UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-35534
RMG NETWORKS HOLDING CORPORATION
Delaware |
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27-4452594 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification Number) |
15301 Dallas Parkway
Suite 500
Addison, Texas 75001
(800) 827-9666
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Common Stock, par value $0.0001 per share
Securities registered pursuant to Section 12(b) of the Act
NASDAQ Capital Market
Name of each exchange on which registered
Warrants to purchase shares of Common Stock
Units, each comprising of one share of Common Stock and one Warrant
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ .
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
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 (§ 232.405 of this chapter) 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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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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 June 30, 2016, the aggregate market value of the common stock held by nonaffiliates of the registrant, based on the $0.97 closing price of the registrant’s common stock as reported on the NASDAQ Stock Market on that date, was approximately $15.8 million. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of March 2, 2017, there were 44,623,949 shares of common stock of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this annual report on Form 10-K, to the extent not set forth in this Form 10-K, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in 2016, to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2016.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Unless the context otherwise requires, when we use the words the “Company,” “RMG”, “RMG Networks,” “we,” “us,” or “our Company” in this Form 10-K, 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 Networks Holding Corporation.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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. There can be no assurance that actual results will not materially differ from expectations. You should read statements that contain these words carefully because they :
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discuss future expectations; |
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contain projections of future results of operations or financial condition; or |
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state other “forward-looking” information. |
We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors and cautionary language discussed in this Form 10-K provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in our forward-looking statements, including among other things:
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our history of incurring significant net losses and limited operating history; |
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the ability to maintain our Nasdaq listing; |
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the risk that any projections, including earnings, revenues, expenses, margins or any other financial items are not realized; |
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business development activities, including our ability to contract with, and retain, customers on attractive terms; |
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the competitive environment in the markets in which we operate; |
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success in retaining or recruiting, or changes required in, our management and other key personnel; |
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the potential liquidity and trading of our securities; |
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our ability to raise additional capital, if needed, on satisfactory terms, or at all; |
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the general volatility of the market price of our common stock; |
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risks and costs associated with regulation of corporate governance and disclosure standards (including pursuant to Section 404 of the Sarbanes-Oxley Act); and |
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changing legislation and regulatory environments; |
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general economic conditions. |
You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-K. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual future results to differ materially from those projected or contemplated in the forward-looking statements.
All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events. You should be aware
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that the occurrence of the events described in the “Risk Factors” section and elsewhere in this Form 10-K could have a material adverse effect on us.
This Form 10-K contains statistical data that we obtained from various government and private publications. We have not independently verified the data in these reports. Statistical data in these publications also include projections based on a number of assumptions. The industries referenced may not grow at such projected rates or at all. The failure of these industries to grow at such projected rates may have a material adverse effect on our business and the market price of our securities. Furthermore, if any one or more of the assumptions underlying the statistical data turns out to be incorrect, actual results may differ from the projections based on these assumptions.
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Overview
RMG goes beyond traditional communications to help businesses increase productivity, efficiency, and engagement through intelligent digital signage messaging. By combining leading software, hardware, business applications, and services, we offer a single point of accountability for integrated data visualization and real-time performance management. We are headquartered in Addison, Texas, with additional offices in the United States, United Kingdom and the United Arab Emirates.
We provide enterprise communication solutions that empower organizations to visualize critical business data to better run their business in contact center, supply chain, internal communications, hospitality, retail and other applications primarily in the financial services, telecommunications, manufacturing, healthcare, pharmaceutical, utility and transportation industries, and for federal, state and local governments. We differentiate ourselves through dynamic business data visualization delivering real-time intelligent visual content that enhances the ways in which organizations communicate with employees and customers. The solutions we provide are designed to integrate seamlessly with a customer’s IT infrastructure and data and security environments. Our solutions are comprised of a suite of products that include proprietary software, software-embedded hardware, maintenance and support services, content and creative services, installation services and third-party displays.
We power thousands of digital screens and end-points, and the diversity of products that we offer and our technical expertise provide our customers and partners with business data visualization solutions that differentiate us from our competitors. We are led by an experienced senior management team with a proven track record of building and successfully running and growing technology and services companies.
Our operations span over 30 years with our principal subsidiary having been in operation since 1980.
History
We were incorporated in Delaware on January 5, 2011 as a “blank check company” for the purpose of effecting a business combination with one or more businesses. On April 8, 2013, we consummated the acquisition of RMG Networks Holdings, Inc., f/k/a Reach Media Group Holdings, Inc. (“Reach Media Group”), which became our Media business, pursuant to a merger agreement, dated as of January 11, 2013, as amended. On April 19, 2013, we consummated the acquisition of RMG Enterprise Holdings Corporation, f/k/a Symon Holdings Corporation (“Symon”), which became our Enterprise Solutions business, pursuant to a merger agreement, dated as of March 1, 2013. As a result of the Reach Media Group and Symon acquisitions, Reach Media Group and Symon became our subsidiaries, and the businesses and assets of Reach Media Group, Symon and their subsidiaries became our only operations. Symon was considered to be our predecessor for accounting purposes. On July 1, 2015, we sold the assets of our Airline Media Network to an unaffiliated third party, effectively exiting what were the legacy operations of our Media business.
Industry
We believe digital signage in business environments allows companies to engage targeted audiences, such as employees and consumers, more effectively than traditional communications. The digital signage industry is comprised of software, hardware, content, and professional services that create solutions for business customers. Frost & Sullivan, in its 2015 Analysis of the Global Digital Signage Systems Market report, estimated that the market for digital signage system technology in 2014 was approximately $1.5 billion and expects the market to grow from 2014 to 2020 at a compound annual growth rate of 13.2%. Others, such as IHS, Inc. estimate that aggregate global digital signage expenditures, including ancillary components, approached $14 billion in 2014.
As digital signage systems have evolved, they have become more cost effective and are able to provide richer media content. The initial costs of planning and deploying digital signage infrastructure have dropped, reducing a significant barrier to growth. Today’s solutions support remote manageability, energy efficiency and the ability to process and blend rich media content. We believe customers are increasingly recognizing the flexibility and cost-effectiveness digital signage can provide compared to other forms of communication.
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A key market driver that is dramatically impacting the traditional digital signage industry and driving increased utilization of digital signage solutions is a demand for real-time information. Because of increased technology enablement, both organizations and individual consumers expect information to be more available and timely. Digital signage solutions are increasingly providing organizations with multiple ways of distributing and collecting data in real time, often in an interactive manner.
Competitive Strengths
We believe that the following factors differentiate us from our competitors and position us for continued growth:
We provide dynamic “real time” business data visualization. Differentiated from digital signage solutions that only offer the capability to place a set loop of content onto one or a few display endpoints, we offer solutions to dynamically visualize critical business data and content that help companies track and measure their operations or communicate with target audiences more efficiently and effectively. Our technology platform and integrated solutions can interface with a customers’ disparate business systems, assemble data, apply business logic and display the output in real-time on thousands of end points across a global network.
Our products can be easily adapted to satisfy a wide array of customer applications. Our solutions encompass a full array of key consumer-facing, corporate and advertising network types. We believe our solutions add significant value and provide a definable return on investment across a diverse set of business applications such as real-time reporting and alerting for contact centers, supply chain warehousing and manufacturing. Other enterprise uses include company news and “real time” information for employee or corporate communications. Our products are also commonly used in public-facing environments, such as retail operations, hotels, convention centers, hospitals, universities, casinos and government facilities. Our enterprise software suite incorporates leading network security features and is both robust and scalable. Our solutions meet the requirements of many of the largest financial services and telecommunications companies in the United States. Our data-integration components ensure that nearly any external source can be leveraged in a solution, including databases, telephony, interactive kiosks, POS, RSS and web content, among others.
We offer comprehensive, configurable solutions and not just individual solution components. One key to our market leadership is our robust software suite that offers flexibility for nearly any client application. This includes installations ranging from a single display to many hundreds or even thousands of end-points. This platform allows us to build, manage, maintain and monetize comprehensive visual communication solutions for our customers. To accomplish this, we approach the market with a full complement of integrated ready-to-use technologies, including our proprietary software and software-embedded appliances, and a wide range of proprietary and third-party flat screen displays, kiosks, video walls, mobile devices and other digital signage endpoints. We also provide a wide range of professional services including installation and training, software and hardware maintenance and support, and creative content. We are typically the prime source globally for technical resources for implementations that feature our proprietary software and software-embedded appliances. We maintain strong customer support groups in the United States and internationally offering around-the-clock client support. In addition, we have a full-time global team of content writers, video producers, graphic designers and editors who develop both original and subscription content as required by customers.
We are trusted by some of the largest organizations in the world. Some of the largest and most demanding organizations, including a majority of Fortune 100 companies, count on our solutions every day to inform, educate and motivate their employees and customers and to build their brands. Because of our product’s ability to integrate with mission critical software applications, our solution is required to pass a higher level of security testing. We have found that add-on sales opportunities and customer longevity are very high when our hardware and software have been authorized by customers to work behind their firewalls. Being a trusted solution provider to large multi-national corporations also affords us the opportunity to efficiently cross sell throughout a customer’s global footprint and sell solutions for additional application areas into a single organization.
We serve customers through a global footprint. We have offices or personnel focused on developing business located in North America, Europe, the Middle East and Asia. We service thousands of customers worldwide and estimate that hundreds of thousands of people globally view our content each day on our customers’ installations. Our global presence enables us to satisfy the worldwide requirements of our multi-national customers and to pursue market opportunities in high-growth geographies outside of North America. To efficiently utilize our global footprint, we have well-established relationships with leading business partners and resellers around the world.
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Experienced management team. Our management team has significant experience in growing technology and services companies.
Growth Strategy
Our growth strategy is to leverage and continue to build upon our past successes including through the following:
Expanding our installed customer footprint. We have identified and are pursuing numerous opportunities to expand our customer base, including:
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Driving technology innovation and launching new solutions, applications and products that provide increasing value to our customers. |
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Selling additional solutions to our large, multi-national customers and expanding the geographies in which these customers use our solutions. |
Growing and expanding our customer base. We have identified and are currently pursuing numerous opportunities to expand our existing base of business, including:
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Growing our presence in segments that have shown a high propensity to deploy data-driven visual communications like contact center management, supply chain management, internal communications, higher education, healthcare and customer-facing retail applications. |
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Developing additional reseller channels and strategic partners who are “best in class” in their specific industries to supplement our direct sales efforts. |
Products and Solutions
We provide enterprise communication solutions that empower organizations to visualize critical business data to better run their businesses. Our proprietary software platform seamlessly integrates with our customers’ existing mission critical departmental applications and offers premise-based or hosted content management, content subscription services and mobility solutions. We work closely with leading global technology partners, developing proprietary technical interfaces. Our solutions portfolio, comprised of solutions for Intelligent Contact Center, Visual Internal Communications, Visual Supply Chain and consumer-facing retail, financial services, higher education and hospitality applications, is assembled from the following product components:
Enterprise Server (“ES”) is a robust software application server used to collect content from various application and other data sources, organize the content according to business rules and distribute the content to a variety of end-points, including our proprietary media players, PCs and mobile devices. Our data collectors, collectively called portal services, connect ES with customers’ enterprise applications to retrieve real-time data. Our data collectors give us a distinct advantage by being able to deliver solutions more quickly, less expensively and with higher quality than the competition.
Media Players/Smart Digital Appliances (“SDA”) are media players with our software pre-loaded that function as the content storage and rendering hardware between our ES content engine and the visual display end-points (LED displays, HD TVs or PCs). SDAs “pull” content and content rules and parameters from ES and then render the content on the displays according to established rules and layouts.
Design Studio (“DS”) is a software offering that is either a full-function application installed on the client’s PC (DS) used to design the look, feel, function and timing of how content is played on end-point displays. The software features a set of pre-designed templates that can be combined with external content feeds that are provided by us or other external content providers.
InView™ software is a fully integrated internal communications software product delivering real-time business data and other content across all employee devices, including desktop, laptop, mobile and tablet. InView is a messaging platform that enables real time communication of rich media, including business data, to all or a subset of connected corporate
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users. Automatic message delivery ensures employees are aware of critical events, for example call volumes spikes or emergency weather conditions, allowing them to quickly respond with appropriate actions to exceed established company goals.
Subscription Content Services provides syndicated “business-appropriate” news and current information, created by our editors. In addition, weather, stock information, airport flight data and over 100 ticker feeds allow clients to customize the desired output in almost any manner they require. This service is hosted by us, and it complements customers’ messaging by keeping their audience engaged with fresh news and information throughout the day.
Electronic Displays (“ED”) include a line of displays designed by us, such as door displays that are architected to work seamlessly with our content management software. We also offer a large portfolio of third-party displays from some of the most recognizable brands in screen and electronic display technology.
MAX LED (“MAX”) includes a line of customizable LED display solutions for indoor and outdoor market applications. RMG’s MAX series offers full custom LED solution that scale to HD-quality image support, 4K and beyond, in addition to delivering embedded audio, energy efficiency, low heat emissions and an industry-leading 1.2mm pixel pitch. RMG MAX LED visual solutions integrate with RMG’s current software and creative content media players to further leverage the strength of existing platforms.
