased by $6.6 million to $9.7 million for the year ended
December 31, 2008 compared to $3.1 million for the year ended December 31, 2007.
The increase was principally attributed to the acquisition of Traffix, Inc.
which took place February 4, 2008. Product and distribution expenses are costs
necessary to develop and maintain proprietary content, support and maintain our
websites and user data, technology platforms which drives both transactional and
subscription based revenue. Included in product and distribution cost is stock
compensation expense of $6,593 and $288,443 for 2008 and 2007
respectively.Selling
and marketingSelling
and marketing expense increased by $8.4 million to $9.9 million in 2008 as
compared to $1.5 million for the year ended December 31, 2007. The increase is
primarily due to an increase in fixed and variable labor, principally attributed
to the acquisition of Traffix, Inc. which took place February 4, 2008. In
addition, the company incurred approximately $2.2 million of bad debt expense in
2008 and none in 2007.General,
Administrative and Other OperatingGeneral
and administrative expenses increased by approximately $8.7 million to $16.1
million for the year ended December 31, 2008 compared to $7.4 million for the
year ended December, 31, 2007. The increase is primarily due to an increase in
labor and related costs necessary to support core operations, professional and
consulting fees, facilities and related costs principally attributable to the
growth the company experienced as of result of the acquisition of Traffix, Inc.
Management has taken action to achieve approximately $4.0 million of
efficiencies resulting from the acquisition of Traffix, however the Company
continues to make appropriate and modest investments in labor, facilities,
technology infrastructure, and utilization of third party professional service
providers to support its continued growth, business development and corporate
governance initiatives. Included in general and administrative expense is stock
compensation expense of $1.3 million and $828,045 for 2008 and 2007
respectively.Depreciation
and amortizationDepreciation
and amortization expense increased $4.5 million to $5.9 million for the year
ended December 31, 2008 compared to $1.3 million for the year ended December 31,
2007 principally as the result of the amortization of intangible assets and
depreciation of fixed assets acquired in connection with the acquisition of the
Traffix, Inc. and Ringtone.com.Impairment
of GoodwillIn
connection with its annual goodwill impairment testing for the year ended
December 31, 2008, the Company determined there was impairment and recorded a
non-cash charge of $114.8 million. The goodwill impairment, the majority of
which is not deductible for income tax purposes, is primarily due to our
declining market price and reduced valuation multiples. Such negative factors
are reflected in our stock price and market capitalization.Income
(Loss) from OperationsOperating
loss increased to approximately $117.0 million for the year ended December 31,
2008, compared to an operating loss of $5.5 million for the year ended December
31, 2007. This increase was principally attributable to the $114.8 million
charge for the impairment of goodwill taken during the fourth quarter of 2008.
Excluding the charge for impairment, the operating loss for the year ended
December 31, 2008 decreased $3.2 million to ($2.3) million compared to an
operating loss of ($5.5) million for the year ended December 31, 2007.
Management has taken action to gain approximately $4.0 million of efficiencies
resulting from the acquisition of Traffix, however the Company continues to make
appropriate and modest investments in labor, facilities, technology
infrastructure, and utilization of 3rd party
professional service providers to support its continued growth, business
development and corporate governance initiatives.Interest
income and dividendsInterest
and dividend income increased $284,000 to $748,000 for the year ended December
31, 2008, compared to $464,000 for the year ended December 31, 2007. The
increase is primarily due to interest income earned on higher cash balances
maintained throughout 2008, offset by lower rates, and interest and dividends
earned on marketable securities.Interest
expenseInterest
expense increased $125,000 to $147,000 for the year ended December 31, 2008,
compared to $22,000 for the year ended December 31, 2007. The increase is
primarily attributable to interest expense of $90,000 on the note payable
associated with the purchase of the assets of Ringtone .com.Other
Income (Expense)Other
expense increased $141,000 to $153,000 for the year ended December 31, 2008,
compared to $12,000 for the year ended December 31, 2007. The increase is
primarily attributable to loss on the sale of marketable securities of
$174,000.Income
TaxesIncome
tax benefit for the year ended December 31, 2008 was $852,000 and reflects an
effective tax rate of 0.73%, which was computed taking into consideration the
non-deductible impairment charge noted above, the effects of the merger
with Traffix, Inc. which occurred on February 4, 2008,  and includes the
result of changes in the weighted average statutory rate attributable to the
addition of certain local jurisdictions resulting from the merger, and certain
adjustments realized in connection with the finalization of tax
returns.Minority
interestMinority
interest represents the income allocable to the non-controlling interests and
net income attributable to the shareholders of the Company for its interest in
MECC. Minority interest for the year ended December 31, 2008 was $24,000
compared to ($283,000) for the year ended December 31, 2007.Net
LossNet loss
increased by $111.6 million to $115.8 million for the year ended December 31,
2008 as compared to a net loss of $4.1 million for the year ended December 31,
2007. The increase is as described above.Liquidity
and Capital ResourcesThe
Company continually projects anticipated cash requirements, which may include
share repurchases, business combinations, capital expenditures, principal and
interest payments on its outstanding and future indebtedness, and working
capital requirements. Funding requirements have been financed through business
combinations, cash flow from operations, issuance of preferred stock,
option exercises and issuance of long-term debt. As of December 31, 2008, the
Company had cash and cash equivalents of approximately $20.4 million, marketable
securities of approximately $4.2
million (including Auction Rated Securities of $4.0 million that was redeemed
and converted to cash at par plus interest in January 2009) and a working
capital balance of approximately $23.7 million. The Company generated
approximately $4.4 million from operations for the year ended December 31, 2008
and expects to generate cash flows from operating activities prospectively,
which, contingent on prospective operating performance, may require reductions
in discretionary variable costs and other realignments to permanently reduce
fixed operating costs.In
conjunction with the Company’s objective of enhancing shareholder value, the
Company’s Board of Directors authorized a share repurchase program. Under this
share repurchase program, the Company purchased 1,908,926 shares of the
Company’s common stock for an aggregate price of approximately $4.05 million
during the Fiscal 2008.The
Company believes that its existing cash and cash equivalents and anticipated
cash flows from our operating activities will be sufficient to fund minimum
working capital and capital expenditure needs for at least the next twelve
months. The extent of the Company’s future capital requirements will depend on
many factors, including its results of operations. If the Company’s cash flows
from operations is less than anticipated or its working capital requirements or
capital expenditures are greater than expectations, or if the Company expands
its business by acquiring or investing in additional products or technologies,
it may need to secure additional debt or equity financing. The Company is
continually evaluating various financing strategies to be used to expand its
business and fund future growth. There can be no assurance that additional debt
or equity financing will be available on acceptable terms, it at all. The
potential inability to obtain additional debt or equity financing, if required,
could have a material adverse effect on the Company’s operations.In
connection with its investments as further described in footnote 14, the Company
is obligated to fund investments totaling approximately $1.6 million in 2009.
Furthermore, management anticipates the risk adjusted return is sufficiently in
excess of the contributed capital obligations, as of this date.  There
is however, no guarantee of the anticipated returns. In addition, management has
taken considerable actions to secure its interest in achieving such a
return.Significant
Estimates and Accounting PoliciesPrinciples of
ConsolidationThe
consolidated financial statements include the accounts of all majority and
wholly-owned subsidiaries and significant intercompany balances and transactions
have been eliminated.The
equity method is used to account for investments in entities in which we have an
ownership of less than 50% and have significant influence over the operating and
financial policies of the affiliate. For investments in entities for which the
company has a less than 50 percent ownership interest, but has certain
participatory rights, the investee is consolidated.Use
of EstimatesThe
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses as well
as the disclosure of contingent assets and liabilities. Management continually
evaluates its estimates and judgments including those related to allowances for
doubtful accounts and the associated allowances for returns and chargebacks,
useful lives of property, plant and equipment and intangible assets, fair value
of stock options granted, forfeiture rate of equity based compensation grants,
probable losses associated with pre-acquisition contingencies, income taxes and
other contingencies. Management bases its estimates and judgments on historical
experience and other factors that are believed to be reasonable in the
circumstances. Actual results may differ from those estimates. Macroeconomic
conditions may directly, or indirectly through our business partners and
vendors, impact our financial performance and available resources. Such
conditions may, in turn, impact the aforementioned estimates and
assumptions. Accounts
Receivable and Related Allowances
The
Company maintains allowances for doubtful accounts for estimated losses which
may result from the inability of its customers to make required payments. The
Company bases its allowances on the likelihood of recoverability of
accounts receivable by customer, based on past experience, the age of the
accounts receivable balance, the credit quality of the Company’s customers, and,
taking into account current collection trends. If specific customer
circumstances change or industry trends worsen beyond the Company’s estimates,
the Company would be required to increase its allowances for doubtful accounts.
Alternatively, if trends improve beyond the Company’s estimates, the Company
would be required to decrease its allowance for doubtful accounts. The Company’s
estimates are reviewed periodically, and adjustments are reflected through bad
debt expense in the period they become known. Changes in the Company’s bad debt
experience can materially affect its results of operations.

