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EX-31.1 - EXHIBIT 31.1 - RMG Networks Holding Corpexh31_1.htm



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, 2016

 

 

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 3, 2016, 36,882,041 shares of common stock, par value $0.0001 per share, of the registrant were outstanding.







TABLE OF CONTENTS

 

  

  

Page

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Consolidated Financial Statements

3

  

Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015

3

  

Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months ended September 30, 2016 and 2015

4

  

Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015

5

  

Unaudited Notes to Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

18

Item 4.

Controls and Procedures

18

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

19

Item 1A.

Risk Factors

19

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 6.

Exhibits

29

 

 

SIGNATURES 

31


Unless the context otherwise requires, when we use the words the “Company,” “RMG Networks,” “we,” “us,” or “our Company” in this Form 10-Q, we are referring to RMG Networks Holding Corporation, a Delaware corporation, and its subsidiaries, unless it is clear from the context or expressly stated that these references are only to RMG Holding Corporation.





PART I


Item 1.      Consolidated Financial Statements

 

RMG Networks Holding Corporation

Consolidated Balance Sheets

September 30, 2016 and December 31, 2015

(In thousands, except share and per share information)

 

 

 

September 30,

2016

 

December 31,

2015

 

 

(Unaudited)

 

 

Assets

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

1,487

$

3,206

Accounts receivable, net of allowance for doubtful accounts of $570 and $676, respectively

 

9,171

 

10,626

Inventory, net

 

602

 

1,055

Prepaid assets

 

772

 

1,154

Total current assets

 

12,032

 

16,041

Property and equipment, net

 

3,849

 

4,340

Intangible assets, net

 

7,332

 

8,988

Loan origination fees

 

72

 

123

Other assets

 

218

 

226

Total assets

$

23,503

$

29,718

Liabilities and Stockholders’ equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

2,080

$

3,080

Accrued liabilities

 

3,497

 

4,236

Secured line of credit

 

1,100

 

400

Loss on long-term contract

 

92

 

616

Deferred revenue

 

7,457

 

7,507

Total current liabilities

 

14,226

 

15,839

Warrant liability

 

48

 

96

Deferred revenue – non-current

 

765

 

1,519

Deferred tax liabilities

 

17

 

18

Deferred rent and other

 

1,696

 

1,917

Total liabilities

 

16,752

 

19,389

Stockholders’ equity:

 

 

 

 

Common stock, $.0001 par value, (250,000,000 shares authorized; 37,182,041 shares issued; 36,882,041 shares outstanding, at September 30, 2016 and December 31, 2015)

 

4

 

4

Additional paid-in capital

 

108,994

 

108,237

Accumulated comprehensive income (loss)

 

(727)

 

(196)

Retained earnings (accumulated deficit)

 

(101,040)

 

(97,236)

Treasury stock, at cost (300,000 shares)

 

(480)

 

(480)

Total stockholders’ equity

 

6,751

 

10,329

Total liabilities and stockholders’ equity

$

23,503

$

29,718



See accompanying notes to consolidated financial statements.



3



RMG Networks Holding Corporation

Consolidated Statements of Comprehensive Loss

For the Three and Nine Months Ended September 30, 2016 and 2015

(In thousands, except share and per share information)

(Unaudited)


 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2015

 

2016

 

2015

Revenue:

 

 

 

 

 

 

 

 

Products

$

4,174

$

4,442

$

11,080

$

11,578

Maintenance and content services

 

3,534

 

3,375

 

10,475

 

10,242

Professional services

 

1,820

 

2,377

 

5,351

 

7,023

Total Revenue

 

9,528

 

10,194

 

26,906

 

28,843

Cost of Revenue:

 

 

 

 

 

 

 

 

Products

 

2,169

 

2,798

 

6,049

 

6,853

Maintenance and content services

 

161

 

367

 

887

 

1,069

Professional services

 

1,139

 

1,599

 

3,806

 

4,913

Loss (Gain) on long-term contract

 

-

 

-

 

-

 

(444)

Total Cost of Revenue

 

3,469

 

4,764

 

10,742

 

12,391

Gross Profit

 

6,059

 

5,430

 

16,164

 

16,452

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

2,239

 

2,191

 

6,135

 

6,896

General and administrative

 

3,287

 

3,876

 

9,576

 

12,994

Research and development

 

595

 

1,118

 

1,993

 

2,668

Depreciation and amortization

 

801

 

863

 

2,410

 

2,881

Total operating expenses

 

6,922

 

8,048

 

20,114

 

25,439

Operating loss

 

(863)

 

(2,618)

 

(3,950)

 

(8,987)

Other Income (Expense):

 

 

 

 

 

 

 

 

Gain on change in warrant liability

 

-

 

246

 

48

 

1,303

Interest (expense) and other income – net

 

3

 

(121)

 

386

 

(1,457)

Loss before income taxes and discontinued operations

 

(860)

 

(2,493)

 

(3,516)

 

(9,141)

Income tax expense

 

27

 

29

 

27

 

29

Loss from continuing operations

 

(887)

 

(2,522)

 

(3,543)

 

(9,170)

Loss from discontinued operations, net of taxes

 

-

 

(1,019)

 

(260)

 

(3,994)

Gain on sale of discontinued operations, net of taxes

 

-

 

2,340

 

-

 

2,340

Net loss

 

(887)

 

(1,201)

 

(3,803)

 

(10,824)

Other comprehensive income -

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(128)

 

(140)

 

(532)

 

(65)

Total comprehensive loss

$

(1,015)

$

(1,341)

$

(4,335)

$

(10,889)

Net loss per share of Common Stock (basic and diluted):

 

 

 

 

 

 

 

 

Continuing operations

$

(0.02)

$

(0.07)

$

(0.10)

$

(0.37)

Discontinued operations

 

-

 

0.04

 

(0.01)

 

(0.07)

Net loss per share of Common Stock (basic and diluted):

$

(0.02)

$

(0.03)

$

(0.10)

$

(0.43)

Weighted average shares used in computing basic and diluted net loss per share of Common Stock

 

36,882,041

 

36,882,041

 

36,882,041

 

24,932,277



See accompanying notes to consolidated financial statements.



4



RMG Networks Holding Corporation

Consolidated Statements of Cash Flows (Inclusive of Discontinued Operations)

For the Nine Months Ended September 30, 2016 and 2015

(In thousands)

(Unaudited)


 

 

Nine Months Ended September 30,

 

 

2016

 

2015

Cash flows from operating activities

 

 

 

 

Net loss

$

(3,803)

$

(10,824)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

Depreciation and amortization

 

2,410

 

3,024

Gain on sale of discontinued operations

 

-

 

(2,340)

Gain on change in warrant liability

 

(48)

 

(1,303)

Impairment of fixed assets

 

-

 

160

Stock-based compensation

 

757

 

1,197

Non-cash loan origination fees

 

52

 

742

Non-cash consulting expense

 

-

 

320

Non-cash directors’ fees

 

31

 

31

Bad debt expense

 

-

 

460

Deferred tax expense

 

-

 

7

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

955

 

4,745

Inventory

 

416

 

249

Other current assets

 

330

 

88

Non-current deferred tax liabilities

 

-

 

(32)

Other assets

 

8

 

(293)

Accounts payable

 

(913)

 

(2,405)

Accrued liabilities

 

(706)

 

329

Deferred revenue

 

(521)

 

(579)

Loss on long-term contract

 

(524)

 

(1,840)

Deferred rent and other liabilities

 

(222)

 

(522)

Net cash used in operating activities

 

(1,778)

 

(8,786)

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Proceeds from sale of discontinued operations

 

-

 

1,190

Purchases of property and equipment

 

(288)

 

(356)

Net cash provided by (used in) investing activities

 

(288)

 

834

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Net borrowings on line of credit

 

700

 

-

Proceeds from long-term debt

 

-

 

1,000

Conversion of preferred to common stock

 

-

 

(41)

Issuance of preferred shares, net of issuance costs

 

-

 

9,627

Net cash provided by financing activities

 

700

 

10,586

 

 

 

 

 

Effect of exchange rate changes on cash

 

(353)

 

3

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(1,719)

 

2,637

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

3,206

 

3,077

 

 

 

 

 

Cash and cash equivalents, end of period

$

1,487

$

5,714



See accompanying notes to consolidated financial statements.



