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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to            

 

Commission File Number 000-51644

 

RMG Networks Holding Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		27-4452594
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

15301 Dallas Parkway

Suite 500

Addison, Texas 75001

(800) 827-9666

(Address including zip code, and telephone number, including area code, of principal executive offices)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒     No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ☒     No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer		☐		Accelerated Filer		☐
Non-Accelerated Filer		☐		Smaller reporting company		☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 14, 2014, 12,167,756 shares of common stock, par value $0.0001 per share, of the registrant were outstanding.

 

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TABLE OF CONTENTS

 

		Page
	PART I — FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets	3
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2014 and 2013	4
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three months ended September 30, 2014 and 2013	5
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2014	6
	Unaudited Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4.	Controls and Procedures	45
	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 5.	Other Information	58
Item 6.	Exhibits	58
SIGNATURES		58

  

 

PART I

 

Item 1.      Consolidated Financial Statements 

  

RMG Networks Holding Corporation

Consolidated Balance Sheets

September 30, 2014 and December 31, 2013

 

		September 30, 2014				December 31, 2013
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	5,045,819			$	8,235,566
Accounts receivable, net			11,565,009				22,731,678
Inventory, net			2,919,876				4,633,213
Deferred tax assets			18,884				63,617
Other current assets			2,113,491				2,224,547
Total current assets			21,663,079				37,888,621
Property and equipment, net			4,941,016				3,548,985
Intangible assets, net			18,330,125				38,782,000
Goodwill			20,798,027				28,642,398
Loan origination fees			800,243				971,726
Other assets			181,198				496,879
Total assets		$	66,713,688			$	110,330,609
Liabilities and Stockholders’ equity
Current liabilities:
Accounts payable		$	3,369,494			$	6,606,200
Revenue share liabilities			3,747,139				3,998,794
Accrued liabilities			3,789,117				4,510,848
Loss on long-term contract			2,204,424				-
Deferred revenue			7,714,130				10,074,420
Total current liabilities			20,824,304				25,190,262
Notes payable – non current			12,000,000				8,000,000
Warrant liability			1,929,743				4,573,123
Deferred revenue – non current			1,683,881				990,989
Deferred tax liabilities			6,173,925				6,430,853
Loss on long-term contract – non current			902,220				-
Other			986,872				392,558
Total liabilities			44,500,945				45,577,785
Commitments and Contingencies
Stockholders’ equity:
Common stock, $.0001 par value, (250,000,000 shares authorized; 12,467,756 and 11,920,583 shares issued, 12,167,756 and 11,920,583 shares outstanding, at September 30, 2014 and December 31, 2013, respectively.)			1,247				1,192
Additional paid-in capital			81,512,431				77,452,317
Accumulated comprehensive income			201,414				299,618
Retained earnings (accumulated deficit)			(59,022,349	)			(13,000,303	)
Treasury stock (300,000 shares)			(480,000	)			-
Total stockholders’ equity			22,212,743				64,752,824
Total liabilities and stockholders’ equity		$	66,713,688			$	110,330,609

 

See accompanying notes to consolidated financial statements.

 

 

RMG Networks Holding Corporation

For The Nine Months Ended September 30, 2014 and the Period April 20 through September 30, 2013 

Consolidated Statements of Comprehensive Income (Loss)

 

		Successor				Successor				Predecessor
		Company				Company				Company
		Nine Months Ended September 30, 2014				April 20, 2013 Through September 30, 2013				February 1, 2013 Through April 19, 2013
		(Unaudited)				(Unaudited)
Revenue:
Advertising		$	10,989,894			$	9,565,274			$	-
Products			9,976,720				10,529,906				2,239,236
Maintenance and content services			12,044,494				5,805,021				3,594,520
Professional services			6,053,823				4,732,649				1,323,559
Total Revenue			39,064,931				30,632,850				7,157,315
Cost of Revenue:
Advertising			8,581,701				6,707,899				-
Products			7,411,693				6,990,780				1,498,135
Maintenance and content services			2,210,373				1,445,773				611,692
Professional services			4,393,966				2,542,140				861,640
Cost of Revenue – products and services			22,597,733				17,686,592				2,971,467
Loss on long-term contract			1,373,371				-				-
Total Cost of Revenue			23,971,104				17,686,592				2,971,467
Gross Profit			15,093,827				12,946,258				4,185,848
Operating expenses:
Sales and marketing			14,776,478				7,675,656				1,729,871
General and administrative			13,617,293				6,504,162				1,739,348
Research and development			3,114,219				1,711,010				512,985
Acquisition expenses			378,193				1,995,250				3,143,251
Depreciation and amortization			5,398,978				2,971,620				140,293
Impairment of intangible assets and goodwill			24,421,849				-				-
Total operating expenses			61,707,010				20,857,698				7,265,748
Operating income (loss)			(46,613,183	)			(7,911,440	)			(3,079,900	)
Other Income (Expense):
Warrant liability income (expense)			182,889				(1,829,333	)			-
Interest expense and other – net			(1,194,967	)			(1,695,988	)			(14,553	)
Income (loss) before income taxes			(47,625,261	)			(11,436,761	)			(3,094,453	)
Income tax expense (benefit)			(1,603,215	)			-				(540,897	)
Net income (loss)			(46,022,046	)			(11,436,761	)			(2,553,556	)
Other comprehensive income (loss) -
Foreign currency translation adjustments			(98,204	)			191,818				(121,144	)
Total comprehensive income (Loss)		$	(46,120,250	)		$	(11,244,943	)		$	(2,674,700	)
Net income(loss) per share:
Basic and dilutive net income (loss) per share of Common Stock		$	(3.79	)		$	(1.46	)		$	-
Basic and dilutive net income (loss) per share of Class L Common Stock		$	-			$	-			$	(2.55	)
Basic and dilutive net income (loss) per share of Class A Non-Voting Common Stock		$	-			$	-			$	-
Weighted average shares used in computing basic and dilutive net income (loss) per share of Common Stock			12,151,630				7,824,059				-
Weighted average shares used in computing basic and dilutive net income (loss) per share of Class L Common Stock			-				-				1,000,000
Weighted average shares used in computing basic and dilutive net income (loss) per share of Class A Non-Voting Common Stock			-				-				68,889

 

See accompanying notes to consolidated financial statements

 

 

RMG Networks Holding Corporation

Consolidated Statements of Comprehensive Income (Loss)

For The Three Months Ended September 30, 2014 and 2013

 

		Successor Company				Successor Company
		Three Months Ended September 30, 2014				Three Months Ended September 30, 2013
		(Unaudited)				(Unaudited)
Revenue:
Advertising		$	3,572,657			$	4,308,717
Products			4,387,418				5,460,746
Maintenance and content services			4,140,207				3,232,466
Professional services			1,813,134				2,580,894
Total Revenue			13,913,416				15,582,823
Cost of Revenue:
Advertising			2,791,791				3,352,016
Products			2,989,925				3,729,288
Maintenance and content services			694,289				873,340
Professional services			1,308,998				1,344,836
Cost of Revenue – products and services			7,785,003				9,299,480
Adjustment of loss on long-term contract			(2,756,733	)			-
Total Cost of Revenue			5,028,270				9,299,480
Gross Profit			8,885,146				6,283,343
Operating expenses:
Sales and marketing			4,140,374				4,324,370
General and administrative			3,126,949				3,888,646
Research and development			994,182				904,610
Acquisition expenses			378,193				789,653
Depreciation and amortization			1,598,160				1,679,344
Impairment of intangible assets and goodwill			17,176,490				-
Total operating expenses			27,414,348				11,586,623
Operating income (loss)			(18,529,202	)			(5,303,280	)
Other Income (Expense):
Warrant liability income (expense)			771,898				2,090,667
Interest expense and other – net			(1,080,276	)			(949,671	)
Income (loss) before income taxes			(18,837,580	)			(4,162,284	)
Income tax expense (benefit)			(1,274,355	)			-
Net income (loss)			(17,563,225	)			(4,162,284	)
Other comprehensive income -
Foreign currency translation adjustments			(199,992	)			178,661
Total comprehensive income (loss)		$	(17,763,217	)		$	(3,983,623	)
Net income (loss) per share:
Basic and diluted net income (loss) per share of Common Stock		$	(1.45	)		$	(.46	)
Weighted average shares used in computing basic and diluted net income (loss) per share of Common Stock			12,132,973				9,028,083

 

See accompanying notes to consolidated financial statements.

 

 

RMG Networks Holding Corporation

Consolidated Statements of Cash Flows

For The Nine Months Ended September 30, 2014 and the Period April 20 through September 30, 2013

 

		Successor				Successor				Predecessor
		Company				Company				Company
		Nine Months				April 20, 2013				February 1, 2013
		Ended				Through				Through
		September 30,				September 30,				April 19,
		2014				2013				2013
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net income (loss)		$	(46,022,046	)		$	(11,436,761	)		$	(2,553,556	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			5,398,978				2,971,620				140,293
Change in warrant liability			(182,889	)			1,829,333				-
Impairment of intangible assets and goodwill			24,421,849				-				-
Stock-based compensation			1,483,214				557,641				-
Non-cash treasury stock			(480,000	)			-				-
Non-cash loan origination fees			171,483				249,650				-
Non-cash consulting fees			384,750				80,000				-
Non-cash directors’ fees			116,464				-				-
Interest capitalized as debt			-				135,000				-
Deferred tax (benefit)			(212,029	)			-				(12,294	)
Changes in operating assets and liabilities:
Accounts receivable			11,166,670				(2,608,668	)			2,846,332
Inventory			1,713,337				(295,315	)			(488,722	)
Other current assets			31,056				(188,155	)			(154,529	)
Other assets, net			10,929				(34,994	)			12,572
Accounts payable			(3,236,706	)			(159,338	)			(2,978,808	)
Accrued liabilities			2,110,418				(1,435,808	)			(767,991	)
Deferred revenue			(1,667,397	)			378,732				(372,579	)
Net cash provided by (used in) operating activities			(4,791,919	)			(9,957,063	)			(4,329,282	)
Cash flows from investing activities:
Acquisition of Symon Holdings Corporation			-				(209,079	)			-
Purchases of property and equipment			(2,299,624	)			(775,055	)			(86,470	)
Net cash provided by (used in) investing activities			(2,299,624	)			(984,134	)			(86,470	)
Cash flows from financing activities:
Proceeds from debt			4,000,000				-				-
Proceeds from stock			-				39,115,785				-
Repayment of debt			-				(10,943,590	)			-
Net cash provided by (used in) financing activities			4,000,000				28,172,195				-
Effect of exchange rate changes on cash			(98,204	)			230,758				(121,144	)
Net increase (decrease) in cash and cash equivalents			(3,189,747	)			17,461,756				(4,536,896	)
Cash and cash equivalents, beginning of period			8,235,566				10,824,943				10,203,169
Cash and cash equivalents, end of period		$	5,045,819			$	28,286,699			$	5,666,273
Supplemental disclosures of cash flow information:
Cash paid during the year for interest		$	1,114,699			$	1,247,465			$	2,053
Cash paid during the year for income taxes		$	68,670			$	-			$	150,000

 

See accompanying notes to consolidated financial statements

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Summary of Significant Accounting Policies

 

Description of the Company

 

RMG Networks Holding Corporation (“RMG Networks” or the “Company”) is a holding company which owns 100% of the capital stock of RMG Networks Holding, Inc. (formerly Reach Media Group Holdings, Inc.) and its subsidiaries and RMG Enterprise Solutions Holdings Corporation and its subsidiaries (formerly Symon Holdings Corporation).

 

RMG Networks (formerly SCG Financial Acquisition Corp.) was incorporated in Delaware on January 5, 2011. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets (“Initial Business Combination”). The Company had neither engaged in any operations nor generated any income, other than interest on the Trust Account assets (the “Trust Account”). Until its initial acquisition, the Company was considered to be in the development stage as defined in FASB Accounting Standards Codification 915, or FASB ASC 915, “Development Stage Entities,” and was subject to the risks associated with activities of development stage companies. The Company selected December 31 as its fiscal year end. All activity through April 8, 2013 was related to the Company’s formation, initial public offering (“Offering”) and identification and investigation of prospective target businesses with which to consummate an Initial Business Combination.

 

The registration statement for the Offering was declared effective April 8, 2011. The Company consummated the Offering on April 18, 2011 and received gross proceeds of approximately $80,000,000, before deducting underwriting compensation of $4,000,000 (which included $2,000,000 of deferred contingent underwriting compensation payable upon consummation of an Initial Business Combination) and including $3,000,000 received for the purchase of 4,000,000 warrants by SCG Financial Holdings LLC (the “Sponsor”), as described in the next paragraph. Total offering costs (excluding $2,000,000 in underwriting fees) were $433,808.

 

On April 12, 2011, the Sponsor purchased 4,000,000 warrants (“Sponsor Warrants”) from the Company for an aggregate purchase price of $3,000,000. The Sponsor Warrants were identical to the warrants sold in the Offering, except that if held by the original holder or its permitted assigns, they (i) could be exercised for cash or on a cashless basis and (ii) were not subject to being called for redemption.

 

The Company sold 8,000,000 units in the Offering with total gross proceeds to the Company of $80,000,000. Each unit consisted of one share of common stock and one Warrant (the "Public Warrants"). The Company’s management had broad discretion with respect to the specific application of the net proceeds of the Offering, although substantially all of the net proceeds of the Offering were intended to be generally applied toward consummating an Initial Business Combination.

 

On April 27, 2011, $80,000,000 from the Offering and Sponsor Warrants that had been placed in a Trust Account (“Trust Account”) was invested, as provided in the Company’s registration statement. The Company was permitted to invest the proceeds of the Trust Account in U.S. “government securities,” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 (the “1940 Act”) with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the 1940 Act. The Trust Account assets were required to be maintained until the earlier of (i) the consummation of an Initial Business Combination or (ii) the distribution of the Trust Account as required if no acquisition was consummated.

 

The Company’s common stock currently trades on The Nasdaq Global Market (“Nasdaq”), under the symbol “RMGN”. The warrants are quoted on the Over-the-Counter Bulletin Board quotation system under the symbol “RMGNW”.

 

On April 8, 2013, the Company consummated the acquisition of Reach Media Group Holdings, Inc. (“RMG”). As a result of the acquisition, the Company is no longer considered a Development Stage Entity. In addition, on April 19, 2013, the Company acquired Symon Holdings Corporation (“Symon”). Symon is considered to be the Company's predecessor corporation for accounting purposes. 

 

In connection with the acquisition of RMG, the Company provided its stockholders with the opportunity to redeem their shares of common stock for cash equal to $10.00 per share, upon the consummation of the acquisition, pursuant to a tender offer. The tender offer expired at 5:00 p.m. Eastern Time on April 5, 2013, and the Company promptly purchased the 4,551,228 shares of common stock validly tendered and not withdrawn pursuant to the tender offer, for an aggregate purchase price of approximately $45.5 million.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Description of the Business

 

The Company is a global provider of media applications and enterprise-class digital signage solutions. Through an extensive suite of products, including media services, proprietary software, software-embedded hardware, maintenance and creative content service, installation services, and third-party displays, the Company delivers complete end-to-end intelligent visual communication solutions to its clients. The Company is one of the largest integrated digital signage solution providers globally and conducts operations through its RMG Media Networks and its RMG Enterprise Solutions business units.

 

The RMG Media Networks business unit engages elusive audience segments with relevant content and advertising delivered through digital place-based networks. These networks include the RMG Airline Media Network. The RMG Airline Media Network is primarily a U.S.-based network focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment, or IFE, systems, on in-flight Wi-Fi portals and in private airport terminals. The network, which spans almost all major commercial passenger airlines in the United States, delivers advertising to an audience of affluent travelers and business decision makers in a captive and distraction-free video environment.

 

The RMG Enterprise Solutions business unit provides end-to-end digital signage applications to power intelligent visual communication implementations for critical contact center, supply chain, employee communications, hospitality, retail and other applications with a large concentration of customers in the financial services, telecommunications, manufacturing, healthcare, pharmaceutical, utility and transportation industries, and in federal, state and local governments. These solutions are relied upon by approximately 70% of the North American Fortune 100 companies and thousands of overall customers in locations worldwide. The installations of Enterprise Solutions deliver real-time intelligent visual content that enhance the ways in which organizations communicate with employees and customers. The solutions provided are designed to integrate seamlessly with a customer’s IT infrastructure and data and security environments.

 

Principles of Consolidation

 

The unaudited consolidated financial statements of RMG Networks Holding Corporation include the accounts of RMG and its wholly-owned subsidiaries and the accounts of Symon and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Amounts shown for the “Predecessor Company” represent the transactions of Symon for the period shown. Symon is the predecessor due to the significance of its business compared to the other companies.

 

Basis of Presentation for Interim Financial Statements

 

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and the notes required by GAAP for complete financial statements. The Balance Sheet at December 31, 2013 and the Statements of Comprehensive Income and Cash Flows for the Successor Company for the period April 20 through September 30, 2013, the Statements of Comprehensive Income and Cash Flows for the Predecessor Company for the period February 1, 2013 through April 19, 2013 have been derived from the Company’s audited financial statements, but do not include all disclosures required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed interim consolidated financial statements reflect all adjustments and disclosures necessary for a fair presentation of the results of the reported interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements and notes there to. The interim results of operations are not necessarily indicative of the results to be expected for the full year.

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, cash and cash equivalents include demand deposits in financial institutions and investments with an original maturity of three months or less from the date of purchase.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable

 

Accounts receivable are comprised of sales made primarily to entities located in the United States of America, EMEA and Asia. Accounts receivable are recorded at the invoiced amounts and do not bear interest. The allowance for doubtful accounts is reviewed monthly and the Company establishes reserves for doubtful accounts on a case-by-case basis based on a current review of the collectability of accounts and historical collection experience. The allowance for doubtful accounts was $227,380 at September 30, 2014 and $241,535 at December 31, 2013. As of September 30, 2014 and December 31, 2013, no single customer accounted for more than 10% of accounts receivable or revenues.

 

Inventory

 

Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Writeoffs of slow moving and obsolete inventories are provided based on historical experience and estimated future usage.

 

The composition of inventory at September 30, 2014 and December 31, 2013 was as follows:

 

		September 30, 2014				December 31, 2013
Raw Materials		$	384,627			$	535,830
Finished Goods			2,535,249				4,097,383
Total		$	2,919,876			$	4,633,213

 

Property and Equipment

 

The Company records purchases of property and equipment at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset.

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of net identifiable assets resulting from the acquisitions of RMG and Symon. Goodwill is tested annually at December 31 for impairment or tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying value exceeds the fair value of the assets of the reporting unit. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying value. Second, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit's goodwill.

 

In performing the impairment test at December 31, 2013, there was some indication that there could be impairment at that date. The Company engaged an independent specialist to assist the Company in completing an impairment test as of December 31, 2013 and, based on the results of the testing, the Company has concluded there was no impairment. The Media reporting unit’s fair value exceeded its carrying value by $1,578,000 or 5.7% and the Enterprise reporting unit’s fair value exceeded it carrying value by $6,500,000, or 13%. The Company's impairment analysis contained certain assumptions, such as the discount rate, that are subject to change. Changes in the assumptions could have a material impact on the impairment analysis.

 

In the second quarter of 2014, as a result of the continued decline in the Company’s stock price, coupled with lower than anticipated operating results for the quarter ended June 30, 2014 and a change in the estimate of future operating results for the Media unit, goodwill was tested for impairment as of June 30, 2014. The Company engaged an independent specialist to assist in determining if goodwill was impaired at June 30, 2014. Based on the impairment testing performed, it was determined that goodwill of the Media unit was impaired and the Company recorded an impairment charge of $1,332,359 at June 30, 2014. This impairment is reflected in Note 4.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The impairment testing concluded there was no impairment of goodwill at the Enterprise reporting unit. The Enterprise reporting unit’s fair value exceeded its carrying value by $4,718,000 or 10.4%. The Company’s impairment analysis contained certain assumptions, such as the discount rate, that are subject to change. Changes in the assumptions could have a material impact on the impairment analysis. 

 

In the third quarter of 2014, as a result of another decline in the Company’s stock price, coupled with lower than anticipated operating results for the quarter ended September 30, 2014, the employment of a new Chief Executive Officer and a new Chief Revenue Officer for the Media unit, turnover in the Media unit’s sales team, and a change in the estimate of future operating results for the Media unit, goodwill was again tested for impairment as of September 30, 2014. The Company engaged an independent specialist to assist in determining if goodwill was impaired at September 30, 2014. Based on the impairment testing performed, it was determined that goodwill of the Media unit was impaired and the Company recorded an impairment charge of $7,129,000 at September 30, 2014. This impairment charge was equal to the remaining carrying value of goodwill at the Media unit and is reflected in Note 4.

 

The impairment testing concluded there was no impairment of goodwill at the Enterprise unit. The Enterprise unit’s fair value exceeded its carrying value by $3,815,000 or 9.8%. The Company’s impairment analysis contained certain assumptions, such as the discount rate, that are subject to change. Changes in the assumptions could have a material impact on the impairment analysis.  