The
Company also makes estimates for refunds, chargebacks or credits, and provides
for these probable uncollectible amounts through a deferral and reduction of
recorded revenues in the period for which the sale occurs based on analyses of
previous rates and trends.Due to
the payment terms of the carriers requiring in excess of 60 days from the date
of billing or sale, at its sole discretion, the Company can elect to use trade
discounts in order to facilitate quicker payment. This discount or fee allows
for payments of approximately 80% of the prior month’s billings 15 to 20 days
after the end of the month. The Company records revenue net of that fee, if
incurred, which is 3.5% to 5% of the associated revenue.
Goodwill
and Intangible Assets

            Goodwill
represents the excess of cost over fair value of net assets of businesses
acquired. In accordance with Statement of Financial Accounting Standards
No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets”, the value
assigned to goodwill and indefinite lived intangible assets is not amortized to
expense, but rather it is evaluated at least on an annual basis to determine if
there is a potential impairment. If the fair value of the reporting unit is less
than its carrying value, an impairment loss is recorded to the extent that the
implied fair value of the reporting unit goodwill is less than the carrying
value. If the fair value of an indefinite lived intangible is less than its
carrying amount, an impairment loss is recorded. Fair value is determined based
on discounted cash flows, market multiples or appraised values as appropriate.
Discounted cash flow analysis requires assumptions about the timing and amount
of future cash inflows and outflows, risk, the cost of capital, and terminal
values. Each of these factors can significantly affect the value of the
intangible asset. The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require management’s judgment. Any
changes in key assumptions about the Company’s businesses and their prospects,
or changes in market conditions, could result in an impairment charge. Some of
the more significant estimates and assumptions inherent in the intangible asset
valuation process include: the timing and amount of projected future cash flows;
the discount rate selected to measure the risks inherent in the future cash
flows; and the assessment of the asset’s life cycle and the competitive trends
impacting the asset, including consideration of any technical, legal or
regulatory trends.The
Company has determined that there was an impairment of goodwill as a result of
completing its annual impairment analysis as of December 31, 2008. In
performing the related valuation analysis the company used various valuation
methodologies including probability weighted discounted cash flows, comparable
transaction analysis, and market capitalization and comparable company multiple
comparison. The results of this review and impact of the impairment are more
fully described in Note 6 - “Goodwill and Intangible
Assets”.Intangible
assets subject to amortization primarily consist of customer lists, trade names
and trademarks, and restrictive covenants that were acquired.  The
intangible asset values assigned to the identified assets for each acquisition
were generally determined based upon the expected discounted aggregate cash
flows to be derived over the estimated useful life. The method of amortizing the
intangible asset values reflects, based upon the Company’s historical
experience, an accelerated rate of attrition in the subscriber database based
over the expected life of the underlying subscriber database after considering
turnover.  Accordingly, the Company amortizes the value assigned to
subscriber database based on the actual depletion of the acquired subscriber
database. The Company reviews the recoverability of its finite-lived intangible
assets for recoverability whenever events or circumstances indicated that the
carrying amount of an asset may not be recoverable. Recoverability is assessed
by comparison to associated undiscounted cash flows.Stock-Based
Compensation
The
Company records stock based compensation in accordance with Financial Accounting
Standard Board Statement of Financial Accounting Standards No. 123 (revised
2004). In estimating the grant date fair value at stock option awards, we use
certain assumptions and estimates to derive fair value, such as expected term,
rate of risk free returns and volatility. If different assumptions and estimates
were used, the amounts charged to compensation expense would be
different.

Revenue
RecognitionThe
Company monetizes a portion of its user activities through subscription based
sources by providing on-going monthly access to and usage of premium products
and services.  In general, customers are billed at standard rates, at
the beginning of the month, and revenues are recognized upon receipt of
information confirming an arrangement. The Company estimates a provision for
refunds and credits which is recorded as a reduction to revenues. In determining
the estimate for refunds and credits, the Company relies upon historical data,
contract information and other factors. The estimated provision for refunds can
vary from actual results.The
Company effectuates this type of revenues through a carrier or distributors who
are paid a transaction fee for their services.  In accordance with
Emerging Issues Task Force (“EITF” No 99-19) “Reporting Revenues Gross as
Principal Versus Net as an Agent”, the Company recognizes as revenues the net
amount received from the carrier or distributor, net of their
fee.  Revenues are deferred if the probability of collection is not
reasonably assured.The
Company monetizes a portion of its user activities through transactional based
services generated primarily from (a) fees earned, primarily on a CPC basis,
from search syndication services; (b) commission fees earned for the Company's
search engine marketing ("SEM") services; (c) commission fees earned from
marketing service arrangements associated with our affiliate marketing partners;
and (d) other fees for marketing services including data and list management
services, which can be either periodic or transactional. Commission fee revenue
is recognized in the period that the Company's advertiser customer generates a
sale or other agreed-upon action on the Company's affiliate marketing networks
or as a result of the Company's SEM services, provided that no significant
Company obligations remain, collection of the resulting receivable is reasonably
assured, and the fees are fixed or determinable. All transaction services
revenues are recognized on a gross basis in accordance with the provisions of
EITF 99-19, due to the fact that the Company is the primary obligor to its
customer, and publisher expenses that are directly related to a
revenue-generating event are recorded as a component of 3rd part Media
Cost.Income
TaxesThe
Company uses the asset and liability method of financial accounting and
reporting for income taxes required by Statement of Financial Accounting
Standards No. 109 (“SFAS 109”), “Accounting for Income Taxes”. Under SFAS
109, deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for tax purposes.Effective
January 1, 2007, the Company adopted FIN No. 48, “Accounting for
Uncertainty in Income Taxes” which resulted in no material adjustment in the
liability for unrecognized tax benefits. The Company classifies interest expense
and penalties related to unrecognized tax benefits as income tax expense. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109 and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The evaluation of a tax position in accordance with this
Interpretation is a two-step process. The first step is recognition, in which
the enterprise determines whether it is more likely than not that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. The
second step is measurement. A tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements.The
Company and its subsidiaries file income tax returns in the U.S and Canada. The
Company is subject to U.S., Australian (prior years filing) and Canadian federal
and state examinations. The statute of limitations for 2007 and 2008 in all
jurisdictions remains open and are subject to examination by tax
authorities.Contractual
Obligations and Off-Balance Sheet ArrangementsAt
December 31, 2008, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, the Company is not
exposed to any financing, liquidity, market or credit risk that could arise if
it had engaged in such relationships.The
following table shows the Company’s future commitments for future minimum lease
payments required under operating leases that have remaining non cancellable
lease terms in excess of one year, future commitments under investment and
marketing agreements, future commitments under employment agreements, and note
and interest payable as of December 31, 2008:


STRATEGIC
INITIATIVES

In
certain situations, the Company does have minimum fee obligations assuming the
counterparty performs the required level of services. We feel that the level of
business activity under normal and ordinary circumstances exceeds the minimum
thresholds. Therefore, the amounts are not included in the table
above.Recent
Accounting PronouncementsIn
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” EITF 03-6-1 gives guidance as to the circumstances
when unvested share-based payment awards should be included in the computation
of EPS. EITF 03-6-1 is effective for fiscal years beginning after
December 15, 2008. We are currently assessing the impact of EITF 03-6-1 on
our consolidated financial statements.In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162
("SFAS 162"), The Hierarchy of Generally Accepted Accounting
Principles. This
statement identifies the sources of accounting principles and the framework for
selecting the principles used in preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP.
This statement is effective November 15, 2008. The Company will adopt
SFAS 162 as required, and its adoption is not expected to have an impact on
the consolidated financial statements.In
April 2008, the FASB issued FASB Staff Position No. FSP 142-3,
“Determining the Useful Life of Intangible Assets” FSP 142-3 amends the factors
to be considered in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an intangible asset and
the period of expected cash flows used to measure its fair value. FSP 142-3 is
effective for fiscal years beginning after December 15, 2008. We are
currently assessing the impact of FSP 142-3 on our consolidated financial
statements.In March
2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and
Hedging Activities,” an amendment of FASB Statement No. 133. SFAS No. 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement No. 133 and its
related interpretations and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. The Company is currently evaluating the impact SFAS No.
161 may have its consolidated financial statements.In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which we refer to as SFAS No. 160. SFAS No.
160 establishes requirements for ownership interests in subsidiaries held by
parties other than us (minority interests) be clearly identified and disclosed
in the consolidated statement of financial position within equity, but separate
from the parent's equity. Any changes in the parent's ownership interests are
required to be accounted for in a consistent manner as equity transactions and
any noncontrolling equity investments in deconsolidated subsidiaries must be
measured initially at fair value. SFAS No. 160 is effective, on a prospective
basis, for fiscal years beginning after December 15, 2008; however, presentation
and disclosure requirements must be retrospectively applied to comparative
financial statements. The Company will adopt SFAS No. 160 in our fiscal year
ending December 31, 2009. However, the Company is currently evaluating the
impact of SFAS No. 160 may have its consolidated financial
statements.On
February 12, 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-2,
“Effective Date of SFAS No. 157,” which defers the effective date of SFAS 157
for nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. This
FSP delayed the implementation of SFAS 157 for the Company’s accounting of
goodwill, acquired intangibles, and other nonfinancial assets and liabilities
that are measured at the lower of cost or market until January 1,
2009.In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”). SFAS 141R establishes the principles and requirements for how an
acquirer: (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree; (ii) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and (iii) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS 141R
is to be applied prospectively to business combinations consummated on or after
the beginning of the first annual reporting period on or after December 15,
2008, with early adoption prohibited. We are currently evaluating the impact
SFAS 141R will have on adoption on our accounting for future acquisitions.
Previously, any release of valuation allowances for certain deferred tax assets
would serve to reduce goodwill, whereas under the new standard any release of
the valuation allowance related to acquisitions currently or in prior periods
will serve to reduce our income tax provision in the period in which the reserve
is released. Additionally, under SFAS 141R transaction-related expenses, which
were previously capitalized, will be expensed as incurred.In
February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which gives companies the option
to measure eligible financial assets, financial liabilities and firm commitments
at fair value (i.e., the fair value option), on an instrument-by-instrument
basis, that are otherwise not permitted to be accounted for at fair value under
other accounting standards. The election to use the fair value option is
available when an entity first recognizes a financial asset or liability or upon
entering into a firm commitment. Subsequent changes in fair value must be
recorded in earnings. SFAS 159 is effective for financial statements issued for
fiscal year beginning after November 15, 2007. The Company elected not to adopt
the provisions of SFAS 159 for its financial instruments that are not required
to be measured at fair value.AcquisitionsOn
February 4, 2008, New Motion completed its merger with Traffix, Inc.
(“Traffix”); a performance based online marketing company, pursuant to a merger
agreement entered into by the companies on September 26, 2007. As a result of
the closing of the transaction, Traffix became a wholly owned subsidiary of New
Motion. Immediately following the consummation of the merger, Traffix
stockholders owned approximately 45% of the capital stock of New Motion, on a
fully-diluted basis. Each issued and outstanding share of Traffix common stock
was converted into the right to receive approximately 0.676 shares of New Motion
common stock based on the capitalization of both companies on the closing date
of the merger. Effective the date of the close of the merger, New Motion
commenced trading on The NASDAQ Global Market under the symbol
“NWMO.”On June
30, 2008, New Motion entered into an Asset Purchase Agreement with Ringtone.com,
LLC, a Minnesota limited liability company and W3i Holdings LLC, a Minnesota
limited liability company and the sole member of Ringtone.com. In consideration
for the assets, the Company at the closing paid to Ringtone.com $7 million in
cash. In addition, the Company delivered to Ringtone.com a convertible
promissory note (the “Note”) in the aggregate principal amount of $1.75 million,
which accrues interest at a rate of 10% per annum (provided that from and after
an event of default, the Note will bear interest at a rate of 15% per
annum).See Note
4 to the consolidated financial statements for a more detailed description
of the Traffix and Ringtone.com acquisitions.Pro Forma Financial
DataAs more
fully described in Note 4 to the consolidated financial statements, New Motion
acquired all of the outstanding common shares of Traffix in accordance with the
merger agreement as well as certain assets and liabilities of Ringtone.com, LLC
in accordance with the asset purchase agreement. The following unaudited pro
forma results of operations are based on the historical statements of operations
of New Motion,  Traffix and Ringtone.com, LLC, after giving effect to
the acquisition of Traffix by New Motion, using the purchase method of
accounting and applying the assumptions and adjustments described in the related
discussion below.The pro
forma combined statement of operations for the year ended December 31, 2008 is
presented as if the acquisitions of Traffix and Ringtone.com had occurred on
January 1, 2008. You should read this information in conjunction with the
accompanying notes to the consolidated financial statements included
herewith.The pro
forma information presented is for illustrative purposes only and is not
necessarily indicative of the financial position or results of operations that
would have been realized if the acquisitions had been completed on the dates
indicated, nor is it indicative of future operating results or financial
position.Financial
statements of New Motion issued after the acquisitions reflects only the
operations of Traffix and Ringtone.com after the acquisitions and have not been
restated retroactively to reflect the historical financial position or results
of operations of Traffix and Ringtone.com.
Traffix
and Ringtone results of operations are derived from the unaudited management
accounts of Traffix and Ringtone for the period from January 1, 2008 to February
3, 2008 and the period from January 1, 2008 to June 30, 2008,
respectively.


UNAUDITED
PRO FORMA RESULTS OF OPERATIONS

Pro
Forma AdjustmentsThe
following pro forma adjustments are included in the unaudited pro forma
consolidated statement of operations:


44

Plan
of OperationsBusiness
OverviewThe
Company is in its developmental stage, with encouraging but not conclusive evidence that its lead drug candidate, PT00014, may
be effective as an anti-anxiety and/or anti-depression drug. It is focused on confirming the efficacy of this drug candidate,
along with performing the other preclinical steps needed to progress along the pathway to bring this drug candidate into human
clinical trials and eventually, to the global market to provide a new pharmaceutical for patients suffering from anxiety or treatment-resistant
depression.We
anticipate $4,225,000 in capital expenditures in FY 2021 to implement our current plan of operations in connection with the development
of PT00114.If
we are able to successfully develop our drug, PT00114, and obtain FDA approval, we could then begin marketing and selling it in
the United States and generate revenue. FDA approval to begin commercial sales is the singular gating item that will allow us
to begin generating sales revenue in the U.S., so it will have an enormous impact on our business plan and our financial condition.
It is anticipated that the sale of our drug will allow the Company to generate enough sales revenue to support all of our operations
and to generate a profit. However, given the stage of development, even if FDA Approval is obtained, we do not anticipate generating
any revenue from sales prior to 2024.Development
Milestones (upcoming developmental milestones)Upcoming
development milestones include confirming efficacy of our lead drug candidate in an animal model in a CRO, conducting toxicology
testing in two animal species, and filing an IND application to begin human clinical trials.


23

*This
expenditure may depend on a successful capital raising event. We do not currently have any commitments for such a capital raising
event.If
we are able to successfully develop our drug, PT00114, and obtain FDA approval, we could then begin marketing and selling it in
the United States and generate revenue. FDA approval to begin commercial sales is the singular gating item that will allow us
to begin generating sales revenue in the U.S., so it will have an enormous impact on our business plan and our financial condition.
It is anticipated that the sale of our drug will allow the Company to generate enough sales revenue to support all of our operations
and to generate a profit. However, given the stage of development, even if FDA Approval is obtained, it is not anticipated prior
to 2023.Development
Milestones (upcoming developmental milestones)Upcoming
development milestones include confirming efficacy of our lead drug candidate in an animal model in a clinical research organization
(CRO), conducting toxicology testing in two animal species, and filing an Investigational New Drug (IND) application to begin
human clinical trials.

|  |  | Estimated Cost | |  |
| --- | --- | --- | --- | --- |
| 2Q 2019 |  |  | |  |
| Final Dosing work for Phase I |  | $ | 55,000 |  |
| Final Safety and Toxicology Animal studies |  | $ | 850,000 | \* |
|  |  |  |  |  |
| 3Q 2019 |  |  |  |  |
| Complete Stability and Formulation |  | $ | 85,000 |  |
| IND application write-up and filing |  | $ | 120,000 |  |
|  |  |  |  |  |
| 4Q 2019 |  |  |  |  |
| Site selection, patient enrollment |  | $ | 850,000 | \* |
|  |  |  |  |  |
| 1H 2020 |  |  |  |  |
| Human Safety Data generated from Phase I trial |  | $ | 450,000 |  |
|  |  |  |  |  |
| 2H 2020 |  |  |  |  |
| Human Efficacy Data generated from Phase II trial |  | $ | 600,000 |  |


24

Off
Balance Sheet ArrangementsWe
have no material off-balance sheet arrangements that are likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources, or capital expenditures.Critical
accounting policies and estimatesOur
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The notes to the consolidated financial statements contained in this Annual Report describe our significant accounting policies
used in the preparation of the consolidated financial statements. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.We
believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation
of our consolidated financial statements.Foreign
Currency Translation and Transactions. The assets and liabilities of our foreign subsidiary PTI Canada are translated into
U.S. dollars from the functional currency using the exchange rate in effect at the balance sheets date. Additionally, the accounts
on the statements of operations are translated using exchange rates approximating average rates prevailing during the years. Equity
accounts are translated at historical exchange rates. Translation adjustments that arise from translating its financial statements
from the local currency to the U.S. dollar are accumulated and reflected as a separate component of stockholders’ equity
(deficit). The current year effects of the transaction adjustments are included on the statement of operations as a realized gain
(loss) on foreign transaction exchange.

| Basic Science of TCAP-1 |  | $ | 60,000 |  |
| --- | --- | --- | --- | --- |
| Efficacy Studies |  | $ | 1,050,000 |  |
| Toxicology Studies |  | $ | 850,000 |  |
| Stability and Formulation |  | $ | 85,000 |  |
| Custom antibodies as an alternative to ELISA |  | $ | None |  |
| Tagged antibodies |  | $ | 104,000 |  |
| Antibody purification |  | $ | 24,000 |  |
| Clinical consultants |  | $ | 30,000 |  |
| Medical Writing and IND application compilation |  | $ | 79,000 |  |
| Technical Infrastructure |  | $ | 11,000 |  |
| Total R&D not including personnel |  | $ | 2,293,000 |  |