Global Sales Model
We sell products and services through a worldwide professional sales force, as well as through a select group of resellers and local partners. In North America, approximately 92% of sales were generated solely by our sales team, with approximately 8% through resellers in the year ended December 31, 2016. Outside of the United States, the situation is reversed, with approximately 66% of sales coming from the reseller channel. Overall, approximately 75% of global sales were derived from direct sales, with the remaining 25% generated through indirect partner channels.
Our global sales team includes approximately 41 sales representatives and sales support staff as of December 31, 2016. The sales representatives each have multiple years of specific experience in selling complex enterprise technology solutions. The sales team is supported in the pre-sales process by a team of highly skilled subject matter experts and sales engineers, who help to present solutions that meet each customer’s specific needs. In general, the sales compensation structure for the sales staff is approximately half base salary and half commissions. The amount of payment of commissions is dependent on representatives reaching their quarterly and annual sales objectives. In addition, commissions are modified by the overall profitability of the mix of products that are sold. Our resellers globally are generally supported by one or more of our sales team members to assist them with proposing unique solutions for clients and prospects.
Customers
Customers around the world purchase our enterprise communication solutions including software, hardware and services. For larger customers, a master services agreement is individually negotiated when necessary. Upon approval of the customer’s or reseller’s credit, customers purchase a solution which includes licensed software, hardware, installation services, training services, maintenance services and/or content services. Maintenance and content services are sold on an annualized basis, creating an annuity income stream and a close business relationship. Our resellers purchase products and services from us to resell to their clients. In general, we assist resellers with installation, training services and on-going support in partnership with our resellers.
Competition
Holding a strong, competitive position in the market for intelligent visual solutions requires maintaining a diverse product portfolio that addresses a wide variety of customer needs. We believe we have been a leading global provider of such products and services for more than 30 years. Our customers include many of the largest organizations in the world and, as a result, our brand is well established globally. The worldwide digital signage market is vast and diverse. In addition to the scope of our product and service portfolio, we compete based upon commercial availability, price, visual performance, brand reputation and customer service. Customer requirements vary as to products and services, and as to the size and geographic location of the solutions.
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We compete with a broad range of companies, including local, national and international organizations. Some competitors offer a range of products and services; others offer only a single part of the overall digital signage solution. Though our direct competitors are numerous, diverse and vary greatly in size, we view our principal competitors as Cisco, Samsung, Broadsign, Four Winds Interactive, Inova, Janus Displays, John Ryan & Associates, Nanonation, Navori, S.A., Scala, Stratacache, Nanolumens and Visix.
Our competitive strategy is built around our ability to provide end-to-end solutions; extensive software and hardware options; a consultative sales and partnership approach that delivers optimized customer solutions; a highly qualified staff of installation, integration and creative design professionals; seamless integration with customers’ IT infrastructure, data, and security environments; custom screen and content design; and post-sale customer service and global technical support. We believe that our relative size and competitive strategy gives us an advantage in the markets we serve.
Employees
As of December 31, 2016, we had 161 global employees, with 113 in our North American operations and 48 employees in our international operations. Our U.S. employees are not covered by any collective bargaining units and we have never experienced a work stoppage in the U.S. Our international employees are also not covered by any national union contracts.
Intellectual Property and Trademarks
We rely on a combination of trademark, copyright, patent, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. These laws, procedures and contractual restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology. We generally require employees, consultants, customers, suppliers and partners to execute confidentiality agreements with us that restrict the disclosure of our intellectual property. We also generally require our employees and consultants to execute invention assignment agreements with us that protect our intellectual property rights. Despite these precautions, third parties may obtain and use without our consent intellectual property that we own or license. Any unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
As of December 31, 2016, we had four issued patents expiring between 2019 and 2023 in the United States. None of these patents are material to our business. We cannot ensure that any future patent applications will be granted or that any of our issued patents will adequately protect our intellectual property. In addition, third parties could claim invalidity or co-inventorship, or make similar claims with respect to any of our currently issued patents or any patents that may be issued to us in the future. Any such claims, whether or not successful, could be extremely costly to defend, divert management’s time, attention, and resources, damage our reputation and brand and substantially harm our business.
We expect that we and others in the industry may be subject to third-party infringement claims as the number of competitors grows and the functionality of products and services overlaps. Our competitors could make a claim of infringement against us with respect to our products and underlying technology. Third parties may currently have, or may eventually be issued, patents upon which our current solution or future technology infringe. Any of these third parties might make a claim of infringement against us at any time.
Government Regulation
We are subject to varied federal, state and local government regulation in the jurisdictions in which we conduct business, including tax laws and regulations relating to our relationships with our employees, public health and safety, zoning, and fire codes. We operate each of our offices, and distribution operations in accordance with standards and procedures designed to comply with applicable laws, codes and regulations.
We import and export products into and from the United States. These activities are subject to laws and regulations, including those issued and/or enforced by U.S. Customs and Border Protection. We work closely with our suppliers to ensure compliance with the applicable laws and regulations in these areas.
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Available Information
We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Our website address is www.rmgnetworks.com .
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-K, including our historical financial statements and related notes included herein. The following discussion highlights some of the risks that may affect future operating results. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or businesses in general, may also impair our businesses 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 years ended December 31, 2016 and 2015, we incurred total losses from continuing operations of approximately $4.5 million and $10.1 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, we entered into a Loan Agreement with Silicon Valley Bank pursuant to which we may borrow the principal amount of up to $7.5 million from time to time under a revolving credit facility (the “Revolving Facility”). The Revolving Facility is secured by a first-priority security interest in substantially all of our assets. When we have a balance outstanding, 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. Likewise, when we have a balance outstanding, we may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal 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.
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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 December 31, 2016, we had cash and cash equivalents of $5.1 million, including 1.0 million held in bank accounts of our subsidiaries located outside the United States, approximately $1.3 million in outstanding indebtedness under the Revolving Facility, and approximately $1.0 million in unused availability under the Revolving Facility. If we are unable to increase our revenues or decrease our operating expenses to meet our operating plan, 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 may 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.
The markets for digital signage 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:
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a decline in economic conditions in an industry we serve; |
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a decline in capital spending in general; |
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a decision to shift expenditures to competing products; |
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unfavorable local or regional economic conditions; or |
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a downturn in an individual business sector or market. |
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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 experienced extreme disruption in 2008 and 2009. While there has been improvement in recent years, the worldwide economy remains fragile as uncertainty remains regarding when each global region’s economy will improve to historical growth levels. In addition, political changes in the United States, the United Kingdom and other nations, including the probability of Brexit, contribute to economic uncertainty. Any return to the conditions that existed during the 2008-2009 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:
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increased competition for fewer industry dollars; |
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pricing pressure that may adversely affect revenue and gross margin; |
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reduced credit availability and/or access to capital markets; |
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difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers; or |
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customer financial difficulty and increased risk of doubtful accounts receivable. |
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, barring a decision by Parliament to remain in the E.U., 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 year ended December 31, 2016, approximately 31% 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
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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 software, media player and services product portfolios, could harm our results of operations.
A key component of our growth strategy is to develop and market new products. We may be unable to produce new products and services that meet customers’ needs or specifications. If we fail to meet specific product specifications requested by a customer, the customer may have the right to seek an alternate source for a product or service or to terminate an underlying agreement. A failure to successfully meet the specifications of our potential customers could decrease demand or otherwise significantly hinder market adoption of our products and may have a material adverse effect on our business, financial condition or results of operations.
The process of introducing a new product to the market is extremely complex, time consuming and expensive, and will become more complex as new platforms and technologies emerge. In the event we are not successful in developing a wide range of offerings or do not gain wide acceptance in the marketplace, we may not recoup our investment costs, and our business, financial condition and results of operations may be materially adversely affected.
Shortages of components or a loss of, or problems with, a supplier could result in a disruption in the installation or operation of our products or services.
From time to time, we have experienced delays in manufacturing our products for several reasons, including component delivery delays, component shortages and component quality deficiencies. Component shortages, delays in the delivery of components and supplier product quality deficiencies may occur in the future. These delays or problems have in the past and could in the future result in delivery delays, reduced revenues, strained relations with customers and loss of business. Also, in an effort to avoid actual or perceived component shortages, we may purchase more components than we may otherwise require. Excess component inventory resulting from over-purchases, obsolescence, installation cancellations or a decline in the demand for our products could result in equipment impairment, which in the past has had and in the future would have a negative effect on our financial results.
We obtain several of the components used in our products from limited sources. We rarely have guaranteed supply arrangements with our suppliers, and cannot be sure that suppliers will be able to meet our current or future component requirements. If component manufacturers do not allocate a sufficient supply of components to meet our needs or if current suppliers do not provide components of adequate quality or compatibility, we may have to obtain these components at a higher cost from distributors or on the spot market. If we are forced to use alternative suppliers of components, we may have to alter our manufacturing processes or solutions offerings to accommodate these components. Modification of our
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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 customers using Internet connectivity supplied by a variety of third-party network providers. If we experience failures or limited network capacity, we may be unable to maintain programming 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 customers becomes unavailable, limited due to bandwidth constraints or is interrupted or delayed because of necessary equipment changes, our customer relationships and our ability to obtain revenues from current and new 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 customers may expose us to liability.
We provide or facilitate the distribution of content for our customers. This content is procured from third-parties and can include news, weather, sports and stock information as well as other types of media content. As a distributor of content, we face potential liability for negligence, copyright, patent or trademark infringement, or other claims based on the content that we distribute. We or entities that we license content from may not be adequately insured or indemnified to cover claims of these types or liability that may be imposed on us.
The growth of our business is dependent in part on successfully implementing our international expansion strategy.
Our growth strategy includes expanding our geographic coverage in or into the Asia-Pacific region, Europe and the Middle East. 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.
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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. 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 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
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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 31% and 38% of our revenue was derived from international markets in the years ended December 31, 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:
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uncertainties concerning import and export license requirements, tariffs and other trade barriers; |
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restrictions on repatriating foreign profits back to the United States; |
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changes in foreign policies and regulatory requirements; |
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inadequate intellectual property protection in foreign countries; |
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difficulty in enforcing agreements and collections in foreign legal systems; |
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changes in, or unexpected interpretations of, intellectual property laws in any country in which we operate; |
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difficulties in staffing and managing international operations; |
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taxation issues; |
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the extended decline in crude oil prices and its effects on Middle Eastern and other economies; |
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political, cultural and economic uncertainties; and |
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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 .
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Our strategy to expand our sales and marketing operations and activities may not generate the revenue increases anticipated or such revenue increases may only be realized over a longer period than currently expected.
Building a digital signage solutions customer base and achieving broader market acceptance of our digital signage solutions will depend to a significant extent on our ability to expand our sales and marketing operations and activities. We plan to expand our direct sales force both domestically and internationally; however, there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. Our business could be harmed if our sales and marketing expansion efforts do not generate a corresponding significant increase in revenue.
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
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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 December 31, 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:
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laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and |
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policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use. |
The laws of certain foreign countries may not protect the use of unregistered trademarks or our proprietary technologies to the same extent as do the laws of the United States. As a result, international protection of our image may be limited and our right to use our trademarks and technologies outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for digital signage in foreign countries. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries. Our inability to register our trademarks or technologies or purchase or license the right to use the relevant trademarks or technologies in these jurisdictions could limit our ability to penetrate new markets in jurisdictions outside the United States.
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
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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 personnel, and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.
We depend on the leadership and experience of our key executive management, as well as other key personnel with specialized industry, sales and technical knowledge and/or industry relationships. Because of the intense competition for these employees, particularly in certain of the metropolitan areas in which we operate, we may be unable to retain our management team and other key personnel and may be unable to find qualified replacements if their services were no longer available to us. 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
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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.
In the past, 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 may 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.
Any future acquisitions and investments we may undertake, subject us to various risks, including:
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failure to transition key customer relationships and sustain or grow sales levels, particularly in the short-term; |
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loss of key employees related to acquisitions; |
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inability to successfully integrate acquired technologies or operations; |
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failure to realize anticipated synergies in sales, marketing and distribution; |
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diversion of management’s attention; |
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adverse effects on our existing business relationships; |
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potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities; |
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expenses related to amortization of intangible assets and potential write-offs of acquired assets; and |
|
· |
|
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 December 31, 2016, Donald R. Wilson, Jr. and affiliated entities beneficially owned approximately 41% of our outstanding common stock, and Gregory H. Sachs, our Executive Chairman, and affiliated entities beneficially owned approximately 22% 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, and to seek an additional 180 days to regain compliance if necessary. 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 cannot assure you that we will be able to demonstrate compliance within the allotted compliance period, including any extension that may be granted by Nasdaq, 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
17
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.
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; |
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· |
|
the relative voting strength of each previously outstanding share of common stock may be diminished; and |
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· |
|
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.
18
Item 1B. Unresolved Staff Comments
None.