5



RMG Networks Holding Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Organization and Summary of Significant Accounting Policies

 

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 as of December 31, 2015 has been derived from the Company’s audited financial statements, but does 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 thereto. The interim results of operations are not necessarily indicative of the results to be expected for the full year.

 

Inventory


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


The composition of inventory at September 30, 2016 and December 31, 2015 was as follows:


(in thousands)

 

September 30, 2016

 

December 31, 2015

Finished Goods

$

384

$

586

Raw Materials

 

218

 

469

Total

$

602

$

1,055


Revenue Recognition


The Company recognizes revenue primarily from these sources:


·

Products

·

Maintenance and content services

·

Professional services


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 software support and updates as well as hardware maintenance and repair. 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 subscription 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.




6



Professional services revenue


Professional services consist primarily of project management, installation, training and custom creative services. Installation fees are contracted either on a fixed-fee basis or on a time-and-materials basis. For both fixed-fee and time-and materials contracts, the Company recognizes revenue using the percentage-of-completion method as services are performed. 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 using the percentage-of-completion method as the Company performs the services.


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.


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’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 $0.7 million held in foreign countries as of September 30, 2016 were not insured.


Net Income (Loss) per Common Share


Basic net income (loss) per share of common stock, excluding any dilutive effects of stock options and warrants, 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. Due to the reported net loss for all periods presented, all stock options, warrants, or other equity instruments outstanding at September 30, 2016 and 2015 were anti-dilutive.


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 quarter-end 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 loss. Currency gains and losses are included in interest and other expenses in the consolidated statements of comprehensive loss.


Business Segments


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. Since July 1, 2015, the Company’s business operates as one business segment, Enterprise Solutions. Prior to July 1, 2015, the Company was comprised of two operating segments, Enterprise and Media. The CEO reviewed financial data that encompassed the Company’s Enterprise and Media revenues, cost of revenues, and gross profit. Since the Company operates as a single entity globally, it did not allocate operating expenses to each segment for purposes of calculating operating income, earnings before interest, income taxes, depreciation and amortization (“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. See Footnote 4, Discontinued Operations regarding the Company’s decision to exit the Media segment.




7



Recent Issued Accounting Pronouncements


In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, providing 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 Standard, and to eliminate the 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. To allow entities additional time to implement systems, gather data and resolve implementation questions, the FASB issued ASU No. 2015-14, Revenue From Contracts with Customers – Deferral of the Effective Date, in August 2015, to defer the effective date of ASU No. 2014-09 for one year.  The Company will be required to apply the guidance in FASB ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company will further study the implications of this statement in order to evaluate the expected impact on its consolidated financial statements.


In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”, which requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company will further study the implications of this statement in order to evaluate the expected impact on its consolidated financial statements.


In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 781), Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which amends and simplifies the accounting for share-based payment awards in three areas: (1) income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. For public companies, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company will further study the implications of this statement in order to evaluate the expected impact on its consolidated financial statements.


Reclassifications


Certain prior year amounts have been reclassified for consistency with the current period presentation.  These reclassifications had no effect on the reported results of operations.


2. Revolving Facility


Effective November 2, 2015, the Company and certain of its subsidiaries (collectively, the “Borrowers”) entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”), pursuant to which the Bank agreed to make a revolving credit facility available to the Borrowers in the principal amount of up to $7.5 million (the “Revolving Facility”).  The Revolving Facility has an effective date (the “Effective Date”) of October 13, 2015, and matures on October 13, 2017.  Availability under the Revolving Facility is tied to a borrowing base formula.  Interest on advances under the Revolving Facility (the “Advances”) originally accrued on the unpaid principal balance of such Advances at a floating per annum rate equal to either 1.25% above the prime rate or 2.25% above the prime rate, depending on whether certain conditions are satisfied.  During an event of default, the rate of interest would increase to 5% above the otherwise applicable rate, until such event of default is cured or waived. All accrued and unpaid interest is payable monthly on the last calendar day of each month.


In connection with the closing of the Revolving Facility, the Borrowers paid the Bank a commitment fee of $38 thousand, and the Borrowers will be required to pay the Bank an additional commitment fee of $38 thousand on the first anniversary of the Effective Date. If the Borrowers terminate the Loan Agreement prior to the first anniversary of the Effective Date, the Borrowers will be required to pay the Bank a termination fee equal to 1% of the Revolving Facility, unless the Revolving Facility is replaced with a new facility from the Bank.


The Loan Agreement contains customary affirmative covenants regarding the operations of Borrowers’ business and customary negative covenants that, among other things, limit the ability of the Borrowers to incur additional indebtedness, grant certain liens, make certain investments, merge or consolidate, make certain restricted payments, including dividends, and engage in certain asset dispositions, including a sale of all or substantially all of their property.  In addition, the Borrowers must maintain, on a consolidated basis, certain minimum amounts of adjusted EBITDA, as measured at the end of each month. On March 9, 2016, a Second Amendment to the Loan Agreement was executed which modified, effective February 2016, the minimum amounts of adjusted EBITDA that the Borrowers are required to maintain pursuant to a covenant contained in the Loan Agreement. On September 30, 2016, a Third Amendment to the Loan Agreement was executed which modified, effective September 2016, the minimum amounts of adjusted EBITDA that the Borrowers are required to maintain pursuant to a covenant contained in the Loan Agreement, increased the floating per annum rate equal to either 1.75% above the prime rate or 2.75% above the prime rate, depending on whether certain conditions are satisfied, and provides that the minimum EBITDA covenant levels for January 2017 and thereafter are to be determined in the future.



8



The Loan Agreement contains customary events of default including, among others, Borrowers’ breach of payment obligations or covenants, defaults in payment of other outstanding debt, material misrepresentations, a material adverse change and bankruptcy and insolvency.  The Bank’s remedies upon the occurrence of an event of default include, among others, the right to accelerate the debt and the right to foreclose on the collateral securing the Revolving Facility. The Revolving Facility is secured by a first priority perfected security interest in substantially all of the assets of the Borrowers.


The Company had no incremental borrowings against the Revolving Facility during the three months ended September 30, 2016. At September 30, 2016, the Company had $1.1 million in borrowings and $2.4 million in unused availability under the Revolving Facility. At December 31, 2015, the Company had $0.4 million in borrowings and $3.0 million in unused availability under the Revolving Facility. Borrowings under the Revolving Facility are available for the Company’s working capital and general business requirements, as may be needed from time to time.


3. Income Taxes


The Company is reporting a book loss for the three and nine months ended September 30, 2016.  The Company reported a full valuation allowance against its net deferred U.S. income tax assets at September 30, 2016 and December 31, 2015.  All evidence and information available suggests that the Company will maintain the full valuation allowance in 2016.  Therefore, no income tax benefit was recorded for the three and nine months ended September 30, 2016 U.S. pre-tax book loss. The $27 thousand tax expense relates to foreign taxes for the three and nine months ended September 30, 2016. The $29 thousand tax expense relates to foreign taxes for the three and nine months ended September 30, 2015.


4. Discontinued Operations   


Due to ongoing losses, in 2015 the Company decided to exit its Media business.  This strategic shift was intended to allow the Company to focus on its core Enterprise digital signage business and to improve the Company’s overall margins and profitability. The Company exited these operations on July 1, 2015 and has not had any involvement with the operations post disposal. Therefore, under applicable accounting standards, the Company has classified its Media operations as discontinued operations for financial reporting purposes in all periods presented except where specifically identified otherwise.  