Comparison of Fiscal Years Ended December 31, 2018 and 2017

The $14.5 million decrease in research and development expense during the year ended December 31, 2018 as compared to the year ended December 31, 2017 principally reflects a $7.2 million decrease in costs related to the VTL-308 clinical trial due to completion of enrollment in the first quarter of 2018. There were 97 subjects enrolled in the VTL-308 clinical trial in the twelve months ended December 31, 2017, while there were 19 subjects enrolled in the twelve months ended December 31, 2018 due to the completion of enrollment. In addition, upon the release of results from the VTL-308 clinical trial in September 2018, we ceased substantially all development efforts related to the ELAD System. As a result, research and development expense also reflects a $1.7 million reduction in salaries and wages, $1.4 million reduction in estimated incentive compensation costs and a $1.3 million net reversal of stock-based compensation in the 2018 period, all reflecting that our VTL-308 clinical trial did not successfully reach its primary or secondary survival endpoints and a related reduction in staff. Manufacturing supplies, travel and entertainment, outside marketing efforts and consulting also all decreased primarily as a result of the completion of the VTL-308 clinical trial by $918,000, $697,000, $498,000 and $225,000, respectively.  Depreciation expense also decreased by $279,000 in 2018 as compared to 2017, in part due to the impairment loss recorded in 2018.The $0.3 million increase in general and administrative expense during the year ended December 31, 2018 as compared to the year ended December 31, 2017 reflects an increase of $786,000 in outside services, primarily due to strategic marketing efforts in anticipation of the potential commercialization of ELAD, and increases in patent and other legal and securities-related costs of $882,000 including costs for the filing of a shelf registration statement on Form S-3 in the second quarter of 2018 and the subsequent write-off of deferred offering costs as a result of our inability to complete a follow-on offering considering the VTL-308 clinical trial results. These increased costs were largely offset by a $1.5 million decrease in compensation-related costs driven by a $862,000 reduction in stock-based compensation for the reversal of previously recognized expense related to performance-based stock options and a $502,000 reduction in estimated incentive compensation costs both reflecting that our  VTL-308 clinical trial did not successfully reach its primary or secondary survival endpoints.As previously reported, we ceased substantially all of our development efforts related to the ELAD System in September 2018. This resulted in a substantial change in the expected use of our long-lived assets and a significant decrease in the benefits expected to be realized from these assets. Accordingly, we recognized an impairment charge of $1.2 million on our property and equipment reflecting the difference in the carrying value of such property and equipment and its estimated fair value, and severance costs of $2.4 million for the related reduction in staff, in the consolidated statement of operations for the year ended December 31, 2018.In conjunction with our review of strategic alternatives and our decision to cease the further development of ELAD, we have significantly reduced our projected monthly cash usage entering into 2019. In addition, we are exploring options to reduce the amount of space we lease to further reduce expenses. The reduction in staff in September 2018 and the cancellation of stock options in January 2019 has also reduced and should reduce reported stock-based compensation in 2019.  However, we expect our expenditures will change materially to the extent we enter into any strategic transactions, such as the Transaction with Immunic. For example, the Transaction would be expected to trigger the accelerated vesting of restricted stock unit awards and payments to our officers under severance and control agreements increasing costs. The timing and amount of our actual expenditures will be based on many factors, including, but not limited to, future research and development efforts including such costs incurred by Immunic assuming completion of the Transaction, and any other strategic options that we pursue.


Comparison of Fiscal Years Ended December 31, 2017 and 2016

The $9.3 million increase in research and development expense during the year ended December 31, 2017 as compared to the year ended December 31, 2016 principally reflects an $8.0 million increase in costs related to the VTL-308 and prior clinical trials, primarily in higher costs for subjects, sites, manufacturing, enrollment support activities and consulting. As enrollment started in the second quarter of 2016, 35 subjects were enrolled in the VTI-308 clinical trial in the year ended December 31, 2016, while 97 subjects were enrolled during the year ended December 31, 2017. Costs also increased by $1.2 million for activities to support a potential biologics license application, or BLA, submission in the future.The $2.1 million increase in general and administrative expense during the year ended December 31, 2017 as compared to the year ended December 31, 2016 was largely the result of a $1.9 million increase in compensation-related costs. In December 2017, our chief executive officer transitioned from being an employee to a consultant. As a result of the related transition and consulting agreements, we recorded $525,000 in severance costs and $674,000 in stock-based compensation related to stock option modifications. In total, stock-based compensation increased by $1.2 million in 2017 as compared to 2016 principally due to the stock option modifications and an increase in the number of options outstanding.


Comparison of Fiscal Years Ended December 31, 2015 and 2014

Research and development expense increased by $0.3 million during the year ended December 31, 2015 as compared to the year ended December 31, 2014. The higher research and development expenses were primarily attributable to increases of $3.1 million in third-party consulting and other service fees, $1.8 million in salaries, stock-based compensation and other compensation-related costs and $1.3 million in facilities costs and additional overhead allocations and costs, substantially offset by a reduction of $5.9 million in clinical trial and related costs.The increased third-party consulting and service fees are principally attributable to fees for clinical trial monitoring, for data management services, for analytical services in preparation for the evaluation of our VTI-208 clinical results and for activities to support a potential BLA filing. Higher salary and other compensation-related costs are principally due to increases in average headcount (i) in research to support mechanism of action and BLA activities, (ii) in manufacturing to support BLA activities, and (iii) for clinical trials as we moved certain third-party CRO activities in house and to support data management. These compensation related costs also included $486,000 for severance primarily related to a reduction in workforce following the termination of our VTI-210 and VTI-212 clinical trials and most of our BLA activities, and an increase of $381,000 for non-cash stock-based compensation costs, including costs for the extension of the post-termination option exercise period in conjunction with the workforce reduction.The decrease in clinical trial and related costs reflects the completion of enrollment in the VTI-208 clinical trial in January 2015, the termination of the VTI-210 and VTI-212 clinical trials in September 2015 and the transfer of certain CRO activities to company personnel in the year ended December 31, 2015 as compared to the year ended December 31, 2014. This decrease in clinical costs was also due to the change in our estimated clinical accrual, reducing our clinical costs by $750,000 in the year ended December 31, 2015. Costs of manufacturing materials and supplies also decreased by $448,000 due to the completion of enrollment in the VTI-208 clinical trial and the termination of the VTI-210 and VTI-212 clinical trials.The $1.5 million increase in general and administrative expense during the year ended December 31, 2015 as compared to the year ended December 31, 2014 was primarily attributable to a $1.8 million increase in salaries and wages and other compensation-related expenses principally due to higher stock-based compensation costs and increased average headcount to support our operations. These compensation-related costs included an increase of $1.1 million for non-cash stock-based compensation costs, including costs for the extension of the post-termination option exercise period and an increase of $115,000 for severance costs related to the reduction in workforce for the year ended December 31, 2015. In addition, our insurance and consulting costs increased by $213,000 and $136,000, respectively, in the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily reflecting higher costs associated with being a public company following our IPO in April 2014. These increases were partially offset by a $595,000 decrease in costs primarily due to a higher allocation of overhead to research and development.We expect our research and development costs to decline in 2016 relative to 2015 due to the anticipated timing of patient enrollment in the VTL-308 clinical trial during 2016, the reduction in workforce in late 2015 and a reduction in BLA-related activities. We expect general and administrative costs to increase in 2016 relative to 2015 primarily due to legal costs that we expect to incur related to the lawsuits which are more fully described in Note 4, "Commitments and Contingencies," in the notes to the consolidated financial statements.


Comparison of Fiscal Years Ended December 31, 2014 and 2013

The $17.7 million increase in research and development expense during the year ended December 31, 2014, as compared to the year ended December 31, 2013 was primarily associated with an increase in our phase 3 clinical trial activities for VTI-208 reflecting increases in the number of participating clinical sites and in the number of subjects enrolled. The higher costs were principally attributable to increases of $4.4 million in fees paid to clinical sites and related costs; $5.1 million in salaries and wages and other compensation related costs due to increased headcount, including a $1.1 million increase in stock-based compensation; $4.6 million in consulting and professional service fees; $1.6 million in manufacturing supplies and related costs; $714,000 in travel and conference expenses; and $1.3 million in facilities related costs, which includes depreciation, computer and equipment costs, utilities and lease expenses.The $1.2 million increase in general and administrative expense during the year ended December 31, 2014, as compared to the year ended December 31, 2013 was principally attributable to a $1.3 million increase in salaries and wages and other compensation related expenses due to increased headcount to support our operations, including a $453,000 increase in stock-based compensation, and higher insurance costs of $547,000 related to corporate insurance coverage increases. Such increases are due in part to support becoming a publicly-traded company in the second quarter of 2014. These increases were partially offset by a $640,000 reduction in recruiting costs in 2014 as compared to 2013.Other income (expense) primarily reflects the $2.6 million recognized as other income for the re-measurement of future purchase rights liabilities for the year ended December 31, 2014, as all remaining purchase rights liabilities outstanding at December 31, 2013 were exercised or terminated in conjunction with the completion of our IPO in April 2014. Other expense of $1.3 million for the year ended December 31, 2013 reflects the re-measurement of future purchase rights liabilities during the period.