 

The Company’s market capitalization could fluctuate in the future. As a result, it will continue to treat this data as an indicator of possible impairment if its market capitalization falls below its book value. If this situation occurs, it will perform the required detailed analysis to determine if there is impairment.

 

Intangible assets include software and technology, customer relationships, partner relationships, trademarks and trade names, customer order backlog and covenants not-to-compete associated with the acquisitions of RMG and Symon. The intangible assets are being amortized over their estimated useful lives. 

 

The definite lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis, and, if the asset is not recoverable, recognizing an impairment charge, if necessary, to reduce the asset's carrying amount to its fair value. Intangible assets are evaluated for impairment annually and on an interim basis as events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount.

 

In the second quarter of 2014, as a result of the continued decline in the Company’s stock price, coupled with lower than anticipated operating results for the quarter ended June 30, 2014 and a change in the estimate of future operating results for the Media unit, intangible assets were tested for impairment as of June 30, 2014. The Company engaged an independent specialist to assist it in determining if intangible assets were impaired at June 30, 2014. Based on the impairment testing performed, it was determined that some intangible assets of RMG were impaired, specifically Customer Relationships, Partner Relationships, and Covenant Not-to-Compete, and the Company recorded an impairment charge of $5,913,000. See Note 4.

 

In the third quarter of 2014, as a result of another decline in the Company’s stock price, coupled with lower than anticipated operating results for the quarter ended September 30, 2014, the employment of a new Chief Executive Officer and a new Chief Revenue Officer for the Media unit, turnover in the Media unit’s sales team,  and a change in the estimate of future operating results for the Media unit, intangible assets were tested for impairment as of September 30, 2014. The Company engaged an independent specialist to assist it in determining if intangible assets were impaired at September 30, 2014. Based on the impairment testing performed, it was determined that the intangible assets of the Media unit were impaired and the Company recorded an impairment charge of $10,047,490. This impairment charge was equal to the remaining carrying value of intangible assets at the Media unit and is reflected in Note 4. 

 

The impairment testing concluded there was no impairment of intangible assets at the Enterprise reporting unit at June 30, 2014 or at September 30, 2014. Changes in the assumptions could have a material impact on the impairment analysis.

 

The Company’s Intangible Assets are amortized as follows:

 

Acquired Intangible Asset:		Amortization Period: (years)
Software and technology		5
Customer relationships		8
Partner relationships		10
Tradenames and trademarks		10
Customer order backlog		3
Covenant Not-To-Compete		2

 

Deferred Revenue

 

Deferred revenue consists of billings or payments received in advance of revenue recognition from professional service agreements. Deferred revenue is recognized as the revenue recognition criteria are met. The Company generally invoices the customer in annual advance for professional services.

 

Impairment of Long-lived Assets

 

In accordance with ASC 360, Property, Plant, and Equipment, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset.

 

There was no impairment of long-lived assets at September 30, 2014 and December 31, 2013.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. The Company recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.

 

Under ASC 740, Income Taxes (“ASC 740”), the Company recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized. It also requires the Company to accrue interest and penalties where there is an underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause it to change its assessment of the appropriate accrual amount (see Note 6). U.S. income taxes have not been provided on $4.1 and $3.9 million of undistributed earnings of foreign subsidiaries as of September 30, 2014 December 31, 2013, respectively. The Company reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign operations indefinitely. The Company has elected to recognize accrued interest and penalties related to income tax matters as a component of income tax expense if incurred.

 

Revenue Recognition

 

The Company recognizes revenue primarily from these sources:

 

●

Advertising

●

Products

●

Maintenance and content services

●

Professional services

 

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, which is when product title transfers to the customer, or services have been rendered; (iii) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (iv) collection is reasonably assured. The Company assesses collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.

 

Advertising

 

The Company sells advertising through agencies and directly to a variety of customers under contracts ranging from one month to one year. Contracts usually specify the network placement, the expected number of impressions (determined by passenger or visitor counts) and the cost per thousand impressions (“CPM”) over the contract period to arrive at a contract amount. The Company bills for these advertising services as requested by the customer, generally on a monthly basis following delivery of the contracted number of impressions for the particular ad insertion. Revenue is recognized at the end of the month in which fulfillment of the advertising order occurred. Although the Company typically presents invoices to an advertising agency, collection is reasonably assured based upon the customer placing the order.

 

Under Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 605-45 Principal Agent Considerations (Reporting Revenue Gross as a Principal versus Net as an Agent), the Company has recorded its advertising revenues on a gross basis.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Payments to airline and other partners for revenue sharing are paid on a monthly basis either under a minimum annual guarantee (based upon estimated advertising revenues), or as a percentage of the advertising revenues following collection from customers. The portion of revenue that the Company shares with its partners ranges from 25% to 80% depending on the partner and the media asset. The Company makes minimum annual guarantee payments under three agreements (two to airline partners and one to another partner). Payments to all other partners are calculated on a revenue sharing basis. The Company’s partnership agreements have terms ranging from one to five years. Four partnership agreements renew automatically unless terminated prior to renewal and the other partners have no obligation to renew.

 

Multiple-Element Arrangements

 

Products consist of proprietary software and hardware equipment. The Company considers the sale of software more than incidental to the hardware as it is essential to the functionality of the hardware products. The Company enters into multiple-product and services contracts, which may include any combination of equipment and software products, professional services, maintenance and content services.

 

Multiple Element Arrangements (“MEAs”) are arrangements with customers which include multiple deliverables, including a combination of equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the Company's control. Revenue from arrangements for the sale of tangible products containing both software and non-software components that function together to deliver the product’s essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price (“RSP”) method for each unit of accounting based first on Vendor Specific Objective Evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists, and on estimated selling price (“ESP”) if neither VSOE or TPE of selling price of the Company's various applicable tangible products containing essential software products and services. The Company establishes the pricing for its units of accounting as follows:

 

●

VSOE— for certain elements of an arrangement, VSOE is based upon the pricing in comparable transactions when the element is sold separately. The Company determines VSOE based on its pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or standalone prices for the service element(s).

●

TPE— if the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, it uses third-party evidence of selling price. The Company determines TPE based on sales of comparable amounts of similar products or services offered by multiple third parties considering the degree of customization and similarity of the product or service sold.

●

ESP— the estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When VSOE or TPE does not exist for an element, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on its pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP.

 

The Company has also established VSOE for its professional services and maintenance and content services based on the same criteria as previously discussed under the software revenue recognition rules.

 

The Company uses the estimated selling price to determine the relative sales price of its products. Revenue for elements that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement has been met or over the period that our last remaining obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria.

 

The Company sells its products and services through its global sales force and through a select group of resellers and business partners. In North America, approximately 90% or more of sales have historically been generated solely by the Company’s sales team, with 10% or less through resellers. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales historically coming from the reseller channel. Overall, approximately 67% of the Company’s global revenues have historically been derived from direct sales, with the remaining 33% generated through indirect partner channels.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties and product returns from resellers have be insignificant to date. The Company therefore sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies as discussed above. The Company bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users.

 

The Company recognizes revenue on sales to resellers consistent with its recognition policies as discussed below.

 

Product revenue

 

The Company recognizes revenue on product sales generally upon delivery of the product or customer acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue.

 

Maintenance and content services revenue

 

Maintenance support consists of hardware maintenance and repair and software support and updates. Software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Support includes access to technical support personnel for software and hardware issues. Content services consist of providing customers live and customized news feeds.

 

Maintenance and content services revenue is recognized ratably over the term of the contracts, which is typically one to three years. Maintenance and support is renewable by the customer annually. Rates, including subsequent renewal rates, are typically established based upon specified rates as set forth in the arrangement. The Company’s hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal.

 

Professional services revenue

 

Professional services consist primarily of installation and training services. Installation fees are recognized either on a fixed-fee basis or on a time-and-materials basis. For time-and materials contracts, the Company recognizes revenue as services are performed. For fixed-fee contracts, the Company recognizes revenue upon completion of the installation which is typically completed within five business days. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Training services are also not considered essential to the functionality of the product and have historically been insignificant; the fee allocable to training is recognized as revenue as the Company performs the services.

 

Research and Development Costs

 

Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.

 

Advertising

 

Advertising costs, which are included in selling, general and administrative expense, are expensed as incurred and are not material to the consolidated financial statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Fair Value Measurements

 

The Company follows the authoritative guidance on fair value measurements and disclosures with respect to assets and liabilities that are measured at fair value on both a recurring and non-recurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels defined as follows:

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

	•	Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.
	•	Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.
	•	Level 3 - Inputs are unobservable for the asset or liability.

 

As part of its testing of goodwill and intangible assets for impairment, the Company fair values all of its assets and liabilities, many of which were based on discounted cash flows analysis and forecasted future operating results which represent Level 3 inputs. In addition, the Company values its warrant liability at the end of each period based on Level 2 inputs.

 

Concentration of Credit Risk and Fair Value of Financial Instruments

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities reflected in the financial statements approximates fair value due to the short-term maturity of these instruments; the short term debt and the long-term debt’s carrying value approximates its fair value due to the variable market interest rate of the debt.

 

The Company does not generally require collateral or other security for accounts receivable. However, credit risk is mitigated by the Company’s ongoing evaluations of customer creditworthiness. The Company maintains an allowance for doubtful accounts receivable balances.

 

The Company maintains its cash and cash equivalents in the United States with three financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation insurable limit. Cash and cash equivalents of $446,638 and $1,696,475 held in foreign countries as of September 30, 2014 and December 31, 2013, respectively, were not insured.

 

 

Net Income (Loss) per Common Share

 

Basic net income (loss) per share for each class of participating common stock, excluding any dilutive effects of stock options, warrants and unvested restricted stock, is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is computed similar to basic; however diluted income (loss) per share reflects the assumed conversion of all potentially dilutive securities. There were no stock options, warrants, or other equity instruments outstanding at September 30, 2014 and December 31, 2013 that had a dilutive effect on net income (loss) per share.

 

Foreign Currency Translation

 

The functional currency of the Company’s United Kingdom subsidiary is the British pound sterling. All assets and all liabilities of the subsidiary are translated to U.S. dollars at period-ending exchange rates. Income and expense items are translated to U.S. dollars at the weighted-average rate of exchange prevailing during the period. Resultant translation adjustments are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

 

The Company includes currency gains and losses on temporary intercompany advances in the determination of net income. Currency gains and losses are included in interest and other expenses in the consolidated statements of income and comprehensive income.

 

Business Segment

 

Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (the Company’s Chief Executive Officer (“CEO”)) in assessing performance and deciding how to allocate resources. The Company’s business is comprised of two operating segments, media advertising and enterprise solutions. The CEO reviews financial data that encompasses the Company’s media advertising and enterprise solutions revenues, cost of revenues, and gross profit. Since the Company operates as a single entity globally, it does not allocate operating expenses to each segment for purposes of calculating operating income, EBITDA, or other financial measurements for use in making operating decisions and assessing financial performance. The CEO manages the business based primarily on broad functional categories of sales, marketing and technology development and strategy.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with FASB ASC No. 718-10 - "Compensation – Stock Compensation”. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based awards that are ultimately expected to vest during the period. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of share granted and the closing price of the Company's common stock on the date of grant. Compensation expense for all share-based payment awards is recognized using the straight-line amortization method over the vesting period.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Recently Issued Accounting Pronouncements 

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification ("ASC") Section 606, "Revenue from Contracts with Customers". The new section will replace Section 605, "Revenue Recognition" and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. The Company will adopt the new provisions of this accounting standard at the beginning of fiscal year 2017, given that early adoption is not an option. The Company will further study the implications of this statement in order to evaluate the expected impact on the consolidated financial statements.

 

2. Acquisitions

 

Acquisition of RMG

 

On April 8, 2013, the Company acquired RMG for a total purchase price of $27,516,010. The amount paid for RMG was comprised of (i) 400,001 shares of Company common stock valued at $9.98 per share on March 31, 2013, (ii) $10,000 in cash, and (iii) $10,000 deposited into an escrow account. Additionally, the Company paid, on behalf of RMG, all indebtedness of RMG under RMG's credit agreement at a discounted amount equal to $23,500,000, paid with $21,000,000 of cash and $2,500,000 of shares of Company common stock.

 

The acquisition was accounted for as an acquisition of a business and, accordingly, the results of its operations have been included in the Company’s consolidated results of operations from the date of acquisition.

 

The Company engaged an independent specialist to assist the Company in calculating the fair value of the assets and liabilities acquired. The allocation of the total purchase price to the net tangible and identifiable intangible assets was based on the fair value at the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets was allocated to goodwill, which is deductible for tax purposes. Qualitatively, goodwill represents the market position and the collective expertise of Reach Media with respect to advertising services. The purchase price allocation was preliminary as of December 31, 2013 pending the final determination of the fair value of certain acquired assets and assumed liabilities. The purchase price allocation was finalized as of March 31, 2014.

 

The valuation of the identifiable intangible assets was performed using the following methodologies:

 

●	Partner relationships	With-and-Without Method
●	Customer relationships	Income Method – Multi-Period Excess Earnings
●	Tradename and trademarks	Income Method – Relief from Royalty
●	Developed technology	Income Method – Relief from Royalty
●	Non-compete agreements	Income Method – Avoided Loss of Income

 

The fair values were based on significant inputs that were not observable in the market and thus represent Level 3 measurements under the fair value hierarchy. The significant unobservable inputs include the discount rate of 19.5% which was based on the estimated weighted cost of capital.

 

The purchase price allocation was as follows:

 

Tangible Assets		$	6,498,063
Intangible Assets			19,460,000
Goodwill			8,461,359
Liabilities			(6,903,412	)
Total Purchase Price		$	27,516,010

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Intangible assets acquired consist of the following:

 

Partner relationships		$	8,800,000
Customer relationships			6,500,000
Trade name and trademarks			1,700,000
Developed technology			1,600,000
Non-compete agreements			860,000
Total		$	19,460,000

 

The primary tangible assets acquired were cash of $819,052, accounts receivable of $4,813,553, and property and equipment of $514,280. The primary liabilities assumed were accounts payable of $2,220,858, accrued liabilities of $1,075,736, and revenue share liabilities of $2,721,121.  

 

Acquisition of Symon  

 

On April 19, 2013, the Company acquired Symon for $43,685,828 in cash. The acquisition was accounted for as an acquisition of a business and, accordingly, the results of its operations have been included in the Company’s consolidated results of operations from the date of acquisition.

 

The Company engaged an independent specialist to assist Company in calculating the fair value of the assets and liabilities acquired. The allocation of the total purchase price to the net tangible and identifiable intangible assets was based on the fair value at the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets was allocated to goodwill (which is not deductible for tax purposes). Qualitatively, goodwill represents the market position and the global operating experience of Symon. The purchase price allocation was preliminary as of December 31, 2013 pending the final determination of the fair value of certain acquired assets and assumed liabilities. The purchase price allocation was finalized as of March 31, 2014.

 

The valuation of the identifiable intangible assets was performed using the following methodologies:

 

●	Customer relationships	Income Method – Multi-Period Excess Earnings
●	Developed technology	Income Method – Relief from Royalty
●	Customer order backlog	Income Method – Multi-Period Excess Earnings
●	Non-compete agreements	Income Method – Avoided Loss of Income

 

The fair values were based on significant inputs that were not observable in the market and thus represent Level 3 measurements under the fair value hierarchy. The significant unobservable inputs include the discount rate of 21.0% which was based on the estimated weighted cost of capital.

 

The purchase price allocation was as follows: 

 

Tangible Assets		$	17,807,856
Intangible Assets			23,990,000
Goodwill			20,798,027
Liabilities			(18,910,055	)
Total Purchase Price		$	43,685,828

 

Intangible assets acquired consist of:

 

Customer relationships		$	15,700,000
Developed technology			7,600,000
Customer order backlog			400,000
Non-compete agreements			290,000
Total		$	23,990,000

 

The primary tangible assets acquired were cash of $5,666,273, accounts receivable of $6,423,976, inventory of $3,477,488, and property and equipment of $918,768. The primary liabilities assumed were accounts payable of $1,171,922, accrued liabilities of $1,160,240, deferred revenue of $6,200,000, and deferred tax liabilities of $10,377,893.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3. Property and Equipment

 

Property and equipment consist of the following:

 

		September 30, 2014				December 31, 2013
Machinery and equipment		$	2,869,567			$	2,058,217
Furniture and fixtures			1,034,647				1,019,082
Software			705,796				567,900
Leasehold improvements			1,827,221				492,408
			6,437,231				4,137,607
Less accumulated depreciation and amortization			1,496,215				588,622
Property and equipment, net		$	4,941,016			$	3,548,985

 

Depreciation expense for the nine months ended September 30, 2014 was $907,593. Depreciation expense for the period April 20 through June 30, 2013 was $127,431 and for the period February 1 through April 19, 2013 was $130,771. Depreciation expense for the three months ended September 30, 2014 and 2013 was $326,775 and $202,708, respectively.

  

4. Goodwill and Intangible Assets

 

The carrying amount of goodwill and intangible assets, resulted from the valuation related to the acquisitions of RMG and Symon and the application of Financial Accounting Standards Board Standard Codification 805, “Business Combinations”. As a result, the basis of the net assets and liabilities of RMG and Symon were adjusted to reflect their fair values and the appropriate amount of goodwill was recorded for the consideration given in excess of the fair values assigned to the net identifiable assets. The carrying value of goodwill and certain intangible assets has subsequently been reduced due to an impairment charge of $8,461,359 and $15,960,490, respectively.

 

The carrying amount of goodwill for the Enterprise unit was $20,798,027 and $20,181,039 at September 30, 2014 and December 31, 2013, respectively. The carrying amount of goodwill for the Media unit was $0 and $8,461,359 at September 30, 2014 and December 31, 2013, respectively. The carrying value of goodwill for the Media unit has been completely written off in 2014 in connection with impairment charges discussed in Note 1.

 

The following table shows the carrying amount of goodwill:

 

		September 30, 2014				December 31, 2013
Balance - beginning		$	28,642,398			$	-
Goodwill resulting from acquisitions occurring in April 2013			-				28,642,398
Purchase price accounting adjustment			616,988				-
Impairment			(8,461,359	)			-
Balance - ending		$	20,798,027			$	28,642,398

  

The carrying value of the Company’s intangible assets at September 30, 2014 were as follows:

 

		Weighted Average Amortization Years				Gross Carrying Amount				Accumulated Amortization				Charge for Impairments				Net carrying Amount
Software and technology			5			$	9,200,000			$	(2,668,000	)		$	(1,136,000	)		$	5,396,000
Customer relationships			8				22,200,000				(3,916,921	)			(5,428,704	)			12,854,375
Partner relationships			10				8,800,000				(1,201,714	)			(7,598,286	)			-
Tradenames and trademarks			10				1,700,000				(246,500	)			(1,453,500	)			-
Covenant not-to-compete			2				1,150,000				(726,250	)			(344,000	)			79,750
Customer order backlog			1				400,000				(400,000	)			-				-
Total						$	43,450,000			$	(9,159,385	)		$	(15,960,490	)		$	18,330,125

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The carrying values of the Company’s intangible assets at December 31, 2013, were as follows:

 

		Weighted Average Amortization Years				Gross Carrying Amount				Accumulated Amortization				Net carrying Amount
Software and technology			5			$	9,200,000			$	(1,288,000	)		$	7,912,000
Customer relationships			8				22,200,000				(1,942,500	)			20,257,500
Partner relationships			10				8,800,000				(616,000	)			8,184,000
Tradenames and trademarks			10				1,700,000				(119,000	)			1,581,000
Covenant not-to-compete			2				1,150,000				(402,500	)			747,500
Customer order backlog			1				400,000				(300,000	)			100,000
Total						$	43,450,000			$	(4,668,000	)		$	38,782,000

 

Amortization expense for the nine months ended September 30, 2014 was $4,491,385. Amortization expense for the period April 20 through June 30, 2013 was $1,164,845 and for the period February 1 through April 19, 2013 was $9,522. Amortization expense for the three months ended September 30, 2014 and 2013 was $1,271,385 and $1,476,564, respectively.

 

Future amortization expense for these assets for the five years ending December 31 and thereafter is as follows:

 

2014 (remainder)		$	906,875
2015			3,526,000
2016			3,482,500
2017			3,482,500
2018			2,418,500
Thereafter			4,513,750
Total		$	18,330,125

 

5. Notes Payable

 

Senior Credit Agreement

 

On April 19, 2013, the Company entered into a Credit Agreement (the “Senior Credit Agreement”) by and among it and certain of its direct and indirect domestic subsidiaries party thereto from time to time (including RMG and Symon) as borrowers (the “Borrowers”), certain of its direct and indirect domestic subsidiaries party thereto from time to time as guarantors (the “Guarantors” and, together with the Borrowers, collectively, the “Loan Parties”, and the financial institutions from time to time party thereto as lenders (the “Senior Lenders”).