Our corporate headquarters is located in a facility in Addison, a suburb of Dallas, Texas, with approximately 31,255 rentable square feet. In the United States, we also lease office space in Pittsford, New York.
Our EMEA (Europe, Middle East & Asia) operations are based in our leased offices located in and around London, England, with a sub-office serving the Middle East located in Dubai, United Arab Emirates.
Our corporate headquarters is subject to a long-term lease, which expires in 2025. We believe our facilities are adequate to meet our current needs and intend to add or change facilities as our needs require.
We also have leased office space associated with our legacy Media business, which we sold on July 1, 2015. These office leases are located in New York City and San Francisco and expire from 2017 to 2021. We have subleased or are attempting to sublease these offices.
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 4. Mine Safety Disclosures
Not applicable.
19
Item 5. Market for Registrant’s Commo n Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Price for Equity Securities
Our common stock is quoted on the NASDAQ Capital Market after transitioning from the NASDAQ Global Market on February 25, 2016, and our warrants and units are quoted on the OTC bulletin board, under the symbols “RMGN” and “RMGNW, respectively. Our units commenced public trading on April 13, 2011 and were quoted on the OTC bulletin board until April 18, 2016. Our common stock was quoted on the OTC bulletin board until its listing on the NASDAQ Stock Market on May 2, 2012.
The following table sets forth the high and low bid prices as quoted on the NASDAQ Stock Market (with respect to our common stock) and OTCBB (with respect to our warrants and our units) for the periods indicated.
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RMGN |
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RMGNU |
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RMGNW |
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Common Stock |
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Units |
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Warrants |
||||||||||||
Quarter Ended |
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High |
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Low |
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High |
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Low |
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High |
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Low |
||||||
12/31/16 |
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$ |
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$ |
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$ |
— |
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$ |
— |
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$ |
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$ |
— |
09/30/16 |
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$ |
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$ |
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|
$ |
— |
|
$ |
— |
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$ |
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$ |
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06/30/16 |
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$ |
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$ |
|
|
$ |
— |
|
$ |
— |
|
$ |
|
|
$ |
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03/31/16 |
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$ |
|
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$ |
|
|
$ |
— |
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$ |
— |
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$ |
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$ |
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12/31/15 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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09/30/15 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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06/30/15 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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03/31/15 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
|
As of February 28, 2017, there were 25 holders of record of our common stock, five holders of record of our warrants and one holder of record of our units. These numbers exclude holders whose securities are held in nominee or street name by brokers.
Dividends
To date, we have not paid any dividends on our common stock, and we do not expect to pay any dividends in the foreseeable future. The payment of any future cash dividend will be dependent upon revenue and earnings, if any, capital requirements and general financial condition. As a holding company without any direct operations, our ability to pay cash dividends may be limited to availability of cash provided to us by our operating subsidiaries through a distribution, loan or other transaction, and will be within the discretion of our board of directors. Any indebtedness we incur in the future may also limit our ability to pay dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends.
Recent Sales of Unregistered Securities
Other than as previously disclosed in a current report on Form 8-K, none.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our equity securities during 2016.
Item 6. Selected Financial Data
As a smaller reporting company, we are not required to provide the information required by this Item.
20
Item 7. Management’s Discussion and Analysi s of Financial Condition and Results of Operations
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 Reach Media Group on April 8, 2013, and on April 19, 2013, acquired Symon. Symon is considered to be the Company’s predecessor corporation for accounting purposes.
The Company is one of the largest integrated digital signage solution providers, offering enterprise-class digital signage solutions that are relied upon by a majority of Fortune 100 companies and thousands of overall customers in locations worldwide. Through an extensive suite of products that include 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 for critical contact center, supply chain, internal 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. Our installations deliver real-time intelligent visual content that enhances 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 Company conducts operations through its RMG Enterprise Solutions business unit.
On July 1, 2015, the Company divested its RMG Media Networks business unit which was focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment, on in-flight Wi-Fi portals and in private airport terminals. 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.
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. Customer support services:
|
· Product maintenance services; and |
|
· Subscription-based content services. |
3. Professional services:
|
· Professional installation services; |
|
· Custom, “innovative” creative services; and |
|
· Training services. |
Revenue is recognized as outlined in “Critical Accounting Policies - Revenue Recognition” below. 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 92% and 91% of its annual sales in 2016 and 2015, respectively, while 8% and 9% of its sales were generated through resellers in 2016 and 2015, respectively. The slight increase in revenue from resellers in 2016 reflects the Company’s strategy to drive incremental revenue growth through resellers in the United States. Outside the United States, approximately 66% and 67% of sales come from the reseller channel in 2016 and 2015, respectively. Overall, approximately 75% and 68% of the Company’s global enterprise sales are derived from direct sales
21
in 2016 and 2015, respectively, with the remaining 25% and 32% generated through indirect partner channels in 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 consist primarily of the costs of media players, the costs of third-party flat screen displays and the operating costs of the Company’s assembly and distribution operations. The cost of revenue associated with professional services consists of the salary and related benefit costs and the travel costs of the Company’s employees providing installation and training services as well as on-site installation costs from third-party providers. The cost of revenue associated with maintenance and content services consists of the salary and related benefit costs of the Company’s employees engaged in providing customer support and content services and the annual costs associated with acquiring data from third-party content providers.
Operating Expenses
The Company’s operating expenses are comprised of the following components:
|
· |
|
Sales and marketing expenses include salary and related benefit costs of sales personnel, sales commissions, travel by sales and sales support personnel, and marketing and advertising costs. |
|
· |
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Research and development (“R&D”) costs consist of salary and related benefit costs of R&D personnel and expenditures to outside third-party contractors. To date, all R&D expenses are expensed as incurred. |
|
· |
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General and administrative expenses consist primarily of salary and related benefit costs of executives, accounting, finance, administrative, and IT personnel. Also included in this category are other corporate expenses such as rent, utilities, insurance, professional service fees, office expenses, travel by general and administrative personnel and meeting expenses. |
|
· |
|
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
22
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 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
As a result of various renewal initiatives, maintenance revenues began to stabilize starting in late 2015, and increased on a year-over-year basis in 2016, after the Company had seen declines in 2014, primarily from the decision to proactively “end-of-life” maintenance services on certain products in 2014. 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. In addition, the macro-economic impact of continuing low oil prices in the Middle East will likely continue to have an impact on some customers electing to delay committed projects until oil prices begin to rise again.
Expenses
As compared to 2014, the Company has significantly reduced its overall cost structure in both 2015 and 2016 as a result of headcount reductions across the organization, closing underperforming geographies, divesting its non-core Media business, reducing ineffective marketing initiatives, and developing more efficient product distribution operations. In 2016, the Company continued to maintain a strict focus on its operating expenses. Going forward into 2017, the Company plans to invest in areas that it believes have a strong return potential such as research and development and its sales and marketing teams.
23
Results of Operations
Comparison of the years ended December 31, 2016 and 2015
The following financial statements present the results of operations of the Company for the years ended December, 31, 2016 and 2015. The year ended December 31, 2015 results of operations is exclusive of the discontinued operations.
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(in thousands) |
|
Years Ended December 31, |
|
||||||
|
|
2016 |
|
2015 |
|
% Chg |
|
||
Revenue |
|
$ |
|
|
$ |
|
|
|
% |
Cost of Revenue |
|
|
|
|
|
|
|
|
% |
Gross Profit |
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|
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|
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% |
Operating Expenses - |
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|
Sales and marketing |
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|
|
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|
|
|
% |
General and administrative |
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|
|
|
|
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|
% |
Research and development |
|
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|
|
|
|
|
|
% |
Depreciation and amortization |
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|
|
|
|
|
|
|
% |
Total Operating Expenses |
|
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|
|
|
|
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% |
Operating Loss |
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% |
Gain (loss) on change in warrant liability |
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% |
Interest (expense) and other - net |
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% |
Loss before income taxes and discontinued operations |
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% |
Income Tax Expense |
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% |
Net loss before discontinued operations |
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% |
Loss from discontinued operations, net of taxes |
|
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% |
Gain from sale of discontinued operations, net of taxes |
|
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— |
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|
|
% |
Net Loss |
|
$ |
|
|
$ |
|
|
|
% |
Revenue
Revenue was $37.6 million and $40.6 million for the years ended December 31, 2016 and 2015, respectively, a decrease of $3.0 million, or 7.4%. Overall, revenue was down due to revenue declines in our international operations which were down $3.6 million, or 23.6%.
The following table reflects the Company’s revenue on a geographic basis.
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(in thousands) |
|
Years Ended December 31, |
|
||||||||
Region |
|
2016 |
|
2015 |
|
||||||
North America |
|
$ |
|
|
|
% |
$ |
|
|
|
% |
International: |
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|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
|
|
|
% |
|
|
|
|
% |
Europe |
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|
|
|
% |
|
|
|
|
% |
Middle East |
|
|
|
|
|
% |
|
|
|
|
% |
Other |
|
|
|
|
|
% |
|
|
|
|
% |
Total International |
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|
% |
|
|
|
|
% |
Total |
|
$ |
|
|
|
% |
$ |
|
|
|
% |
Revenue growth in the North America region in 2016, resulted primarily from stronger orders driving increased product sales, partially offset by a decline in professional services revenue as further discussed below. United Kingdom revenues decreased in 2016 as compared to 2015 due to lower product sales and professional services revenue. The weakening of the British pound sterling against the U.S. dollar in 2016 had an approximately $774 thousand negative foreign exchange impact on the United Kingdom region’s revenues. Excluding the negative impact of the exchange rate, United Kingdom revenues in British pounds sterling only declined 6.2% in 2016 as compared to 2015. Revenue in the Middle East region decreased 41.8% in 2016 as compared to 2015, as the economic impact of low oil prices continued to be felt in the region. The revenue decline in the Middle East region in 2016 primarily impacted our product sales.
24
The following table summarizes the composition of the Company’s revenue and cost of revenue for the years ended December 31, 2016 and 2015.
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(in thousands) |
|
Years Ended December 31, |
|
||||||||
|
|
2016 |
|
% |
|
|
2015 |
|
% |
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
|
|
|
% |
$ |
|
|
|
% |
Maintenance and content services |
|
|
|
|
|
% |
|
|
|
|
% |
Professional services |
|
|
|
|
|
% |
|
|
|
|
% |
Total Revenue |
|
|
|
|
|
% |
|
|
|
|
% |
Cost of Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
|
|
% |
|
|
|
|
% |
Maintenance and content services |
|
|
|
|
|
% |
|
|
|
|
% |
Professional services |
|
|
|
|
|
% |
|
|
|
|
% |
Total Cost of Revenue before Loss (Gain) on long-term contract |
|
|
|
|
|
% |
|
|
|
|
% |
Loss (Gain) on long-term contract |
|
|
— |
|
— |
% |
|
|
|
|
% |
Total Cost of Revenue |
|
$ |
|
|
|
% |
$ |
|
|
|
% |
Revenues derived from product sales for the year ended December 31, 2016 decreased by $1.6 million, or 9.5%, as compared to the year ended 2015, primarily driven by decreased sales of proprietary hardware and software in international markets, partially offset by increased hardware and software sales in North America. Revenues derived from maintenance and content service contracts for the year ended December 31, 2016 increased by $0.3 million, or 2.2%, as compared to the year ended 2015, primarily due to various renewal initiatives focus on retaining and growing our customer base. Professional service revenue is impacted by the sales mix and professional services employee utilization in any given year. In the year ended December 31, 2016, professional services revenue decreased $1.7 million, or 18.5%, as compared to the year ended December 31, 2015, primarily driven by installation services performed during 2015 that were associated with the sale of a large customer solution made during the fourth quarter of 2014. These installation services remained in backlog at December 31, 2014, until they were completed in 2015.
Cost of Revenue
Cost of revenue was $15.5 million and $18.1 million for the years ended December 31, 2016 and 2015, respectively, a decrease of $2.6 million, or 14.4%. Cost of revenue for the year ended 2015 includes a $0.4 million gain adjustment, reducing cost of revenue resulting from the revaluation of the loss expected on a long-term contract. Excluding this adjustment in 2015, cost of revenues for the year ended December 31, 2016 was $3.0 million lower than during the year ended 2015, primarily attributable to a favorable sales mix with a higher proportion of software sales, lower costs on proprietary hardware, lower warehousing and distribution costs, and a combination of non-recurring credits to product and maintenance costs from a component manufacturer and resolution of a vendor billing matter. Specifically, cost of revenue related to products decreased $1.9 million in 2016 due primarily to higher software sales and lower hardware costs in 2016 as compared to 2015. Cost of revenue related to maintenance and content decreased $0.1 million and professional services decreased $1.0 million in 2016 due to cost reductions implemented in 2015.