On March 19, 2015, the Company announced that it had entered into a non-binding letter of intent to sell the Media business to an unaffiliated third party. On July 1, 2015, the Company completed the sale of its Media business to Global Eagle Entertainment (“GEE”). Under the terms of the agreement, the Company sold $2.3 million of customer receivables, fixed assets, and prepaid assets offset by $3.5 million of assumed and transferred liabilities such as accounts payable, accrued revenue share and agency fees, and accrued liabilities of Media in exchange for cash.  In addition, the transaction included certain amounts paid into escrow in full support of future potential obligations and an earn-out.  The transaction resulted in an initial pre-tax gain of $2.3 million. As part of the transaction agreement, GEE assumed all existing partner revenue sharing agreements and their related minimum revenue sharing requirements and certain vendor contracts held by Media. In addition, $0.9 million of certain asset and lease impairment charges, severance expenses, and transaction costs were incurred as part of the transaction and are reflected in the net loss from discontinued operations. Also, some employees of Media were transferred to GEE as part of the transaction agreement. The terms of the escrow required certain levels of performance related to a revenue sharing agreement and its related minimum revenue share requirements.  The Company did not meet the terms of the escrow and will not receive any additional funds.

 

The following table shows the results of operations of the Company’s discontinued operations for the three and nine months ended September 30, 2016 and 2015:  


(in thousands)

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

2016

 

2015

 

2016

 

2015

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

Revenue

$

-

$

5

$

-

$

3,960

Cost of Revenue

 

-

 

46

 

-

 

4,107

Operating Expenses

 

-

 

818

 

260

 

3,550

Operating Loss

 

-

 

(859)

 

(260)

 

(3,697)

Other expenses (income), net

 

-

 

160

 

-

 

297

Net loss from discontinued operations

$

-

$

(1,019)

$

(260)

$

(3,994)


The $0.3 million operating expenses incurred during the nine months ended September 30, 2016 were related to a lease impairment adjustment and final additional expenses for the discontinued operations of its Media business.  There are no assets nor liabilities of the Company’s discontinued operations at September 30, 2016 and December 31, 2015.




9



5. Equity Incentive Plan


On April 11, 2016, the Company cancelled the 850,000 vested options which were granted on August 13, 2013 and held by the Company’s chairman of the board. In addition, on April 11, 2016, the Company granted new equity awards under the Company’s 2013 Equity Incentive Plan to senior executives in two tranches, tranche A and tranche B.  The 960,000 tranche A stock options have a vesting base date of the employee’s start date, while the 740,000 tranche B stock options have a vesting base date of April 11, 2016. All the new options have an exercise price of $1.00 and a three year service requirement with 1/3 of the options vesting on the anniversary of the vesting base date, except in the case of the tranche A options granted to the Company’s chief executive officer, which vest monthly over a 36-month period beginning on July 22, 2014. In addition, all the new stock options have a 10-year term and the Black Scholes model was used to measure the fair value of the stock-based compensation awards. Also on April 11, 2016, the Company cancelled the 500,000 vested and unvested options that were granted on July 22, 2014 to the Company’s chief executive officer in connection with the issuance of the chief executive officer’s new tranche A and tranche B options. For accounting purposes, the transaction was treated as a modification of the original options resulting in $23 thousand of amortization expense for the catch-up adjustment on the modification date.


The amortization expense associated with stock options during the three months ended September 30, 2016 and 2015 were $0.1 million and $0.4 million, respectively. The amortization expense associated with stock options during the nine months ended September 30, 2016 and 2015 were $0.8 million and $1.2 million, respectively. The unamortized cost of the options at September 30, 2016 was $1.1 million, to be recognized over a weighted-average remaining life of 1.8 years.  At September 30, 2016 and December 31, 2015, 929,166 and 916,667 shares of options were exercisable, respectively. In addition, there was no intrinsic value associated with the options as of September 30, 2016. The weighted-average remaining contractual life of the options outstanding is 8.3 years.


6. Geographic Information


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


(in thousands)

 

Nine Months Ended

September 30,

Region

 

2016

 

2015

North America

$

17,942

$

18,826

International:

 

 

 

 

United Kingdom

 

4,272

 

5,682

Europe

 

1,246

 

1,286

Middle East

 

2,753

 

2,704

Other

 

693

 

345

International

 

8,964

 

10,017

Total

$

26,906

$

28,843


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


7. Loss on Long-Term Contract


During the second quarter of 2014, the Company updated its analysis of a long-term partner related contract. Based on the results of that analysis 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 $6.2 million loss on the long-term contract at September 30, 2014, which represented the amount it expected that the total minimum annual guarantees payable to the partner would exceed the revenue generated under the contract at that time. The loss on the long-term contract was recorded as follows:


Loss on Long-Term Contract

$

4,130

Revenue reduction

 

2,070

Total

$

6,200


The Company continues to re-evaluate this loss contract status. During the first half of 2015, the Company reassessed its future revenue projections and operating costs for the remainder of the contract until it terminates on December 31, 2016.  Based on lower revenue and operating expense projections, the Company revised its loss contract estimates during the nine months ended September 30, 2015, which resulted in a net gain of $0.4 million. The Company evaluated its loss contract estimates during the three and nine months ended September 30, 2016, which resulted in no net change on the long-term contract.  At September 30, 2016, the remaining balance on the loss on long-term contract was $92 thousand.




10



8. 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 provided 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 $1.0 million when issued in August 2013. The value of the common stock is amortized over the term of the agreement. The amortized expense charged to operations for the three and nine months ended September 30, 2016 were $0.  The amortized expense charged to operations for the three and nine months ended September 30, 2015 was $0.1 million and $0.3 million, respectively.  There was no unamortized value of the common stock at September 30, 2016 and at December 31, 2015.  Under the Agreement, which terminated in July 2015, the Consultant also received an annual services fee of $50 thousand. 


The Company also has an agreement with a company owned by a board member under which it pays $10 thousand a month for public relations services which was renegotiated to $5 thousand a month starting August 2016. Under this agreement the Company has incurred charges of $21 thousand and $83 thousand for the three and nine months ended September 30, 2016, respectively, and charges of $32 thousand and $94 thousand for the three and nine months ended September 30, 2015, respectively.


The Company entered into a one year auto-renewing agreement with a company owned by an employee under which it receives flat fee of $5 thousand a month for content and marketing services. Under this agreement the Company has earned $15 thousand in revenue for the three and nine months ended September 30, 2016.




11



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, 2015 (the “2015 Form 10-K”). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. 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. On July 1, 2015, the Company divested its Media business. Therefore, the financial information discussed below and in the consolidated financial statements and accompanying footnotes are exclusive of our Media business, classified as discontinued operations, unless specifically identified otherwise. In addition, all amounts presented and discussed are in thousands, except share and per share data.


The Company is a global provider of enterprise-class digital signage solutions. Through an extensive suite of products, 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, conducting operations through its RMG Enterprise Solutions business unit.


The Company provides end-to-end digital signage solutions 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 more than 50 of the North American Fortune 100 companies and thousands of overall customers in locations worldwide. Our installations deliver real-time intelligent visual content that enhance the ways in which organizations communicate with employees and customers to drive productivity and engagement. The solutions are designed to integrate seamlessly with a customer’s IT infrastructure, data and security environments.


The RMG Media Networks business unit engaged elusive audience segments with relevant content and advertising delivered through digital place-based networks. These networks included the Media business. The Media business was a U.S.-based network focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment systems, on in-flight Wi-Fi portals and in private airport terminals. On March 19, 2015, the Company announced that it had entered into a non-binding letter of intent to sell the Media business to an unaffiliated third party, and on July 1, 2015, the sale of the Media business was completed.


Revenue


The Company derives its revenue as follows from three primary sources:


1.

Product sales:


·

Licenses to use its proprietary software products;

·

Proprietary software-embedded media players; and

·

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


2.

Maintenance and content services:


·

Product maintenance services; and

·

Subscription-based content services.