Contractual Obligations

As of December 31, 2015, our purchase obligations include existing purchase commitments for future minimum payments of $282,000 with a vendor for raw materials that will be used in manufacturing on an as needed basis. During the years ended December 31, 2015, 2014 and 2013, we purchased $1.2 million, $1.2 million and $724,000, respectively, of materials from this vendor. Our purchase obligations also include a purchase order with a vendor for a component of the ELAD device that will be manufactured and delivered on an agreed upon schedule during 2016 for a future payment of $225,000. During the years ended December 31, 2015, 2014 and 2013, we purchased $97,000, $105,000 and $131,000 of components from this vendor. Additionally, our purchase obligations include a purchase order with a vendor that will be installing an upgrade to our manufacturing facility with an agreed upon payment during 2016 of $114,000. We have not made any purchases from this vendor during the years ended December 31, 2015, 2014 and 2013.


Comparison of Fiscal Years Ended December 31, 2016 and 2015

Research and development expense decreased by $9.7 million during the year ended December 31, 2016 as compared to the year ended December 31, 2015. The reduction in research and development expenses resulted from an $8.3 million decrease in clinical trial and related consulting, manufacturing and outside service costs. We opened 38 sites during the year ended December 31, 2016 and enrolled 35 subjects in the VTL-308 clinical trial. Higher costs in the year ended December 31, 2015 reflected costs associated with locking the database for and analysis of the VTI-208 clinical trial, and costs associated with the opening of 42 sites and the enrollment of 38 subjects in the VTI-208, VTI-210 and VTI-212 clinical trials. In addition, research and development-related salaries and related compensation costs decreased by $1.3 million in the year ended December 31, 2016, primarily as a result of the reduction in staff and the recording of related severance costs in the third quarter of 2015.The $1.1 million decrease in general and administrative expense during the year ended December 31, 2016 as compared to the year ended December 31, 2015 was primarily the result of $503,000, $348,000 and $177,000 of lower salaries, for consulting and outside services and for travel costs, respectively, in part reflecting reductions in costs in conjunction with the reduction in staff completed in the fourth quarter of 2015. The decrease was also driven by a $250,000 reduction in audit and accounting fees and costs associated with being a public company and a $170,000 reduction in insurance costs. These decreases were partially offset by increased stock-based compensation of $640,000, primarily due to performance-based stock options that were granted in the fourth quarter of 2015. In addition, legal expenses increased by $223,000 in 2016, principally reflecting costs associated with securities litigation that was dismissed in 2016. We expect our research and development costs to increase significantly in 2017 relative to 2016 primarily due to the anticipated higher subject enrollment in the VTL-308 clinical trial during 2017 and due to increased activity related to a possible BLA filing. We expect general and administrative costs to increase slightly in 2017 as compared to 2016.


Research and development expense increased by $0.3 million during the year ended December 31, 2015 as compared to the year ended December 31, 2014. The higher research and development expenses were primarily attributable to increases of $3.1 million in third-party consulting and other service fees, $1.8 million in salaries, stock-based compensation and other compensation-related costs and $1.3 million in facilities costs and additional overhead allocations and costs, substantially offset by a reduction of $5.9 million in clinical trial and related costs.The increased third-party consulting and service fees are principally attributable to fees for clinical trial monitoring, for data management services, for analytical services in preparation for the evaluation of our VTI-208 clinical results and for activities to support a potential BLA filing. Higher salary and other compensation-related costs are principally due to increases in average headcount (i) in research to support mechanism of action and BLA activities, (ii) in manufacturing to support BLA activities, and (iii) for clinical trials as we moved certain third-party CRO activities in house and to support data management. These compensation related costs also included $486,000 for severance primarily related to a reduction in workforce following the termination of our VTI-210 and VTI-212 clinical trials and most of our BLA activities, and an increase of $381,000 for non-cash stock-based compensation costs, including costs for the extension of the post-termination option exercise period in conjunction with the workforce reduction.The decrease in clinical trial and related costs reflects the completion of enrollment in the VTI-208 clinical trial in January 2015, the termination of the VTI-210 and VTI-212 clinical trials in September 2015 and the transfer of certain CRO activities to company personnel in the year ended December 31, 2015 as compared to the year ended December 31, 2014. This decrease in clinical costs was also due to the change in our estimated clinical accrual, reducing our clinical costs by $750,000 in the year ended December 31, 2015. Costs of manufacturing materials and supplies also decreased by $448,000 due to the completion of enrollment in the VTI-208 clinical trial and the termination of the VTI-210 and VTI-212 clinical trials.The $1.5 million increase in general and administrative expense during the year ended December 31, 2015 as compared to the year ended December 31, 2014 was primarily attributable to a $1.8 million increase in salaries and wages and other compensation-related expenses principally due to higher stock-based compensation costs and increased average headcount to support our operations. These compensation-related costs included an increase of $1.1 million for non-cash stock-based compensation costs, including costs for the extension of the post-termination option exercise period and an increase of $115,000 for severance costs related to the reduction in workforce for the year ended December 31, 2015. In addition, our insurance and consulting costs increased by $213,000 and $136,000, respectively, in the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily reflecting higher costs associated with being a public company following our IPO in April 2014. These increases were partially offset by a $595,000 decrease in costs primarily due to a higher allocation of overhead to research and development.


Contractual Obligations

As of December 31, 2016, our purchase obligations include existing purchase commitments of $167,000 with a vendor for raw materials that will be used in manufacturing on an as needed basis. During the years ended December 31, 2016, 2015 and 2014, we purchased $943,000, $1.2 million and $1.2 million, respectively, of materials from this vendor. Our purchase obligations also include a purchase commitment of $119,000 with a vendor for a component used in our clinical trials that will be manufactured and delivered on an as agreed upon schedule during 2017. During the years ended December 31, 2016, 2015 and 2014, we purchased $118,000, $335,000 and $574,000, respectively, of materials from this vendor. In the course of normal business operations, we also enter into agreements with contract service providers and others. We can elect to discontinue the work under these contracts and purchase orders with notice.


Item 6. Selected Financial Data.

The $17.7 million increase in research and development expense during the year ended December 31, 2014,
as compared to the year ended December 31, 2013 was primarily associated with an increase in our Phase 3 clinical trial activities for VTI-208 reflecting increases in the number of participating clinical sites and in the number of subjects
enrolled. The higher costs were principally attributable to increases of $4.4 million in fees paid to clinical sites and related costs; $5.1 million in salaries and wages and other compensation related costs due to increased headcount, including a
$1.1 million increase in stock-based compensation; $4.6 million in consulting and professional service fees; $1.6 million in manufacturing supplies and related costs; $714,000 in travel and conference expenses; and $1.3 million in facilities related
costs, which includes depreciation, computer and equipment costs, utilities and lease expenses. The $1.2 million increase in general and
administrative expense during the year ended December 31, 2014, as compared to the year ended December 31, 2013 was principally attributable to a $1.3 million increase in salaries and wages and other compensation related expenses due to
increased headcount to support our operations, including a $453,000 increase in stock-based compensation, and higher insurance costs of $547,000 related to corporate insurance coverage increases. Such increases are due in part to support becoming a
publicly-traded company in the second quarter of 2014. These increases were partially offset by a $640,000 reduction in recruiting costs in 2014 as compared to 2013. Other income (expense) primarily reflects the $2.6 million recognized as other income for the re-measurement of future purchase rights
liabilities for the year ended December 31, 2014, as all remaining purchase rights liabilities outstanding at December 31, 2013 were exercised or terminated in conjunction with the completion of our IPO in April 2014. Other expense of $1.3
million for the year ended December 31, 2013 reflects the re-measurement of future purchase rights liabilities during the period. Comparison of Fiscal Years Ended December 31, 2013 and 2012 The following table summarizes our operating expenses for the years ended December 31, 2013 and 2012 (dollars in thousands):


Item 6. Selected Financial Data.