The following table reflects the Company’s gross margins for the years ended December 31, 2016 and 2015:
|
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|
|
|
|
|
|
(in thousands) |
|
Years Ended December 31, |
|
||||||||
|
|
2016 |
|
% |
|
2015 |
|
% |
|
||
Products |
|
$ |
|
|
|
% |
$ |
|
|
|
% |
Maintenance and content services |
|
|
|
|
|
% |
|
|
|
|
% |
Professional services |
|
|
|
|
|
% |
|
|
|
|
% |
Subtotal |
|
|
|
|
|
% |
|
|
|
|
% |
Gain (Loss) on long-term contract |
|
|
— |
|
— |
% |
|
|
|
|
% |
Total |
|
$ |
|
|
|
% |
$ |
|
|
|
% |
25
The Company’s overall gross margin for the year ended December 31, 2016 increased to 58.8% from 55.5% for the year ended December 31, 2015. The higher gross margin was primarily attributable to the following:
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Gross margin resulting from product revenue increased to 45.2% for the year ended December 31, 2016, as compared to 39.7% for the year ended December 31, 2015, due a higher mix of software sales, lower proprietary hardware costs, lower warehousing and distribution costs, and lower mix of third party product sales that carry a lower margin. |
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Gross margin resulting from maintenance and content services revenue increased to 91.0% for the year ended December 31, 2016 as compared to 84.3% for the year ended December 31, 2015, due primarily to cost savings from headcount reductions and a combination of non-recurring credits from a component manufacturer and resolution of a vendor billing matter. |
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Gross margin resulting from professional services revenue decreased to 28.6% for the year ended December 31, 2016 as compared to 32.9% for the year ended December 31, 2015, due primarily to lower professional services revenue and lower utilization rates as larger projects in 2015 were completed and not replaced in 2016. |
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Gain on long-term contract increased the gross margin percentage in 2015 by 1.1%, resulting from operational changes incorporated in 2015 reducing the remaining loss on long-term contract. There were no revaluation adjustments to the gain (loss) on long-term contract in 2016. |
Operating Expenses
Operating expenses totaled $26.7 million for the year ended December 31, 2016, a $5.6 million decrease as compared to $32.3 million for the year ended December 31, 2015. This 17.3% decrease was attributable to the following items:
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Sales and marketing expenses were $0.6 million lower for the year ended December 31, 2016, as compared to the prior year, primarily due to lower salary and related benefit costs of sales personnel and sales commissions expense. |
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General and administrative expenses decreased $3.6 million for the year ended December 31, 2016, as compared to prior year, due primarily to reductions in headcount during the second half of 2015, the waived rights to receive deferred salary accrued by the Company’s executive chairman effective February 29, 2016, reduced outside service costs and professional fees, reduced amortization expense associated with stock options and lower bad debt expense. |
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Research and development expenses were $0.8 million lower for the year ended December 31, 2016 as compared to 2015, due to timing associated with our development programs and reductions in headcount. |
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Depreciation and amortization was $0.6 million lower in the year ended December 31, 2016 as compared to 2015, primarily due to lower amortization expense as the customer order backlog intangible asset was amortized fully in 2015. |
Warrant Liability Expense
The Company calculates its warrant liability based on the quoted market value of its outstanding warrants. The gain (loss) on change in warrant liability for the years ended December 31, 2016 and 2015, were $(0.2) million and $1.4 million, respectively. A gain on change in warrant liability represents a decrease in the amount of the Company’s warrant liability during that year.
Interest and other – Net
Interest (expense) and other - net for the year ended December 31, 2016 and 2015 was $0.4 million and $(1.6) million, respectively, a $2.0 million increase. In 2016, the foreign currency gain from the strengthening U.S. dollar against the British pound sterling, slightly offset by interest expense, was the primary driver for other income. In 2015, the $1.6 million
26
interest expense was primarily due to the combined impact from interest expense from the Company’s long-term debt until it 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).
Income Tax Benefit (Expense)
The income tax expense for the years ended December 31, 2016 and 2015 were $143 thousand and $122 thousand, respectively. The Company had book net losses in the years ended December 31, 2016 and 2015 with a U.S. full valuation allowance against the resulting deferred tax asset at December 31, 2016 and 2015.
Liquidity and Capital Resources
The Company’s primary source of liquidity prior to acquiring Reach Media Group and Symon had been the cash generated from its initial public offering. Historically, Symon has generated cash from the sales of its products and services to its global customers. During 2015 and 2016, the Company pursued several financing strategies to ensure the company had liquidity to support its ongoing strategic and operating plans.
During 2014, the Company entered into two agreements that required future cash outlays. The Company renegotiated a revenue sharing agreement with a business partner. The parties agreed, among other things, to eliminate the Company’s remaining minimum revenue sharing commitment of $11.5 million if certain terms and conditions were met in the future. This commitment was paid in full on October 14, 2015. The Company also entered into a revenue sharing agreement directly with a customer that required the Company to make minimum revenue sharing payments of $4.6 million in 2015. As a result of the sale of the Media business, this liability was assumed by the buyer and is no longer an obligation of the Company. As of December 31, 2016, the Company has no further cash obligations under these agreements.
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 the $15.0 million in principal amount owed to the lenders (the “Lenders”) under the Senior Credit Agreement, to which the Company and certain subsidiaries were a party. 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 those generated by 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 Borrowers entered into the Loan Agreement with Silicon Valley Bank (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 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”) 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.
On December 29, 2016, the Company completed a rights offering to existing stockholders of record at November 29, 2016 as well as the related sale of shares to existing stockholders pursuant to a standby purchase agreement. Pursuant to the rights offering and the related private placement, the Company issued an aggregate of 7,741,908 shares of common stock
27
at a price of $0.62 per share for gross proceeds of approximately $4.8 million. Offset by $0.4 million in transaction expenses, the rights offering resulted in $4.4 million of net cash proceeds to be used for general working capital purposes.
At December 31, 2016, the Company had $1.3 million in borrowings and $1.0 million in unused availability under the Revolving Facility. At December 31, 2016, the Company’s cash and cash equivalents balance was $5.1 million. This includes cash and cash equivalents of $1.0 million held in bank accounts of its subsidiaries located outside the United States. The Company currently plans to use this cash to fund its ongoing foreign operations. If the Company were to repatriate the cash held by its subsidiary located outside the United States, it may incur tax liabilities.
The Company believes that the combination of cash and availability under its Revolving Facility provide adequate cash to operate the Company through at least the next twelve months.
The Company has generated and used cash, inclusive of discontinued operations, as follows:
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(in thousands) |
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Years Ended December 31, |
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2016 |
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2015 |
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Operating cash flow |
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$ |
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$ |
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Investing cash flow |
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Financing cash flow |
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Total |
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$ |
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$ |
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Operating Activities
Cash used in operating activities of $2.4 million during 2016 resulted primarily from the Company’s net loss of $4.8 million. The net loss is offset primarily by the following non-cash items:
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Non-cash depreciation and amortization expense of $3.1 million |
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Non-cash loss related to the increase in the Company’s warrant liability of $0.2 million |
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Non-cash stock-based compensation of $0.9 million |
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Non-cash amortization of loan origination fees of $72 thousand |
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Non-cash directors’ fees of $31 thousand |
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Non-cash inventory reserve adjustment for obsolescence of $60 thousand |
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Non-cash allowance for doubtful accounts of $93 thousand |
In addition, the following principal changes in assets and liabilities affected cash from operating activities during the year:
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Accounts receivable increased by $0.5 million due to higher sales in the last quarter of 2016 as compared to 2015, offset by the $0.7 million foreign exchange impact of the strengthened U.S. Dollar that decreased accounts receivable held internationally in British Pound sterling |
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Inventory decreased by $0.2 million as the Company improved demand forecasting and inventory management |
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Other current assets decreased by $0.3 million |
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Accounts payable increased by $0.3 million due primarily to timing of payments on obligations in 2016 as compared to 2015 |
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Accrued liabilities decreased by $0.8 million due to lower operating expenses in 2016 |
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Deferred revenue decreased by $0.7 million due primarily to the timing of the renewal of annual |
28
maintenance and content contracts at December 31, 2016 as compared to 2015 |
Investing Activities
Cash used in investing activities of $0.3 million during 2016 resulted primarily from expenditures for property and equipment.
Financing Activities
Cash generated by financing activities of $5.2 million during 2016 resulted primarily from the $4.4 million of net proceeds received at the end of December from the sale of common shares and $0.9 million of net proceeds borrowed under the Revolving Facility during 2016. See Note 4. Note Payable and Debt Financing and Note 7. Common Stock in the accompanying Notes to the Consolidated Financial Statements.
Critical Accounting Policies
The Company’s significant accounting policies are described in Note 1 of the Company’s consolidated financial statements included elsewhere in this filing. The Company’s 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.
Accounts Receivable
Accounts receivable are comprised of sales made primarily to entities located in the United States, United Kingdom, Europe, Middle East and Asia. Accounts receivable are recorded at the invoiced amounts and do not bear interest. The allowance requires judgment and is reviewed monthly, and the Company establishes reserves for doubtful accounts on a case-by-case basis based on historical collection experience and a current review of the collectability of accounts. The Company’s collection experience has been consistent with its estimates.
Inventory
Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Slow moving and obsolete inventories are written off based on historical experience and estimated future usage.
Intangible Assets
Intangible assets include software and technology, customer relationships, and customer order backlog associated with the acquisition of Symon. The intangible assets are being amortized over their estimated useful lives. The definite lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis, and, if the asset is not recoverable, recognizing an impairment charge, if necessary, to reduce the asset’s carrying amount to its fair value. Intangible assets are evaluated for impairment annually and on an interim basis as events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount.
During 2016 and 2015 and at the years ended December 31, 2016 and 2015, impairment testing was performed for definite lived intangible assets and the Company determined there was no impairment.
The Company’s intangible assets are amortized as follows:
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Weighted Average |
Acquired Intangible Asset: |
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Amortization Period: (years) |
Software and technology |
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2 |
Customer relationships |
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4 |
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Deferred Revenue
Deferred revenue consists of billings or payments received in advance of revenue recognition from maintenance and some professional service agreements. Deferred revenue is recognized as the revenue recognition criteria are met. The Company generally invoices the customer in advance for maintenance agreements.
Impairment of Long-lived Assets
In accordance with ASC 360, Property, Plant, and Equipment , long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset.
There was no impairment of long-lived assets during 2016 and a $0.2 million impairment of long-lived assets during 2015 related to Media assets.
Income Taxes
The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. The Company recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.
Under ASC 740, Income Taxes (“ASC 740”), the Company recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized. It also requires the Company to accrue interest and penalties where there is an underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause it to change its assessment of the appropriate accrual amounts (see Note 6). As of December 31, 2016 and 2015, the Company had no accrual recorded for uncertain tax positions. U.S. income taxes have not been provided on $4.9 million of undistributed earnings of foreign subsidiaries as of December 31, 2016. The Company reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign operations indefinitely. The Company has elected to recognize accrued interest and penalties related to income tax matters as a component of income tax expense if incurred.
Revenue Recognition
The Company recognizes revenue primarily from these sources:
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Products |
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Maintenance and content services |
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Professional services |
The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, which is when product title transfers to the customer, or services have been rendered; (iii) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (iv) collection is reasonably assured. The Company assesses collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If a customer’s acceptance is required for professional services, revenue is recognized upon the earlier of
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customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.
Multiple-Element Arrangements
Products consist of proprietary software and hardware equipment. The Company considers the sale of software more than incidental to the hardware as it is essential to the functionality of the hardware products. The Company enters into multiple-product and services contracts, which may include any combination of equipment and software products, professional services, maintenance and content services.
Multiple Element Arrangements (“MEAs”) are arrangements with customers which include multiple deliverables, including a combination of equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the Company’s control. Revenue from arrangements for the sale of tangible products containing both software and non-software components that function together to deliver the product’s essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price (“RSP”) method for each unit of accounting based first on Vendor Specific Objective Evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists, and on estimated selling price (“ESP”) if neither VSOE or TPE of selling price of the Company’s various applicable tangible products containing essential software products and services. The Company establishes the pricing for its units of accounting as follows:
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VSOE— for certain elements of an arrangement, VSOE is based upon the pricing in comparable transactions when the element is sold separately. The Company determines VSOE based on its pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or standalone prices for the service element(s). |
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TPE— if the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, it uses third-party evidence of selling price. The Company determines TPE based on sales of comparable amounts of similar products or services offered by multiple third parties considering the degree of customization and similarity of the product or service sold. |
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ESP— the estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When VSOE or TPE does not exist for an element, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on its pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP. |
The Company has also established VSOE for its professional services and maintenance and content services based on the same criteria as previously discussed under the software revenue recognition rules.
The Company uses the estimated selling price to determine the relative sales price of its products. Revenue for elements that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement has been met or over the period that our last remaining obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria.
The Company sells its products and services through its global sales force and through a select group of resellers and business partners. In North America, approximately 92% of sales in 2016 have been generated solely by the Company’s sales team, with 8% through resellers. Internationally, the situation is reversed, with around 66% of sales in 2016 coming from the reseller channel. Overall, approximately 75% of the Company’s global sales in 2016 have been derived from direct sales, with the remaining 25% generated through indirect partner channels. The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties and product returns from resellers have be insignificant to date. The Company therefore sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its
31
recognition policies as discussed above. The Company bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users.