3.

Professional services:


·

Professional installation services;

·

Training services; and

·

Custom creative services.


Revenue is recognized as outlined in “Critical Accounting Policies - Revenue Recognition” in the 2015 Form 10-K.



12



The Company sells its solutions through its global sales force and through a select group of resellers and business partners. In North America, the Company’s sales team generated approximately 89% and 90% of its sales in the first nine months of 2016 and 2015, respectively, while 11% and 10% of its sales were generated through resellers in the first nine months of 2016 and 2015, respectively. Outside North America, approximately 69% and 68% of sales were generated from the reseller channel in the first nine months of 2016 and 2015, respectively. Overall, approximately 73% and 69% of the Company’s global enterprise sales were derived from direct sales in the first nine months of 2016 and 2015, respectively, with the remaining 27% and 31% generated through indirect partner channels in the first nine months of 2016 and 2015, respectively.


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


The cost of revenue associated with product sales consists 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 operations. The cost of revenue associated with professional services consists of the salary and related benefit costs of the Company’s employees, the travel costs of personnel providing installation, training, and custom content services, and costs associated with third-party installation services providers.  The cost of revenue of maintenance and subscription content services consists of the salary and related benefit costs of personnel engaged in providing maintenance and subscription 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 costs of 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 have been 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 costs of general and administrative personnel and meeting expenses.

·

Depreciation and amortization expenses include depreciation of the Company’s office furniture, fixtures and equipment and amortization of intangible assets.


Trends in Operating Results


The Company is a leading global provider of enterprise-class digital signage solutions and as such, its operations are subject to factors that generally affect corporate budgets, including but not limited to general economic conditions, employment levels, business conditions, and global uncertainty.


Since the arrival of a new chief executive officer in July 2014, the Company has been executing a multi-year strategic turnaround plan that emphasized delivering new, innovative products and solutions, diversifying into select industry verticals, improving the effectiveness and productivity of its sales and marketing efforts, and implementing a cost rationalization effort. During late 2014, the Company introduced a number of new products and enhancements, increased its focus on solution areas that aligned with its data-intensive core competencies, and lowered operating costs by reducing headcount, closing underperforming geographies, and refocusing its marketing initiatives.


During 2015, the Company continued to make progress on its multi-year strategic turnaround plan by strengthening the executive leadership team, including hiring a new chief financial officer and North American sales leader, enhancing the breadth and depth of its suite of product offerings, continuing its targeted solution area focus such as supply chain and internal communications, improving the effectiveness and productivity of its sales organization, significantly reducing its cost structure, and divesting its non-core Media business. The Company continued executing its strategic plan in 2016, as it further enhanced its product offerings and solution portfolio with a product development roadmap that worked toward addressing growing mobile demand and important data and analytics capabilities. The Company also further strengthened its management team with the addition of a new chief technical officer and global chief marketing and creative officer. In addition, the Company continued its solution area strategy to seek to further



13



penetrate the contact center space, as well as expand into the supply chain and internal communications spaces. The Company also continued its sales efficiency initiative by focusing on selling larger deals and expanding its third-party sales channels in North America to create incremental revenues opportunities without commensurate selling cost increases. Finally, the Company maintained a reduced level of operating costs to support its effort to achieve long-term sustainable profitability.


Revenues


Starting in 2015, the Company has seen a decrease in maintenance revenues primarily from the decision in 2014 to proactively “end-of-life” maintenance services on certain products; however, maintenance revenues have begun to stabilize, increasing on a year-over-year basis in the second and third quarters of 2016 as a result of various renewal initiatives. Since the first quarter of 2015, professional services revenue has varied greatly based on the open project backlog at designated points in time. Going forward, we expect that professional services revenues will be largely dependent on the Company’s success in signing larger deals with significant professional services components. Also in 2016, the Company replaced the managing director leading its Europe and South East Asia markets and added new sales headcount to seek to improve sales in those regions. Given the uncertainty in the United Kingdom and Europe as a result of Brexit, revenue trends in that region remain uncertain. And finally, the macro-economic impact of continuing low oil prices in the Middle East, will likely have an impact on some customers electing to delay committed projects until oil prices begin to rise again.


Expenses


Since 2014, the Company has significantly reduced its overall cost structure as a result of headcount reductions across the organization, closing underperforming geographies, divesting its non-core Media business, and reducing ineffective marketing initiatives. In 2016, the Company continues to maintain a strict focus on its operating expenses, while investing in areas that the Company believes have a strong return potential such as research and development and its sales and marketing teams.


Results of Operations


Comparison of the three and nine months ended September 30, 2016 and 2015


The following table summarizes the results of operations of the Company for the three and nine months ended September 30, 2016 and 2015.


(in thousands)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2015

 

% Chg

 

2016

 

2015

 

% Chg

Revenue

$

9,528

$

10,194

 

(6.5%)

$

26,906

$

28,843

 

(6.7%)

Cost of Revenue

 

3,469

 

4,764

 

(27.2%)

 

10,742

 

12,391

 

(13.3%)

Gross Profit

 

6,059

 

5,430

 

11.6%

 

16,164

 

16,452

 

(1.8%)

Operating Expenses -

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

2,239

 

2,191

 

2.2%

 

6,135

 

6,896

 

(11.0%)

General and administrative

 

3,287

 

3,876

 

(15.2%)

 

9,576

 

12,994

 

(26.3%)

Research and development

 

595

 

1,118

 

(46.8%)

 

1,993

 

2,668

 

(25.3%)

Depreciation and amortization

 

801

 

863

 

(7.2%)

 

2,410

 

2,881

 

(16.3%)

Total Operating Expenses

 

6,922

 

8,048

 

(14.0%)

 

20,114

 

25,439

 

(20.9%)

Operating Loss

 

(863)

 

(2,618)

 

67.0%

 

(3,950)

 

(8,987)

 

56.0%

Expense (gain) on change in warrant liability

 

-

 

246

 

(100.0%)

 

48

 

1,303

 

(96.3%)

Interest (expense) and other income - net

 

3

 

(121)

 

102.5%

 

386

 

(1,457)

 

126.5%

Loss before income taxes and discontinued operations

 

(860)

 

(2,493)

 

65.5%

 

(3,516)

 

(9,141)

 

61.5%

Income tax expense

 

27

 

29

 

(6.9%)

 

27

 

29

 

(6.9%)

Net loss before discontinued operations

 

(887)

 

(2,522)

 

64.8%

 

(3,543)

 

(9,170)

 

61.4%

Loss from discontinued operations, net of taxes

 

-

 

(1,019)

 

100.0%

 

(260)

 

(3,994)

 

93.5%

Gain from sale of discontinued operations, net of taxes

 

-

 

2,340

 

0.0%

 

-

 

2,340

 

0.0%

Net Loss

$

(887)

$

(1,201)

 

26.1%

$

(3,803)

$

(10,824)

 

64.9%




14



Revenue


Revenue was $9.5 million and $10.2 million for the three months ended September 30, 2016 and 2015, respectively, a $0.7 million, or 6.5%, decrease. Revenue was $26.9 million and $28.8 million for the nine months ended September 30, 2016 and 2015, respectively, representing a $1.9 million, or 6.7%, decrease.  The following table summarizes the composition of the Company’s revenue for the three and nine months ended September 30, 2016 and 2015.