 

The Senior Credit Agreement provided for a five-year $24 million senior secured term loan facility (the “Senior Credit Facility”), which was funded in full on April 19, 2013. The Senior Credit Facility is guaranteed jointly and severally by the Guarantors, and is secured by a first-priority security interest in substantially all of the existing and future assets of the Loan Parties (the “Collateral”), except for the accounts receivable of the company’s Media business segment which are pledged as collateral for the Company’s Revolving Accounts Receivable Borrowing Facility.

 

The Senior Credit Facility bore interest at a rate per annum equal to the Base Rate plus 7.25% or the LIBOR Rate plus 8.5%, at the election of the Borrowers. If an event of default occurred and was continuing under the Senior Credit Agreement, the interest rate applicable to borrowings under the Senior Credit Agreement would automatically be increased by 2% per annum. The “Base Rate” and the “LIBOR Rate” were defined in a manner customary for credit facilities of this type. The LIBOR Rate was subject to a floor of 1.5%.

 

The Company was required to make quarterly principal amortization payments in the amount of $600,000 (subject to adjustment as provided in the Senior Credit Agreement), with the first such amortization payment due on July 1, 2013. Subject to certain conditions contained in the Senior Credit Agreement, the Company could prepay the principal of the Senior Credit Facility in whole or in part. In addition, the Company was required to prepay the principal of the Senior Credit Facility (subject to certain basket amounts and exceptions) in amounts equal to (i) 50% of the “Excess Cash Flow” of the Company and its subsidiaries for each fiscal year (as defined in the Senior Credit Agreement); (ii) 100% of the net cash proceeds from asset sales, debt issuances or equity issuances by the Company or any of the other Loan Parties; and (iii) 100% of any cash received by the Company or any of the other Loan Parties not in the ordinary course of business (excluding cash from asset sales and debt and equity issuances), net of reasonable collection costs.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

The Company was not required to make any mandatory prepayment to the extent that, after giving effect to such mandatory prepayment, the unrestricted cash on hand of the Loan Parties would be less than $5 million. The amount of any mandatory prepayment not prepaid as a result of the foregoing sentence would be deferred and would be due and owing on the last day of each month thereafter, but in each case solely to the extent that unrestricted cash on hand of the Loan Parties exceeds or equals $5 million after giving effect thereto.

 

In the event of any mandatory or optional prepayment under the Senior Credit Agreement or the termination of the Senior Credit Agreement prior to April 19, 2018, the Company is required to pay the Senior Lenders a prepayment fee equal to the following percentage of the amount repaid or prepaid: 3% if such prepayment or termination occurs prior to April 19, 2014; 2% if such prepayment or termination occurs prior to April 19, 2015; and 1% if such prepayment or termination occurs prior to April 19, 2016. Amounts repaid or prepaid under the Senior Credit Agreement will not be available for borrowing.

 

The Senior Credit Agreement includes customary representations and warranties, restrictive covenants, including covenants limiting the ability of the Company to incur indebtedness and liens; merge with, make an investment in or acquire any property or assets of another entity; pay cash dividends; repurchase shares of its outstanding stock; make loans and other investments; dispose of assets (including the equity securities of its subsidiaries); prepay the principal on any subordinate indebtedness; enter into certain transactions with its affiliates; or change its principal business (in each case, subject to certain basket amounts and exceptions). The Senior Credit Agreement also includes customary financial covenants, including minimum Consolidated EBITDA (as defined in the Senior Credit Agreement) requirements, and maximum leverage ratios, tested quarterly, as well as customary events of default.

 

In connection with the Company's public offering of common stock in July 2013, the Company received a waiver from the Senior Lenders, pursuant to which the first $10,000,000 of proceeds from that offering were required to be used to pay down the Senior Credit facility. The remaining proceeds were available for general corporate purposes, which included the funding of growth initiatives in sales and marketing, capital expenditures, working capital, and/or strategic acquisitions.

 

Junior Credit Agreement

 

On April 19, 2013, the Company entered into a Junior Credit Agreement by and among the Borrowers, the Guarantors, and the financial institutions from time to time party thereto as lenders (the “Junior Lenders”).

 

The Junior Credit Agreement provided for a five and a half year unsecured $2.5 million junior Term Loan A (issued with an original issue discount of $315,000) and a five and a half year unsecured $7.5 million junior Term Loan B (the “Junior Loans”). Each of the Junior Loans were funded in full on April 19, 2013. The Junior Loans were guaranteed jointly and severally by the Guarantors.

 

The Term Loan A bore interest at a fixed rate of 12% per annum and the Term Loan B bore interest at a fixed rate equal to the greater of 16% per annum and the current rate of interest under the Senior Credit Agreement relating to the Senior Credit Facility plus 4%. Interest owing under the Term B Loan was paid quarterly in arrears of which 12% was paid in cash and the remaining amount owed paid in kind If an event of default occurred and was continuing under the Junior Credit Agreement, borrowings under the Junior Credit Agreement would automatically be subject to an additional 2% per annum interest charge. 

 

Borrowings under the Junior Credit Agreement were due and payable on the maturity date, October 19, 2018. Following the repayment in full of the Senior Credit Facility, the Company could voluntarily prepay the principal of the Junior Loans in whole or in part. In addition, the Company was required to prepay the Junior Loans in full upon the occurrence of a “change of control” under the Junior Credit Agreement (generally defined as (i) the acquisition by any person or “group” (within the meaning of Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 as in effect on April 19, 2013), other than certain named parties and their respective controlled affiliates, of more than 45% of the outstanding shares of the Company’s common stock; (ii) subject to certain exceptions, the failure by the Company to directly or indirectly own 100% of the issued and outstanding capital stock of each other Loan Party and its subsidiaries, free and clear of all liens other than the liens created under the Senior Credit Agreement); (iii) the cessation of the Company’s current Executive Chairman (unless a successor reasonably acceptable to the Junior Lenders was appointed on terms reasonably acceptable to such parties within 90 days of such cessation); (iv) the listing of any person who owned a controlling interest in or otherwise controls a Loan Party on the Specially Designated Nationals and Blocked Person List maintained by the Office of Foreign Assets Control (“OFAC”), Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (B) a person designated under Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders or law; or (v) the occurrence of a “Change of Control” as defined in the Senior Credit Agreement).

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In the event of any mandatory or optional prepayment under the Junior Credit Agreement or the termination of the Junior Credit Agreement prior to October 19, 2018, the Company was required to pay the Junior Lenders a prepayment fee equal to the following percentage of the amount repaid or prepaid: 5% if such prepayment or termination occurred prior to the thirteenth month following April 19, 2013; 4% if such prepayment or termination occurred from the thirteenth month following April 19, 2013 but prior to the twenty-fifth month thereafter; 3% if such prepayment or termination occurred from the twenty-fifth month following April 19, 2013 but prior to the thirty-first month thereafter; 2% if such prepayment or termination occurred from the thirty-first month following April 19, 2013 but prior to the thirty seventh-month thereafter; and 1% if such prepayment or termination occurred from the thirty-seventh month following April 19, 2013 but prior to the forty-third month thereafter. Amounts repaid or prepaid under the Junior Credit Agreement were not available for borrowing.

 

The Junior Credit Agreement contained substantially the same representations and warranties, affirmative and negative covenants and financial covenants as the Senior Credit Agreement, except that the permitted baskets in the Junior Credit Agreement were generally higher than under the Senior Credit Agreement, and the financial covenant requirements and ratios were 15% looser than under the Senior Credit Agreement. In addition, the Junior Credit Agreement included additional covenants intended to ensure that any Junior Lender that is a small business investment company complies with the applicable rules and regulations of the Small Business Administration, including a covenant granting the Junior Lenders Board of Director observation rights.

 

The Junior Credit Agreement also contained substantially the same events of default as under the Senior Credit Agreement, except that the thresholds included in the Junior Credit Agreement were generally higher than under the Senior Credit Agreement. The Junior Credit Agreement included cross-default provisions tied to either (1) the acceleration of the indebtedness under the Senior Credit Agreement or (2) the occurrence of an event of default under any of our other indebtedness or of any of the other Loan Parties having a principal balance in excess of $575,000.

 

The loans under the Junior Credit Agreement were subordinated to the Senior Credit Facility pursuant to the terms of a Subordination Agreement dated as of April 19, 2013 between the Junior Lenders and the Loan Parties.

 

In consideration for the Term Loan A under the Junior Credit Agreement, the Company issued to the Junior Lenders an aggregate of 31,500 shares of its common stock on April 19, 2013. In addition, on April 19, 2013, the Company also issued an aggregate of 31,500 shares of its common stock to certain affiliates of the Senior Lenders for their services in connection with arranging and structuring the financing provided under the Junior Credit Agreement. These shares were capitalized as loan origination fees and are being amortized over the life of the debt.

 

 

 

Debt Refinancing

 

On November 14, 2013, the Administrative Agent resigned as administrative agent under the Senior Credit Agreement and Comvest Capital II, L.P. (the "New Administrative Agent") was appointed administrative agent. Immediately after the appointment, the Loan Parties entered into a Second Amendment to Credit Agreement with the New Administrative Agent (the "Second Amendment"). The Second Amendment amended certain provisions of the Senior Credit Agreement and provided for a new $8 million term loan facility (the "Term Loan Facility"). The proceeds of the Term Loan Facility, along with cash on hand, were used to (i) repay certain lenders under the Senior Credit Agreement and (ii) repay in full all the obligations owed by the Loan Parties to Plexus Fund II, L.P. pursuant to the Company's Junior Credit Agreement.

 

Pursuant to the terms of Second Amendment, the Term Loan Facility bore interest at a rate per annum equal to the Base Rate plus 6.25% or the LIBOR Rate plus 7.5%, at the election of the Borrowers. The Company was no longer required to make quarterly principal amortization payments, and the entire unpaid portion of the Term Loan Facility was due on the termination date (April 19, 2018). The Second Amendment also included, among other things, revisions to the financial covenants contained in the Senior Credit Agreement. 

 

The covenants included requirements that the Company must achieve specified levels of consolidated EBITDA and must maintain a minimum fixed charge coverage ratio, which requirements are tested quarterly (beginning with the quarter ending December 31, 2014). There was also a limit on the amount of capital expenditures in any fiscal year. In addition, the Company was required to maintain Specified Coverage Assets, consisting of eligible receivables and unrestricted cash, equal to or exceeding the outstanding principal balance of the loan. The Company could not have less than $1,500,000 of unrestricted cash at any time. Failure to comply with these or other covenants resulted in an event of default. In the event of any default, the lenders could elect to declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be immediately due and payable and could foreclose on the Company's assets. The Company was in compliance with its debt covenants at December 31, 2013.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On July 16, 2014 the Company amended its Senior Credit Facility to increase the amount borrowed under the facility to $12,000,000, adding approximately $3,400,000 in net cash proceeds to its Balance Sheet. The amendment also eliminates financial covenants until at least mid-year 2015. The amended Senior Credit Facility, which matures in July 2017, bears interest at a fixed rate of 12% and continues to defer principal payments until maturity.

 

Prior to the amendment, the Company’s former senior lender, Comvest Capital II, L.P., sold its interest in the Senior Credit Facility to a new lender group that includes the Company’s Executive Chairman and the Company’s largest shareholder. After acquiring the Senior Credit Facility, the new lender group entered into a Third Amendment to the Credit Agreement and funded the $4,000,000 increase in the Senior Credit Facility.

 

6. Sale of Accounts Receivable

 

In September 2014, the Company entered into an agreement with a third party (the “Purchaser”) under which the Company will, from time to time, sell specific accounts receivable to the Purchaser. The Purchaser has agreed to advance to the Company 85% of the total value of the purchased accounts, up to a maximum of $3,000,000. The Company will receive the remaining 15% of the total value of the purchased accounts upon the collection of the full amount of the purchased accounts. All customer payments of the purchased accounts are made to a lock-box controlled by the Purchaser. The Company pays interest to the Purchaser on the total amount of cash advances that have not been repaid at the rate of prime plus 1%; however, the interest rate can never be less than 4.25%. In addition, the Company pays the Purchaser a service charge of 2% on each cash advance.

 

The purchased accounts are sold by the Company to the Purchaser with full recourse and, in the event the purchased accounts are not fully repaid, the Company is liable for the unpaid portion of the purchased accounts. At September 30, 2014 the amount of unpaid purchased accounts was $860,562. The Company has collateralized the agreement by granting the Purchaser a security interest in the total receivables of its Media business segment.

  

7. Income Taxes

 

The Company recognized a loss before provision for income taxes for the nine months ended September 30, 2014; however, no tax benefit related to the loss has been recognized because the realization of the tax benefit is uncertain. The Company has also recorded a valuation allowance equal to 100% of the potential tax benefit applicable to its total net operating loss carry forwards at September 30, 2014 of $23,914,120 because the realization of the tax benefit is uncertain. In addition, the Company has recorded valuation allowances for certain other deferred tax items.

 

The Company’s position with respect to its deferred tax assets and liabilities is a very complex matter due to the fact that the Company’s financial results have created uncertainty as to the future realization of the deferred tax assets and liabilities. As a result, the Company has commenced an in-depth analysis of its deferred tax assets and liabilities and expects to utilize the services of independent tax consultants to assist in this analysis. The Company expects to complete this analysis by December 31, 2014.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The IRS completed an examination of Symon's income tax returns for the years ended January 31, 2009 and 2010 during 2012. The examination did not result in any material adjustments to Symon's tax returns. Subsequent to the examinations, the Company has determined that there are no uncertain tax positions and therefore no accruals have been made. There are no uncertain tax positions related to the successor. Symon's open tax years are 2011 through 2013. RMG's open tax years are 2008 through 2013.

 

With respect to state and local jurisdictions and countries outside of the United States, the Company and its subsidiaries are typically subject to examination for three to six years after the income tax returns have been filed.

 

8. Common Stock

 

The Company is authorized to issue up to 250,000,000 shares of common stock, par value $0.0001 per share. As of September 30, 2014 and December 31, 2013, the Company had 12,467,756 and 11,920,583, respectively, outstanding shares of common stock.

 

In February 2014, the Company commenced an offer to exchange one share of its common stock for every eight of its outstanding warrants tendered by the holder for exchange pursuant to the offer. The exchange offer expired on March 26, 2014, at 11:59 p.m. Eastern Time. A total of 3,417,348 Public Warrants, or approximately 26% of the 13,066,067 outstanding Warrants (and approximately 43% of the 8,000,000 outstanding Public Warrants), were properly tendered and not withdrawn in the offer.

  

Under the terms of the offer, the Company accepted all tendered Warrants, and issued an aggregate of 427,169 shares of common stock in exchange.

 

Stockholders of record are entitled to one vote for each share of common stock held on all matters to be voted on. Stockholders are entitled to receive ratable dividends when, as and if declared, by the Company’s Board of Directors out of funds legally available. In the event of a liquidation, dissolution, or winding up of the Company, stockholders are entitled to share ratably in all assets remaining available for distribution after payment of all liabilities of the Company, and after all provisions are made for each class of stock, if any, having preference over the common stock. Common stockholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the Company’s common stock.  

 

9. Warrants

 

At September 30, 2014 and December 31, 2013, the Company had 9,648,719 and 13,066,067 warrants outstanding, respectively. As of September 30, 2014, 4,582,652 of these were public warrants. Each warrant entitles the registered holder to purchase one share of common stock at an exercise price of $11.50 per share. During the nine months ended September 30, 2014, the Company redeemed 3,417,348 Public Warrants in connection with the common stock exchange discussed in Note 7.

  

Public Warrants 

 

Each Warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment as discussed below, and are currently exercisable, provided that there is an effective registration statement under the Securities Act covering the underlying shares and a current prospectus relating to them is available.

 

The Warrants issued as part of the Offering expire on April 8, 2018 or earlier upon redemption or liquidation. The Company may call Warrants for redemption:

 

●

in whole and not in part;

●

at an exercise price of $0.01 per Warrant;

●

upon not less than 30 days’ prior written notice of redemption, or the 30-day redemption period, to each Warrant holder; and

●

if, and only if, the last sale price of the Company’s common stock equals or exceeds $17.50 per share for any 20 trading days within a 30-day trading period ending on the third business day before the Company sends notice of redemption to the Warrant holders.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

If the Company calls the Public Warrants for redemption as described above, it will have the option to require any holder of Warrants that wishes to exercise his, her or its Warrant to do so on a “cashless basis”. If the Company takes advantage of this option, all holders of Public Warrants would pay the exercise price by surrendering his, her or its Warrants for that number of shares of our common stock equal to, but in no case less than $10.00, the quotient obtained by dividing (x) the product of the number of shares of the Company’s common stock underlying the Warrants, multiplied by the difference between the exercise price of the Warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the Company’s common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Warrants. If the Company takes advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of common stock to be received upon exercise of the Warrants, including the “fair market value” in such case. Requiring a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the dilutive effect of a Warrant redemption. If the Company calls the Warrants for redemption and the Company’s management does not take advantage of this option, the Sponsor and its permitted transferees would still be entitled to exercise their Sponsor Warrants for cash or on a cashless basis using the same formula described above that holders of Public Warrants would have been required to use had all Warrant holders been required to exercise their Warrants on a cashless basis, as described in more detail below.

 

The exercise price, the redemption price and number of shares of common stock issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a stock dividend, stock split, extraordinary dividend, or recapitalization, reorganization, merger or consolidation. However, the exercise price and number of Common Shares issuable on exercise of the Warrants will not be adjusted for issuances of common stock at a price below the Warrant exercise price.

 

The Public Warrants were issued in registered form under a Warrant Agreement between the Company’s transfer agent (in such capacity, the “Warrant Agent”), and the Company (the “Warrant Agreement”). The Warrants may be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to the Company for the number of Warrants being exercised. The Warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their Warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the Warrants, each holder will be entitled to one vote for each share of common stock held of record on all matters to be voted on by our stockholders.

 

No Public Warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the Warrants is current and available throughout the 30-day redemption period and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the Warrants.

 

No fractional shares of common stock will be issued upon exercise of the Public Warrants. If, upon exercise of the Warrants, a holder would be entitled to receive a fractional interest in a share of common stock, the Company will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the Warrant holder.

 

Sponsor Warrants

 

The Sponsor purchased an aggregate of 4,000,000 Sponsor Warrants from the Company at a price of $0.75 per Warrant in a private placement completed on April 12, 2011. In addition, on April 8, 2013, the Company issued to the Company's Executive Chairman and a significant stockholder Sponsor Warrants exercisable for a total of 1,066,666 shares of the Company’s common stock. These Warrants were issued upon the conversion by each of the parties of a Promissory Note issued by the Company to the Sponsor and in the aggregate principal amount of $800,000, which Promissory Note was subsequently assigned by the Sponsor to the Executive Chairman and significant stockholder in the aggregate principal amount of $400,000 each. The conversion price of the Promissory Notes was $0.75 per Warrant. The Sponsor Warrants (including the shares of Company common stock issuable upon exercise of the Sponsor Warrants) were not transferable, assignable or salable (other than to the Company’s officers and directors and other persons or entities affiliated with the Sponsor) until May 8, 2013, and they will not be redeemable by the Company so long as they are held by the Sponsor or its permitted transferees. Otherwise, the Sponsor Warrants have terms and provisions that are identical to the Public Warrants, except that such Sponsor Warrants may be exercised by the holders on a cashless basis. If the Sponsor Warrants are held by holders other than the Sponsor or its permitted transferees, the Sponsor Warrants will be redeemable by the Company and exercisable by the holders on the same basis as the Public Warrants. The Sponsor Warrants expire on April 8, 2018. 

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10. Preferred Stock

 

The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. As of September 30, 2014 and December 31, 2013, the Company has not issued any shares of preferred stock.

 

11. Treasury Stock

 

In June 2014, the Company received 300,000 shares of its common stock in settlement of a claim for damages. The stock was recorded at cost as Other Income per the guidance under ASC 450. The stock was valued at $480,000 which represents its market price on the day it was received.

 

12. Warrant Liability

 

Pursuant to the Company's Offering, the Company sold 8,000,000 units, which subsequently separated into one warrant at an initial exercise price of $11.50 and one share of common stock. The Sponsor also purchased 4,000,000 warrants in a private placement in connection with the initial public offering. The warrants expire on April 8, 2018. The warrants issued contain a cashless exercise feature and a restructuring price adjustment provision in the event of any merger or consolidation of the Company with or into another corporation, subsequent to the initial business combination, where the surviving entity is not the Company and whose stock is not listed for trading on a national securities exchange or on the OTC Bulletin Board, or is not to be so listed for trading immediately following such event (the "Applicable Event"). The exercise price of the warrant is decreased immediately following an Applicable Event by a formula that causes the warrants to not be indexed to the Company's own stock. As a result, the warrants are considered a derivative and the liability has been classified as a liability on the Balance Sheet. Management uses the quoted market price of the warrants to calculate the warrant liability which was determined to be $1,929,744 at September 30, 2014 and $4,573,123 at December 31, 2013. This valuation is revised on a quarterly basis until the warrants are exercised or they expire with the changes in fair value recorded in the statement of operations. Any change in the market value of the warrant liability is recorded as Other Income (Expense) in the Statement of Comprehensive Income (Loss).