The Company recognizes revenue on sales to resellers consistent with its recognition policies as discussed below.
Product revenue
The Company recognizes revenue on product sales generally upon delivery of the product or customer acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue.
Maintenance and content services revenue
Maintenance support consists of 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.
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 consolidated 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 $1.0 million held in foreign countries as of December 31, 2016 were not insured.
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Fair Value Measurements
The Company follows the authoritative guidance on fair value measurements and disclosures with respect to assets and liabilities that are measured at fair value on both a recurring and non-recurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels defined as follows:
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Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities. |
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Level 2 – Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. |
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Level 3 – Inputs are unobservable for the asset or liability. |
As part of its testing of intangible assets for impairment, the Company fair values all of its assets and liabilities, many of which were based on discounted cash flows analysis and forecasted future operating results which represent Level 3 inputs. In addition, the Company values its warrant liability at the end of each period based on Level 2 inputs.
Research and Development Costs
Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed . The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.
Net Income (Loss) per Common Share
Basic net income (loss) per share for each class of participating common stock, excluding any dilutive effects of stock options, 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. There were no stock options, warrants, or other equity instruments outstanding at December 31, 2016 and 2015 that had a dilutive effect on net loss per share.
Foreign Currency Translation
The functional currency of the Company’s United Kingdom subsidiary is the British pound sterling. All assets and all liabilities of the subsidiary are translated to U.S. dollars at period-ending exchange rates. Income and expense items are translated to U.S. dollars at the weighted-average rate of exchange prevailing during the period. Resultant translation adjustments are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.
The Company includes currency gains and losses on temporary intercompany advances in the determination of net income. Currency gains and losses are included in interest and other expenses in the consolidated statements of comprehensive loss.
Business Segment
Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (the Company’s Chief Executive Officer (“CEO”)) in assessing performance and deciding how to allocate resources. Until July 1, 2015, the Company’s business was comprised of two operating segments, Enterprise and Media. The CEO reviewed financial data that encompasses the Company’s Enterprise and Media revenues, cost of revenues, and gross profit. Since the Company operates as a single
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entity globally, it does not allocate operating expenses to each segment for purposes of calculating operating income, EBITDA, or other financial measurements for use in making operating decisions and assessing financial performance. The CEO manages the business based primarily on broad functional categories of sales, marketing and technology development and strategy. See Note 15, Discontinued Operations regarding the Company’s decision to exit the Media segment.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC No. 718-10 - “Compensation – Stock Compensation”. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based awards that are ultimately expected to vest during the period. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the closing price of the Company’s common stock on the date of grant. Compensation expense for all share-based payment awards is recognized using the straight-line amortization method over the vesting period.
Item 7A. Quantitative and Qualitativ e Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Dat a
Our consolidated financial statements and related notes required by this item are set forth as a separate section of this Report. See Part IV, Item 15 of this Form 10-K.
Item 9. Changes in and Disagreement s with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedure s
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 Securities Exchange Act of 1934, as amended (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 December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
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financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, our management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 2016 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (May 14, 2013). Based on its evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.
On March 1, 2017, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to the Loan Agreement. The Fourth Amendment modifies, effective with the month ended January 2017, the minimum amounts of adjusted EBITDA that the Borrowers are required to maintain pursuant to a covenant contained in the Loan Agreement. Other than such change, the Fourth Amendment does not modify the terms of the Loan Agreement.
A copy of the Fourth Amendment is filed as Exhibit 10.18 to this Annual Report and is incorporated herein by reference. The foregoing description of the Fourth Amendment does not purport to be complete and is qualified in its entirety by reference to such Exhibit.
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The information required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2016 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2016.
Item 15. Exhibits, Financial Statement Schedules .
The following documents are filed as part of this report. All amounts presented and discussed are in thousands, except share and per share data.
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(1) |
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Financial Statements |
Consolidated Financial Statements:
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Report of Independent Registered Public Accounting Firm; |
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Consolidated Balance Sheets as of December 31, 2016 and 2015; |
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Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016 and 2015; |
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· |
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Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016 and 2015; |
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· |
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Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015. |
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(2) |
|
Exhibits |
The accompanying Index to Exhibits is incorporated herein by reference.
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
RMG Networks Holding Corporation
We have audited the accompanying consolidated balance sheets of RMG Networks Holding Corporation and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Whitley Penn LLP
Dallas, Texas
March 2, 2017
37
RMG Networks Holding Corporation
Consolidated Balance Sheets
December 31, 2016 and 2015
(in thousands, except share and per share data)
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December 31, |
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December 31, |
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2016 |
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2015 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net of allowance for doubtful accounts of $364 and $676, respectively |
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Inventory, net |
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Prepaid assets |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Loan origination fees |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Secured line of credit |
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Loss on long-term contract |
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— |
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Deferred revenue |
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Total current liabilities |
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Warrant liability |
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Deferred revenue – non-current |
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Deferred tax liabilities |
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— |
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Deferred rent and other |
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Total liabilities |
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Stockholders’ equity: |
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Common stock, $.0001 par value, (250,000,000 shares authorized; 44,923,949 and 37,182,041, shares issued; 44,623,949 and 36,882,041 shares outstanding, at December 31, 2016 and December 31, 2015, respectively.) |
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Additional paid-in-capital |
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Accumulated other comprehensive loss |
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Retained earnings (accumulated deficit) |
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Treasury Stock, at cost (300,000 shares) |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
38
RMG Networks Holding Corporation
Consolidated Statements of Comprehensive Loss
Years Ended December 31, 2016 and 2015
(in thousands, except share and per share data)
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Years Ended December 31, |
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2016 |
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2015 |
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Revenue: |
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Products |
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$ |
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$ |
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Maintenance and content services |
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Professional services |
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Total Revenue |
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Cost of Revenue: |
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Products |
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Maintenance and content services |
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Professional services |
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Gain on long-term contract |
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— |
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Total Cost of Revenue |
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Gross Profit |
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Operating expenses: |
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Sales and marketing |
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General and administrative |
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Research and development |
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Depreciation and amortization |
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Total operating expenses |
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Operating loss |
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Other Income (Expense): |
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Gain (loss) on change in warrant liability |
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Interest (expense) and other income – net |
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Loss before income taxes and discontinued operations |
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Income tax expense |
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Total loss from continuing operations |
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Loss from discontinued operations, net of taxes |
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Gain on sale of discontinued operations, net of taxes |
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— |
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Net loss |
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Other comprehensive loss - |
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Foreign currency translation adjustments |
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Total comprehensive loss |
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$ |
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$ |
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Net loss per share of Common Stock (basic and diluted): |
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Continuing operations |
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$ |
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$ |
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Discontinued operations |
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Net loss per share of Common Stock (basic and diluted) |
|
$ |
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|
$ |
|
Weighted average shares used in computing basic and diluted net loss per share of Common Stock |
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|
The accompanying notes are an integral part of these consolidated financial statements.
39
RMG Networks Holding Corporation
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2016 and 2015
(in thousands)
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Accumulated |
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Retained |
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||||||
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Other |
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Earnings |
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Total |
||||||
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Common |
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Preferred |
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Additional |
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Comprehensive |
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(Accumulated |
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Treasury |
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Stockholders’ |
|||||||
|
|
Stock |
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Shares |
|
Paid-In Capital |
|
Income (Loss) |
|
Deficit) |
|
Stock |
|
Equity (Deficit) |
|||||||
Balances, December 31, 2014 |
|
$ |
|
|
$ |
— |
|
$ |
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$ |
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$ |
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$ |
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$ |
|
Preferred stock issued, net of fees |
|
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Preferred stock conversion to common stock |
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Stock-based compensation |
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|
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|
Foreign currency translation adjustment |
|
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|
|
|
|
|
|
|
|
Net loss |
|
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|
|
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|
|
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|
|
|
Balances, December 31, 2015 |
|
$ |
|
|
$ |
— |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
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|
|
|
|
|
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|
Accumulated |
|
Retained |
|
|
|
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|
||||||
|
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Additional |
|
Other |
|
Earnings |
|
|
|
Total |
|
|
|
||||||
|
|
Common |
|
Preferred |
|
Paid |
|
Comprehensive |
|
(Accumulated |
|
|
|
Stockholders’ |
|
|
|
|||||||
|
|
Stock |
|
Shares |
|
In Capital |
|
Income (Loss) |
|
Deficit) |
|
Treasury Stock |
|
Equity (Deficit) |
|
|
|
|||||||
Balances, December 31, 2015 |
|
$ |
|
|
$ |
— |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
Common stock issued, net of fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Stock-based compensation |
|
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|
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|
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|
|
|
|
|
|
|
|
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|
Foreign currency translation adjustment |
|
|
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|
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|
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|
|
|
|
|
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|
Net loss |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2016 |
|
$ |
|
|
$ |
— |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
40
RMG Networks Holding Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 2016 and 2015
(Inclusive of Discontinued Operations)
(in thousands)
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
||||
|
|
2016 |
|
2015 |
||
Cash flows from operating activities |
|
|
|
|
|
|
Net loss |
|
$ |
|
|
$ |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
Gain on sale of discontinued operations |
|
|
— |
|
|
|
(Gain) loss on change in warrant liability |
|
|
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|
|
|
Impairment of long-lived assets |
|
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— |
|
|
|
Stock-based compensation |
|
|
|
|
|
|
Non-cash loan origination fees |
|
|
|
|
|
|
Non-cash consulting expense |
|
|
— |
|
|
|
Non-cash directors’ fees |
|
|
|
|
|
|
Inventory reserve adjustment for obsolescence |
|
|
|
|
|
— |
Allowance for doubtful accounts |
|
|
|
|
|
|
Deferred tax (benefit) |
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
Non-current deferred tax liabilities |
|
|
|
|
|
— |
Other assets, net |
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
Accrued liabilities |
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
Loss on long-term contract |
|
|
|
|
|
|
Deferred rent and other liabilities |
|
|
|
|
|
|
Net cash used in operating activities |
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
Proceeds from sale of discontinued operations |
|
|
— |
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
Borrowings on line of credit |
|
|
|
|
|
|
Payments on line of credit |
|
|
|
|
|
— |
Proceeds from long-term debt |
|
|
— |
|
|
|
Debt issuance costs |
|
|
|
|
|
|
Conversion of preferred stock to common stock |
|
|
— |
|
|
|
Issuance of common stock, net of issuance costs |
|
|
|
|
|
— |
Issuance of preferred stock, net of issuance costs |
|
|
— |
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
|
|
$ |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
|
|
$ |
|
Cash paid during the period for income taxes |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of these consolidated financial statements.
41
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
1. Organization and Summary of Significant Accounting Policies
Description of the Company
RMG Networks Holding Corporation (“RMG” or the “Company”) is a holding company which owns 100% of the capital stock of RMG Networks Holding, Inc. f/k/a Reach Media Group Holdings, Inc. (“Reach Media Group”) and its subsidiaries and RMG Enterprise Solutions Holdings Corporation, f/k/a Symon Holdings Corporation (“Symon”) and its subsidiaries.
The Company’s common stock currently trades on The Nasdaq Capital Market (“Nasdaq”), under the symbol “RMGN”. Its warrants are quoted on the Over-the-Counter Bulletin Board quotation system under the symbol “RMGNW”.
Description of the Business
The Company is one of the largest integrated digital signage solution providers, offering enterprise-class digital signage solutions that are relied upon by a majority of Fortune 100 companies and thousands of overall customers in locations worldwide. Through an extensive suite of products that include 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 for critical contact center, supply chain, internal 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. The Company’s 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 Company conducts operations through its RMG Enterprise Solutions business unit.
On July 1, 2015, the Company divested its RMG Media Networks business unit which was focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment, on in-flight Wi-Fi portals and in private airport terminals. 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.
Basis of Presentation for Financial Statements
The audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for financial information and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission. In the opinion of management, the audited consolidated financial statements reflect all adjustments and disclosures necessary for a fair presentation of the results of the reported years.
Principles of Consolidation
The consolidated financial statements of RMG Networks Holding Corporation include the accounts of Reach Media Group and its wholly-owned subsidiaries and the accounts of RMG Enterprise Holdings Corporation, f/k/a Symon Holdings Corporation (“Symon”) and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include demand deposits in financial institutions and investments with an original maturity of three months or less from the date of purchase.
42
Accounts Receivable
Accounts receivable are comprised of sales made primarily to entities located in the United States of America, Europe, Middle East, and Asia. Accounts receivable are recorded at the invoiced amounts and do not bear interest. Payment is generally due ninety days or less from the invoice date and accounts more than ninety days are analyzed for collectability. The allowance for doubtful accounts is reviewed monthly and the Company establishes reserves for doubtful accounts on a case-by-case basis based on a current review of the collectability of accounts and historical collection experience. Once all collection efforts have been exhausted, the account is written-off against the allowance. The allowance for doubtful accounts was $364 thousand and $676 thousand at December 31, 2016 and 2015, respectively. As of and for the years presented, no single customer accounted for more than 10% of accounts receivable or revenues.