(in thousands)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

%

 

2015

 

%

 

2016

 

%

 

2015

 

%

Revenue -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

$

4,174

 

43.8%

$

4,442

 

43.6%

$

11,080

 

41.2%

$

11,578

 

40.1%

Maintenance and content services

 

3,534

 

37.1%

 

3,375

 

33.1%

 

10,475

 

38.9%

 

10,242

 

35.5%

Professional services

 

1,820

 

19.1%

 

2,377

 

23.3%

 

5,351

 

19.9%

 

7,023

 

24.3%

Total

$

9,528

$

100.0%

 

10,194

$

100.0%

$

26,906

 

100.0%

$

28,843

 

100.0%


Overall, total revenue for the three and nine months ended September 30, 2016 were down as compared to the same periods in 2015. Revenues derived from product sales for the three months ended September 30, 2016 decreased by $0.3 million, or 6.0%, as compared to the same period in 2015, primarily driven by decreased sales of proprietary and third party hardware in the Middle East market, slightly offset by increased software sales. Revenues derived from product sales for the nine months ended September 30, 2016 decreased by $0.5 million, or 4.3%, as compared to the same period in 2015, driven primarily by lower sales of proprietary and third party hardware in the United Kingdom market. The Company has taken steps to seek to improve product sales by hiring new sales leadership and driving to improve sales productivity, pursue larger sales opportunities, and offer new solutions in supply chain and employee communications.


Revenues derived from maintenance and content service contracts for the three months ended September 30, 2016 increased by $0.2 million, or 4.7%, as compared to the same period in 2015, primarily due to improved renewal billings.  Revenues derived from maintenance and content service contracts for the nine months ended September 30, 2016 increased by $0.2 million, or 2.3%, as compared to the same period in 2015, primarily due to improved renewal billings in the second and third quarters of 2016.


Professional service revenue is impacted by the sales mix and professional services employee utilization in any given quarter. In the three months ended September 30, 2016, professional services revenues decreased by $0.6 million, or 23.4%, as compared to the same period in 2015, primarily driven by fewer large projects in 2016. Professional services revenues for the nine months ended September 30, 2016 decreased by $1.7 million, or 23.8%, primarily driven by installation services performed during the first quarter of 2015 that were associated with the sale of a large customer solution made during the fourth quarter of 2014. These installation services remained in the backlog at December 31, 2014, until they were completed in the first quarter of 2015.


The following table sets forth the Company’s revenue on a geographic basis for the nine months ended September 30, 2016 and 2015.


(in thousands)

 

Nine Months Ended September 30,

Region

 

2016

 

2015

North America

$

17,942

 

66.7%

$

18,826

 

65.3%

International:

 

 

 

 

 

 

 

 

United Kingdom

 

4,272

 

15.9%

 

5,682

 

19.7%

Europe

 

1,246

 

4.6%

 

1,286

 

4.5%

Middle East

 

2,753

 

10.2%

 

2,704

 

9.4%

Other

 

693

 

2.6%

 

345

 

1.1%

Total International

 

8,964

 

33.3%

 

10,017

 

34.7%

Total

$

26,906

 

100.0%

$

28,843

 

100.0%


As noted in the above revenue assessment, the lower revenue for North America for the nine months ended September 30, 2016 was due primarily to a decrease in professional services revenue in the first quarter of 2016 as compared to the first quarter of 2015. United Kingdom revenues decreased in 2016 as compared to 2015 due to both lower product sales and professional services revenues. The weakening of the British pound sterling against the U.S. dollar in 2016 also had a negative foreign exchange impact on revenues.


Cost of Revenue


Cost of revenue totaled $3.5 million and $4.8 million for the three months ended September 30, 2016 and 2015, respectively. This $1.3 million, or 27.2%, decrease in cost of revenue was primarily attributable to a favorable sales mix with a higher proportion of software sales, and a combination of non-recurring credits to product and maintenance costs from a component manufacturer and resolution of a vendor billing matter. The lower cost of revenue and favorable revenue mix drove an overall gross margin for the three months ended September 30, 2016 of 63.6%, an increase from 53.3% for the same period in 2015.




15



Cost of revenue totaled $10.7 million and $12.4 million for the nine months ended September 30, 2016 and 2015, respectively. This $1.7 million, or 13.3%, decrease in cost of revenue included the $0.4 million gain adjustment recorded in the first half of 2015 to the loss on long-term contract from reducing operating expenses related to the long-term contract. Excluding this adjustment in 2015, cost of revenues for the nine months ended September 30, 2016 was $2.1 million lower than during the same period in 2015, primarily due to a favorable sales mix with a higher proportion of software sales, lower costs on proprietary hardware, lower warehousing and distribution costs, and non-recurring credits in the third quarter of 2016 to product and maintenance costs from a component manufacturer and resolution of a vendor billing matter. The Company’s overall gross margin for the nine months ended September 30, 2016 increased to 60.1% from 57.0% for the same period in 2015, which included the non-recurring vendor credits in the third quarter of 2016 and the net $0.4 million gain adjustment in 2015 related to the loss on long-term contract. Without these adjustments, gross margin improved to 59.2% for the nine months ended September 30, 2016 as compared to 55.5% for the nine months ended September 30, 2015.


Operating Expenses


Operating expenses totaled $6.9 million and $8.0 million for the three months ended September 30, 2016 and 2015, respectively. This $1.1 million, or 14.0% decrease in operating expenses is due to the concerted effort by management to bring operational expenses in line with our revenues.  Specifically, we note the following items:


·

General and administrative expenses were lower by $0.6 million in the three months ended September 30, 2016 as compared to the same period in 2015, primarily due to reductions in headcount and reduced outside service costs.

·

Research and development expenses were $0.5 million lower in the three months ended September 30, 2016 as compared to the same period in 2015, due to the timing associated with our development programs and reductions in headcount.


Operating expenses totaled $20.1 million and $25.4 million for the nine months ended September 30, 2016 and 2015, respectively. This $5.3 million, or 20.9% decrease in operating expenses is due to the concerted effort by management to bring operational expenses in line with our revenues.  Specifically, we note the following items:


·

Sales and marketing expenses were $0.8 million lower for the nine months ended September 30, 2016 as compared to the same period in 2015, primarily due to reductions in sales headcount and marketing expense.

·

General and administrative expenses were lower by $3.4 million in the nine months ended September 30, 2016 as compared to the same period in 2015, primarily due to reductions in headcount during the second half of 2015, the waived rights to receive any deferred salary accrued by the Company’s executive chairman effective February 29, 2016, reduced outside service costs and professional fees, and lower bad debt expense.

·

Research and development expenses were $0.7 million lower in the nine months ended September 30, 2016 as compared to the same period in 2015, due to the timing associated with our development programs and reductions in headcount.

·

Depreciation and amortization was lower by $0.5 million in the nine months ended September 30, 2016 as compared to the same period in 2015, primarily due to lower amortization expense.


Warrant Liability


The Company calculates its warrant liability based on the quoted market value of its outstanding warrants. There was no change in the warrant liability for the three months ended September 30, 2016 as compared to the $0.2 million gain on change in warrant liability for the same period in 2015. The gain on change in warrant liability for the nine months ended September 30, 2016 and 2015 was $48 thousand and $1.3 million, respectively.


Interest and other – Net


Interest (expense) and other income - net for the three months ended September 30, 2016 and 2015 were $3 thousand and $(0.1) million, respectively. This increase in income of $0.1 million was primarily due to the impact from gain on currency exchange related to the strengthening of the U.S. dollar against the British pound sterling. Interest (expense) and other income - net for the nine months ended September 30, 2016 and 2015 were $0.4 million and $(1.5) million, respectively, a $1.9 million income increase. The increase is primarily due to the combined impact from the reduction in interest expense when the Company’s long-term debt was eliminated in the first quarter of 2015, the write-off of $0.7 million in loan origination fees on March 26, 2015 when the outstanding debt was converted into shares of the Company’s convertible preferred stock (see “–Liquidity and Capital Resources” below), and the foreign currency gain from the strengthening U.S. dollar against the British pound sterling.  

 

Income Tax Expense


The income tax expense for the three months ended September 30, 2016 and 2015 was $27 thousand and $29 thousand, respectively. Income tax expense for the nine months ended September 30, 2016 and 2015 was $27 thousand and $29 thousand, respectively. The Company had book net losses in the three and nine months ended September 30, 2016 and 2015 with a full valuation allowance in 2016 and 2015.