 

The fair value of the derivative warrant liability was determined by the Company using the quoted market prices for the publicly traded warrants. On reporting dates where there are no active trades the Company uses the last reported closing trade price of the warrants to determine the fair value (Level 2). There were no transfers between Level 1, 2 or 3 during the nine months ended September 30, 2014 and the year ended December 31, 2013.

 

The following table presents information about the Company's warrant liability that is measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:

 

Description		Fair Value				Quoted Prices In Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)
Warrant Liability:
December 31, 2013		$	4,573,123				-			$	4,573,123				-
March 31, 2014		$	6,754,103				-			$	6,754,103				-
June 30, 2014		$	2,701,641				-			$	2,701,641				-
September 30, 2014		$	1,929,743				-			$	1,929,743				-

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13. Commitments and Contingencies

 

Office Lease Obligations –

  

The Company currently leases office space and manufacturing facilities in Dallas, Texas. The office space lease that expires on March 1, 2025 and the manufacturing facilities lease expires on April 30, 2015.

 

The Company also leases office space in San Francisco and Los Angeles, California, New York, New York, Chicago, Illinois, and Pittsford, New York, under leases that expire at various dates through 2020.

 

In addition, the Company leases office space in London, England under a lease agreement that expires in August 2016; in Dubai, UAE under a lease agreement that expires in August 2015; and in Singapore under a lease that expires in August 2015.

 

Future minimum rental payments under these leases are as follows:

 

		Amount
Fiscal year ending December 31:
2014 (remainder)		$	392,329
2015			2,098,582
2016			1,802,041
2017			1,548,287
2018			1,318,652
Thereafter			6,428,572
		$	13,588,463

 

Total rent expense under all operating leases for the nine months ended September 30, 2014 was $1,646,111. Total rent expense for the period April 20 through June 30, 2013 was $346,768, and for the period February 1 through April 19, 2013 was $102,704. Total rent expense for the three months ended September 30, 2014 and 2013 was $513,164 and $453,014, respectively.

 

Capital Lease Commitments - 

 

The Company has entered into capital lease agreements with leasing companies for the financing of equipment and furniture purchases. The capital lease payments expire at various dates through June 2017. Future minimum lease payments under non-cancelable capital lease agreements consist of the following amounts for the year ending December 31:

 

		Capital Leases
2014		$	58,764
2015			232,664
2016			230,274
2017			86,226
Total minimum lease payments			607,928
Less amount representing interest			(54,334	)
Present value of capital lease obligations			553,594
Less current portion			(202,346	)
Non-current portion		$	351,248

 

The Company is currently subleasing two facilities and receiving monthly payments which are less than the Company’s monthly lease obligations. Based upon the then current real estate market conditions, the Company believed that these leases had been impaired and accrued lease impairment charges. The impairment charges were calculated based on future lease commitments less estimated future sublease income. The leases expire in February 28, 2021 and August 31, 2017, respectively.

 

Revenue Share Commitments

 

The Company has entered into revenue sharing agreements with certain business partners, requiring the Company to make minimum yearly revenue sharing payments.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Future minimum payments under these agreements consist of the following amounts for the years ending December 31:

 

2014 (remainder)		$	1,067,000
2015			4,620,000
Total minimum revenue share commitments		$	5,687,000

 

During the three-month period ended September 30, 2014, the Company renegotiated a revenue sharing agreement with a business partner. The parties agreed, among other things, to eliminate the Company’s remaining minimum revenue sharing commitment of $11,500,000 if certain terms and conditions are met in the future. As a result, the remaining minimum revenue sharing commitment is not included in the table above.

  

Legal proceedings -

 

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management is not aware of any claims that would have a material effect on the Company’s financial position, results of operations or cash flows. 

 

14. Accrued Liabilities 

 

Accrued liabilities are as follows:

 

		September 30, 2014				December 31, 2013
Professional fees		$	642,091			$	460,924
Accrued sales commissions			446,910				619,186
Accrued bonuses and severance			11,043				467,701
Accrued capital expenditures			749,571				828,716
Taxes payable			313,254				(279,391	)
Accrued expenses			753,018				807,884
Accrued interest			-				100,480
Other			873,230				1,505,348
Total		$	3,789,117			$	4,510,848

 

15. Geographic Information

 

Revenue by geographic area are based on the deployment site location of end-user customers. Substantially all of the revenue from North America are generated from the United States of America. Geographic area information related to revenue from customers is as follows:

 

		Successor Company				Successor Company				Predecessor Company				Successor Company				Successor Company
Region		Nine Months Ended September 30, 2014				April 20 Through September 30, 2013				February 1 Through April 19, 2013				Three Months Ended September 30, 2014				Three Months Ended September 30, 2013
North America		$	28,250,933			$	22,364,518			$	5,137,363			$	9,945,990			$	12,314,246
International -
United Kingdom			5,487,772				4,299,283				911,879				2,068,263				1,550,767
Middle East			2,389,847				2,046,957				485,712				817,746				1,019,714
Europe			2,009,514				1,741,873				616,710				737,395				561,051
Other			926,865				180,219				5,652				344,022				137,045
Total International		$	10,813,998			$	8,268,332			$	2,019,953			$	3,967,426			$	3,268,577
Total		$	39,064,931			$	30,632,850			$	7,157,315			$	13,913,416			$	15,582,823

 

The vast majority of the Company's long-lived assets are located in the United States.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

16. Unaudited Pro- Forma Operating Income for the Nine Months Ended September 30, 2014 and 2013

 

The following table presents Unaudited Pro-Forma Operating Income (Loss) for the Company for the nine months ended September 30, 2014 and 2013 based on the assumption that both RMG and Symon had been acquired on January 1, 2012. These results are not, however, intended to reflect actual operations of the Company had the acquisitions occurred on January 1, 2012. Operating expenses do not included any acquisition related expenses. In addition, Revenue has been adjusted to reflect the reclassification of certain charges (reductions) of Revenue that were required under GAAP. These reductions of Revenue have been reclassified as Cost of Revenue in order to more accurately reflect Revenue, Cost of Revenue, and Gross Margin. This reclassification does not affect Gross Profit or Operating Income (Loss). The analysis includes the effect of the following entries required under GAAP purchase accounting guidelines:

 

●

Amortization expense includes amortization of the fair value Intangible Assets that were acquired.

●

Revenues have been reduced due to an adjustment of deferred revenue existing at the acquisition date to market value at the acquisition date.

 

		Nine Months Ended September 30, 2014				Nine Months Ended September 30, 2013
Revenue		$	43,094,284			$	49,932,797
Cost of Revenue			27,422,458				26,668,082
Gross Profit			15,671,826				23,264,715
Operating Expenses			61,086,182				33,083,865
Operating Income (Loss)			(45,414,356	)			(9,819,150	)

 

During the nine months ended September 30, 2014, Cost of Revenue includes a charge of $3,443,267 related to a loss recorded on a long-term contract and Operating Expenses include a charge of $24,421,849 related to the impairment of intangible assets and goodwill. Amounts shown for 2013 have been updated to include the financial results of the holding company which were previously excluded. The financial results of the holding company are included in the amounts shown for 2014.

 

17. Equity Incentive Plan 

 

On July 12, 2013, the Company’s stockholders approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”) and the reservation of 2,500,000 shares of the Company’s common stock for issuance under the 2013 Plan. The 2013 Plan is intended to promote the interests of the Company and its stockholders by providing the Company’s employees, directors and consultants with incentives and rewards to encourage them to continue in the Company’s service and with a proprietary interest in pursuing the Company’s long-term growth, profitability and financial success. Equity awards available under the 2013 Plan include stock options, stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units, share-denominated performance units and cash awards. The 2013 Plan is administered by the compensation committee of the board of directors of the Company, which has the authority to designate the employees, consultants and members of the board of directors who will be granted awards under the 2013 Plan, to designate the amount, type and other terms and conditions of such awards and to interpret any and all provisions of the 2013 Plan and the terms of any awards under the 2013 Plan. The 2013 Plan will terminate on the tenth anniversary of its effective date. In August 2013 the Company awarded 1,660,000 options to its employees. 291,666 of these stock options have been subsequently cancelled. These options have an exercise price of $8.10 and vest over a three-year period. The cost associated with these options for the nine months and the three months ended September 30, 2014 was $1,199,152 and $39,473, respectively. These amounts are net of a credit of $291,076 related to the cancellation of certain stock options during the three months ended September 30, 2014. The unamortized cost of these options at September 30, 2014 was $3,103,916 to be recognized over a weighted-average life of 1.0 years. The unamortized cost of these options at December 31, 2013 was $4,467,863. At September 30, 2014, 565,000 of these options were exercisable. At December 31, 2013, none of these options were exercisable. There was no intrinsic value associated with these options as of September 30, 2014 and December 31, 2013. The weighted-average remaining contractual life of the options outstanding is 8.8 years.

 

The Company estimated the fair value of the stock-based rights granted to employees in 2013 using the Black-Scholes option pricing model with the following weighted-average assumptions: expected life of 6.0 years, expected volatility of 48.9%, dividend yield of 0%, and risk-free interest rate of 1.97%. The average fair value of options granted during 2013 was $3.91.

 

On August 13, 2013 the Company granted its Chief Executive Officer 350,000 shares of common stock under the 2013 Plan. The shares had a three-year vesting period beginning in April 2014. On July 22, 2014 the CEO resigned. In connection with his resignation, the CEO received 100,000 shares of common stock that had vested and the remaining unvested restricted stock grant was forfeited. The cost associated with the restricted stock grant for the nine months ended September 30, 2014 was $305,613. In connection with the cancellation of the restricted stock grant, the Company reversed $334,825 of previously recorded stock-based compensation charges. The reversal of these charges resulted in a net credit to stock-based compensation expense of $278,545 for the three months ended September 30, 2014.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On July 22, 2014 the Company awarded 500,000 options to its new CEO under the 2013 Plan. These options have an exercise price of $2.45 and vest over a 3.5 year period. The cost associated with these options for the three months ended September 30, 2014 was $34,730. The unamortized cost of these options at September 30, 2014 was $590,270 to be recognized over a weighted-average life of 2.0 years. At September 30, 2014, none of these options were exercisable and there was no intrinsic value associated with these options. The weighted-average remaining contractual life of the options outstanding is 9.8 years.  

 

The Company estimated the fair value of the stock-based rights granted to its new CEO in 2014 using the Black-Scholes option pricing model with the following weighted-average assumptions: expected life of 6.75 years, expected volatility of 48.9%, dividend yield of 0%, and risk-free interest rate of 1.98%. The average fair value of options granted to the new CEO was $1.25. 

 

18. Related Party Transactions

 

In August 2013 the Company entered into a two-year Management Services Agreement with 2012 DOOH Investments, LLC (the "Consultant"), an entity managed by Mr. Donald R. Wilson, a major stockholder. Under the agreement, the Consultant provides management consulting services to the Company and its subsidiaries with respect to financing, acquisitions, sourcing, diligence, and strategic planning.

 

In consideration for its services, the Consultant received a one-time payment of 120,000 shares of the common stock of the Company which had a market value of $960,000 when issued in August 2013. The value of the common stock is being amortized over the term of the agreement and related charges to operations for the nine months and three months ended September 30, 2014 were $384,750 and $120,000, respectively. The unamortized value of the common stock was $400,000 and $784,750 at September 30, 2014 and December 31, 2013, respectively. The unamortized balance of the common stock at September 30, 2014 is included in other current assets. $480,000 of the unamortized value of the common stock at December 31, 2013 is included in other current assets. The remainder of the unamortized balance of the common stock at December 31, 2013 is included in other assets. Under the Agreement, the Consultant also receives an annual services fee of $50,000.  

 

In addition, the Company provides consulting services to an entity owned by Mr. Wilson for which it has recognized related consulting fees during the nine months and three months ended September 30, 2014 of $400,000 and $112,500, respectively.

 

The Company also had an agreement with a company owned by a board member under which it paid $15,000 a month for public relations services. This agreement was terminated on June 30, 2014. Under this agreement the Company incurred charges for the nine months ended September 30, 2014 of $90,000.

 

As discussed in Note 5, the Company's former senior lender sold its interest in the Company's Senior Credit Facility to a new lender group that included the Company's Executive Chairman and largest shareholder. Interest expense paid to the new lender group was $308,000 during the three months ended September 30, 2014.

 

19. Loss on Long-Term Contract

 

In 2013 the Company entered into a long-term contract with a partner under which it agreed to share revenue generated under the contract with the partner. The revenue sharing arrangement included minimum annual guarantees payable to the partner over the term of the contract.

 

During the second quarter of 2014, the Company updated its analysis of the long-term contract. Based on results to date and an estimate of revenue to be generated in the future under the contract, the Company determined that sufficient revenue would not be generated under the contract for it to meet its minimum annual guarantees of revenue sharing to its partner. As a result, the Company recorded a $6,200,000 loss on the long-term contract at June 30, 2014 which represented the amount it expected the total minimum annual guarantees payable to the partner would exceed the revenue generated under the contract. The loss on the long-term contract was recorded as follows:

 

Cost of Revenue - Loss on Long-Term Contract		$	4,130,104
Revenue reduction			2,069,896
Total		$	6,200,000

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

During the third quarter, the Company and its partner renegotiated the contract and agreed to significant changes in the contract which include, among other things, reductions in the minimum annual revenue-sharing guarantees if certain terms and conditions are met. In connection with amending the agreement, the Company granted its partner a subordinated security interest in the accounts receivable of its Enterprise business segment.  This security interest is subordinate to the security interest granted to its lenders under the Senior Credit Agreement. As a result of the agreed changes to the contract and the Company’s expectation that the terms and conditions contained in the amended agreement will be met by both parties, the Company now estimates that the loss on the long-term contract will be less than previously recorded. Consequently, the Company has recorded a credit to Cost of Revenue – loss on long-term contract of $2,756,733 during the three months ended September 30, 2014. 

 

20. Segment Reporting

 

The Company provides advertising services through digital place-based networks and sells enterprise-class digital signage solutions to customers worldwide. The Company has two separate reporting business segments - Media and Enterprise - for the following reasons:

 

●

The segments have different business models. The Media segment sells advertising to major corporate advertisers and the advertising is placed on screens owned by business partners. In return for the use of their screens, the business partners share in the advertising revenue. The Enterprise segment sells intelligent visual solutions that consist of its proprietary software and hardware products and third-party displays. The Enterprise segment also provides installation services and maintenance and support services to corporate customers.

●

The segments have different economic characteristics. The Media segment is projected to have a higher rate of sales growth than the Enterprise segment. The Enterprise segment realizes a higher gross margin on revenues than the Media segment.

●

Each segment has a different head of operations that manages the segment. Each segment head utilizes discrete financial information about his individual segment and regularly reviews the operating results of that component.

 

Since the Company operates as a highly integrated entity which is characterized by substantial inter-segment cooperation and sharing of personnel and assets, it limits its segment reporting to revenues, cost of revenues, and gross profit by segment.

 

An analysis of the two reporting business segments follows:

 

		Successor Company								Successor Company								Predecessor Company
		Nine Months Ended September 30, 2014								April 20, 2013 Through June 30, 2013								February 1, 2013 Through June 30, 2013
		Media				Enterprise				Media				Enterprise				Media				Enterprise
Revenue			$10,989,894				$28,075,037			$	5,556,557			$	9,493,470				-			$	7,157,315
Cost of Revenue			9,955,072				14,016,032				3,355,883				5,031,229				-				2,971,467
Gross Profit			1,034,822				14,059,005				2,200,674				4,462,241				-				4,185,848
Gross Profit %			9.4	%			50.1	%			39.6	%			47.0	%			-				58.5	%

 

		Successor Company								Successor Company
		Three Months Ended September 30, 2014								Three Months Ended September 30, 2013
		Media				Enterprise				Media				Enterprise
Revenues		$	3,572,657			$	10,340,759			$	4,308,717			$	11,274,106
Cost of Revenues			35,058				4,993,212				3,352,016				5,947,464
Gross Profit			3,537,599				5,347,547				956,701				5,326,642
Gross Profit %			99.0	%			51.7	%			22.2	%			47.2	%

 

For the nine months ended September 30, 2014, the Media segment’s Cost of Revenue includes a charge of $1,373,371 related to an estimated loss recognized on a long-term contract. Without the inclusion of this loss, the Media segment’s gross margin for the nine months ended September 30, 2014 was 21.9%.

 

 

RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

During the period February 1, 2013 through April 19, 2013, the Enterprise segment realized a gross margin of 58.5%. The Predecessor Company consisted only of the Enterprise segment during this period, and, as a result, there were no advertising segment revenues on which the Company realizes a lower gross margin.

 

For the three months ended September 30, 2014, the Media segment's Cost of Revenue includes a credit of $2,756,733 related to a change in the estimated loss recognized on a long-term contract. Without the inclusion of the change in the estimated loss, the Media segment's gross margin for the three months ended September 30, 2014 was 21.9%. 

 

21. Subsequent Event and Liquidity

 

On November 13, 2014, the Company amended the size of its Senior Credit Facility by two million dollars to 14 million dollars. Unless the Company is able to increase its revenues or decrease its operating expenses from recent historical run-rate levels, management expects that the Company will need to obtain additional capital over the next twelve months to fund its planned operations. The Company is currently in active discussions regarding a number of potential capital raising alternatives and, while we have no firm commitment at this time, we expect that we will be able to secure additional capital that will permit us to support our planned operations. There is no assurance, however, that we will be able to obtain additional capital on acceptable terms, or at all. If we fail to obtain additional capital, we will encounter significant difficulties in funding our planned operations and may be unable to meet our debt obligations under our credit facility.

 

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2013. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors" in Item 1A of Part II.

 

Overview

 

The Company was formed on January 5, 2011 for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets. The Company consummated the acquisition of Reach Media Group Holdings, Inc. (“RMG”) on April 8, 2013 and on April 19, 2013 acquired Symon Holdings Corporation (“Symon”). Symon is considered to be the Company's predecessor corporation for accounting purposes.

 

As a result of its two acquisitions, the Company is a global provider of media applications and enterprise-class digital signage solutions. Through an extensive suite of products, including media services, proprietary software, software-embedded hardware, maintenance and creative content service, installation services, and third-party displays, the Company delivers complete end-to-end intelligent visual communication solutions to its clients. The Company is one of the largest integrated digital signage solution providers globally and conducts operations through its RMG Media Networks and its RMG Enterprise Solutions business units.

 

The RMG Media Networks business unit engages elusive audience segments with relevant content and advertising delivered through digital place-based networks. These networks include the RMG Airline Media Network. The RMG Airline Media Network is a U.S.-based network focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment, or IFE, systems, on in-flight Wi-Fi portals and in private airport terminals. The network, which spans almost all major commercial passenger airlines in the United States, delivers advertising to an audience of affluent travelers and business decision makers in a captive and distraction-free video environment.

 

The RMG Enterprise Solutions business unit provides end-to-end digital signage applications to power intelligent visual communication implementations for critical contact center, supply chain, employee communications, hospitality, retail and other applications with a large concentration of customers in the financial services, telecommunications, manufacturing, healthcare, pharmaceutical, utility and transportation industries, and in federal, state and local governments. These solutions are relied upon by approximately 70% of the North American Fortune 100 companies and thousands of overall customers in locations worldwide. The installations of Enterprise Solutions deliver real-time intelligent visual content that enhance the ways in which organizations communicate with employees and customers. The solutions are designed to integrate seamlessly with a customer’s IT infrastructure and data and security environments.

 

Revenue

 

The Company derives its revenue as follows:

 

●

Advertising

●

Product sales:

 

●

Licenses to use its proprietary software products;

●

Proprietary software-embedded media players;

●

Proprietary LED displays; and

●

Third-party flat screen displays and other third-party hardware.

 

●

Customer support services:

 

●

Product maintenance services; and

●

Subscription-based and custom creative content services.

 

●

Professional installation and training services

 

Revenue is recognized as outlined in “Critical Accounting Policies - Revenue Recognition” below.

 

 

RMG Media Networks Revenues

 

The Company sells advertising through agencies and directly to a variety of customers under contracts ranging from one month to one year. Contracts usually specify the network placement, the expected number of impressions (determined by passenger or visitor counts), and the cost per thousand impressions (“CPM”) over the contract period to arrive at a contract amount. The Company bills for these advertising services as required by the customer, but most frequently on a monthly basis following the delivery of the contracted ad insertions. Revenue is recognized at the end of the month in which fulfillment of the advertising orders occurred.

 

RMG Enterprise Solutions Revenues

 

The Company sells its Enterprise products and services through its global sales force and through a select group of resellers and business partners. In the United States, approximately 90% or more of its enterprise sales are generated solely by the Company’s sales team, with 10% or less through resellers in 2013. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of the Company’s global enterprise revenues are derived from direct sales, with the remaining 33% generated through indirect partner channels.