Inventory
Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Write-offs of slow moving and obsolete inventories are provided based on historical experience and estimated future usage.
|
|
|
|
|
|
|
(in thousands) |
|
December 31, 2016 |
|
December 31, 2015 |
||
Finished Goods |
|
$ |
|
|
$ |
|
Raw Materials |
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
Property and Equipment
The Company records purchases of property and equipment at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset.
Intangible Assets
Intangible assets include software and technology, customer relationships and customer order backlog associated with the acquisition of Symon. The intangible assets are being amortized over their estimated useful lives. The definite lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis, and, if the asset is not recoverable, recognizing an impairment charge, if necessary, to reduce the asset’s carrying amount to its fair value. Intangible assets are evaluated for impairment annually and on an interim basis as events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount.
During the years 2016 and 2015 and at the years ended December 31, 2016 and 2015, impairment testing was performed for definite lived intangible assets and the Company determined that there were no impairments.
The Company’s remaining intangible assets in 2016 are being amortized as follows:
|
|
|
Acquired Intangible Asset: |
|
Amortization
|
Software and technology |
|
2 |
Customer relationships |
|
4 |
Deferred Revenue
Deferred revenue consists of billings or payments received in advance of revenue recognition from maintenance and some professional service agreements. Deferred revenue is recognized as the revenue recognition criteria are met. The Company generally invoices the customer in advance for maintenance agreements.
43
Impairment of Long-lived Assets
In accordance with ASC 360, Property, Plant, and Equipment , long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset.
There was a $0.2 million impairment of long-lived assets during 2015 related to Media assets and no impairment of long-lived assets during 2016.
Income Taxes
The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. The Company recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.
Under ASC 740, Income Taxes (“ASC 740”), the Company recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized. It also requires the Company to accrue interest and penalties where there is an underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause it to change its assessment of the appropriate accrual amounts (see Note 6). As of December 31, 2016 and 2015, the Company had no accrual recorded for uncertain tax positions. U.S. income taxes have not been provided on $4.9 million of undistributed earnings of foreign subsidiaries as of December 31, 2016. The Company reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign operations indefinitely. The Company has elected to recognize accrued interest and penalties related to income tax matters as a component of income tax expense if incurred.
Revenue Recognition
The Company recognizes revenue primarily from these sources:
|
· |
|
Products |
|
· |
|
Maintenance and content services |
|
· |
|
Professional services |
The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, which is when product title transfers to the customer, or services have been rendered; (iii) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (iv) collection is reasonably assured. The Company assesses collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.
Multiple-Element Arrangements
Products consist of proprietary software and hardware equipment. The Company considers the sale of software more than incidental to the hardware as it is essential to the functionality of the hardware products. The Company enters into multiple-
44
product and services contracts, which may include any combination of equipment and software products, professional services, maintenance and content services.
Multiple Element Arrangements (“MEAs”) are arrangements with customers which include multiple deliverables, including a combination of equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the Company’s control. Revenue from arrangements for the sale of tangible products containing both software and non-software components that function together to deliver the product’s essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price (“RSP”) method for each unit of accounting based first on Vendor Specific Objective Evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists, and on estimated selling price (“ESP”) if neither VSOE or TPE of selling price of the Company’s various applicable tangible products containing essential software products and services. The Company establishes the pricing for its units of accounting as follows:
|
· |
|
VSOE— For certain elements of an arrangement, VSOE is based upon the pricing in comparable transactions when the element is sold separately. The Company determines VSOE based on its pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or standalone prices for the service element(s). |
|
· |
|
TPE— If the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, it uses third-party evidence of selling price. The Company determines TPE based on sales of comparable amounts of similar products or services offered by multiple third parties considering the degree of customization and similarity of the product or service sold. |
|
· |
|
ESP— The estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When VSOE or TPE does not exist for an element, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on its pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP. |
The Company has also established VSOE for its professional services and maintenance and content services based on the same criteria as previously discussed under the software revenue recognition rules.
The Company uses the estimated selling price to determine the relative sales price of its products. Revenue for elements that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement has been met or over the period that our last remaining obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria.
The Company sells its products and services through its global sales force and through a select group of resellers and business partners. In North America, approximately 92% of sales have been generated solely by the Company’s sales team, with approximately 8% through resellers. Internationally, the situation is reversed, with around 66% of sales coming from the reseller channel. Overall, approximately 75% of the Company’s global sales have been derived from direct sales, with the remaining 25% generated through indirect partner channels.
The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not normally offer contractual rights of return other than under standard product warranties and product returns from resellers have been insignificant to date. Therefore, the Company generally sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies as discussed above. The Company bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users as well as applying to the resellers.
The Company recognizes revenue on sales to resellers consistent with its recognition policies as discussed below.
45
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.
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 fixed-fee and time-and materials contracts, the Company recognizes revenue 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 as the Company performs the services.
Advertising revenue
The RMG Airline Media Network (“Media”) was classified as discontinued operations and on July 1, 2015 was sold. See Note 15, Discontinued Operations for further detail.
This segment sold advertising through agencies and directly to a variety of customers under contracts ranging from one month to one year. Contracts usually specified the network placement, the expected number of impressions (determined by passenger or visitor counts) and the cost per thousand impressions (“CPM”) over the contract period to arrive at a contract amount. The Company billed for these advertising services as requested by the customer, generally on a monthly basis following delivery of the contracted number of impressions for the particular ad insertion. Revenue was recognized at the end of the month in which fulfillment of the advertising order occurred. Although the Company typically presented invoices to an advertising agency, collection was reasonably assured based upon the customer placing the order.
Payments to airline and other partners for revenue sharing were paid either under a minimum annual guarantee (based upon estimated advertising revenues), or as a percentage of the advertising revenues following collection from customers. The portion of revenue that the Company shared with its partners ranges from 25% to 80% depending on the partner and the media asset. The Company made minimum annual guarantee payments under two agreements (one to an airline partner and one to another partner). Payments to all other partners were calculated on a revenue sharing basis.
Research and Development Costs
Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed . The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.
46
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, accounts receivable and accounts payable. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities reflected in the financial statements approximates fair value due to the short-term maturity of these instruments; the short term debt and the long-term debt’s carrying value approximates its fair value due to the variable market interest rate of the debt.
The Company does not generally require collateral or other security for accounts receivable. However, credit risk is mitigated by the Company’s ongoing evaluations of customer creditworthiness. The Company maintains an allowance for doubtful accounts receivable balances.
The Company maintains its cash and cash equivalents in the United States with three financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation insurable limit. Cash and cash equivalents of $1.0 held in foreign countries as of December 31, 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, warrants and unvested restricted stock, is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is computed similar to basic; however diluted income (loss) per share reflects the assumed conversion of all potentially dilutive securities. Due to the reported net loss for all periods presented, all stock options, warrants, or other equity instruments outstanding at December 31, 2016 and 2015 are 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 year-end exchange rates. Income and expense items are translated to U.S. dollars at the weighted-average rate of exchange prevailing during the year. Resultant translation adjustments are recorded in accumulated other comprehensive 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. Until July 1, 2015, the Company’s business was comprised of two operating segments, Enterprise and Media. The CEO reviewed financial data that encompasses the Company’s Enterprise and Media revenues, cost of revenues, and gross profit. Since the Company operates as a single entity globally, it does not allocate operating expenses to each segment for purposes of calculating operating income, EBITDA, or other financial measurements for use in making operating decisions and assessing financial performance. The CEO manages the business based primarily on broad functional categories of sales, marketing and technology development and strategy. See Note 15, Discontinued Operations regarding the Company’s decision to exit the Media segment.
47
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC No. 718-10 - “Compensation – Stock Compensation”. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based awards that are ultimately expected to vest during the period. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the closing price of the Company’s common stock on the date of grant. Compensation expense for all share-based payment awards is recognized using the straight-line amortization method over the vesting period.
Recent Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, “Revenue from Contracts with Customers”. The new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. 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. We 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 standard requires entities to recognize revenue through the application of a five-step model that includes the: identification of the contract; identification of the performance obligations; determination of the transaction price; allocation of the transaction price to the performance obligations; and recognition of revenue as the entity satisfies the performance obligations. The guidance permits two methods of adoption, the full retrospective method applying the standard to each prior reporting period presented, or the modified retrospective method with a cumulative effect of initially applying the guidance recognized at the date of the initial application. The standard also allows entities to apply certain practical expedients at their discretion. The Company currently anticipates adopting the standard using the modified retrospective method with a cumulative catch up adjustment and providing the additional disclosures comparing results to previous rules. The Company continues to evaluate the impact of the new standard on its consolidated financial statements but its initial assessment anticipates this standard will have no material impact on its consolidated financial statements. The Company will continue the process of evaluating the standard and its initial assessment may change as it continues to refine its systems, processes and assumptions.
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 has assessed the implications of ASU2016-09 and there is no significant impact to its consolidated financial statements for its current options .
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current period presentation. Specifically, $1.1 million of Maintenance and content services revenue related to custom creative services was reclassified to Professional
48
services revenue in the December 31, 2015 Consolidated Statement of Comprehensive Loss and the reported results of operations.
2. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
(in thousands) |
|
Years Ended December 31, |
||||
|
|
2016 |
|
2015 |
||
Machinery & Equipment |
|
$ |
|
|
$ |
|
Furniture & Fixtures |
|
|
|
|
|
|
Software |
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
|
|
|
|
Property and equipment, net |
|
$ |
|
|
$ |
|
Depreciation expense for the years ended December 31, 2016 and 2015 was $0.9 million and $1.2 million, respectively.
3. Intangible Assets
The intangible assets resulted from the valuation related to the acquisition of Symon and the application of Financial Accounting Standards Board Standard Codification 805, “Business Combinations”.
The carrying value of the Company’s intangible assets at December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
||||
|
|
Average |
|
Gross |
|
|
|
|
|
Net |
||||
(in thousands) |
|
Amortization |
|
Carrying |
|
Accumulated |
|
Charge for |
|
Carrying |
||||
|
|
Period (Years) |
|
Amount |
|
Amortization |
|
Impairments |
|
Amount |
||||
Software and technology |
|
2 |
|
$ |
|
|
$ |
|
|
$ |
— |
|
$ |
|
Customer relationships |
|
4 |
|
|
|
|
|
|
|
|
— |
|
|
|
Total |
|
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
$ |
|
The carrying values of the Company’s intangible assets at December 31, 2015, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
||||
|
|
Average |
|
Gross |
|
|
|
|
|
Net |
||||
(in thousands) |
|
Amortization |
|
Carrying |
|
Accumulated |
|
Charge for |
|
Carrying |
||||
|
|
Period (Years) |
|
Amount |
|
Amortization |
|
Impairments |
|
Amount |
||||
Software and technology |
|
3 |
|
$ |
|
|
$ |
|
|
$ |
— |
|
$ |
|
Customer relationships |
|
5 |
|
|
|
|
|
|
|
|
— |
|
|
|
Customer order backlog |
|
— |
|
|
|
|
|
|
|
|
— |
|
|
— |
Total |
|
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
$ |
|
Amortization expense for the year ended December 31, 2016 and 2015 was $2.2 million and $2.5 million, respectively.
Future amortization expense for these assets for the five years ending December 31 and thereafter is as follows:
|
|
|
|
(in thousands) |
|
|
|
2017 |
|
$ |
|
2018 |
|
|
|
2019 |
|
|
|
2020 |
|
|
|
2021 |
|
|
— |
Thereafter |
|
|
— |
Total |
|
$ |
|
49
4. Notes Payable and Debt Financing
Senior Credit Agreement
On April 19, 2013, the Company entered into a Credit Agreement (the “Senior Credit Agreement”) by and among it and certain of its direct and indirect domestic subsidiaries party thereto from time to time (including Reach Media Group and Symon) as borrowers (the “Borrowers”), certain of its direct and indirect domestic subsidiaries party thereto from time to time as guarantors (the “Guarantors” and, together with the Borrowers, collectively, the “Loan Parties”, and the financial institutions from time to time party thereto as lenders (the “Senior Lenders”). The Senior Credit Agreement provided for a five year $24.0 million senior secured term loan facility (the “Senior Credit Facility”).
At the beginning of 2015, the outstanding balance under the Senior Credit Facility was $14.0 million and an additional $1.0 million was borrowed during the first quarter of 2015, all of which was converted to Series A Preferred Stock on March 26, 2015, as described in Note 9 Preferred Stock. As a result of the conversion to Series A Preferred stock, all amounts due under the Senior Credit Agreement were paid in full and the Senior Credit Agreement was terminated in 2015.
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”) will accrue 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 paid 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. On March 1, 2017, the Company entered into the Fourth Amendment (the “Fourth Amendment”) to the Loan Agreement. The Fourth Amendment modifies, effective with the month ended January 2017, the minimum amounts of adjusted EBITDA that the Borrowers are required to maintain pursuant to a covenant contained in the Loan Agreement. Other than such change, the Fourth Amendment does not modify the terms of the Loan Agreement (see Note 18. Subsequent Events).
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 events of default. The Bank’s remedies upon the occurrence of an event of default
50
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.