The $16.7 million increase in research and development expense during the year ended December 31, 2013,
as compared to the year ended December 31, 2012, was principally associated with an increase in our Phase 3 clinical trial activities for VTI-208. The higher costs were primarily attributable to increases of $6.7 million in fees paid to CROs,
clinical sites, and other related costs, primarily due to subject enrollment that commenced in March 2013; $4.5 million in salaries and wages, stock-based compensation, and other compensation related costs due to increased headcount; $2.5 million in
manufacturing supplies and related costs; $1.7 million in consulting fees related to professional services; $0.7 million in travel costs to support our clinical trial activities; and $0.4 million of allocated facilities costs attributable to
additional clinical office space in 2013. The $5.1 million increase in general and administrative expense during the year ended
December 31, 2013, as compared to the year ended December 31, 2012, was primarily attributable to increases of $2.1 million in salaries and wages, stock-based compensation, and other compensation related expenses due to increased headcount
to support our operations; $1.0 million in consulting fees primarily related to professional services for accounting, marketing and information technology consultants; $0.7 million in expenses related to executive and board member recruitment; and
$0.5 million in facilities related to additional office space in 2013. The $413,000 decrease in interest expense for 2013, as compared to
2012, was attributable to no outstanding convertible notes or loans during 2013. Our convertible notes were converted into shares of our senior preferred stock in September 2012 and our term loan was repaid in October 2012. The $180,000 decrease in revaluation of preferred stock warrant liabilities was attributable to the final valuation adjustment of our
preferred stock warrant liabilities in 2012, as these warrants were converted to common stock warrants in connection with the junior preferred stock offering in February 2012. The $1.3 million recognized for the re-measurement of future purchase rights liabilities for the year ended December 31, 2013 was the
result of an increase in the estimated fair value of future purchase rights liabilities associated with our senior preferred stock financings and an increase during 2013 in the number of shares available under such rights from December 31, 2012
to December 31, 2013. The increase in the estimated fair value of the future purchase rights was primarily the result of an increase to our enterprise value offset in part by an increase in the number of shares of senior preferred stock
outstanding as of December 31, 2013 as compared to the prior year. Liquidity and Capital Resources Overview We have
incurred losses since inception and negative cash flows from operating activities for the years ended December 31, 2014, 2013 and 2012. As of December 31, 2014, we had an accumulated deficit of $150.8 million. We anticipate that we will
continue to incur net losses for the foreseeable future as we continue the development and potential commercialization of our ELAD System and incur additional costs associated with being a public company. In particular, we expect that our research
and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may seek to obtain through a combination of equity offerings, debt financings,
government or other third-party financing, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To date, we have financed our operations through preferred equity financings, our initial public offering completed in April 2014 and our
follow-on public offering completed in October 2014. In January and February 2014, we raised an aggregate of $18.2 million in private placements through the issuance and sale of 2,296,016 shares of senior preferred stock at a price of $8.00 per
share. In April 2014, we completed our initial public offering selling 4,500,000 shares of our common stock and, in May 2014, the underwriters exercised their option to purchase an additional 675,000 shares of our common stock, at $12.00 per share.
In total, we received net proceeds of $57.8 million after underwriters discounts and commissions and before transaction-related costs of $5.8 million. In October 2014, we completed a follow-on public offering selling 2,000,000 shares of
our common stock and, in November 2014, the underwriters exercised a portion of their option and purchased an additional 50,000 shares of our common stock, at $17.50 per share. In total, we received net proceeds of $33.4 million after
underwriters discounts and commissions and before transaction-related costs of $511,000. As of December 31, 2014, we had cash
and cash equivalents of approximately $102.2 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with an intent to maximize liquidity and preserve capital. As of December 31, 2014,
such balances were held in cash and money market funds. Cash Flows The following table shows a summary of our cash flows for each of the three years ended December 31, 2014, 2013, and 2012 (in thousands):


Item 6. Selected Financial Data.

Net cash used in operating activities During the year ended December 31, 2014, operating activities used $40.8 million of cash. The use of cash was primarily related to our net
loss of $47.7 million adjusted for non-cash income of $2.6 million related to the re-measurement of future purchase rights liabilities, non-cash charges of $1.1 million and $2.5 million for depreciation and stock-based compensation,
respectively, and $5.8 million of net changes in our operating assets and liabilities. Net cash provided by changes in our operating assets and liabilities during the year ended December 31, 2014 consisted primarily of an increase of $5.5
million in accounts payable and accrued liabilities, reflecting an increase in clinical activities, related research and development expenditures and the timing of payments made by us to vendors since the beginning of the year. The decrease of
$279,000 in other current assets and prepaid expenses was attributable to a reduction in prepaid clinical costs of $737,000 related to the utilization of prepayments to our CROs, offset by an increase of $329,000 in prepaid expenses primarily
attributable to payments on corporate insurance policies. During the year ended December 31, 2013, operating activities used $28.6
million of cash. The use of cash primarily related to our net loss of $32.7 million, partially offset by $3.0 million of non-cash charges related to the re-measurement of future purchase rights, depreciation, deferred rent, and stock-based
compensation and $1.0 million of net changes in our operating assets and liabilities. Net cash provided by changes in our operating assets and liabilities during the year ended December 31, 2013 consisted primarily of an increase of
$2.2 million in accounts payable and accrued liabilities, reflecting an increase in clinical activities and the timing of payments made by us to vendors, partially offset by an increase in prepaid clinical costs of $841,000, an increase in
lease deposits of $198,000, and an increase of $102,000 related to other assets. During the year ended December 31, 2012, operating
activities used $9.2 million of cash. The use of cash during 2012 primarily related to our net loss of $6.7 million, adjusted for $3.1 million in non-cash income related to the re-measurement of future purchase rights, $473,000 of net changes in our
operating assets and liabilities, and adjustments to our net loss of $180,000 due to the non-cash revaluation of the preferred stock warrant liabilities, partially offset by $1.2 million of non-cash charges related to depreciation, interest, and
stock-based compensation. Changes in our operating assets and liabilities consisted primarily of a decrease of $231,000 in accounts payable and accrued liabilities, due primarily to the timing of payments made by us to vendors, and an increase in
prepaid expenses of $242,000 due primarily to increases in prepaid clinical costs of $54,000. Net cash (used in) provided by investing
activities During the year ended December 31, 2014, investing activities used $2.0 million of cash, primarily related to $1.4
million in purchases of capital equipment for manufacturing and clinical operations and a net increase of $631,000 in restricted cash requirements. The net increase in our restricted cash is primarily related to an increase in our clinical trial
obligations of $917,000, which was offset by $288,000 related to the elimination of certain restrictions associated with an agreement we entered into with certain investors in February 2012 related to the sale of junior preferred stock. During the year ended December 31, 2013, investing activities provided $11.9 million of cash, primarily related to sales of short-term
investments of $17.0 million, partially offset by $3.0 million of purchases of short-term investments, as well as $1.5 million in purchases of capital equipment and a $608,000 increase in restricted cash requirements primarily related to our
clinical trial obligations and lease arrangements. During the year ended December 31, 2012, investing activities used $14.6 million
of cash due to the purchase of $14.0 million in short-term investments, capital equipment purchases of $261,000, and an increase in restricted cash requirements of $355,000 associated with clinical trial obligations and potential corporate wind-down
and employee related expenses. Net cash provided by financing activities During the year ended December 31, 2014, financing activities provided $106.9 million of cash, which included net proceeds after
underwriters discounts and commissions, as applicable, and offering costs paid in 2014 of $55.0 million from our IPO, $32.9 million from our follow-on offering and $18.2 million from the sale of senior redeemable convertible preferred stock.
In addition to these equity offerings, we received proceeds of $852,000 related to the exercise of options during 2014. During the year ended December 31, 2013, financing activities provided $50.4 million of
cash, compared to $27.5 million during the year ended December 31, 2012. The increase in cash provided by financing activities during 2013 primarily related to the sale of additional senior preferred stock for $53.2 million, net of offering
costs. These increases were partially offset by deferred financing costs of $3.1 million related to our IPO, which was not completed until April 2014. Our 2012 financing activities included the sale of senior preferred stock for $21.1 million, net of offering costs, and proceeds of $6.9
million from a loan that was converted to senior preferred stock during 2012. These financings were partially offset by principal payments of $533,000 on our term loan, which was repaid in October 2012. To date, we have not generated any revenues from product sales, and we do not have any approved products. We do not know when, or if, we will
generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize the ELAD System. Even assuming no commercialization costs, we anticipate
that we will continue to incur losses for the foreseeable future, and we expect the losses to increase over the next year as we continue the development of, and seek regulatory approvals for, our ELAD System. We are subject to all of the risks
incident in the development of new therapeutic products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial
additional funding in connection with our continuing operations. Based on our current business plan, we believe that our existing cash
and cash equivalents as of December 31, 2014 will be sufficient to fund our operations into the third quarter of 2016, assuming we do not begin building any significant commercial infrastructure during the period. Under this plan, our existing
cash and cash equivalents will be sufficient to fund development through the completion of enrollment and receipt of topline results from our VTI-208 Phase 3 clinical trial; however, we believe we will need additional funds to complete
enrollment in both our VTI-210 Phase 3 clinical trial and our VTI-212 Phase 2 clinical trial. This is a change from our prior projections of the fourth quarter of 2016 reflecting higher expected costs, principally related to preparations
for a potential filing of a biologics license application, or BLA. However, if the VTI-208 clinical trial has good results and we proceed to file the BLA and to prepare for market launch, we anticipate increasing our cash burn and raising additional
funds. A decision to build commercial infrastructure will be based on a variety of factors, most importantly the outcome of our clinical trials. If the VTI-208 clinical trial results do not support the filing of a BLA, we expect to focus on
conserving cash in order to enable completion of the VTI-210 clinical trial. The amount and timing of our actual expenditures also depend on numerous factors, including the rate of subject enrollment in our clinical trials, filing requirements with
various regulatory agencies, and any unforeseen cash needs. Our forecast of the period of time through which our financial resources will
be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. Our future capital requirements are difficult to forecast and will depend on many factors,
including, but not limited to:  the scope, progress, results and costs of research and development and clinical trials related to
the ELAD System or any future product candidates;  the cost and timing of scaling up and validating the manufacturing process for
the ELAD System or any other product candidates for commercialization;  the cost and timing of commercialization activities,
including reimbursement, marketing, sales and distribution costs, both before and after product approval (if any);  our ability to
establish new collaborations, licensing or other arrangements and the financial terms of such agreements;  the number and
characteristics of any future product candidates we pursue;  the costs involved with being a public company;  the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the
outcome of such litigation; and  the timing, receipt and amount of sales of, or royalties on the ELAD System and any future product
candidates.         Until such time, if ever, as we can generate substantial product revenues, we expect to
finance our cash needs through a combination of stock offerings, debt financings, collaborations and licensing arrangements. In any event, we do not expect to achieve revenue from product sales prior to the use of the net proceeds from our recently
completed initial public offering and follow-on public offering. We do not have any committed external source of funds. Additional funds may not be available on acceptable terms, if at all. To the extent that we raise additional capital through the
sale of equity securities, the ownership interest of our stockholders will be diluted and may be on terms that are not favorable to us or our stockholders. Debt financing, if available, may involve covenants restricting our operations or our ability
to incur additional debt or other terms that are not favorable to us or our stockholders. If we raise additional funds through collaborations and licensing arrangements with third parties, which we have no prior experience in, we may have to
relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope or
eliminate some or all of our development programs. We may have also have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technology that we would otherwise seek to
commercialize. Any of these factors could harm our operating results. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in
Item 303(a)(4) of Regulation S-K. Contractual Obligations Some of our most significant clinical trial expenditures are to investigative sites and to CROs. The agreements are cancellable by either party
at any time upon written notice and do not have any cancellation penalties, but do obligate us to reimburse the providers for any time or costs incurred through the date of termination. These items are not included in the table below. We lease
office and manufacturing space in San Diego, California. The following table summarizes our contractual obligations at December 31, 2014 and the effect such obligations are expected to have on our cash flow in future periods:


Item 6. Selected Financial Data.

As of December 31, 2014, our purchase obligations include existing purchase commitments for future
minimum payments of $391,000 with a vendor for raw materials that will be manufactured and utilized on an as needed basis. During the years ended December 31, 2014, 2013 and 2012, we purchased $1.2 million, $724,000 and $462,000, respectively,
of materials from this vendor. Our purchase obligations also include a purchase order with a vendor for cartridges that will be manufactured and delivered on an agreed upon schedule during 2015 for a future payment of $367,000. During the years
ended December 31, 2014 and 2013, we purchased $1.2 million and $439,000 of materials from this vendor. During the year ended 2012, we purchased no material from this vendor. If we cancel any future shipment, we would be required to pay 50% of the
scheduled invoice amount for that shipment. Recent Accounting Pronouncements In August 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-15,
Presentation of Financial Statements  Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 will require management to assess,
at each annual and interim reporting period, the entitys ability to continue as a going concern. The amendments in ASU 2014-15 do not have any application to an entitys financial statements, but only to disclosure in the related notes.
ASU 2014-15 is effective for annual periods ending after December 15, 2016 and early application is permitted. We intend to apply ASU 2014-15 beginning with the first quarter of fiscal year 2016. In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915)  Elimination of Certain Financial
Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, or ASU 2014-10, which eliminates the concept of a development stage entity in its entirety from current accounting guidance
and provides for certain amendments to the consolidation guidance in Topic 810 in the Accounting Standards Codification, or ASC. Prior to the issuance of this guidance, we were considered a development stage entity and as a result we included
certain inception-to-date disclosures in our financial statements. The guidance related to the elimination of the concept of a development stage entity is effective for public companies for annual reporting periods beginning after December 15,
2014, and interim periods therein. The amendment of the consolidation guidance in Topic 810 is effective for public companies for annual reporting periods beginning after December 15, 2015. Early adoption of the new standard is permitted. We
adopted ASU No. 2014-10 during the quarter ended June 30, 2014. As such, all inception-to-date disclosures have not been included in our consolidated financial statements.JOBS Act In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an
emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of
certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards
on the relevant dates on which adoption of such standards is required for other companies.


The $9.3 million increase in research and development expense during the year ended December 31, 2017 as compared to the year ended December 31, 2016 principally reflects an $8.0 million increase in costs related to the VTL-308 and prior clinical trials, primarily in higher costs for subjects, sites, manufacturing, enrollment support activities and consulting. As enrollment started in the second quarter of 2016, 35 subjects were enrolled in the VTI-308 clinical trial in the year ended December 31, 2016, while 97 subjects were enrolled during the year ended December 31, 2017. Costs also increased by $1.2 million for activities to support a potential biologics license application, or BLA, submission in the future. The $2.1 million increase in general and administrative expense during the year ended December 31, 2017 as compared to the year ended December 31, 2016 was largely the result of a $1.9 million increase in compensation-related costs. In December 2017, our chief executive officer transitioned from being an employee to a consultant. As a result of the related transition and consulting agreements, we recorded $525,000 in severance costs and $674,000 in stock-based compensation related to stock option modifications. In total, stock-based compensation increased by $1.2 million in 2017 as compared to 2016 principally due to the stock option modifications and an increase in the number of options outstanding.We expect to continue to incur significant research and development costs to complete enrollment in the VTL-308 clinical trial and in support of BLA activities. We also expect general and administrative costs to remain relatively constant in 2018 compared to 2017 except for increases in stock-based compensation and costs associated with hiring a new chief executive officer in January 2018. In addition, with successful topline results from our VTL-308 clinical trial, we would expect to increase our research and development costs to support a BLA submission and our general and administrative costs as we begin to prepare for the potential commercialization of the ELAD System.


Research and development expense decreased by $9.7 million during the year ended December 31, 2016 as compared to the year ended December 31, 2015. The reduction in research and development expenses resulted from an $8.3 million decrease in clinical trial and related consulting, manufacturing and outside service costs. We opened 38 sites during the year ended December 31, 2016 and enrolled 35 subjects in the VTL-308 clinical trial. Higher costs in the year ended December 31, 2015 reflected costs associated with locking the database for and analysis of the VTI-208 clinical trial, and costs associated with the opening of 42 sites and the enrollment of 38 subjects in the VTI-208, VTI-210 and VTI-212 clinical trials. In addition, research and development-related salaries and related compensation costs decreased by $1.3 million in the year ended December 31, 2016, primarily as a result of the reduction in staff and the recording of related severance costs in the third quarter of 2015.The $1.1 million decrease in general and administrative expense during the year ended December 31, 2016 as compared to the year ended December 31, 2015 was primarily the result of $503,000, $348,000 and $177,000 of lower salaries, for consulting and outside services and for travel costs, respectively, in part reflecting reductions in costs in conjunction with the reduction in staff completed in the fourth quarter of 2015. The decrease was also driven by a $250,000 reduction in audit and accounting fees and costs associated with being a public company and a $170,000 reduction in insurance costs. These decreases were partially offset by increased stock-based compensation of $640,000, primarily due to performance-based stock options that were granted in the fourth quarter of 2015. In addition, legal expenses increased by $223,000 in 2016, principally reflecting costs associated with securities litigation that was dismissed in 2016.


Contractual Obligations

As of December 31, 2017, our purchase obligations include existing purchase commitments of $288,000 with a vendor for raw materials that will be used in manufacturing on an as needed basis. During the years ended December 31, 2017, 2016 and 2015, we purchased $1.1 million, $943,000 and $1.2 million, respectively, of materials from this vendor. Our purchase obligations also include a purchase commitment of $143,000 with a vendor for a component used in our clinical trials that will be manufactured and delivered on an as agreed upon schedule during 2018. During the years ended December 31, 2017, 2016 and 2015, we purchased $228,000, $139,000 and $106,000, respectively, of materials from this vendor. In the course of normal business operations, we also enter into agreements with contract service providers and others. We can elect to discontinue the work under these contracts and purchase orders with notice.


Comparison of Fiscal Years Ended December 31, 2020 and 2019

Research and development expenses increased by $16.1 million during the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. The increase reflects (i) a $9.6 million increase in external development costs for IMU-838 related to the Phase 2 clinical trial in patients with COVID-19 since the trial was started in 2020, (ii) a $5.0 million increase in license fees, drug supply and Phase 1 costs related to IMU-856 since these trials have ramped up in 2020, (iii) a $2.1 million increase in drug supply, Phase 1 and preclinical costs related to IMU-935 since these trials have ramped up in 2020, (iv) a $1.5 million increase in personnel expenses, (v) a $0.7 million increase in drug supply costs related to IMU-838, and (vi) a $0.7 million increase for a bioequivalence study related to IMU-838. The increases were partially offset by (i) a $2.0 million decrease related to the Phase 2 clinical trial of IMU-838 in patients with RRMS as the clinical trial came to an end in 2020, and (ii) a $1.5 million decrease in costs related to a Phase 2 clinical trial in patients with Crohn’s disease. General and administrative expenses decreased by $4.2 million during the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. The decrease is primarily due to (i) $5.1 million lower stock compensation expense as a result of non-recurring costs recorded in 2019 related to the Transaction, (ii) $0.9 million of decreased legal, accounting and consultancy costs, and (iii) a $0.7 million decrease in travel costs due to worldwide travel restrictions in connection with the COVID-19 pandemic. The decrease was partially offset by (i) a $2.2 million increase in personnel expenses, and (ii) $0.3 million of increased costs across numerous categories.Total other income increased by $2.9 million during the twelve months ended December 31, 2020, as compared to the twelve months ended December 31, 2019. The increase is primarily attributable to (i) a $2.5 million foreign exchange gain on a $68.0 million intercompany loan between Immunic, Inc. and Immunic AG, and (ii) a $0.9 million increase in research and development tax incentives for clinical trials in Australia as a result of increased spending on clinical trials in Australia.  This increase was partially offset by (i) the $0.4 million difference between the face value and fair value of the promissory note collected in full in September 2019 in connection with the sale of ELAD Assets, offset by the $0.1 million write-off of the investment in VTL China included in the ELAD Assets sale, and (ii) a $0.2 million decrease of recognized income attributable to reimbursements of research and development expenses in connection with the Daiichi Sankyo Agreement.