 

The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties, and product returns from resellers have been insignificant to date. The Company sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies. The Company bills resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users.

 

Cost of Revenue

 

RMG Media Networks Cost of Revenue

 

The cost of revenue associated with RMG Media Networks revenues consists primarily of revenue sharing with the Company’s airline and other business partners. Revenue sharing payments to airlines and other business partners are made on a monthly basis under either under minimum annual guarantees, or as a percentage of advertising revenues following collection from customers. The portion of revenue shared with partners ranges from 25% to 80% depending on the partner and the media asset. The Company makes minimum annual payments to three partners and revenue sharing payments to all other partners. The Company’s partnership agreements have terms generally ranging from one to five years. Four of the Company’s partnership agreements renew automatically unless terminated prior to renewal, and the remaining agreements have no obligation to renew. 

 

RMG Enterprise Solutions Cost of Revenue

 

The cost of revenue associated with RMG Enterprise Solutions product sales consist primarily of the costs of media players, the costs of third-party flat screen displays and the operating costs of the Company’s assembly and distribution center. The cost of revenue of professional services is the salary and related benefit costs of the Company’s employees and the travel costs of personnel providing installation and training services.  The cost of revenue of maintenance and content services consists of the salary and related benefit costs of personnel engaged in providing maintenance and content services and the annual costs associated with acquiring data from third-party content providers.

 

Operating Expenses

 

The Company’s operating expenses are comprised of the following components:

 

●

Sales and marketing expenses include salaries and related benefit costs of sales personnel, sales commissions, travel by sales and sales support personnel, and marketing and advertising costs.

●

Research and development (“R&D”) costs consist of salaries and related benefit costs of R&D personnel and expenditures to outside third-party contractors. To date, all R&D expenses are expensed as incurred.

●

General and administrative expenses consist primarily of salaries and related benefit costs of executives, accounting, finance, administrative, and IT personnel. Also included in this category are other corporate expenses such as rent, utilities, insurance, professional service fees, office expenses, travel by general and administrative personnel and meeting expenses.

●

Acquisition expenses are comprised of the following:

■

Professional fees paid to attorneys, accountants, consultants and other professionals in connection with the acquisitions of RMG and Symon.

■

All costs associated with integrating and restructuring the operations of the acquired companies.

■

Expenses incurred by the Company prior to the acquisitions while still a development stage company.

	●	Depreciation and amortization costs include depreciation of the Company’s office furniture, fixtures and equipment and amortization of intangible assets.
	●	Impairment of intangible assets and goodwill.

 

Given the nature of the formation of the Company, its financial results are required to be reported on a basis that includes the three companies’ (RMG Networks Holding Corporation, RMG and Symon) operations and for different time periods.

 

  

Results of Operations

 

Comparison of the nine months ended September 30, 2014 to the period April 20, 2013 through September 30, 2013

 

As discussed above, the Company acquired RMG on April 8, 2013 and Symon on April 19, 2013. The financial statements for the nine months ended September 30, 2014 include the results of operations of RMG Networks, RMG, and Symon (the “Successor Company”) for the entire nine-month period. The financial statements for the period April 20 through September 30, 2013 present the operations of the Successor Company for only 164 days. As a result, the financial results shown are not generally comparable on a meaningful basis.

 

		Successor				Successor
		Company				Company
						April 20,
		Nine Months				2013
		Ended				through
		September 30,				September 30,				Change
		2014				2013				Dollars				%
Revenue		$	39,064,931			$	30,632,850			$	8,432,081				27.5	%
Cost Of Revenue			23,971,104				17,686,592				6,284,512				35.5	%
Gross Profit			15,093,827				12,946,258				2,147,569				16.6	%
Operating Expenses -
Sales and marketing			14,776,478				7,675,656				7,100,822				92.5	%
General and administrative			13,617,293				6,504,162				7,113,131				109.4	%
Research and development			3,114,219				1,711,010				1,403,209				82.0	%
Acquisition expenses			378,193				1,995,250				(1,617,057	)			(81.0	)%
Depreciation and amortization			5,398,978				2,971,620				2,427,358				81.7	%
Impairment of intangible assets and goodwill			24,421,849				-				24,421,849				-
Total Operating Expenses			61,707,010				20,857,698				40,849,312				195.8	%
Operating Income (Loss)			(46,613,183	)			(7,911,440	)			(38,701,743	)			(489.2	)%
Warrant liability expense			182,889				(1,829,333	)			(2,012,222	)			(110.0	)%
Interest expense and other - net			(1,194,967	)			(1,695,988	)			(501,021	)			(29.5	)%
Income (Loss) Before Income Taxes			(47,625,261	)			(11,436,761	)			(36,188,500	)			(316.4	)%
Income Tax Expense (Benefit)			(1,603,215	)			-				1,603,215				-
Net Income (Loss)		$	(46,022,046	)		$	(11,436,761	)		$	(34,585,285	)			(302.4	)%

 

Revenue

 

Revenue was $39,064,931 and $30,632,850 for the nine months ended September 30, 2014 and for the period April 20, 2013 through September 30, 2013, respectively. This represents an $8,432,081, or 27.5%, increase. This difference in revenue is primarily due to the fact that operations for the nine months ended September 30, 2014 include revenue for the Successor Company for the entire nine-month period, while operations for the period April 20 through September 30, 2013 include revenue of the Successor Company for only 164 days.

 

 

During the nine months ended September 30, 2014 and the period April 20, 2013 through September 30, 2013, the Company’s revenue was derived as follows. 

 

		Successor								Successor
		Company								Company
		Nine Months								April 20
		ended								through								Change
		September 30,								September
										30,
		2014				%				2013				%				Dollars				%
Revenue -
Advertising		$	10,989,894				28.2	%		$	9,565,274				31.2	%		$	1,424,620				14.9	%
Products			9,976,720				25.5	%			10,529,906				34.4	%			(553,186	)			(5.3	)%
Maintenance and content services			12,044,494				30.8	%			5,805,021				19.0	%			6,239,473				107.5	%
Professional services			6,053,823				15.5	%			4,732,649				15.4	%			1,321,174				27.9	%
Total		$	39,064,931				100.0	%		$	30,632,850				100.0	%		$	8,432,081				27.5	%

 

The fluctuations in the components of revenue between the two periods are primarily due to the same reasons as stated above with respect to total revenue. Specifically, operations for the nine months ended September 30, 2014 include revenue for the Successor Company for the entire nine-month period while operations for the period April 20 through September 30, 2013 include revenue for the Successor Company for only 164 days.

 

The following table reflects the Company’s revenue on a geographic basis.

 

		Successor Company								Successor Company
		Nine Months Ended								April 20, 2013 through
Region		September 30, 2014								September 30, 2013
North America		$	28,250,933				72.3	%		$	22,364,518				73.0	%
International-
United Kingdom			5,487,772				14.1	%			4,299,283				14.0	%
Middle East			2,389,847				6.1	%			2,046,957				6.7	%
Europe			2,009,514				5.1	%			1,741,873				5.7	%
Other			926,865				2.4	%			180,219				0.6	%
Total International			10,813,998				27.7	%			8,268,332				27.0	%
Total		$	39,064,931				100.0	%		$	30,632,850				100.0	%

 

The higher level of revenue for each region for the nine months ended September 30, 2014 was primarily due to the fact that revenue for the Successor Company are included for the entire nine-month period while operations for the period April 20 through September 30, 2013 include revenue for the Successor Company for only164 days.

 

We believe that a better basis for comparing the Company’s financial results can be found in Note 16 to the Company’s unaudited consolidated financial statements located elsewhere in this filing that provides unaudited “pro-forma” financial results for the nine months ended September 30, 2014 and 2013. These Pro-Forma financial results present the Company’s results of operations assuming the acquisitions of RMG and Symon had occurred on January 1, 2012 and the Company had operated as a combined entity since that date. The financial results include the following entries required under GAAP purchase accounting guidelines:

 

●

Amortization expense includes amortization of the fair value of intangible assets that were acquired.

●

Revenues have been reduced based on the adjustment to market value of the Predecessor Company’s deferred revenue that existed at the acquisition date.

 

Pro-Forma Operating Expenses do not include any acquisition related expenses. In addition, revenue has been adjusted to reflect the reclassification of certain charges (reductions) of revenue. These reductions of revenue have been reclassified as cost of revenue. This reclassification does not affect gross profit or operating income (loss).

 

The pro-forma financial results reflect revenue of $43,094,284 and $49,932,797 for the nine months ended September 30, 2014 and 2013, respectively.

 

Differences in the composition of the Company’s revenues for the two pro-forma periods are as follows:

 

●

Advertising revenue for the Company’s Media business unit totaled $10,989,894 and $16,819,393 for the nine months ended September 30, 2014 and 2013, respectively. This is a $5,829,499, or 34.7%, decrease. The decrease in advertising revenue was due to a decline in demand for the Company’s advertising services and a general decline in demand for advertising services in the out-of-home market.

●

Revenue from sales of products of the Enterprise Solutions business unit totaled $12,345,720 and $14,170,093 for the nine months ended September 30, 2014 and 2013, respectively. This is a $1,824,373, or 12.9%, decrease.

●

Maintenance and content services revenue for the Enterprise Solutions business unit totaled $13,017,058 and $11,875,700 for the nine months ended September 30, 2014 and 2013, respectively. This is $1,141,358, or 9.6%, increase.

●

The Company’s professional services revenue totaled $6,741,612 and $7,067,611 for the nine months ended September 30, 2014 and 2013, respectively. This is a $325,999, or 4.6%, decrease and was due to lower productivity and decreased use of third-party contractors for installation services.

  

 

Cost of Revenue

 

Cost of revenue totaled $23,971,104 and $17,686,592 for the nine months ended September 30, 2014 and for the period April 20, 2013 through September 30, 2013, respectively. This $6,284,512, or 35.5%, increase in cost of revenue is directly attributable to the previous explanations given for the fluctuations in revenue, i.e., the cost of revenue for the nine months ended September 30, 2014 includes the cost of revenue for the Successor Company for the entire nine-month period, while operations for the period April 20 through September 30, 2013 includes the cost of revenue of the Successor Company for only 164 days.. In addition, cost of revenue for the nine months ended September 30, 2014 includes a loss on a long-term contract of $1,373,371.

 

The following table summarizes the composition of the Company’s cost of revenue for the nine months ended September 30, 2014 and for the period April 20 through September 30, 2013. 

 

		Successor								Successor
		Company								Company
		Nine
		Months								April 20
		ended								through								Change
		September								September
		30,								30,
		2014				%				2013				%				Dollars				%
Cost of Revenue -
Advertising		$	8,581,701				35.8	%		$	6,707,899				37.9	%		$	1,873,802				27.9	%
Products			7,411,693				30.9	%			6,990,780				39.5	%			420,913				6.0	%
Maintenance and content services			2,210,373				9.2	%			1,445,773				8.2	%			764,600				52.9	%
Professional services			4,393,966				18.4	%			2,542,140				14.4	%			1,851,826				72.8	%
Loss on long-term contract			1,373,371				5.7	%			-				-	%			1,373,371				-	%
Total		$	23,971,104				100.0			$	17,686,592				100.0	%		$	6,284,512				35.5	%

 

The fluctuations in the components of cost of revenue between the two periods are due to the same reasons stated above with respect to total revenue. Specifically, operations for the nine months ended September 30, 2014 include the cost of revenue for the entire nine-month period, while operations for the period April 20, 2013 through September 30, 2013, include the cost of revenue for only 164 days. In addition, cost of revenue for the nine months ended September 30, 2014 includes a loss on a long-term contract of $1,373,371.

 

The following table reflects the Company’s gross profit and gross margins for the nine months ended September 30, 2014 and for the period April 20, 2013 through September 30, 2013:

 

		Successor Company								Successor Company
		Nine Months Ended								April 20, 2013 through
		September 30, 2014								June 30, 2013
			$			%					$			%
Advertising		$	2,408,193				21.9	%			2,857,375				29.9	%
Products			2,565,027				25.7	%			3,539,126				33.6	%
Maintenance and content services			9,834,121				81.6	%			4,359,248				75.1	%
Professional services			1,659,857				27.4	%			2,190,509				46.3	%
			16,467,198				42.2	%			12,946,258				42.3	%
Loss on long-term contract			(1,373,371	)			(3.5	)%			-				-
Total			15,093,827				38.6	%			12,946,258				42.3	%

 

The Company’s overall gross margin for the nine months ended September 30, 2014 decreased to 38.6% from 42.3% for the period April 20, 2013 through September 30, 2013. The lower gross margin was primarily attributable to the fact that the Company’s cost of revenue for the nine months ended September 30, 2014 includes a loss on a long-term contract of $1,373,371. There was not a loss on a long-term contract in the cost of revenue for the period April 20, 2013 through September 30, 2013.

 

 

Operating Expenses

 

Operating expenses totaled $61,707,010 and $20,857,698 for the nine months ended September 30, 2014 and for the period April 20, 2013 through September 30, 2013, respectively. This $40,849,312 or 195.8%, increase in operating expenses is primarily attributable to the following items:

 

●

Operations for the nine months ended September 30, 2014 include operating expenses for the Successor Company for the entire nine-month period while operations for the period April 20 through September 30, 2013 include operating expenses for the Successor Company for only 164 days.

●

Operating expenses for the nine months ended September 30, 2014 include an impairment charge of $24,421,849 related to intangible assets and goodwill.

●

Depreciation and amortization expense for the nine months ended September 30, 2014 was $5,398,978 which was $2,427,358 higher than depreciation and amortization expense for the period April 20, 2013 through September 30, 2013. The higher depreciation and amortization expense in 2014 is primarily due to the fact that the 2014 amount is for the entire nine-month period, while the 2013 amount is only for a period of 164 days.

●

Operating expenses for the nine months ended September 30, 2014 included stock-based compensation of $1,483,214 and reorganization expenses of $579,029. Operating expenses for the period April 20, 2013 through September 30, 2013 included stock-based compensation costs of $557,641.

●

The Company also incurred significant increases in operating expenses due to expenditures made in connection with its planned growth initiatives, which includes additional sales and sales support personnel and marketing programs, and expenditures for enhanced infrastructure, i.e., systems and personnel.

 

A comparison of operating expenses shown in the pro-forma financial results reflects that pro-forma operating expenses totaled $61,086,182 and $34,193,160 for the nine months ended September 30, 2014 and 2013, respectively. The increase in operating expenses of $26,893,022, or 78.7%, was primarily due to the impairment charge, the higher depreciation and amortization expense, the stock-based compensation and reorganization expenses, and the expenditures made in connection with the Company’s planned growth initiatives as discussed above.

 

Warrant Liability Expense

 

The Company calculates its warrant liability based on the quoted market value of its outstanding warrants. The Company recognized warrant liability income for the nine months ended September 30, 2014 of $182,889. This is a net amount and represents the costs associated with the decrease in the Company’s warrant liability for warrants that were exchanged for common stock during the first quarter of 2014 and the change in the Company’s liability for warrants that remain outstanding at September 30, 2014. The warrant liability expense for the nine months ended September 30, 2013 of $1,829,333 represents the costs associated with the increase in the Company’s warrant liability for warrants that were outstanding at September 30, 2013.

 

 

Interest and other – Net

 

Interest expense and other - net for the nine months ended September 30, 2014 decreased by $501,021 compared to the period April 20 through September 30, 2013. This decrease was primarily due to the following items:

 

●

Interest expense was less during 2014 because the Company’s debt was significantly less than in 2013.

●

Other income of $480,000 related to the receipt of 300,000 shares of the Company’s common stock in connection with a claim for damages filed by the Company. The stock was valued at $480,000 which represents its market value on the day it was received.

  

 

Comparison of the three months ended September 30, 2014 to the three months ended September 30, 2013

 

The following financial statements present the results of operations of the Successor Company for the three months ended September 30, 2014 and 2013.

 

		Successor				Successor
		Company				Company
		Three				Three
		Months				Months
		Ended				Ended
		September				September
		30,				30,				Change
		2014				2013				Dollars				%
Revenue		$	13,913,416			$	15,582,823			$	(1,669,407	)			(10.7	)%
Cost Of Revenue			5,028,270				9,299,480				(4,271,210	)			(45.9	)%
Gross Profit			8,885,146				6,283,343				2,601,803				41.4	%
Operating Expenses -
Sales and marketing			4,140,374				4,324,370				(183,996	)			(4.3	)%
General and administrative			3,126,949				3,888,646				(761,697	)			(19.6	)%
Research and development			994,182				904,610				89,572				9.9	%
Acquisition expenses			378,193				789,653				(411,460	)			(52.1	)%
Depreciation and amortization			1,598,160				1,679,344				(81,184	)			(4.8	)%
Impairment of intangible assets and goodwill			17,176,490				-				17,176,490				-
Total Operating Expenses			27,414,348				11,586,623				15,827,725				136.6	%
Operating Income (Loss)			(18,529,202	)			(5,303,280	)			(13,225,922	)			(249.4	)%
Warrant liability income (expense)			771,898				2,090,667				1,318,769				(63.1	)%
Interest expense and other - net			(1,080,276	)			(949,671	)			130,605				13.8	%
Income (Loss) Before Income Taxes			(18,837,580	)			(4,162,284	)			(14,675,296	)			(352.6	)%
Income Tax Expense (Benefit)			(1,274,355	)			-				1,274,355				-
Net Income (Loss)		$	(17,563,225	)		$	(4,162,284	)		$	(13,400,941	)			(322.0	)%

 

Revenue

 

Revenue was $13,913,416 and $15,582,823 for the three months ended September 30, 2014 and 2013, respectively. This represents a $1,669,407, or 10.7%, decrease. The decrease in revenue is primarily attributable to the fact that the Company’s Enterprise unit generated less revenue from product sales during the three months ended September 30, 2014 along with lower professional services revenue. In addition, the Company’s Media unit generated less advertising revenue during the three months ended September 30, 2014. The lower revenues were the result of lower demand for the Company’s products and services.

 

During the three months ended September 30, 2014 and 2013, the Company’s revenue was derived as follows.

 

		Successor								Successor
		Company								Company
		Three								Three
		Months								Months
		Ended								Ended								Change
		September								September
		30,								30,
		2014				%				2013				%				Dollars				%
Revenue -
Advertising		$	3,572,657				25.7	%		$	4,308,717				27.7	%		$	(736,060	)			(17.1	)%
Products			4,387,418				31.5	%			5,460,746				35.0	%			(1,073,328	)			(19.7	)%
Maintenance and content services			4,140,207				29.8	%			3,232,466				20.7	%			907,741				28.1	%
Professional services			1,813,134				13.0	%			2,580,894				16.6	%			(767,760	)			(29.7	)%
Total		$	13,913,416				100.0	%		$	15,582,823				100.0	%		$	(1,669,407	)			(10.7	)%

 

The fluctuations in the components of revenue between the two periods are due to the same reasons as stated above with respect to total revenue.

 

 

The following table reflects the Company’s revenue on a geographic basis for the three months ended September 30, 2014 and 2013.

 

		Successor Company								Successor Company
Region		Three Months Ended								Three Months Ended
		September 30, 2014								September 30, 2013
North America		$	9,945,990				71.5	%		$	12,314,246				79.0	%
International-
United Kingdom			2,068,263				14.8	%			1,550,767				10.0	%
Middle East			817,746				5.9	%			1,019,714				6.5	%
Europe			737,395				5.3	%			561,051				3.6	%
Other			344,022				2.5	%			137,045				0.9	%
Total International			3,967,426				28.5	%			3,268,577				21.0	%
Total		$	13,913,416				100.0	%		$	15,582,823				100.0	%

 

The lower level of revenue for North America for the three months ended September 30, 2014 was due primarily to the same reasons as stated above with respect to total revenue.

 

Cost of Revenue

 

Cost of revenue totaled $5,028,270 and $9,299,480 for the three months ended September 30, 2014 and 2013, respectively. This $4,271,210, or 45.9%, decrease in cost of revenue is primarily attributable to a $2,756,733 positive adjustment to the loss on a long-term contract that was recorded in the three months ended September 30. There was no similar item in the three months ended September 30, 2013.

 

The following table summarizes the composition of the Company’s cost of revenue for the three months ended September 30, 2014 and 2013. 

 

		Successor								Successor
		Company								Company
		Three								Three
		Months								Months
		ended								Ended								Change
		September								September
		30,								30
		2014				%				2013				%				Dollars				%
Cost of Revenue -
Advertising		$	2,791,791				55.5	%		$	3,352,016				36.0	%		$	(560,225	)			(16.7	)%
Products			2,989,925				59.5	%			3,729,288				40.1	%			(739,363	)			(19.8	)%
Maintenance and content services			694,289				13.8	%			873,340				9.4	%			(179,051	)			(20.5	)%
Professional services			1,308,998				26.0	%			1,344,836				14.5	%			(35,838	)			(2.7	)%
Adjustment of loss on long-term contract			(2,756,733	)			(54.8	)%			-				-				(2,756,733	)			-	%
Total		$	5,028,270				100.0	%		$	9,299,480				100.0	%		$	(4,271,210	)			(45.9	)%

 

The fluctuations in the components of cost of revenue between the two periods are due to the lower revenue for the three months ended September 30, 2014 and the adjustment to the loss on long-term contract mentioned above.