16



Liquidity and Capital Resources


At December 31, 2014, the Company had outstanding debt of $14.0 million under its Credit Agreement, dated April 19, 2013 (as subsequently amended, the “Senior Credit Agreement”) to which the Company and certain subsidiaries were a party. This debt represented the remaining balance of the borrowings the Company made in connection with the acquisition of Symon in 2013 and the additional funds borrowed during the year. An additional $1.0 million was borrowed over the course of the first quarter of 2015, such that on March 26, 2015 there was $15.0 million outstanding under the Senior Credit Agreement. On March 26, 2015, the Company issued and sold an aggregate of 249,999.99 shares of newly-designated Series A convertible preferred stock at a price per share of $100.00 (the “Financing”), discharging, on a dollar-for-dollar basis $15.0 million in principal amount owed to the lenders (the “Lenders”) under the Senior Credit Agreement. In addition, simultaneously with the closing of the Financing, the Company paid all accrued interest and any other amounts due from the Company to the Lenders under the Senior Credit Agreement. As a result, all amounts due under the Senior Credit Agreement were paid in full and the Senior Credit Agreement was terminated and the Company retained net cash proceeds of $9.6 million to use for ongoing operations.


The Company has a history of operating losses and negative cash flow, including the Media business which continued to generate losses until its divestiture on July 1, 2015. As such, the Company took several steps in 2015 to reduce its operating costs and continues to closely monitor its cash projections and evaluate its operating structure for opportunities to reduce operating costs.  In order to ensure the Company had adequate working capital, effective November 2, 2015, the Company and certain of its subsidiaries (collectively, the “Borrowers”) entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”), pursuant to which the Bank agreed to make a revolving credit facility available to the Borrowers in the principal amount of up to $7.0 million (the “Revolving Facility”).  The Revolving Facility has an effective date (the “Effective Date”) of October 13, 2015, and matures on October 13, 2017.  Availability under the Revolving Facility is tied to a borrowing base formula.  Interest on advances under the amended Revolving Facility (the “Advances”) will accrue on the unpaid principal balance of such Advances at a floating per annum rate equal to either 1.75% above the prime rate or 2.75% above the prime rate, depending on whether certain conditions are satisfied.  During an event of default, the rate of interest would increase to 5% above the otherwise applicable rate, until such event of default is cured or waived. All accrued and unpaid interest is payable monthly on the last calendar day of each month. At September 30, 2016, the Company had $1.1 million borrowed under the Revolving Facility and $2.4 million in unused availability. At September 30, 2016, the Company’s cash and cash equivalents balance was $1.5 million. This includes cash and cash equivalents of $0.7 million 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.


The Company continues to analyze its liquidity to ensure it is able to execute its planned operations. During the third quarter of 2016, the Company has amended certain financial covenants with the Bank and on October 11, 2016, filed a “shelf” registration statement on Form S-3 with the SEC to allow the Company to quickly seek to raise additional equity capital through a variety of structures in the public markets. Through the combination of the Company’s cash and availability under the Revolving Facility, ability to seek to raise new capital in the short term, and its current forecasts, the Company believes it should have adequate cash to operate the Company through at least the next twelve months. However, if the Company is unable to achieve its forecasts, increase its revenues or decrease its operating expenses from recent historical run-rate levels, fails to meet any of the financial covenants in the Revolving Facility and is unable to obtain a waiver or an amendment from the Bank to allow it to continue to borrow under the Revolving Facility, or is unable to raise additional equity capital within the next twelve months, the Company may need to pursue one or more alternatives, such as to reduce or delay planned capital expenditures or investments in its business, or seek additional financing. There is no assurance, however, that the Company will be able to raise additional capital or obtain additional financing on commercially reasonable terms or at all.


The Company has generated and used cash inclusive of discontinued operations, as follows:


(in thousands)

 

Nine Months Ended September 30,

 

 

2016

 

2015

Operating cash flow

$

(1,778)

$

(8,786)

Investing cash flow

 

(288)

 

834

Financing cash flow

 

700

 

10,586

Total

$

(1,366)

$

2,634


Operating Activities


The decrease in cash from operating activities of $1.8 million for the nine months ended September 30, 2016 is primarily due to the Company’s net loss of $3.8 million. The net loss is offset by the following non-cash items:


·

Non-cash expense for depreciation and amortization of $2.4 million

·

Non-cash stock-based compensation of $0.8 million

·

Gain on change in warrant liability of $48 thousand

·

Non-cash amortization of loan origination fees of $52 thousand

·

Non-cash directors’ fees of $31 thousand


17


In addition, the following are the principal changes in assets and liabilities that affected cash from operating activities during the nine months ended September 30, 2016:


·

Accounts receivable decreased by $1.0 million due to improved collections and lower sales as compared to the same period last year

·

Accounts payable decreased by $0.9 million due primarily to increased payments of obligations and lower operating expenses

·

Inventory decreased by $0.4 million as the Company improved demand forecasting and inventory management

·

Accrued liabilities decreased by $0.7 million, primarily due to increased payments of obligations and lower operating expenses

·

Deferred revenue decreased by $0.5 million due primarily to maintenance revenues exceeding the rate maintenance contract values were added


Investing Activities


The decrease in cash from investing activities of $0.3 million during the nine months ended September 30, 2016 was due to expenditures for property and equipment.


Financing Activities


The increase in cash provided by financing activities during the nine months ended September 30, 2016 was due to $0.7 million of proceeds borrowed under the Revolving Facility in the first quarter of 2016.


Critical Accounting Policies


The Company's significant accounting policies are described in Note 1 of the Company’s unaudited consolidated financial statements included elsewhere in this filing. The Company’s consolidated 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.


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, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




18



PART II


Item 1.      Legal Proceedings


From time to time, we have been and may become involved in legal proceedings arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, we are not presently involved in any legal proceeding in which the outcome, if determined adversely to us, would be expected to have a material adverse effect on our business, operating results, or financial condition. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.


Item 1A.   Risk Factors


An investment in 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-Q, 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 or 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.


Risks Related to Our Business


We have a history of incurring significant net losses, and our future profitability is not assured.


For the nine months ended September 30, 2016 and 2015, we incurred net losses from continuing operations of approximately $3.5 million and $9.2 million, respectively. Our operating results for future periods are subject to numerous uncertainties and there can be no assurances that we will be profitable in the foreseeable future, if at all. If our revenues in a given period are below levels that would result in profitable operation, we may be unable to reduce costs since a significant part of our cost of revenues and operating expenses are fixed, which could materially and adversely affect our business and, therefore, our results of operations and lead to a net loss (or a larger net loss) for that period and subsequent periods.

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


Effective November 2, 2015, the Borrowers entered into the Loan Agreement with the Bank, pursuant to which the Bank agreed to make the Revolving Facility available to the Borrowers in the principal amount of up to $7.5 million.  The Revolving Facility 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 lender 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.


The Revolving Facility contains financial and operational covenants, including covenants requiring us to achieve specified levels of consolidated EBITDA. Failure to comply with these or other covenants in the Revolving Facility would result in an event of default. In the event of any default under the Revolving 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 may require significant amounts of additional financing to execute our business plan and fund our other liquidity needs. If our future operating results do not meet or exceed our projections or we are unable to raise sufficient funds, we may be unable to continue operations and could be forced to substantially curtail operations or cease operations all together.


As of September 30, 2016, we had approximately $1.1 million in outstanding indebtedness under the Revolving Facility, and approximately $2.4 in unused availability under the Revolving Facility. Unless we are able to increase our revenues or decrease our operating expenses from recent historical run-rate levels, or if we fail to meet any of the financial covenants in the Revolving Facility and are unable to obtain a waiver or an amendment from the Bank to allow us to continue to borrow under the Revolving Facility, we expect that we will need to obtain additional capital within the next twelve months to fund our planned operations. Under those circumstances, we may need to pursue one or more alternatives, such as to reduce or delay planned capital expenditures or investments in our business, seek additional financing, sell assets or curtail our operations. Any such actions may materially and adversely affect our future prospects. In addition, we cannot assure you that we will be able to raise additional equity capital or obtain additional financing on commercially reasonable terms or at all.