At December 31, 2015, the Company had $0.4 million in borrowings and $3.0 million in unused availability under the Revolving Facility. At December 31, 2016, the Company had $1.3 million in borrowings and $1.0 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.
5. Sale of Accounts Receivable
In September 2014, the Company entered into an agreement with a third party (the “Purchaser”) under which the Company, from time to time, sold specific accounts receivable related to the Media business to the Purchaser. The Purchaser agreed to advance to the Company 85% of the total value of the purchased accounts, up to a maximum of $3.0 million. The Company received the remaining 15% of the total value of the purchased accounts upon the collection of the full amount of the purchased accounts. All customer payments of the purchased accounts were made to a lock-box controlled by the Purchaser. The Company paid interest to the Purchaser on the total amount of cash advances that had not been repaid at the rate of prime plus 1%; however, the interest rate could never be less than 4.25%. In addition, the Company paid the Purchaser a service charge of 2% on each cash advance.
The purchased accounts were sold by the Company to the Purchaser with full recourse and, in the event the purchased accounts were not fully repaid, the Company was liable for the unpaid portion of the purchased accounts. The Company collateralized the agreement by granting the Purchaser a security interest in the total receivables of its Media business segment and that security interest was included as a credit to accounts receivable on the balance sheet. On July 2, 2015 as part of the divestiture of Media, this amount was paid in full and this agreement was terminated in the third quarter of 2015. There were no outstanding accounts receivables or obligations under this agreement at December 31, 2015 and 2016.
6. Income Taxes
The following table summarizes the tax provision for U.S. federal, state, and foreign taxes on income for the years noted below:
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|
|
|
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(in thousands) |
|
2016 |
|
2015 |
||
Current |
|
|
|
|
|
|
Federal |
|
$ |
— |
|
$ |
— |
State |
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
Current tax expense |
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
Federal |
|
|
|
|
|
— |
State |
|
|
— |
|
|
— |
Foreign |
|
|
|
|
|
|
Deferred tax expense |
|
|
|
|
|
|
Total income tax expense |
|
$ |
|
|
$ |
|
51
Income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income (loss) before income taxes as follows:
|
|
|
|
|
|
|
(in thousands) |
|
2016 |
|
2015 |
||
Computed expected tax benefit |
|
$ |
|
|
$ |
|
State tax benefit, net of federal benefit |
|
|
|
|
|
|
Non-taxable income charge |
|
|
|
|
|
|
Nondeductible expenses, principally goodwill & impairment |
|
|
|
|
|
|
Change in valuation allowance |
|
|
|
|
|
|
Foreign income tax |
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31 and inclusive of discontinued operations are as follows:
|
|
|
|
|
|
|
(in thousands) |
|
2016 |
|
2015 |
||
Deferred revenue |
|
$ |
|
|
$ |
|
Deferred rent |
|
|
|
|
|
|
Accrued wages |
|
|
|
|
|
|
Deferred state sales tax |
|
|
|
|
|
|
Bad debt reserve |
|
|
|
|
|
|
Foreign currency loss |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Current deferred tax assets |
|
|
|
|
|
|
Depreciation and Amortization |
|
|
|
|
|
|
Equity Based Compensation |
|
|
|
|
|
|
Intangible Assets |
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
|
|
|
|
Other |
|
|
— |
|
|
|
Non-current deferred tax assets |
|
|
|
|
|
|
Total Deferred tax assets |
|
|
|
|
|
|
Valuation allowance |
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
— |
|
$ |
— |
The Company evaluates the recoverability of the deferred income tax assets and the associated valuation allowances on a regular basis. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. The increase in the valuation allowance from 2015 to 2016 was $2.0 million and is primarily due to changes in net operating loss carryforwards.
At December 31, 2016, the Company had federal net operating loss carryforwards of approximately $68.4 million, which expire in 2032-2035. Of the $25.6 million in non-current net operating losses above, approximately $2.4 million relates to state net operating losses. The Company evaluates a variety of factors on a regular basis to determine the amount of deferred income tax assets to recognize in the financial statements. These factors include the Company’s recent earnings history, projected future taxable income, the number of years the Company’s net operating loss and tax credits can be carried forward, the existence of taxable temporary differences, and available tax planning strategies.
The Company accounts for uncertain tax positions in accordance with FASB ASC Topic 740. This guidance prescribes a comprehensive model as to how a company should recognize, present, and disclose in its financial statement uncertain tax positions that a company has taken or expects to take on its tax return. Symon’s open tax years are for the years ended January 31, 2012 and 2013 and the short period ending April 19, 2013. All Reach Media Group tax years within the statute of limitations are open. As of December 31, 2016 and 2015, the Company had no accruals recorded for uncertain tax positions. The Company has elected to recognize accrued interest and penalties related to income tax matters as a component of income tax expense if incurred. For the years ended December 31, 2016 and 2015, there were no such costs related to income taxes. It is determined not to be reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months. The Company is currently subject to a three year statute of limitation by major tax jurisdictions.
52
7. Common Stock
The Company is authorized to issue up to 250,000,000 shares of common stock, par value $0.0001 per share. Stockholders of record are entitled to one vote for each share of common stock held on all matters to be voted on. Stockholders are entitled to receive ratable dividends when, as and if declared, by the Company’s Board of Directors out of funds legally available. In the event of a liquidation, dissolution, or winding up of the Company, stockholders are entitled to share ratably in all assets remaining available for distribution after payment of all liabilities of the Company, and after all provisions are made for each class of stock, if any, having preference over the common stock. Common stockholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the Company’s common stock.
On December 29, 2016, the Company closed on its rights offering to existing stockholders of record at November 29, 2016 as well as the related sale of shares to existing stockholders pursuant to a standby purchase agreement. The rights offering also included an over-subscription right, which entitled existing stockholders that exercised all of their basic subscription rights to purchase additional shares to the extent not purchased by other rights holders. The Company issued an aggregate of 7,741,908 shares of common stock at a price of $0.62 per share for gross proceeds of approximately $4.8 million. Offset by $0.4 million in transaction expenses, the rights offering resulted in $4.4 million of net cash proceeds to be used for general working capital purposes.
As of December 31, 2016 and 2015, the Company had 44,623,949 and 36,882,041, respectively outstanding shares of common stock.
8. Warrants
As of December 31, 2016 and 2015, the Company had 9,649,318 warrants outstanding. As of December 31, 2016, 4,582,652 of these were public warrants. Each warrant entitles the registered holder to purchase one share of common stock at an exercise price of $11.50 per share.
Public Warrants
Each warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment as discussed below, and are currently exercisable, provided that there is an effective registration statement under the Securities Act covering the underlying shares and a current prospectus relating to them is available.
The warrants issued as part of the Offering expire on April 8, 2018 or earlier upon redemption or liquidation. The Company may call warrants for redemption:
|
· |
|
in whole and not in part; |
|
· |
|
at an exercise price of $0.01 per warrant; |
|
· |
|
upon not less than 30 days’ prior written notice of redemption, or the 30-day redemption period, to each warrant holder; and |
|
· |
|
if, and only if, the last sale price of the Company’s common stock equals or exceeds $17.50 per share for any 20 trading days within a 30-day trading period ending on the third business day before the Company sends notice of redemption to the warrant holders. |
If the Company calls the Public Warrants for redemption as described above, it will have the option to require any holder of warrants that wishes to exercise his, her or its Warrant to do so on a “cashless basis”. If the Company takes advantage of this option, all holders of Public Warrants would pay the exercise price by surrendering his, her or its warrants for that number of shares of our common stock equal to, but in no case less than $10.00, the quotient obtained by dividing (x) the product of the number of shares of the Company’s common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the Company’s common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. If the Company takes advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of common stock to be received upon exercise of the warrants, including the “fair market value” in such
53
case. Requiring a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the dilutive effect of a warrant redemption. If the Company calls the warrants for redemption and the Company’s management does not take advantage of this option, SCG Financial Holdings, LLC (the “Sponsor”) and its permitted transferees would still be entitled to exercise their 4,000,000 warrants purchased on April 12, 2011 (the “Sponsor Warrants”) for cash or on a cashless basis using the same formula described above that holders of Public Warrants would have been required to use had all warrant holders been required to exercise their warrants on a cashless basis, as described in more detail below.
The exercise price, the redemption price and number of shares of common stock issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a stock dividend, stock split, extraordinary dividend, or recapitalization, reorganization, merger or consolidation. However, the exercise price and number of Common Shares issuable on exercise of the warrants will not be adjusted for issuances of common stock at a price below the Warrant exercise price.
The Public Warrants were issued in registered form under a Warrant Agreement between the Company’s transfer agent (in such capacity, the “Warrant Agent”), and the Company (the “Warrant Agreement”). The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to the Company for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share of common stock held of record on all matters to be voted on by our stockholders.
No Public Warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and available throughout the 30-day redemption period and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants.
No fractional shares of common stock will be issued upon exercise of the Public Warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share of common stock, the Company will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the warrant holder. The Public Warrants expire on April 8, 2018.
Sponsor Warrants
The Sponsor purchased an aggregate of 4,000,000 Sponsor Warrants from the Company at a price of $0.75 per warrant in a private placement completed on April 12, 2011. In addition, on April 8, 2013, the Company issued to the Company’s Executive Chairman and a significant stockholder Sponsor Warrants exercisable for a total of 1,066,666 shares of the Company’s common stock. These warrants were issued upon the conversion by each of the parties of a Promissory Note issued by the Company to the Sponsor and in the aggregate principal amount of $800 thousand, which Promissory Note was subsequently assigned by the Sponsor to the Executive Chairman and significant stockholder in the aggregate principal amount of $400 thousand each. The conversion price of the Promissory Notes was $0.75 per warrant. The Sponsor Warrants (including the shares of Company common stock issuable upon exercise of the Sponsor Warrants) were not transferable, assignable or salable (other than to the Company’s officers and directors and other persons or entities affiliated with the Sponsor) until May 8, 2013, and they will not be redeemable by the Company so long as they are held by the Sponsor or its permitted transferees. Otherwise, the Sponsor Warrants have terms and provisions that are identical to the Public Warrants, except that such Sponsor Warrants may be exercised by the holders on a cashless basis. If the Sponsor Warrants are held by holders other than the Sponsor or its permitted transferees, the Sponsor Warrants will be redeemable by the Company and exercisable by the holders on the same basis as the Public Warrants. The Sponsor Warrants expire on April 8, 2018.
9. Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
54
On March 26, 2015, the Company issued and sold an aggregate of 249,999.99 shares of newly-designated Series A convertible preferred stock (the “Series A Preferred Stock”) to certain accredited investors (collectively, the “Investors”), including certain of the Company’s executive officers and directors (or affiliated entities), at a price per share of $100.00, pursuant to a Purchase Agreement dated March 25, 2015 (the “Financing”). As part of the Financing, $15 million of the shares of Series A Preferred Stock were issued and sold to White Knight Capital Management LLC and Children’s Trust C/U the Donald R. Wilson 2009 GRAT #1 (together, the “Lenders”), which entities were the lenders under the Senior Credit Agreement, in consideration for the satisfaction and discharge of all principal amounts owed to the Lenders under the Senior Credit Agreement on a dollar-for-dollar basis. 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.
The shares of Series A Preferred Stock had the rights and preferences set forth in the Certificate of Designation of Series A Convertible Preferred Stock filed by the Company on March 25, 2015 (the “Certificate of Designation”). Pursuant to the Certificate of Designation, each share of Series A Preferred Stock was automatically converted into 100 shares of the Company’s common stock on May 13, 2015, the date on which the stockholders of the Company approved a proposal to permit the issuance of shares of common stock upon the conversion of the Series A Preferred Stock.
In connection with the Financing, on March 25, 2015 the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Investors pursuant to which the Company filed with the SEC a registration statement covering the resale of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock (the “Registrable Securities”). If the registration statement ceases for any reason to be effective at any time for more than 20 consecutive days or a total of 45 days in any 12 month period before the Registrable Securities have been resold, or if the Company fails to keep public information available or to otherwise comply with certain obligations such that the Investors are unable to resell the Registrable Securities pursuant to the provisions of Rule 144 promulgated under the Securities Act, then the Company shall be obligated to pay to each Investor an amount in cash, as liquidated damages and not as a penalty, equal to 1.5% of the purchase price paid by such Investor for the Shares purchased under the Purchase Agreement per month until the applicable event giving rise to such payments is cured.
The Company recorded its Convertible Preferred Stock at fair value on the dates of issuance, net of issuance costs. A redemption event would have been made possible upon reaching a one year anniversary of the closing of the Preferred Stock agreement. At that date, the Preferred Stock would have become redeemable at the option of the holder. As the redemption event was outside the control of the Company, all shares of Convertible Preferred Stock were presented outside of permanent equity as of March 31, 2015. In connection with the conversion of the Preferred Stock to common stock on May 13, 2015, the redemption feature has been eliminated and the Preferred Stock was reclassified to common stock in permanent equity on this date.