 

The following table reflects the Company’s gross margins for the three months ended September 30, 2014 and 2013:

 

		Successor Company								Successor Company
		Three Months Ended								Three Months Ended
		September 30, 2014								September 30, 2013
			$			%					$			%
Advertising		$	780,866				21.9	%			956,701				22.2	%
Products			1,397,493				31.9	%			1,731,458				31.7	%
Maintenance and content services			3,445,918				83.2	%			2,359,126				73.0	%
Professional services			504,136				27.8	%			1,236,058				47.9	%
			6,128,413				44.0	%			6,283,343				40.3	%
Adjustment of loss on long-term contract			2,756,733				19.8	%			-				-
Total			8,885,146				63.9	%			6,283,343				40.3	%

 

The Company’s overall gross margin for the three months ended September 30, 2014 increased to 63.9% from 40.3% for the three months ended September 30, 2013. The higher gross margin was primarily attributable to the positive adjustment to the loss on long-term contract recorded in 2014.

 

 

Operating Expenses

 

Operating expenses totaled $27,414,348 and $11,586,623 for the three months ended September 30, 2014 and 2013, respectively. This $15,827,725, or 136.6% increase in operating expenses is due primarily to the impairment of intangible assets and goodwill of $17,176,490 for the three months ended September 30, 2014. There was no impairment charge for the three months ended September 30, 2013. This 2014 impairment loss was offset somewhat by the following items:

 

●

Operating expenses for the three months ended September 30, 2014 and 2013 included stock-based compensation of $130,454 and $ 557,641 respectively. Stock-based compensation expense for the three months ended September 30, 2014 included a credit of $391,076 related to the cancellation of certain stock option during the period.

●

Acquisition-related expenses were $411,460 lower in 2014 compared to 2013

●

Amortization was lower in the three months ended September 30, 2014. The Company recorded an impairment charge at June 30, 2014 which reduced the carrying value of intangible assets and, as a result, lowered the ongoing amortization related to intangible assets.

 

Warrant Liability Expense

 

The Company calculates its warrant liability based on the quoted market value of its outstanding warrants. The Company recorded an income credit related to the warrant liability for the three months ended September 30, 2014 of $771,898 which represented a decrease in the Company’s warrant liability at September 30, 2014. For the three months ended September 30, 2013 the Company recorded warrant liability income of $2,090,667 which represented a decrease in its warrant liability.

 

 

 

Interest and other – Net

 

Interest expense and other - net for the three months ended September 30, 2014 increased by $130,605 compared to the three months ended September 30, 2013 due primarily to expenses incurred in connection with the debt refinancing in July 2014.  

 

Liquidity and Capital Resources

 

The Company’s primary source of liquidity prior to acquiring RMG and Symon had been the cash generated from its initial public offering. Historically, Symon has generated cash from the sales of its products and services to its global customers. In addition, both RMG and Symon had realized cash through debt agreements with lenders.

 

In April 2013, the Company entered into two debt agreements whereby it received $34,000,000 of cash. These funds were used to finance the acquisition of Symon.

 

In August 2013, the Company completed a public offering of 5,365,000 shares of its common stock at a public offering price of $8.00 per share, minus the underwriters’ discount of $0.56 per share. The Company received net proceeds of approximately $39.1 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company used substantially all of the net proceeds of the offering to prepay a portion of its outstanding senior indebtedness. 

 

The Company has entered into revenue sharing agreements with certain business partners that require the Company to make minimum revenue sharing payments of $1,067,000 during the remainder of 2014 and $4,620,000 in 2015. During the 3rd quarter of 2014, the Company renegotiated a revenue sharing agreement with a business partner. The parties agreed, among other things, to eliminate the Company’s remaining minimum revenue commitment of $11,500,000 if certain terms and conditions of the amended agreement are met in the future.

 

At September 30, 2014, the Company’s cash and cash equivalents balance was $5,045,819. This included cash and cash equivalents of $446,638 held in bank accounts of its subsidiaries located outside the United States. The Company currently plans to use this cash to fund its ongoing foreign operations. If the Company were to repatriate the cash held by its subsidiary located outside the United States, it may incur tax liabilities.

 

On November 13, 2014, the Company amended the size of its Senior Credit Facility by two million dollars to 14 million dollars. Unless the Company is able to increase its revenues or decrease its operating expenses from recent historical run-rate levels, management expects that the Company will need to obtain additional capital over the next twelve months to fund its planned operations. The Company is currently in active discussions regarding a number of potential capital raising alternatives and, while we have no firm commitment at this time, we expect that we will be able to secure additional capital that will permit us to support our planned operations. There is no assurance, however, that we will be able to obtain additional capital on acceptable terms, or at all. If we fail to obtain additional capital, we will encounter significant difficulties in funding our planned operations and may be unable to meet our debt obligations under our credit facility.

 

 

At September 30, 2014 and December 31, 2013 the Company had outstanding debt of $12,000,000 and $8,000,000, respectively. This debt represents the remaining balance of the borrowings the Company made in connection with the acquisition of Symon as discussed above and the additional funds borrowed when the Company refinanced its debt on November 14, 2013 and July 16, 2014.

 

The Company has generated and used cash as follows:

 

		Successor				Successor
		Company				Company
		Nine Months				April 20, 2013
		Ended				through
		September 30,				September 30,
		2014				2013
Operating cash flow		$	(4,791,919)			$	(9,957,063)
Investing cash flow			(2,299,624)				(984,134)
Financing cash flow			4,000,000				28,172,195

 

Operating Activities

 

The use of cash from operating activities of the Successor Company of $4,791,919 for the nine months ended September 30, 2014 is primarily due to the Company’s net loss of $46,022,046. This decrease in cash flow caused by the net loss is offset somewhat by the non-cash expenses of $5,398,978 for depreciation and amortization, $24,421,849 for impairment of intangible assets and goodwill, and $1,483,214 for stock-based compensation. In addition, the following changes in assets and liabilities affected cash from operating activities during the period:

 

●

Accounts receivable decreased by $11,166,670 due to more focused and improved collections, a decrease in revenues, and sales of accounts receivable.

●

Inventory decreased by $1,713,337 due to better alignment of inventory with sales volume.

●

Accounts payable decreased by $3,236,706 due primarily to payment of amounts owed for equipment purchased from third-party vendors and other operating expenses.

●

Accrued liabilities increased by $2,110,418 due primarily to the accrued loss on a long-term contract.

 

The use of cash from operating activities of the Successor Company of $9,957,063 for the period April 20 through September 30, 2013 was primarily due to the net loss of $11,436,761 for the period. The effect of net loss on cash from operating activities was decreased by the non-cash charge for the change in the Company’s warrant liability of $1,829,333 and by the non-cash charge for depreciation and amortization for the period of $2,971,620. In addition, the following changes in assets and liabilities affected cash from operating activities during the period:

 

●

Accounts receivable increased by $2,608,668 due to the very high sales level by the Enterprise Solutions business unit in September 2013.

●

Accrued liabilities decreased by $1,435,808 primarily due to the payment of professional fees related to the acquisitions.

 

Investing Activities

 

The decrease in cash from investing activities of $2,299,624 during the nine months ended September 30, 2014 was due to expenditures for property and equipment.

 

The decrease in cash from investing activities of $984,134 from investing activities during the period April 20 through September 30, 2013 was due to an additional payment of $209,079 in connection with the acquisition of Symon and expenditures of $775,055 for property and equipment.

 

 

Financing Activities

 

The increase in cash from financing activities of $4,000,000 for the nine months ended September 30, 2014 was due to the increase in debt under the refinancing arrangement in July 2014.

 

In August 2013, the Company completed a public offering of 5,365,000 shares of its common stock at a public offering price of $8.00 per share, less the underwriters’ discount of $0.56 per share. The Company received net proceeds of $39,115,785, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. The Company used $10,493,590 of the net proceeds from the public offering to pay down its debt.

 

Incentive Stock Option Plan  

 

On July 12, 2013, the Company’s stockholders approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”) and the reservation of 2,500,000 shares of the Company’s common stock for issuance under the 2013 Plan. The 2013 Plan is intended to promote the interests of the Company and its stockholders by providing the Company’s employees, directors and consultants with incentives and rewards to encourage them to continue in the Company’s service and with a proprietary interest in pursuing the Company’s long-term growth, profitability and financial success. Equity awards available under the 2013 Plan include stock options, stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units, share-denominated performance units and cash awards. The 2013 Plan is administered by the compensation committee of the board of directors of the Company, which has the authority to designate the employees, consultants and members of the board of directors who will be granted awards under the 2013 Plan, and to designate the amount, type and other terms and conditions of such awards, and to interpret any and all provisions of the 2013 Plan and the terms of any awards under the 2013 Plan. The 2013 Plan will terminate on the tenth anniversary of its effective date. In August 2013 the Company awarded 1,660,000 stock options and in July 2014 issued an additional 500,000 stock options to its employees under the 2013 Plan. 291,666 stock options have been subsequently cancelled. In August 2013 the Company issued 350,000 shares of restricted stock to its Chief Executive Officer under the 2013 Plan. The CEO resigned in July 2014 and was awarded 100,000 shares of common stock. The remaining 250,000 unvested shares were returned to Treasury.

  

Critical Accounting Policies

 

The Company's significant accounting policies are described in Note 1 of the Company’s consolidated financial statements included elsewhere in this filing. The Company’s financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Accounts Receivable

 

Accounts receivable are comprised of sales made primarily to entities located in the United States, EMEA and Asia. Accounts receivable are recorded at the invoiced amounts and do not bear interest. The allowance requires judgment and is reviewed monthly, and the Company establishes reserves for doubtful accounts on a case-by-case basis based on historical collection experience and a current review of the collectability of accounts. The Company’s collection experience has been consistent with our estimates.

 

Inventory

 

Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Slow moving and obsolete inventories are written off based on historical experience and estimated future usage.

 

  

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in a purchase business combination and is tested annually at December 31 for impairment or tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying value exceeds the asset’s fair value. The Company has two reporting units and this determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying value. Second, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. The fair values calculated in the Company’s impairment tests are determined using discounted cash flow models involving several assumptions. These assumptions include, but are not limited to, anticipated operating income growth rates, the Company’s long-term anticipated operating income growth rate and the discount rate. The Company’s cash flow forecasts are based on assumptions that are consistent with the plans and estimates the Company is using to manage the underlying businesses. The assumptions that are used are based upon what the Company believes a hypothetical marketplace participant would use in estimating fair value. The Company evaluates the reasonableness of the fair value calculations of its reporting units by comparing the total of the fair value of all of the Company’s reporting units to the Company’s total market capitalization. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. 

 

In performing the impairment test at December 31, 2013, there was some indication that there could be impairment at that date. The Company engaged an independent specialist to assist the Company in completing an impairment test as of December 31, 2013 and, based on the results of the testing, the Company has concluded there was no impairment. The Media reporting unit’s fair value exceeded its carrying value by $1,578,000 or 5.7% and the Enterprise reporting unit’s fair value exceeded its carrying value by $6,500,000, or 13%. The Company's impairment analysis contains certain assumptions, such as the discount rate, that are subject to change. Changes in the assumptions could have a material impact on the impairment analysis.

 

As a result of a decline in the Company's stock price, coupled with lower than anticipated operating results for the quarter ended June 30, 2014 and a change in the estimate of future operating results, goodwill and intangible assets were tested for impairment as of June 30, 2014. The Company engaged an independent specialist to assist it in determining if goodwill and intangible assets were impaired at June 30, 2014. Based on this impairment testing, it was determined that there was impairment of goodwill and intangible assets. As a result, the Company recorded an impairment charge of $1,332,359 related to goodwill and an impairment charge of $5,913,000 related to intangible assets at June 30, 2014.

 

In the third quarter of 2014, as a result of another decline in the Company’s stock price, coupled with lower than anticipated operating results for the quarter ended September 30, 2014 and a change in the estimate of future operating results, goodwill and intangible assets were again tested for impairment as of September 30, 2014. The Company engaged an independent specialist to assist it in determining if goodwill and intangible assets were impaired at September 30, 2014. Based on the impairment testing performed, it was determined that there was impairment of goodwill and intangible assets. As a result, the Company recorded an impairment charge of $7,129,000 related to goodwill and an impairment charge of $10,047,490 related to intangible assets at September 30, 2014.

 

The Company’s market capitalization could fluctuate in the future. As a result, we will continue to treat this data as an indicator of possible impairment if the Company's market capitalization falls below its book value. If this situation occurs, we will perform the required detailed analysis to determine if there is impairment.

 

Intangible assets include software and technology, customer relationships, partner relationships, trademarks and trade names, customer order backlog and covenants not-to-compete associated with the acquisitions of RMG and Symon. The intangible assets are amortized over their estimated useful lives as follows:

 

		Weighted Average
Acquired Intangible Asset:		Amortization Period: (years)
Software and technology			5
Customer relationships			8
Partner relationships			10
Tradenames and trademarks			10
Customer order backlog			3
Covenant Not-To-Compete			2

 

Intangible assets are evaluated for impairment annually and on an interim basis if events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount. The impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis, and, if the asset is not recoverable, recognizing an impairment charge, if necessary, to reduce the asset’s carrying amount to its fair value.  

 

 

Impairment of Long-lived Assets

 

In accordance with ASC 360, Property, Plant, and Equipment, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset.

 

Income Taxes

 

The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. The Company recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date. The Company provides valuation allowances for deferred tax assets and liabilities to the extent their realization is uncertain.

 

As a result of the Company’s operations outside of the United States, its global tax rate is derived from a combination of applicable tax rates in the various jurisdictions in which the Company operates. The Company bases its estimate of an annual effective tax rate at any given point in time on a calculated mix of the tax rates applicable to the Company and to estimates of the amount of income to be derived in any given jurisdiction.

 

Under ASC 740, Income Taxes (“ASC 740”), the Company recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized. It also requires the Company to accrue interest and penalties where there is an underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause a change in the Company’s assessment of the appropriate accrual amount. The Company reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign operations indefinitely. Significant judgment is required to evaluate uncertain tax positions. The Company files its tax returns based on its understanding of the appropriate tax rules and regulations. However, complexities in the tax rules and the Company’s operations, as well as positions taken publicly by the taxing authorities, may lead the Company to conclude that accruals for uncertain tax positions are required. Changes in facts and circumstances could have a material impact on the Company’s effective tax rate and results of operations.

 

Revenue Recognition

 

The Company recognizes revenue primarily from these sources:

 

●

Advertising;

●

Products;

●

Professional services; and

●

Maintenance and content services.

 

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, which is when product title transfers to the customer, or services have been rendered; (iii) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (iv) collection is reasonably assured. The Company assesses collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.

 

Advertising

 

The Company sells advertising through agencies and directly to a variety of customers under contracts ranging from one month to one year. Contracts usually specify the network placement, the expected number of impressions (determined by passenger or visitor counts) and the cost per thousand impressions (“CPM”) over the contract period to arrive at a contract amount. The Company bills for these advertising services as requested by the customer, generally on a monthly basis following delivery of the contracted number of impressions for the particular ad insertion. Revenue is recognized at the end of the month in which fulfillment of the advertising order occurred. Although the Company typically presents invoices to an advertising agency, collection is reasonably assured based upon the customer placing the order.

 

 

Under Financial Accounting Standards Board’s (“FASB”) ASC 605-45 Principal Agent Considerations (Reporting Revenue Gross as a Principal versus Net as an Agent), the Company has recorded its advertising revenues on a gross basis.

 

Payments to airline and other partners for revenue sharing are paid on a monthly basis either under a minimum annual guarantee (based upon estimated advertising revenues), or as a percentage of the advertising revenues following collection from customers. The portion of revenue that the Company shares with its partners ranges from 25% to 80% depending on the partner and the media asset. The Company makes minimum annual guarantee payments under three agreements (two to airline partners and one to another partner). Payments to all other partners are calculated on a revenue sharing basis. The Company’s partnership agreements have terms ranging from one to five years. Four partnership agreements renew automatically unless terminated prior to renewal and the other partners have no obligation to renew.

 

Multiple-element arrangements

 

Products consist of proprietary software and hardware equipment. The Company considers the sale of its software more than incidental to the hardware as it is essential to the functionality of the product and is classified as part of the Company’s products. The Company enters into multiple-product and services contracts, which may include any combination of equipment and software products, professional services, maintenance and content services.

 

Multiple Element Arrangements (“MEAs”) are arrangements with customers which include multiple deliverables, including a combination of equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the Company’s control. Revenue from arrangements for the sale of tangible products containing both software and non-software components that function together to deliver the product’s essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price (“RSP”) method for each unit of accounting based first on Vendor Specific Objective Evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists, and on estimated selling price (“ESP”) if neither VSOE or TPE of selling price of the Company’s various applicable tangible products containing essential software products and services. The Company establishes the pricing for its units of accounting as follows:

 

●

VSOE— for certain elements of an arrangement, VSOE is based upon the pricing in comparable transactions when the element is sold separately. The Company determines VSOE based on its pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or standalone prices for the service element(s).

●

TPE— if the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, the Company uses third-party evidence of selling price. The Company determines TPE based on sales of comparable amounts of similar products or services offered by multiple third parties considering the degree of customization and similarity of the product or service sold.

●

ESP— the estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When VSOE or TPE does not exist for an element, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on its pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP.

 

The Company has also established VSOE for its professional services and maintenance and content services based on the same criteria as previously discussed under the software revenue recognition rules.

 

Previously, the Company rarely sold its products without maintenance and therefore the residual value of the sales arrangement was allocated to the products. The Company now uses the estimated selling price to determine the relative sales price of its products. Revenue for elements that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement has been met or over the period that the Company’s last remaining obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria.

 

Judgment is required in the determination of company-specific objective evidence of fair value, which may impact the timing and amount of revenue recognized depending on whether company-specific objective evidence of fair value can be demonstrated for the undelivered elements of an arrangement and the approaches used to demonstrate company-specific objective evidence of fair value.

 

 

The Company’s process for determining ESPs involves management’s judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change, the Company’s ESPs and the future rate of related maintenance could change.

 

The Company sells its products and services through its global sales force and through a select group of resellers and business partners. In North America, approximately 90% or more of sales are generated solely by the Company’s sales team, with 10% or less through resellers. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of the Company’s global revenues are derived from direct sales, with the remaining 33% generated through indirect partner channels.

 

The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties and product returns from resellers have been insignificant to date. The Company therefore sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies as discussed above. The Company bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users.

 

The Company recognizes revenue on sales to resellers consistent with its recognition policies as discussed below.

 

Product revenue

 

The Company recognizes revenue on product sales generally upon delivery of the product or customer acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in revenue, and the related shipping costs are included in cost of revenue.

 

Professional services revenue

 

Professional services consist primarily of installation and training services. Installation fees are recognized either on a fixed-fee basis or on a time-and-materials basis. For time-and materials contracts, the Company recognizes revenue as services are performed. For fixed-fee contracts, the Company recognizes revenue upon completion of the installation which is typically completed within five business days. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Training services are also not considered essential to the functionality of the product and have historically been insignificant. The fee allocable to training is recognized as revenue as the Company performs the services.

 

Maintenance and content services revenue

 

Maintenance support consists of hardware maintenance and repair and software support and updates. Software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Support includes access to technical support personnel for software and hardware issues. Content services consist of providing customers live and customized news feeds.

 

Maintenance and content services revenue is recognized ratably over the term of the contracts, which is typically one to three years. Maintenance and support is renewable by the customer annually. Rates, including subsequent renewal rates, are typically established based upon specified rates as set forth in the arrangement. The Company’s hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal.

 

Research and Development Costs

 

Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.

 

 

Net Income (Loss) per Common Share

 

Basic net income (loss) per share for each class of participating common stock, excluding any dilutive effects of stock options, warrants and unvested restricted stock, is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is computed similar to basic; however diluted income (loss) per share reflects the assumed conversion of all potentially dilutive securities. There are no stock options, warrants, or other equity instruments outstanding that are dilutive. 

 

Item 3.      Quantitative and Qualitative Disclosures about Market Risk 

 

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are not required to provide the information required by this item.

 

Item 4.      Controls and Procedures 

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls

 

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II

 

Item 1.      Legal Proceedings 

 

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management is not aware of any claims that would have a material effect on the Company’s financial position, results of operations or cash flows.