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


The markets for digital signage are very competitive and we must compete with other established providers. We compete with larger companies in many of the markets we serve.


We expect existing competitors and new entrants into the markets where we do business to constantly revise and improve their business models, technology, and offerings 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 that are sensitive to general economic conditions. During periods of economic slowdown or during periods of weak business results, our customers often reduce their capital expenditures and defer or cancel pending projects or facilities upgrades. Such developments occur even among customers that are not experiencing financial difficulties.


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 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 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 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, sovereign credit concerns in Europe and the Middle East, the extended decline in crude oil prices and its effects on Middle Eastern economies 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.




20



The vote by the U.K. electorate in favor of a U.K. exit from the E.U. could adversely impact our business, results of operations and financial condition.


On June 23, 2016, the U.K. Government held an in-or-out referendum on the U.K.’s membership within the E.U. The referendum results favored a U.K. exit from the E.U. (“Brexit”) and, as a result a process of negotiation will determine the future terms of the U.K.’s relationship with the E.U.


If the Brexit occurs, we will likely face new regulatory costs and challenges, the scope of which are presently unknown.  Depending on the terms of Brexit, if any, the U.K. could also lose access to the single E.U. market and to the global trade deals negotiated by the E.U. on behalf of its members. Such a decline in trade could affect the attractiveness of the U.K. as a global investment center and, as a result, could have a detrimental impact on U.K. growth.  Such a decline could also make our doing business in Europe more difficult, which could delay new sales contracts and reduce the scope of such sales contracts.  The uncertainty of the outcome of the Brexit process could also have a negative impact on the U.K. and other European economies. Although we have an international customer base, we could be adversely affected by reduced growth and greater volatility in the U.K. and European economies.  


Currency exchange rates in the British pound and the euro with respect to each other and the U.S. dollar have already been affected by Brexit.  As a significant portion of our revenues are derived from our U.K. operations, further exchange rate fluctuations could adversely affect our business, our results of operations and financial condition.


Our revenues are sensitive to fluctuations in foreign currency exchange rates and are principally exposed to fluctuations in the value of the U.S. dollar, the British pound and the euro. Changes to U.K. immigration policy could likewise occur as a result of Brexit. Although the U.K. would likely retain its diverse pool of talent, London’s role as a global center for business may decline, particularly if access to the single E. U. market is interrupted. Any of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.


Currency fluctuations may adversely affect our business.


For the nine months ended September 30, 2016, approximately 33% of our revenues were generated outside of the United States. Accordingly, we receive a significant portion of our revenues in pounds sterling, euros, and other foreign currencies. However, for financial reporting purposes, we use the U.S. dollar. To the extent the U.S. dollar strengthens against the pounds sterling and other foreign currencies, the translation of foreign currency denominated transactions will result in reduced revenue, operating expenses and net income for us. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited, and we may not be able to successfully hedge our exchange rate risks.


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 buying patterns of our customers. 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, profitability, and cash flow from operations. 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.


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.



21



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.


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.



22



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.


Our operations are subject to numerous U.S. and foreign laws, regulations and restrictions affecting our services, solutions, labor and the markets in which we operate, and non-compliance with these laws, regulations and restrictions could have a material adverse effect on our business and financial condition.


Various aspects of our services and solutions offerings are subject to U.S. federal, state and local regulation, as well as regulations outside the United States. Failure to comply with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of service, and/or the imposition of civil and criminal penalties, including fines which could have a material adverse effect on our business, reputation and financial condition.  In addition, our international business subjects us to numerous U.S. and foreign laws and regulations, including, without limitation, the Foreign Corrupt Practices Act (“FCPA”). We hold contracts with various instrumentalities of foreign governments, potentially increasing our FCPA compliance risk. Our failure or the failure of our sales representatives or consultants to comply with these laws and regulations could have a material adverse effect on our business, financial condition and results of operation. In addition, even an inadvertent failure to comply with laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage our reputation and brands.  Also, in the ordinary course of our business we transfer various types of data to and from Europe.  The European Court of Justice’s invalidation of “Safe Harbor” method of protecting personally identifiable information that originates in the European Union as a mechanism to legitimize cross border data flows increases the risk that our Company, directly or through a third-party service provider that we use, may inappropriately transfer data subject to EU privacy regulation.  Any or all of the foregoing could have a negative impact on our business, financial condition, results of operations, and cash flow.


Our business could be adversely affected if our consumer protection, data privacy and security practices are not adequate, or are perceived as being inadequate, to prevent data breaches, or by the application of consumer protection and data privacy and security laws generally.


In the course of our business, we collect certain personal information that may be considered personally identifiable information (“PII”).  Although we take measures to protect PII from unauthorized access, acquisition, disclosure and misuse, our security controls, policies and practices may not be able to prevent the improper or unauthorized access, acquisition or disclosure of such PII.  In addition, third party vendors and business partners which in the course of our business receive access to PII that we collect also may not prevent data security breaches with respect to the PII we provide them or fully enforce our policies, contractual obligations, and disclosures regarding the collection, use, storage, transfer and retention of personal data.  The unauthorized access, acquisition or disclosure of PII could significantly harm our reputation, compel us to comply with disparate breach notification laws and otherwise subject us to proceedings by governmental entities or others and substantial legal liability.  A perception that we do not adequately secure PII could result in a loss of current or potential consumers and business partners, as well as a loss of anticipated revenues.  Our key business partners also face these same risks with respect to PII they collect and data security breaches with respect to such information could cause reputational hard to them and negatively impact our ability to offer our products and services through their platforms.


In addition, the rate of data privacy, security and consumer protection law-making is accelerating globally, and the interpretation and application of consumer protection and data privacy and security laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux.  It is possible that these laws may be interpreted or applied in a manner that is adverse to us or otherwise inconsistent with our practices, which could result in litigation, regulatory investigations and potential legal liability or require us to change our practice in a manner adverse to our business.  As a result, our reputation may be harmed, we could incur substantial costs, and we could lose both customers and revenue.


Any failure by us, or our agents to comply with our privacy policies or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others as well as resulting liability.


Our business could be adversely affected if our cybersecurity practices are inadequate to prevent unauthorized intrusions or theft of data.


We are at risk for interruptions, outages, and breaches of: (i) operational systems (including business, financial, accounting, product development, consumer receivables, data processing, or manufacturing processes); and/or (ii) our facility security systems.  Such cyber incidents could materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively



23



sensitive information; compromise personally identifiable information of customers, employees or other; jeopardize the security of our facilities; and/or affect the performance of our customer-facing solutions.  A cyber incident could be caused by malicious third parties using sophisticated, targeted methods to circumvent firewalls, encryption, and other security defenses, including hacking, fraud, trickery, or other forms of deception.  The techniques used by third parties change frequently and may be difficult to detect for long periods of time.  A significant cyber incident could impact production capability, harm our reputation and/or subject us to regulatory actions or litigation.


We are subject to risks related to our international operations.


We currently have direct sales coverage in North America, the United Kingdom, South East Asia and the United Arab Emirates, as well as coverage of emerging markets through distributors, value added resellers and system integrators in Europe, Asia and the Middle East.  Approximately 33% and 35% of our revenue was derived from international markets in the nine months ended September 30, 2016 and 2015, respectively, and we hope to expand the volume of the services and solutions that we provide internationally.  Our international operations subject us to additional risks, including:


·

uncertainties concerning import and export license requirements, tariffs and other trade barriers;

·

restrictions on repatriating foreign profits back to the United States;

·

changes in foreign policies and regulatory requirements;

·

inadequate intellectual property protection in foreign countries;

·

difficulty in enforcing agreements and collections in foreign legal systems;

·

changes in, or unexpected interpretations of, intellectual property laws in any country in which we operate;

·

difficulties in staffing and managing international operations;

·

taxation issues;

·

the extended decline in crude oil prices and its effects on Middle Eastern and other economies;

·

political, cultural and economic uncertainties; and

·

potential disruption due to terrorist threat or action in certain countries in which we operate.