Other Commitments and Obligations

The purchase obligations above represent non-cancelable contractual obligations under certain agreements related to our development programs IMU-838, IMU-935 and IMU-856.


Acquisitions

(1)           The purchase price for this hotel included the issuance of 412,174 Common Units in our Operating Partnership valued at the time of issuance at $3.7 million.(2)           The amounts reflect actual total renovation costs.(3)           The amounts reflect actual-to-date and estimated remaining costs to complete.The purchase price and renovation costs are funded by mortgage debt, advances on our senior unsecured revolving line of credit facility, cash and the issuance of Operating Partnership Common Units described in footnote 1 to the table above.  Additional information about the mortgage debt financing is provided below in Outstanding Indebtedness  Mortgage Loans.Of the total renovation costs detailed in the table above, $26.2 million have been incurred as of December 31, 2014.  There is no assurance that our actual renovation costs will not exceed our estimates.


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(1)         The sale of these hotel properties included the assignment of the related ground leases.(2)         The sale of this property included three adjacent land parcels totaling 5.64 acres.(3)         We provided seller financing in the form of mortgage loans on these sales totaling $2.4 million.  These mortgage loans mature in the first quarter of 2015.

| **Disposition Date** |  | **Franchise/Brand** |  | **Location** |  | **Gross Sales Price** | |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  | |  |
| ***2014:*** |  |  |  |  |  |  | |  |
| January 17 |  | AmericInn Hotel & Suites and Aspen Hotel & Suites |  | Fort Smith, AR |  | $ | 3,080 | (1) |
| September 9 |  | Hampton Inn |  | Fort Smith, AR |  | 8,800 | | (1) |
| October 21 |  | Country Inn & Suites and adjacent land parcels |  | San Antonio, TX |  | 7,900 | | (2) |
| Total 2014 |  |  |  |  |  | $ | 19,780 |  |
|  |  |  |  |  |  |  | |  |
| ***2013:*** |  |  |  |  |  |  | |  |
| January 15 |  | AmericInn Hotel & Suites |  | Golden, CO |  | $ | 2,600 |  |
| February 15 |  | Hampton Inn |  | Denver, CO |  | 5,500 | |  |
| February 27 |  | Land parcel |  | Jacksonville, FL |  | 1,900 | |  |
| May 1 |  | Holiday Inn and Holiday Inn Express |  | Boise, ID |  | 12,600 | |  |
| May 30 |  | Courtyard by Marriott |  | Memphis, TN |  | 4,225 | |  |
| August 8 |  | SpringHill Suites |  | Lithia Springs, GA |  | 2,400 | |  |
| August 21 |  | Land parcel |  | Missoula, MT |  | 750 | |  |
| August 29 |  | Fairfield Inn |  | Lewisville, TX |  | 1,960 | |  |
| September 30 |  | Fairfield Inn |  | Lakewood, CO |  | 2,800 | |  |
| October 30 |  | Fairfield Inn |  | Emporia, KS |  | 1,650 | | (3) |
| November 1 |  | SpringHill Suites |  | Little Rock, AR |  | 4,500 | |  |
| November 1 |  | Land parcel |  | El Paso, TX |  | 2,400 | |  |
| November 8 |  | Fairfield Inn and AmericInn Hotel & Suites |  | Salina, KS |  | 3,000 | |  |
| November 12 |  | Hampton Inn, Fairfield Inn and land parcel |  | Boise, ID |  | 8,090 | |  |
| November 18 |  | Land parcel |  | Houston, TX |  | 2,500 | |  |
| December 19 |  | Holiday Inn Express |  | Emporia, KS |  | 1,775 | | (3) |
| Total 2013 |  |  |  |  |  | $ | 58,650 |  |


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(1) Includes Common Units in Summit Hotel OP, LP, the Companys operating partnership, held by limited partners (other than us and our subsidiaries) because the Common Units are redeemable for cash or, at our election, shares of our common stock.During the year ended December 31, 2014, FFO increased by $29.7 million, or 61%, over the prior year primarily due to an increase in revenues of $104.5 million during the year ended December 31, 2014 in comparison with the prior year, which resulted in an increase in net income for the year ended December 31, 2014 of $15.0 million over the prior year.  The increase in revenues was the result of increases in Occupancy and ADR as discussed below under Results of Operations.


Earnings Before Interest, Taxes, Depreciation and Amortization

During the year ended December 31, 2014, EBITDA increased by $30.0 million, or 36%, over the prior year primarily due to an increase in net income before depreciation and amortization of $27.2 million during the year ended December 31, 2014 in comparison with the prior year.  The increase in net income before depreciation and amortization was primarily driven by an increase in revenues of $104.5 million during the year ended December 31, 2014 in comparison with the prior year.  The increase in revenues was the result of increases in Occupancy and ADR as discussed below under Results of Operations.


Comparison of 2014 to 2013

The total portfolio information above includes revenues and expenses from the six hotels we acquired in 2014 (the 2014 Acquired Hotels) and the 19 hotel properties we acquired in 2013 (the 2013 Acquired Hotels) from the date of acquisition through December 31, 2014, and operating information (occupancy, ADR, and RevPAR) for the period each hotel was owned. Accordingly, the information does not reflect a full twelve months of operations in 2014 for the 2014 Acquired Hotels or a full twelve months of operations in 2013 for the 2013 Acquired Hotels. The combined 2014 Acquired Hotels and 2013 Acquired Hotels are referred to as the 2014/2013 Acquired Hotels.Revenues. Total revenues increased $104.5 million, or 35.0%, to $403.5 million in 2014, compared with $299.0 million in 2013. The growth was due to a $21.1 million increase in same-store revenues and an $83.7 million increase in revenues at the 2014/2013 Acquired Hotels.The same-store revenue increase of 9.6%, to $240.6 million in 2014 compared with $219.5 million in 2013, was due to a 220 basis point increase in occupancy in 2014 compared with 2013, and a 6.4% increase in ADR in 2014 compared with 2013. The increases in occupancy and ADR resulted in a 9.7% increase in same-store RevPAR to $84.42 in 2014 compared with $76.98 in 2013. These increases were due to the improving economy, our strong revenue and asset management programs, hotel industry fundamentals and renovations made at our hotel properties.


37

Depreciation and Amortization. Depreciation and amortization expense increased $14.1 million, or 27.6%, to $65.3 million in 2014 compared with 2013, primarily due to depreciation associated with the 2014/2013 Acquired Hotels and increased amortization of capitalized renovation costs at existing hotel properties. The 2014 depreciation and amortization expense includes $63.3 million of fixed asset depreciation, $1.5 million of financing costs amortization, and $0.5 million of franchise fees amortization. The 2013 depreciation and amortization expense includes $48.9 million of fixed asset depreciation, $1.9 million of financing costs amortization, and $0.4 million of franchise fees amortization.Corporate General and Administrative. Corporate general and administrative expenses increased by $7.0 million, or 53.4%, to $19.9 million in 2014 compared with 2013. The increase is primarily due to an increase in equity-based compensation of $1.4 million, an increase in salaries and bonus expense of $2.7 million and increased professional fees of $2.6 million related to internal controls improvements and other matters.Other Income/Expense. Other expense, net increased $4.3 million, or 19.6%, in 2014 compared with 2013 primarily due to an increase in interest expense due to higher average debt outstanding.  This increase was slightly offset by a reduction in debt transaction costs and an increase in interest income.Income Tax Expense/Benefit. Our total income tax expense (related to continuing operations and discontinued operations) in 2014 of $0.7 million consists of Alternative Minimum Tax (Federal) of $0.1 million and state taxes of $0.6 million.  Included in state taxes are franchise taxes due in Texas of $0.4 million, which are based on gross receipts, and taxes due in other states of $0.2 million.  Net operating losses of $6.6 million have been used in the current year to reduce our tax expense.  Our total income tax expense (related to continuing operations and discontinued operations) in 2013 of $4.4 million is primarily due to our establishment of a valuation allowance related to net operating losses (NOLs) incurred by our TRS in 2011, 2012 and 2013.


Comparison of 2013 to 2012

The total portfolio information above includes revenues and expenses from the 2013 Acquired Hotels and the 19 hotel properties we acquired in 2012 (the 2012 Acquired Hotels) from the date of acquisition through December 31, 2013, and operating information (occupancy, ADR, and RevPAR) for the period each hotel was owned. Accordingly, the information does not reflect a full