 

Item 1A.   Risk Factors 

 

Ownership of our securities involves a high degree of risk.  Holders of our securities should carefully consider the following risk factors and the other information contained in this Form 10-K, including our historical financial statements and related notes included herein.  The following discussion highlights some of the risks that may affect future operating results. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or businesses in general, may also impair our businesses operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results could be adversely affected in a material way. This could cause the trading prices of our securities to decline, perhaps significantly, and you may lose part or all of your investment. Please see “Cautionary Notes Regarding Forward-Looking Statements.”

 

Risks Related to Our Business

 

The markets for digital signage and advertising are competitive and we may be unable to compete successfully.

 

The markets for digital signage and advertising are very competitive and we must compete with other established providers. We compete with larger companies in many of the markets we serve. We compete for advertising sales directly with all media platforms, including radio and television broadcasting, cable and satellite television services, various local print media, billboards and Internet portals and search engines and digital out-of-home advertising represents a small portion of this market. We expect existing competitors and new entrants into the markets where we do business to constantly revise and improve their business models in light of challenges from us or other companies in the industry. If we cannot respond effectively to advances by our competitors, our business and financial performance may be adversely affected.

 

Increased competition may result in new products and services that fundamentally change our markets, reduce prices, reduce margins or decrease our market share. We may be unable to compete successfully against current or future competitors, some of whom may have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do.

 

Our operations are subject to the strength or weakness of our customers’ businesses, and we may not be able to mitigate that risk.

 

A large percentage of our business is attributable to customers in industries which are sensitive to general economic conditions. During periods of economic slowdown or during periods of weak business results, our customers often reduce their capital and advertising expenditures and defer or cancel pending projects, facilities upgrades or promotional activities. Such developments occur even among customers that are not experiencing financial difficulties.

 

For example, in 2008, a very large U.S.- based mortgage company, which was at the time one of our largest Enterprise Solutions customers, did not buy any of our products as a result of the economic downturn. Similar slowdowns could affect our customers in the hospitality industry in the wake of terrorist attacks, economic downturns or material changes in corporate travel habits. In addition, expenditures by advertisers tend to be cyclical, reflecting economic conditions, budgeting and buying patterns. Periods of a slowing economy or recession, or periods of economic uncertainty, may be accompanied by a decrease in advertising spending.

 

Continued weakness in the industries we serve has had, and may in the future have, an adverse effect on sales of our products and our results of operations. A long term continued or heightened economic downturn in one or more of the key industries that we serve, or in the worldwide economy, could cause actual results of operations to differ materially from historical and expected results.

 

Furthermore, even in the absence of a downturn in general economic conditions, our customers may reduce the money they spend on our products and services for a number of other reasons, including:

 

●

a decline in economic conditions in an industry we serve;

●

a decline in advertising or capital spending in general;

●

a decision to shift expenditures to competing products;

●

unfavorable local or regional economic conditions; or

●

a downturn in an individual business sector or market.

  

 

Such conditions could have a material and adverse effect on our ability to generate revenue from our products and services, with a corresponding adverse effect on our financial condition and results of operations.

 

The recent and ongoing global economic uncertainty may adversely impact our business, operating results or financial condition.

 

As widely reported, financial markets in the U.S., Europe and Asia have experienced extreme disruption since late 2008, and while there has been improvement in recent years, the worldwide economy remains fragile as uncertainty remains regarding when the economy will improve to historical growth levels. Any return to the conditions that existed during the recent recession or other unfavorable changes in economic conditions, including declining consumer confidence, concerns about inflation or deflation, the threat of another recession, increases in the rates of default and bankruptcy and extreme volatility in the credit and equity markets, may lead to decreased demand or delay in payments by our customers or to slowing of their payments to us, and our results of operations and financial condition could be adversely affected by these actions. These challenging economic conditions also may result in:

 

●

increased competition for fewer industry dollars;

●

pricing pressure that may adversely affect revenue and gross margin;

●

reduced credit availability and/or access to capital markets;

●

difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers; or

●

customer financial difficulty and increased risk of doubtful accounts receivable.

 

A higher percentage of our sales and profitability occur in the third and fourth quarters.

 

We sell more of our products in the third and fourth quarters because of traditional technology and advertising buying patterns of our customers. Advertising cycles, corporate year end budgets, government buying and regional economics will affect the amount of our products and services that will fit into customers’ budgets late in the year. Any unanticipated decrease in demand for our products during the third and fourth quarters could have an adverse effect on our annual sales and profitability. In addition, slower selling cycles during the first and second quarters may adversely affect our stock price.

Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly in the future.

 

Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. These fluctuations may cause the market price of our common stock to decline. We base our planned operating expenses in part on expectations of future revenues, and our expenses are relatively fixed in the short term. If revenues for a particular quarter are lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter. In future periods, our revenue and operating results may be below the expectation of analysts and investors, which may cause the market price of our common stock to decline. Factors that are likely to cause our revenues and operating results to fluctuate include those discussed elsewhere in this section.

 

The nature of advertising sales cycles and shifting needs of advertisers makes it difficult for us to forecast revenues and increases the variability of quarterly fluctuations, which could cause us to improperly plan for our operations.

 

A substantial amount of our advertising commitments are made months in advance of when the advertising airs on our media networks. Between the time at which advertising commitments are made and the advertising is aired, the needs of our advertisers can change. Advertisers may desire to change the timing, level of commitment and other aspects of their advertising placements. As a result, our future advertising commitment at any particular date is not necessarily indicative of actual revenues for any succeeding period, making it more difficult to predict our financial performance. These changes could also negatively impact our financial performance, including quarterly fluctuations.

 

Implementation and integration of new products, such as expanding our advertising assets, software, media player and services product portfolios, could harm our results of operations.

 

A key component of our growth strategy is to develop and market new products. We may be unable to produce new products and services that meet customers’ needs or specifications. If we fail to meet specific product specifications requested by a customer, the customer may have the right to seek an alternate source for a product or service or to terminate an underlying agreement. A failure to successfully meet the specifications of our potential customers could decrease demand or otherwise significantly hinder market adoption of our products and may have a material adverse effect on our business, financial condition or results of operations.

 

  

The process of introducing a new product to the market is extremely complex, time consuming and expensive, and will become more complex as new platforms and technologies emerge. In the event we are not successful in developing a wide range of offerings or do not gain wide acceptance in the marketplace, we may not recoup our investment costs, and our business, financial condition and results of operations may be materially adversely affected.

 

Shortages of components or a loss of, or problems with, a supplier could result in a disruption in the installation or operation of our products or services.

 

From time to time, we have experienced delays in manufacturing our products for several reasons, including component delivery delays, component shortages and component quality deficiencies. Component shortages, delays in the delivery of components and supplier product quality deficiencies may occur in the future. These delays or problems have in the past and could in the future result in delivery delays, reduced revenues, strained relations with customers and loss of business. Also, in an effort to avoid actual or perceived component shortages, we may purchase more components than we may otherwise require. Excess component inventory resulting from over-purchases, obsolescence, installation cancellations or a decline in the demand for our products could result in equipment impairment, which in the past has had and in the future would have a negative effect on our financial results.

 

We obtain several of the components used in our products from limited sources. We rarely have guaranteed supply arrangements with our suppliers, and cannot be sure that suppliers will be able to meet our current or future component requirements. If component manufacturers do not allocate a sufficient supply of components to meet our needs or if current suppliers do not provide components of adequate quality or compatibility, we may have to obtain these components at a higher cost from distributors or on the spot market. If we are forced to use alternative suppliers of components, we may have to alter our manufacturing processes or solutions offerings to accommodate these components. Modification of our manufacturing processes or our solutions offerings to use alternative components could cause significant delays and reduce our ability to generate revenues.

 

The failure of our service providers to provide, install and maintain our equipment could result in service interruptions and damage to our business.

 

We are and will continue to be significantly dependent upon third-party service providers to provide, install and maintain relevant video display and media player equipment at our installations. The failure of any third-party provider to continue to perform these services adequately and timely could interrupt our business and damage our relationship with our partners and their relationship with consumers. Any outage would also impact our ability to deliver on the contracted service levels, which would prevent us from recognizing revenues.

 

We rely on third parties for data transmission, and the interruption or unavailability of adequate bandwidth for transmission could prevent us from distributing our programming as planned.

 

We transmit the majority of the content that we provide to our partners and customers using Internet connectivity supplied by a variety of third-party network providers. We also rely on the networks of some of our partners to transmit content to individual screens. If we or our partners experience failures or limited network capacity, we may be unable to maintain programming and meet our advertising commitments. Problems with data transmission may be due to hardware failures, operating system failures or other causes beyond our control. In addition, there are a limited number of Internet providers with whom we could contract, and we may be unable to replace our current providers on favorable terms, if at all. If the transmission of data to our partners or customers becomes unavailable, limited due to bandwidth constraints or is interrupted or delayed because of necessary equipment changes, our partner and customer relationships and our ability to obtain revenues from current and new partners and customers could suffer.

 

Computer viruses could cause significant downtime for our media network, decreasing our revenues and damaging our relationships with partners and customers.

 

We generate revenues from the sales of advertising and content that is aired in our partners’ and customers’ installations. Computer hackers infecting our network, or the networks of our partners or customers in which our network is integrated, with viruses could cause our network to be unavailable. Significant downtime could decrease our revenues and harm our relationships and reputation with partners, customers and consumers.

 

 

Our products often operate on the same network used by our customers for other aspects of their businesses, and we may be held responsible for defects or breakdowns in these networks if it is believed that such defects or breakdowns were caused by our products.

 

Our products are operated across our customers’ proprietary networks, which are used to operate other aspects of these customers’ businesses. In these circumstances, any defect or virus that occurs on our products may enter a customer’s network, which could impact other aspects of the customer’s business. The impact on a customer’s business could be severe, and if we were held responsible, it could have an adverse effect on our customer relationships and on our operating results.

 

The content we distribute to partners and customers may expose us to liability.

 

We provide or facilitate the distribution of content for our partners and customers. This content includes advertising-related content, as well as movie and television content and other media, much of which is obtained from third parties. As a distributor of content, we face potential liability for negligence, copyright, patent or trademark infringement, or other claims based on the content that we distribute. We or entities that we license content from may not be adequately insured or indemnified to cover claims of these types or liability that may be imposed on us.

 

The growth of our business is dependent in part on successfully implementing our international expansion strategy.

 

Our growth strategy includes expanding our geographic coverage in or into the Asia-Pacific region, Europe, the Middle East and Latin America. In many cases, we have limited experience in these regions, and may encounter difficulties due to different technology standards, legal considerations, language barriers, distance and cultural differences. We may not be able to manage operations in these regions effectively and efficiently or compete effectively in these new markets. If we do not generate sufficient revenues from these regions to offset the expense of expansion into these regions, or if we do not effectively manage accounts receivable, foreign currency exchange rate fluctuations and taxes, our business and our ability to increase revenues and enhance our operating results could suffer.

 

If we fail to manage our growth effectively, we may not be able to take advantage of market opportunities, execute on expansion strategies or meet the demands of advertisers.

 

We have expanded, and continue to expand, our operations into new markets. The growth in our business and operations has required, and will continue to require, significant attention from management and place a strain on operational systems and resources. To accommodate this growth, we will need to upgrade, improve or implement a variety of operational and financial systems, procedures and controls, including the improvement of accounting and other internal management systems, all of which require substantial management efforts.

 

We will also need to continue to expand, train, manage and motivate our workforce, manage our relationships with our customers, and add sales and marketing offices and personnel to service these relationships. All of these endeavors will require substantial managerial efforts and skill, and incur additional expenditures. We may not be able to manage our growth effectively and, as a result, may not be able to take advantage of market opportunities, execute on expansion strategies or meet the demands of our customers.

 

We may not realize the anticipated benefits of the acquisitions of Symon and RMG or of future acquisitions or investments.

 

We acquired our operating subsidiaries in two separate business combinations in April 2013, and our operating subsidiaries, in turn, have grown their businesses in part through acquisitions. For example, AFS Message-Link and Dacon, Ltd. are companies that Symon purchased in 2006 and 2008, respectively. AFS Message-Link allowed Symon to enter the hospitality digital markets as a key industry participant, and Symon’s acquisition of Dacon, a company based in the United Kingdom, expanded Symon’s contact center market presence and its base of large resellers. Likewise, RMG established its executive airline club business through the acquisition of the Executive Media Network and its wholly-owned subsidiaries in April 2011. As part of our business strategy, we intend to make future acquisitions of, or investments in, technologies, products and businesses that we believe could complement or expand our business, enhance our technical capabilities or offer growth opportunities. However, we may be unable to identify suitable acquisition candidates in the future or make these acquisitions on a commercially reasonable basis, or at all. In addition, we may spend significant management time and resources in analyzing and negotiating acquisitions or investments that do not come to fruition. These resources could otherwise be spent on our own customer development, marketing and customer sales efforts and research and development.

 

 

Our acquisitions of Symon and RMG, and any future acquisitions and investments we may undertake, subject us to various risks, including:

 

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failure to transition key customer relationships and sustain or grow sales levels, particularly in the short-term;

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loss of key employees related to acquisitions;

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inability to successfully integrate acquired technologies or operations;

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failure to realize anticipated synergies in sales, marketing and distribution;

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diversion of management’s attention;

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adverse effects on our existing business relationships;

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potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;

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expenses related to amortization of intangible assets and potential write-offs of acquired assets; and

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the inability to recover the costs of acquisitions.

 

If our acquisition strategy is not effective, we may not be able to expand our business as expected. In addition, our operating expenses may increase more than our revenues as a result of such expansion efforts, which could materially impact our operating results and our stock price.

 

Our strategy to expand our sales and marketing operations and activities may not generate the revenue increases anticipated or such revenue increases may only be realized over a longer period than currently expected.

 

Building a digital signage solutions customer base and achieving broader market acceptance of our digital signage solutions will depend to a significant extent on our ability to expand our sales and marketing operations and activities. We plan to expand our direct sales force both domestically and internationally; however, there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. Our business could be harmed if our sales and marketing expansion efforts do not generate a corresponding significant increase in revenue.

 

Our RMG subsidiary has a history of incurring significant net losses, and our future profitability is not assured.

 

For the years ended December 31, 2012 and 2011, RMG, which we acquired on April 8, 2013, incurred net losses of $11.5 million and $14.9 million, respectively. RMG’s operating results for future periods are subject to numerous uncertainties and there can be no assurances that it will be profitable in the foreseeable future, if at all. If our RMG Media Networks business unit revenues decrease in a given period, we may be unable to reduce cost of revenues as a significant part of its cost of revenues is fixed, which could materially and adversely affect our business and, therefore, our results of operations and lead to a net loss for that period and subsequent periods.

 

We have minimum payment commitments to certain advertising partners that if we cannot service could negatively impact our profitability.

 

We have minimum payment commitments to three of our advertising partners. These commitments constitute a significant part of our cost of revenues. If our revenues decrease in a given period, we may be unable to reduce cost of revenues as a significant part of our cost of revenues is fixed, which could materially and adversely affect our business and, therefore, our results of operations and lead to a net loss for that period and subsequent periods.

 

Our RMG subsidiary has a limited operating history, which may make it difficult to evaluate its business and prospects.

 

RMG began business operations in September 2005 as Danouv Inc., developing a digital signage technology platform for ad serving and content distribution. RMG launched an initial media network with 650 screens in coffee shops and eateries in August 2006. In September 2006, Danouv Inc. changed its name to Danoo Inc. In July 2009, Danoo purchased certain assets of IdeaCast Inc., which operated a digital signage network in gyms and fitness centers and in the airline in-flight entertainment space. In August 2009, Danoo was renamed RMG Networks, Inc.

 

RMG acquired certain assets and cash from Pharmacy TV Network, LLC in March 2010 in an all-stock transaction. Pharmacy TV was a retail point of sale network in pharmacies across the United States. RMG subsequently shut this network down during the fourth quarter of 2011 due to lack of scale and advertiser demand. RMG acquired Executive Media Network Worldwide and its wholly-owned subsidiaries Corporate Image Media, Inc. and Prophet Media, LLC (collectively the Executive Media Network) in April 2011 to extend its airline media offering from airport business lounges to in-flight media. The Executive Media Network acquisition introduced a proprietary booking, tracking and inventory system called Charlie into the RMG technology portfolio. The Executive Media Network was subsequently transitioned to the RMG technology platform for content delivery and network management. This acquisition also consolidated the number of companies in the United States working with airlines to sell media. During the first quarter of 2012, RMG divested the NYTimes.com Today network, and in July 2012 RMG sold the Fitness Network.

 

  

RMG took steps to align resources behind the airline media properties because RMG was a category leader in that space in 2012. Accordingly, it has a limited operating history for operations upon which you can evaluate the viability and sustainability of its business and its acceptance by advertisers and consumers. It is also difficult to evaluate the viability of RMG’s use of audiovisual advertising displays in airline executive clubs, IFE displays, Wi-Fi advertising and other digital out-of-home commercial locations as a business model because it does not have sufficient experience to address the risks frequently encountered by early stage companies using new forms of advertising media and entering new and rapidly evolving markets. These circumstances may make it difficult to evaluate RMG’s business and prospects.

 

The airline industry is highly competitive, and a substantial weakening of, or business failure by, any of our partner airlines could negatively affect our revenues and jeopardize any investment we make in deploying the RMG Airline Network in airline executive clubs.

 

The airline industry is highly competitive and has experienced substantial consolidation. Because our ability to generate revenues from advertising sales and services depends upon our ongoing relationships with a limited number of airlines, any substantial weakening or failure of the business of one or more of our existing airlines, or the consolidation of one or more of our airlines with a third party, could cause our revenues to decline, adversely affecting our business and prospects.

 

We have in the past made, and plan in the future to make, significant investments in the equipment, installation and support of the RMG Airline Network within airline executive clubs. We intend to pursue opportunities where we may invest in new airline relationships and the deployment of new media inventory, and the weakening, failure or acquisition of any of our airline partners in the future could result in our loss of our investment and/or a negative return on our investment. In addition, we may incur additional expense recovering our equipment from airline executive clubs in the event any such clubs cease to operate or close for any reason.

 

If we are unable to retain or renew existing partnerships on commercially advantageous terms, we may be unable to maintain or expand advertising network coverage and our costs may increase significantly in the future.

 

Our ability to generate revenues from advertising sales depends largely upon our ability to provide a large air travel and office advertising network for the display of advertisements. However, there can be no assurances that we will be able retain or renew our existing partnerships with inventory partners and any failure to maintain our network could damage our relationships with advertisers and materially and adversely affect our business.

 

As of December 31, 2013, we had 12 partnership contracts that have terms ranging from one to five years. Four contracts renew automatically unless terminated prior to renewal while the rest have no automatic renewal provisions. One partnership contract is subject to renewal in 2014. In addition, we have minimum payment commitments to three of our partners, which comprise a significant portion of our total cost of revenues. These commitments may increase over time and as partnership contracts terminate, we may experience a significant increase in our costs of revenues when we have to renew these contracts. If we cannot pass increased costs onto advertisers through rate increases, our earnings and results of operations could be materially and adversely affected. In addition, many of our partnership contracts contain provisions granting us certain exclusive advertising rights. We may not be able to retain these exclusivity provisions when we renew these contracts. If we were to lose exclusivity, our advertisers may decide to advertise with our competitors or otherwise reduce their spending on our network and we may lose market share.

 

Our partners may terminate their contracts with us or may not enter into new contracts with us on terms that are commercially advantageous to us. If our partners seek to negotiate terms that are less favorable to us and we accept such terms, or if we seek to negotiate better terms, but are unable to do so, then our business, operating results and financial condition could be materially and adversely affected.

 

We have relied, and may continue to rely, on a limited number of advertisers for a significant portion of our advertising-related revenues, and such revenues could decline due to the delay of orders from, or the loss of, one or more significant advertisers. 

 

A small number of advertisers may constitute a significant portion of our advertising-related revenues. Our relationships with these advertisers may not expand or may be disrupted. If a major advertiser purchases less advertising or defers orders in any particular period, or if a relationship with a major advertiser is terminated, our revenues could decline and our operating results may be adversely affected. We are also obligated to provide minimum payments to three partners, which we could have difficulty satisfying if our advertising revenues generated with existing partners significantly decrease for any reason or if we fail to generate advertising revenues with newly obtained partners for any reason. In addition, such new partners may require their own minimum payments.

 

  

If advertisers or the viewing public do not accept, or lose interest in, our digital out-of-home advertising network, our revenues may be adversely affected and our business may not expand or be successful.

 

The market for digital out-of-home advertising networks worldwide is relatively new and its potential is uncertain. We compete for advertising spending with many forms of more established advertising media. Our success depends on the acceptance of digital out-of-home advertising networks by advertisers and their continuing interest in these media networks as components of their advertising strategies. Our success also depends on the viewing public continuing to be receptive towards its advertising network. Advertisers may elect not to use our services if they believe that consumers are not receptive to our networks or that our networks do not provide sufficient value as effective advertising media. Likewise, if consumers find some element of our networks, such as its in-flight roadblock unit, to be disruptive or intrusive, the airlines may decide not to place our digital displays in their properties or allow us to sell advertising on their IFE systems and advertisers may view our advertising network as a less attractive advertising medium compared to other alternatives. In that event, advertisers may decide to reduce their spending on our networks. If a substantial number of advertisers lose interest in advertising on our networks for these or other reasons, we will be unable to generate sufficient revenues and cash flow to operate our business, and our advertising service revenue, liquidity and results of operations could be materially adversely affected.