These risks could restrict our ability to provide services to international clients and could have a material adverse effect on our business, financial condition and results of operations.


We may not be able to receive or retain the necessary licenses or authorizations required for us to export or re-export our products, technical data or services, which could have a material adverse effect on our business, financial condition and results of operations.


In order for us to export certain services or solutions, we are required to obtain licenses from the U.S. government. We cannot be sure of our ability to obtain the U.S. government licenses or other approvals required to export our services and solutions for sales to foreign governments, foreign commercial clients or foreign destinations. Failure to receive required licenses or authorizations could hinder our ability to export our services and solutions and could harm our business, financial condition and results of operations. Export transactions may also be subject to the import laws of the importing and destination countries. If we fail to comply with these import laws, our ability to sell our services and solutions may be negatively impacted which would have a material adverse effect on our business and results of operations.


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


We continue to strive 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 places 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.


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



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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.


We must adapt our business model to keep pace with rapid changes in the visual communications market, including rapidly changing technologies and the development of new products and services.


Providing visual communications solutions is a relatively new and rapidly evolving business, and we will not be successful if our business model does not keep pace with new trends and developments. If we are unable to adapt our business model to keep pace with changes in the industry, or if we are unable to continue to demonstrate the value of our services to our customers, our business, results of operations, financial condition and liquidity could be materially adversely affected. Our success is also dependent on our ability to adapt to rapidly changing technology and to make investments to develop new products and services. Accordingly, to maintain our competitive position and our revenue base, we must continually modernize and improve the features, reliability and functionality of our products and services. Future technological advances may result in the availability of new service or product offerings or increase in the efficiency of our existing offerings. Some of our competitors have longer operating histories, larger client bases, longer relationships with clients, greater brand or name recognition, or significantly greater financial, technical, marketing and public relations resources than we do. As a result, they may be in a position to respond more quickly to new or emerging technologies and changes in customer requirements, and to develop and promote their products and services more effectively than we can. We may not be able to adapt to such technological changes or offer new products on a timely or cost effective basis or establish or maintain competitive positions. If we are unable to develop and introduce new products and services, or enhancements to existing products and services, in a timely and successful manner, our business, results of operations, financial condition and liquidity could be materially and 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 in some regard upon the protection of our proprietary technology. As of September 30, 2016, we held four issued patents in the United States. 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. 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.




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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:


·

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

·

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.


We have not registered copyrights for many of our software, written materials or other copyrightable works. The United States Copyright Act automatically protects all of our copyrightable works, but, without registration, we cannot enforce those copyrights against infringers or seek certain statutory remedies for any such infringement. Preventing others from copying our products, written materials and other copyrightable works is important to our overall success in the marketplace. In the event we decide to enforce any of our unregistered copyrights against infringers, we will first be required to register the relevant copyrights, and we cannot be sure that all of the material for which we seek copyright registration would be registrable, in whole or in part, or that, once registered, we would be successful in bringing a copyright claim against any such infringers.


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,



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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. Most 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. Addison is located in an area that experiences frequent severe weather, including tornadoes. Should a tornado, war, terrorist act or other catastrophe, such as fires, floods, power loss, communication failure 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.


Changes in government regulation 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 in the United States, and the governments of other nations have regulatory bodies performing similar functions. FCC licensing, program content and related regulations generally do not currently affect us. However, the FCC or analogous agencies in other countries 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 (and similar foreign agency) regulations also affect many of our content providers and, therefore, these regulations may indirectly affect our business. In addition, the industries in which we provide service are 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. New laws or regulations governing our business or the industries we serve could substantially harm our business.


We may also be required to obtain various regulatory approvals from local, state or national 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 realize the anticipated benefits of future acquisitions or investments.


We have grown our 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. 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.



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Any future acquisitions and investments we may undertake, subject us to various risks, including:


·

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

·

loss of key employees related to acquisitions;

·

inability to successfully integrate acquired technologies or operations;

·

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

·

diversion of management’s attention;

·

adverse effects on our existing business relationships;

·

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

·

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

·

the inability to recover the costs of acquisitions.


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 September 30, 2016, Donald R. Wilson, Jr. and affiliated entities owned approximately 38% of our outstanding common stock, and Gregory H. Sachs, our Executive Chairman, and affiliated entities beneficially owned approximately 26% 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.


We have received a delisting notice from Nasdaq and there can be no assurance that our securities will continue to be listed on Nasdaq.


On September 19, 2016 we received a written notice from Nasdaq indicating that we were not in compliance with the Nasdaq Listing Rule which requires us to maintain a minimum bid price of $1.00 per share, and providing us with a period of 180 calendar days from September 20, 2016 to regain compliance by maintaining a minimum bid price of $1.00 per share for at least ten consecutive business days.  If at any time before that date, the closing bid price of our common stock is at least $1.00 per share for at least ten consecutive business days, we will regain compliance with the price requirement. If we do not regain compliance prior to the expiration of such 180 day period, an additional 180 days may be granted to regain compliance so long as we meet the Nasdaq Capital Market initial listing criteria (other than the minimum bid price requirement). We intend to continue to monitor the bid price of our common stock. If our common stock does not trade at a level that is likely to regain compliance with the Nasdaq requirements, our board of directors may consider other options that may be available to achieve compliance. We have received approval from our stockholders to carry out a reverse stock split, if deemed appropriate by our board of directors; however, a reverse stock split could have negative implications. Such a reverse stock split must be completed by December 21, 2016 or we would need to again seek stockholder approval.  We cannot assure you that we will be able to demonstrate compliance by March 20, 2017, in which case our common stock may then be subject to delisting.


If our common stock is delisted from Nasdaq, it would likely trade only on the over-the-counter market (the “OTC”). If our common stock were to trade on the OTC, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage may be reduced. In addition, in the event our common stock is delisted, broker-dealers transacting in our common stock would be subject to certain additional regulatory burdens, which may discourage them from effecting transactions in our common stock, thus further limiting the liquidity of our common stock and potentially resulting in lower prices and larger spreads in the bid and ask prices for our common stock.  


Compliance with the Sarbanes-Oxley Act of 2002 requires substantial financial and management resources.


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.


We may issue additional shares of our common stock or other equity securities, 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.



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We may finance the execution of our business plan or generate additional working capital through additional equity financings. Therefore, subject to the rules of the SEC and Nasdaq, we may issue additional shares of our common stock, preferred stock, warrants and other equity securities of equal or senior rank, with or without stockholder approval, in a number of circumstances from time to time. The issuance by us of shares of our common stock, preferred stock, warrants or other equity securities of equal or senior rank may have the following effects:


·

a decrease in the proportionate ownership interest in us held by our existing stockholders;

·

the relative voting strength of each previously outstanding share of common stock may be diminished; and

·

the market price of our common stock or warrants may decline.


In addition, 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


None.


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

 

Form of Certificate of Designation of Series A Convertible Preferred Stock (2)

3.2

 

Amended and Restated Bylaws (3)

10.1

 

Third Amendment to the Loan And Security Agreement, dated September 30, 2016 (4)

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




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*

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 March 25, 2015.

(3)

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.

(4)

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 October 5, 2016.




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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/ Jana Ahlfinger Bell

 

 

Jana Ahlfinger Bell

 

 

Chief Financial Officer (principal financial officer)


Date: November 3, 2016




31



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

 

Form of Certificate of Designation of Series A Convertible Preferred Stock (2)

3.2

 

Amended and Restated Bylaws (3)

10.1

 

Third Amendment to the Loan And Security Agreement, dated September 30, 2016 (4)

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 March 25, 2015.

(3)

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.

(4)

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 October 5, 2016.




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