 

Advertisers may not accept our measurements of our networks audiences or the methodologies may change, which could negatively impact our ability to market and sell our advertising packages.

 

We engage third-party research firms to study the number of people viewing our networks, consumer viewing habits and brand recall. Because our digital out-of-home networks are different from at-home broadcast media, third-party research firms have developed measuring standards and methodologies that differ from those used to measure the amount and characteristics of viewers for other broadcast media. We market and sell advertising packages to advertisers based on these measurements. If third-party research firms were to change the way they measure viewers or their viewing habits, it could have an adverse effect on our ability to sell advertising. In addition, if advertisers do not accept or challenge the way third parties measure our viewers or their viewing habits, advertisers may be unwilling to purchase advertising at prices acceptable to us, if at all, and our revenues and operating results could be negatively impacted.

 

If consumers do not accept our ad-based networks as a part of their out-of-home experience, we may be unable to grow or maintain our Media Networks business.

 

The success of our Media Networks business depends, in part, upon the long-term acceptance of digital media in out-of-home settings by consumers. If consumer viewership of our networks or sentiment towards advertising in general, shifts such that consumers become less receptive, advertisers may reduce their spending and partners may decide not to carry our networks.

 

If people change the way they travel or reduce the amount that they travel, our revenues may decline and our business may suffer.

 

Our success in selling advertising depends, in part, on high traffic airlines and airline executive clubs, which increases the number of potential viewers for the RMG Airline Network. The price at which we sell advertising aired on the RMG Airline Network is a direct result of the number of viewers and the quality of those viewers. If the number of travelers visiting the airline clubs or flying on commercial airplanes decreases, advertisers may decide not to advertise on the RMG Airline Network, may purchase less advertising on the RMG Airline Network or may not be willing to pay for advertising at price points necessary for it to succeed. If alternative methods of communication such as the Internet and other forms of travel increase in popularity, fewer consumers may visit our travel media locations. If consumers change the way they travel, such as increasing travel by car, they may not be receptive to our programming. In either case, our ability to generate revenues from advertisers could decrease and our operating results could be adversely affected.  

 

If people change the underlying behaviors that drive viewership of our networks, our revenues may decline and our business may be adversely affected.

 

Our success in selling advertising depends, in part, on the usage of airlines and airline executive clubs, business offices and shopping malls. Higher usage increases the number of potential viewers for our networks. The price at which we sell advertising is a direct result of the number of viewers and the quality of those viewers of our networks. If the number of travelers visiting the airline clubs, flying on commercial airplanes, using offices or visiting shopping malls decreases, advertisers may decide not to advertise on our networks, may purchase less advertising on our networks or may not be willing to pay for advertising at price points necessary for our networks’ profitable operations. If substitutes for the activities that drive viewership to our networks increase in popularity, fewer consumers may view our networks, our ability to generate revenues from advertisers could decrease and our operating results could be adversely affected.

 

  

We rely significantly on information systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to effectively operate our business, harm our net sales, increase our expenses and harm our reputation.

 

Our ability to effectively serve our customers on a timely basis depends significantly on our information systems. To manage the growth of our operations, we will need to continue to improve and expand our operational and financial systems, internal controls and business processes; in doing so, we could encounter implementation issues and incur substantial additional expenses. The failure of our information systems to operate effectively, problems with transitioning to upgraded or replacement systems or a breach in security of these systems could adversely impact financial accounting and reporting, efficiency of our operations and our ability to properly forecast earnings and cash requirements. We could be required to make significant additional expenditures to remediate any such failure, problem or breach. Such events may have a material adverse effect on us.

 

Our current or future internet-based operations may be affected by our reliance on third-party hardware and software providers, technology changes, risks related to the failure of computer systems that operate our internet business, telecommunications failures, electronic break-ins and similar disruptions. Furthermore, our ability to conduct business on the internet may be affected by liability for online content, patent infringement and state and federal privacy laws.

 

In addition, we may now and in the future implement new systems to increase efficiencies and profitability. To manage growth of our operations and personnel, we will need to continue to improve and expand our operational and financial systems, internal controls and business processes. When implementing new or changing existing processes, we may encounter transitional issues and incur substantial additional expenses.

 

Experienced computer programmers and hackers, or even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our customers, create system disruptions or cause shutdowns. In addition, employee error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of its network. Any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth.

 

We may not obtain sufficient patent protection for our systems, processes and technology, which could harm our competitive position and increase our expenses.

 

Our success and ability to compete depends to a significant degree upon the protection of our proprietary technology. As of December 31, 2013, we held three issued patents and four pending patent applications in the United States that we consider to be material to our business. Any patents issued may provide only limited protection for our technology and the rights that may be granted under any future issued patents may not provide competitive advantages to us. Any patent applications may not result in issued patents. Also, patent protection in foreign countries may be limited or unavailable where we need this protection. Competitors may independently develop similar technologies, design around our patents or successfully challenge any issued patent that we hold.

 

We rely upon trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and if these rights are not sufficiently protected, our ability to compete and generate revenues could be harmed.

 

We rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and expand our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, design code for our advertising network, documentation and other written materials under trade secret and copyright laws. We license our software under signed license agreements, which impose restrictions on the licensee’s ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality and invention assignment agreements. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. Our proprietary rights may not be adequately protected because:

 

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laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and

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policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use.

  

 

The laws of certain foreign countries may not protect the use of unregistered trademarks or our proprietary technologies to the same extent as do the laws of the United States. As a result, international protection of our image may be limited and our right to use our trademarks and technologies outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for digital signage in foreign countries. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries. Our inability to register our trademarks or technologies or purchase or license the right to use the relevant trademarks or technologies in these jurisdictions could limit our ability to penetrate new markets in jurisdictions outside the United States.

 

Litigation may be necessary to protect our trademarks and other intellectual property rights, to enforce these rights or to defend against claims by third parties alleging that we infringe, dilute or otherwise violate third-party trademark or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all or prevent us from manufacturing or selling certain products, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in its loss of significant rights.

 

Other parties may assert intellectual property infringement claims against us, and our products may infringe the intellectual property rights of third parties. From time to time, we receive letters alleging infringement of intellectual property rights of others. We may also initiate claims against third parties to defend our intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our core business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Also, we may be unaware of filed patent applications that relate to our products. Parties making infringement claims may be able to obtain an injunction, which could prevent us from operating portions of our business or using technology that contains the allegedly infringing intellectual property. Any intellectual property litigation could adversely affect our business, financial condition or results of operations.

 

We depend on key executive management and other key personal, and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

 

We depend on the leadership and experience of our key executive management, as well as other key personnel with specialized industry, sales and technical knowledge and/or industry relationships. Because of the intense competition for these employees, particularly in certain of the metropolitan areas in which we operate, we may be unable to retain our management team and other key personnel and may be unable to find qualified replacements if their services were no longer available to us. All of our key employees are employed on an “at will” basis and we do not have key-man life insurance covering any of our employees. The loss of the services of any of our executive management members or other key personnel could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all.

 

Our facilities are located in areas that could be negatively impacted by natural disasters.

 

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel, which are primarily located in Addison, Texas. In addition, we manage our networks from our headquarters in Addison, and have significant operations in California. Addison is located in an area that experiences frequent severe weather, including tornadoes, and parts of California exist on or near known earthquake fault zones. Should a tornado, earthquake or other catastrophe, such as fires, floods, power loss, communication failure, terrorist acts or similar events, disable our facilities, our operations would be disrupted. While we have developed a backup and recovery plan, such plan may not ultimately prove effective.

 

 

Government regulation of the telecommunications and advertising industries could require us to change our business practices and expose us to legal action.

 

The Federal Communications Commission, or the FCC, has broad jurisdiction over the telecommunications industry. FCC licensing, program content and related regulations generally do not currently affect us. However, the FCC could promulgate new regulations that impact our business directly or indirectly or interpret existing laws in a manner that would cause us to incur significant compliance costs or force us to alter our business strategy.

 

FCC regulations also affect many of our content providers and, therefore, these regulations may indirectly affect our business. In addition, the advertising industry is subject to regulation by the Federal Trade Commission, the Food and Drug Administration and other federal and state agencies, and to review by various civic groups and trade organizations, including the National Advertising Division of the Council of Better Business Bureaus. New laws or regulations governing advertising could substantially harm our business.

 

We may also be required to obtain various regulatory approvals from local, state or federal governmental bodies. We may not be able to obtain any required approvals, and any approval may be granted on terms that are unacceptable to us or that adversely affect our business.

 

Changes in regulations relating to Wi-Fi networks or other areas of the Internet may require us to alter our business practices or incur greater operating expenses.

 

A number of regulations, including those referenced below, may impact our business as a result of our use of Wi-Fi networks. The Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, liability for distributing materials that infringe copyrights or other rights. Portions of the Communications Decency Act are intended to provide statutory protections to online service providers who distribute third-party content. The Child Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. The costs of compliance with these regulations, and other regulations relating to our Wi-Fi networks or other areas of our business, may be significant. The manner in which these and other regulations may be interpreted or enforced may subject us to potential liability, which in turn could have an adverse effect on our business, financial condition or results of operations. Changes to these and other regulations may impose additional burdens on us or otherwise adversely affect our business and financial results because of, for example, increased costs relating to legal compliance, defense against adverse claims or damages, or the reduction or elimination of features, functionality or content from our Wi-Fi networks. Likewise, any failure on our part to comply with these and other regulations may subject us to additional liabilities.

 

We may not be able to generate sufficient cash to service our debt obligations.

 

We have approximately $14.0 million in outstanding indebtedness under a senior credit facility that is secured by a first-priority security interest in substantially all of our assets. Our ability to make payments on and to refinance our outstanding indebtedness will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If we are unable to make payments or otherwise default on our debt obligations, the lenders could foreclose on our assets, which would have a material adverse effect on our business, financial condition and results of operations.

 

Our outstanding indebtedness requires us to comply with certain financial covenants, the default of which may result in the acceleration of our indebtedness.

 

Our senior credit facility contains financial and operational covenants, including covenants requiring us to achieve specified levels of consolidated EBITDA and to maintain a minimum fixed charge coverage ratio, which requirements are tested quarterly (beginning with the quarter ending December 31, 2014). The senior credit facility also prohibits us from making capital expenditures above certain thresholds in any fiscal year. Failure to comply with these or other covenants in our senior credit facility would result in an event of default. In the event of any default under our senior credit facility, the lenders could elect to declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be immediately due and payable and could foreclose on our assets.

 

  

We require a significant amount of liquidity to fund our operations, capital expenditures, acquisitions and other corporate expenditures.

 

Our ability to fund operations, capital expenditures, acquisitions and other corporate expenditures, including repayment of our indebtedness, depends on our ability to generate cash through future operating performance, which is subject to economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond our control. We cannot ensure that our businesses will generate sufficient cash flow from operations or that future borrowings or other financing will be available to us in an amount sufficient to pay our indebtedness or to fund our other needs.

 

If we are unable to generate sufficient cash flow to fund our needs, we may need to pursue one or more alternatives, such as to:

 

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reduce or delay planned capital expenditures or investments in our business;

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seek additional financing or restructure or refinance all or a portion of our indebtedness at or before maturity;

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sell assets or businesses;

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sell additional equity; or

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curtail our operations.

 

Any such actions may materially and adversely affect our future revenue prospects. In addition, we cannot ensure that we will be able to raise additional equity capital, restructure or refinance any of our indebtedness or obtain additional financing on commercially reasonable terms or at all.

 

Risks Related to Our Common Stock

 

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

 

As of December 31, 2013, our Sponsor and affiliated persons (including Gregory H. Sachs, our Executive Chairman) and entities together beneficially owned almost 40% of our outstanding common stock. As a result, these persons and entities have the ability to exercise control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change in control of our company that other stockholders may view as beneficial.

 

Compliance with the Sarbanes-Oxley Act of 2002 will require substantial financial and management resources and may increase the time and costs of completing an acquisition.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our system of internal controls and, if and when we are no longer a “smaller reporting company,” will require that we have such system of internal controls audited. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or Stockholder litigation. Any inability to provide reliable financial reports could harm our business. Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities.

 

RMG Networks Holding Corporation is a holding company and relies on distributions, loans and other payments, advances and transfers of funds from RMG and Symon to pay dividends, pay expenses and meet our other obligations.

 

We have no direct operations and no significant assets other than our ownership interests in RMG and Symon. Because we conduct our operations through our operating subsidiaries, we depend on RMG and Symon for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, and to pay any dividends with respect to our common stock. Legal and contractual restrictions in agreements governing future indebtedness of RMG and/or Symon, as well as the financial condition and operating requirements of RMG and/or Symon, may limit our ability to obtain cash from RMG and/or Symon. The earnings from, or other available assets of, RMG and/or Symon may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or satisfy our other financial obligations.

 

  

Our ability to request indemnification for damages arising out of claims pursuant to the RMG merger agreement is limited to 300,000 of the shares of our common stock issued in the transaction, which have already been returned to us to satisfy indemnification claims. Consequently, we have no additional remedies for indemnifiable damages that we may have sustained, or that we may sustain in the future.

 

The indemnification obligations of RMG’s prior shareholders against losses that we may sustain and that result from, arise out of or relate to any breach by RMG or the RMG shareholders of any of their representations, warranties, or the covenants or agreements contained in the RMG merger agreement was limited to 300,000 shares of our common stock held in escrow. We have already asserted claims against such shares, and all such shares have been returned to us to satisfy indemnification claims. Accordingly, we have no additional remedies for damages arising out of the RMG merger agreement.

 

Our ability to request indemnification for damages arising out of claims pursuant to the Symon merger agreement is limited. Consequently, we may not be able to be entirely compensated for indemnifiable damages that we may sustain.

 

The indemnification obligations of Symon against losses that we may sustain and that result from, arise out of or relate to any breach by Symon or its shareholders of for breaches of their representations and warranties contained in the Symon merger agreement is limited to certain specified fundamental representations. We are not entitled to indemnification for breaches of most representations and warranties regarding Symon’s business or operations. Accordingly, we may not be able to be compensated for indemnifiable damages that we may sustain.

 

If the benefits of the transactions with Symon and/or RMG do not meet the expectations of investors, the market price of our securities may decline.

 

The market price of our securities may decline as a result of the transactions with Symon and/or RMG if we do not achieve the perceived benefits of the transactions as rapidly, or to the extent anticipated by investors. Accordingly, investors may experience a loss as a result of a decline in the market price of our securities. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

 

We may issue additional shares of our common stock, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. This might have an adverse effect on the market price of our common stock.

 

Outstanding warrants to purchase an aggregate of 9,649,318 shares of common stock are currently exercisable. These warrants would only be exercised if the $11.50 per share exercise price is below the market price of our common stock. To the extent they are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market.

 

Provisions in our charter documents and Delaware law may discourage or delay an acquisition that stockholders may consider favorable, which could decrease the value of our common stock. 

 

Our certificate of incorporation, our bylaws, and Delaware corporate law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include those that: authorize the issuance of up to 1,000,000 shares of preferred stock in one or more series without a stockholder vote; limit stockholders’ ability to call special meetings; establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and provide for staggered terms for our directors. In addition, in certain circumstances, Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

 

We have not paid cash dividends to our shareholders and currently have no plans to pay future cash dividends.

 

We plan to retain earnings to finance future growth and have no current plans to pay cash dividends to shareholders. In addition, our credit facility restricts our ability to pay dividends. Because we have not paid cash dividends, holders of our securities will experience a gain on their investment in our securities only in the case of an appreciation of value of our securities. You should neither expect to receive dividend income from investing in our securities nor an appreciation in value.

 

 

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds 

 

Use of Proceeds

 

On April 18, 2011, we consummated our initial public offering of 8,000,000 units, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $11.50 per share. The units in the initial public offering were sold at an offering price of $10.00 per unit, generating total gross proceeds of $80,000,000. Lazard Capital Markets LLC acted as the representative of the several underwriters (the “Underwriters”).  The securities sold in the Offering were registered under the Securities Act on a registration statement on Form S-1 (No. 333-172085). The SEC declared the registration statement effective on April 8, 2011.

 

The Company paid a total of $2 million in underwriting discounts and commissions and approximately $415,000 for other costs and expenses related to the initial public offering. In addition, the Underwriters agreed to defer $2 million in underwriting discounts and commissions, which amount was reduced to $500,000 by agreement of the Company and the representative of the Underwriters and was paid upon our consummation of the acquisition of RMG in April 2013. The Company also repaid notes outstanding to its sponsor from the proceeds of the initial public offering.

 

On April 12, 2011, we consummated a private sale of an aggregate of 4,000,000 warrants to our sponsor, generating gross proceeds of $3,000,000.

 

After deducting the underwriting discounts and commissions (excluding the deferred portion of underwriting discounts and commissions) and the offering expenses, the total net proceeds from the initial public offering and the private placement of warrants was approximately $80,585,000, of which $80,000,000 (or approximately $10.00 per unit sold in the initial public offering) was placed in a trust account.  Pending the consummation of our initial business combination with RMG on April 9, 2013, the proceeds held in the trust account were invested by the trustee in U.S. government treasury bills with a maturity of 180 days or less or in money market funds investing solely in U.S. Treasuries and meeting certain conditions under Rule 2a-7 under the Investment Company Act.

 

We used approximately $45.5 million of the proceeds from our initial public offering was used to repurchase 4,551,228 shares of our common stock validly tendered and not withdrawn pursuant to the tender offer we conducted in connection with our initial business combination with RMG (the “Tender Offer”). Additionally, at the closing of the acquisition of RMG, we used approximately $21.0 million of the proceeds from our initial public offering in connection with that acquisition, including $21.0 million in partial repayment of the outstanding indebtedness of a subsidiary of RMG. We used the remaining proceeds from our initial public offering to pay the deferred underwriting discount of $500,000, costs and expenses associated with our acquisitions of RMG and Symon; and a portion of the purchase price for the Symon acquisition.

 

Item 5. Other Information

 

On November 13, 2014, RMG Networks Holding Corporation (the “Company”) entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement, dated April 19, 2013 (as subsequently amended, the “Senior Credit Agreement”), by and among it and certain of its direct and indirect domestic subsidiaries party thereto from time to time as borrowers, certain of its direct and indirect domestic subsidiaries party thereto from time to time as guarantors, the lenders party thereto (the “Lenders”) and DOOH Media Management LLC, as administrative agent for the Lenders. The Fourth Amendment increases the principal amount of the term loan thereunder (the “Term Loan”) from $12 million to $14 million. Other than such increase in the principal amount of the Term Loan, the Fourth Amendment does not modify the terms of the Senior Credit Agreement.

 

A copy of the Fourth Amendment is filed herewith as Exhibit 10.4 and is incorporated herein by reference. The foregoing description of the Fourth Amendment does not purport to be complete and is qualified in its entirety by reference to such Exhibit.

 

Item 6.      Exhibits 

 

Exhibit Number	Exhibit
3.1	Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 12, 2013 (1)
3.2	Amended and Restated Bylaws (2)
10.1	Employment Agreement, dated as of July 22, 2014, by and between SCG Financial Merger I Corp. and Robert Michelson (2)
10.2	Confidential Separation Agreement and General Release, dated as of July 23, 2014, by and between the Company and Garry K. McGuire, Jr. (2)
10.3	Amendment 1 to Employment Agreement, effective as of August 1, 2014, by and between the Company and William Cole (2)
10.4	Fourth Amendment to Credit Agreement, dated November 13, 2014.
31.1*	Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1*	Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

  

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith
(1)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on July 18, 2013.
(2)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on July 24, 2014.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	RMG NETWORKS HOLDING CORPORATION
	By:	/s/ Robert Michelson
		Robert Michelson
		President and Chief Executive Officer (principal executive officer)

 

	By:	/s/ William G. Cole
		William G. Cole
		Chief Financial Officer (principal financial and accounting officer)

 

Date: November 14, 2014

 

 

 

EXHIBIT INDEX

 

Exhibit Number	Exhibit
3.1	Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 12, 2013 (1)
3.2	Amended and Restated Bylaws (2)
10.1	Employment Agreement, dated as of July 22, 2014, by and between SCG Financial Merger I Corp. and Robert Michelson (2)
10.2	Confidential Separation Agreement and General Release, dated as of July 23, 2014, by and between the Company and Garry K. McGuire, Jr. (2)
10.3	Amendment 1 to Employment Agreement, effective as of August 1, 2014, by and between the Company and William Cole (2)
10.4	Fourth Amendment to Credit Agreement, dated November 13, 2014.
31.1*	Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1*	Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith
(1)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on July 18, 2013.
(2)	Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on July 24, 2014.

 

 

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