10 . Warrant Liability and Fair Value
Pursuant to the Company’s Offering, the Company sold 8,000,000 units, which subsequently separated into one warrant at an initial exercise price of $11.50 and one share of common stock. The Sponsor also purchased 4,000,000 warrants in a private placement in connection with the initial public offering. The warrants expire on April 8, 2018. The warrants issued contain a cashless exercise feature and a restructuring price adjustment provision in the event of any merger or consolidation of the Company with or into another corporation, subsequent to the initial business combination, where the surviving entity is not the Company and whose stock is not listed for trading on a national securities exchange or on the OTC Bulletin Board, or is not to be so listed for trading immediately following such event (the “Applicable Event”). The exercise price of the warrant is decreased immediately following an Applicable Event by a formula that causes the warrants to not be indexed to the Company’s own stock.
As a result, the warrants are considered a derivative and the liability has been classified as a liability on the Balance Sheet. Management uses the quoted market price of the warrants to calculate the warrant liability which was determined to be $289 thousand at December 31, 2016 and $96 thousand at December 31, 2015. This valuation is revised on a quarterly basis until the warrants are exercised or they expire with the changes in fair value recorded in the statement of operations. Any change in the market value of the warrant liability is recorded as Other Income (Expense) in the Statement of Comprehensive Loss.
55
The fair value of the derivative warrant liability was determined by the Company using the quoted market prices for the publicly traded warrants. On reporting dates where there are no active trades the Company uses the last reported closing trade price of the warrants to determine the fair value (Level 2). There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2016 and 2015.
The following table presents information about the Company’s warrant liability that is measured at fair value on a recurring basis, and intangible assets on a non-recurring basis and indicates the fair value hierarchy of the valuation techniques the Company used to determine such fair value. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
Significant |
||
|
|
|
|
Quoted in |
|
Other |
|
Other |
||
(in thousands) |
|
Fair |
|
Active Markets |
|
Observable Input |
|
Unobservable Inputs |
||
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
||
Warrant Liability: |
|
|
|
|
|
|
|
|
|
|
December 31, 2015 |
|
$ |
|
|
— |
|
$ |
|
|
— |
December 31, 2016 |
|
$ |
|
|
— |
|
$ |
|
|
— |
11. Commitments and Contingencies
Office Lease Obligations –
The Company currently leases office space in Addison, a suburb of Dallas, Texas that expires on March 31, 2025. The Company received a tenant improvement allowance of $1.3 million which was recorded as an increase in leasehold improvements and deferred rent to be amortized over the life of the lease. The Company also received a one-year rent abatement, but the rent expense is being recorded on a straight-line basis. The Company also leases office space in Pittsford, New York.
In addition, the Company leases office spaces in Luton, England under a lease agreement that expires in June 2021 with an option to extend through June 2026; in London, England under a lease agreement that expires in January 2020; in Dubai, UAE under a lease agreement that expires in August 2017; and in Manila, Philippines under a lease that expires in March 2017.
The Company also leases office space associated with its legacy Media business, which was sold on July 1, 2015. These office leases are located in New York City and San Francisco and expire from 2017 to 2021. The Company has subleased some of these locations.
Future minimum rental payments under these leases are as follows:
|
|
|
|
(in thousands) |
|
Amount |
|
2017 |
|
$ |
|
2018 |
|
|
|
2019 |
|
|
|
2020 |
|
|
|
2021 |
|
|
|
Thereafter |
|
|
|
|
|
$ |
|
Total rent expense under all operating leases for the year ended December 31, 2016 and 2015 were $1.5 million and $2.8 million, respectively and inclusive of discontinued operations and lease impairment charge of $0.5 million in 2015. As part of the discontinued operations of the Media business unit, the Company abandoned the related Media properties and accrued a lease impairment charge using a cease-use date of July 1, 2015. The lease impairment charge was calculated at July 1, 2015 based on netting the future lease commitments of $0.8 million less the future sublease income of $0.3 million.
56
The Company is currently subleasing three facilities and received payments totaling $0.6 million during 2016, which was less than the Company’s monthly lease obligations. The leases expire in August 2017, February 2018, and February 2021.
Future minimum sublease receipts under these subleases are as follows:
|
|
|
|
(in thousands) |
|
Amount |
|
2017 |
|
$ |
|
2018 |
|
|
|
2019 |
|
|
|
2020 |
|
|
|
2021 |
|
|
|
Thereafter |
|
|
— |
|
|
$ |
|
Capital Lease Commitments -
The Company has entered into capital lease agreements with leasing companies for the financing of equipment and furniture purchases. The capital lease payments and amortization expire at various dates through June 2017. Any current portion of the capital leases is included in accrued liabilities on the Consolidated Balance Sheets. Future minimum lease payments under non-cancelable capital lease agreements consist of the following amounts for the year ending December 31:
|
|
|
|
(in thousands) |
|
Capital |
|
|
|
Leases |
|
2017 |
|
$ |
|
2018 |
|
|
— |
Total minimum lease payments |
|
|
|
Less amount representing interest |
|
|
|
Present value of capital lease obligations |
|
|
|
Less current portion |
|
|
|
Non-current portion |
|
$ |
— |
Legal proceedings -
The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management is not aware of any claims that would have a material effect on the Company’s financial position, results of operations or cash flows.
As previously disclosed, on March 5, 2015, T-Rex Property AB (“T-Rex”) filed a complaint against the Company in the United States District Court for the North District of Texas, Civil Action Number 3:15-cv-00738-P. T-Rex alleged that the Company was infringing on three United States patents. The complaint sought unspecified monetary relief, injunctive relief for the payment of royalties and reimbursement for attorneys’ fees. The Company denied the allegations set forth in the complaint. On October 5, 2015, the parties entered into a negotiated settlement agreement under which the Company made one payment in 2015 and a final payment in January 2016 to T-Rex and in exchange received a worldwide license to import, make, use and sell all inventions covered by patents owned or managed by T-Rex, with certain exclusions due to limitations on T-Rex’s legal ability to grant licenses. The case was subsequently dismissed.
57
12. Accrued Liabilities
Accrued liabilities are as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Years Ended December 31, |
||||
|
|
2016 |
|
2015 |
||
Professional fees |
|
$ |
|
|
$ |
|
Accrued compensation |
|
|
|
|
|
|
Other taxes payable |
|
|
|
|
|
|
Accrued lease obligations |
|
|
|
|
|
|
Accrued expenses |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
13. 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) |
|
Years Ended December 31, |
||||
Region |
|
2016 |
|
2015 |
||
North America |
|
$ |
|
|
$ |
|
International |
|
|
|
|
|
|
United Kingdom |
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
Middle East |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
International |
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
The vast majority of the Company’s long-lived assets are located in the United States.
14. Equity Incentive Plan
On July 12, 2013, the Company’s stockholders approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”) and the reservation of 2,500,000 shares of the Company’s common stock for issuance under the 2013 Plan. The 2013 Plan is intended to promote the interests of the Company and its stockholders by providing the Company’s employees, directors and consultants with incentives and rewards to encourage them to continue in the Company’s service and with a proprietary interest in pursuing the Company’s long-term growth, profitability and financial success. Equity awards available under the 2013 Plan include stock options, stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units, share-denominated performance units and cash awards. The 2013 Plan is administered by the compensation committee of the board of directors of the Company, which has the authority to designate the employees, consultants and members of the board of directors who will be granted awards under the 2013 Plan, to designate the amount, type and other terms and conditions of such awards and to interpret any and all provisions of the 2013 Plan and the terms of any awards under the 2013 Plan. The 2013 Plan will terminate on the tenth anniversary of its effective date.
There were no new equity awards granted during the year ended December 31, 2015. 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
58
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 CEO in connection with the issuance of the CEO’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 years ended December 31, 2016 and 2015 were $0.9 million and $1.6 million, respectively. The unamortized cost of the options at December 31, 2016 was $0.7 million, to be recognized over a weighted-average remaining life of 1.5 years. At the years ended December 31, 2016 and 2015, 960,000 and 1,166,128 shares of the options were exercisable. In addition, there was no intrinsic value associated with the options as of December 31, 2016. The weighted-average remaining contractual life of the options outstanding is 7.2 years.
A summary of the changes in outstanding stock options under all equity incentive plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Grant |
|
Weighted |
|
Remaining |
|
|
|
|
|
Date |
|
Average |
|
Contractual Term |
|
|
|
Shares |
|
Fair Value |
|
Price |
|
(as of December 31, 2016) |
|
Balance, December 31, 2014 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015 |
|
|
|
|
|
|
|
|
|
Non-exercisable |
|
|
|
|
|
|
|
|
|
Outstanding and exercisable, December 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
$ |
|
|
|
|
|
Forfeited or cancelled |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016 |
|
|
|
|
|
|
|
|
|
Non-exercisable |
|
|
|
|
|
|
|
|
|
Outstanding and exercisable, December 31, 2016 |
|
|
|
|
|
|
|
|
|
Following is a summary of compensation expense recognized for the issuance of stock options and restricted stock grants for the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
(in thousands) |
|
2016 |
|
2015 |
||
Selling and marketing |
|
$ |
|
|
$ |
|
General and administrative |
|
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
The Company computed the estimated fair values of stock options using the Black-Scholes model. These values were calculated using the following assumptions:
|
|
|
|
|
2016 |
Risk-free interest rate |
|
1.32% |
Expected term |
|
6.0 years |
Expected price volatility |
|
103.8% |
Dividend yield |
|
— |
Expected Term: The Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment behavior, so we estimate the expected term of awards granted by taking the average of the vesting term and the contractual term of the awards, referred to as the simplified method.
Volatility: The expected volatility being used is based on a blend of comparable small- to mid-size public companies serving similar markets.
Risk Free Interest Rate: The risk free interest rate is based on the U.S. Treasury’s zero coupon issues with remaining terms similar to the expected term on the award.
59
Dividend Yield: The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Forfeitures: As we do not have sufficient historical information to develop reasonable expectations about forfeitures, we currently apply actual forfeitures.
15. Discontinued Operations
Due to ongoing losses, 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 improve the Company’s overall margins and profitability. The Company exited these operations on July 1, 2015 and did not have involvement with the operations post disposal. Therefore, under applicable accounting standards, the Company 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 a pre-tax gain of $2.3 million and is presented in the Consolidated Statement of Comprehensive Loss. 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. Since the facilities lease liabilities of the Media business were not assumed by GEE and will continue to be incurred under the existing contracts for their remaining terms without economic benefit, the Company has established cease-use dates for the facilities and recorded lease impairment liabilities based on the present value of the remaining future lease rentals, reduced by actual sublease rentals. The lease impairment liability of $0.2 million and $0.5 million are included in accrued liabilities of the Consolidated Balance Sheet at December 31, 2016 and 2015, respectively. Also, some employees of Media were transferred to GEE as part of the transaction agreement. The terms of the escrow requires certain levels of performance related to a revenue sharing agreement and its related minimum revenue share requirements. The terms of the escrow were not met, and as a result, the Company will not receive any additional funds .
The following table shows the results of operations of the Company’s discontinued operations:
|
|
|
|
|
|
|
(in thousands) |
|
Years Ended December 31, |
||||
|
|
2016 |
|
2015 |
||
Revenue |
|
$ |
— |
|
$ |
|
Cost of Revenue |
|
|
— |
|
|
|
Operating Expenses |
|
|
|
|
|
|
Operating Loss |
|
|
|
|
|
|
Other expenses (income), net |
|
|
— |
|
|
|
Net loss from discontinued operations |
|
$ |
|
|
$ |
|
The $0.3 million operating expenses incurred during the year ended December 31, 2016 were related to a lease impairment adjustment and final additional expenses for the discontinued operations of its Media business. There are no assets or liabilities of the Company’s discontinued operations at December 31, 2016 and 2015.
16. 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, Jr., a major stockholder. Under the agreement, the Consultant provides management consulting services to the Company and its subsidiaries with respect to financing, acquisitions, sourcing, diligence, and strategic planning. In consideration for its services, the Consultant received a one-time payment of 120,000 shares of the common stock of the Company which had a market value of $1.0 million when
60
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 year ended December 31, 2015 was $0.3 million. There was no amortized expense charged to operations for the year ended December 31, 2016 since there was no unamortized value of the common stock after the third quarter of 2015. There was no unamortized value of the common stock at December 31, 2016 and 2015. Under the Agreement, the Consultant also received an annual services fee of $50 thousand, which terminated in July 2015.
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 and was terminated in December 2016. Under this agreement, the Company has incurred charges for the years ended December 31, 2016 and 2015 of $98 thousand and $121 thousand, respectively.
As discussed in Note 4, the Company’s former senior lender sold its interest in the Company’s Senior Credit Facility to a new lender group that included the Company’s Executive Chairman and largest shareholder. Interest expense paid to the new lender group was $416 thousand during the year ended December 31, 2015. No interest expense was paid during the year ended December 31, 2016.
Effective July 1, 2016, the Company entered into a one year auto-renewing agreement with a company owned by an employee under which it receives a flat fee of $5 thousand a month for content and marketing services. Under this agreement, the Company has earned $30 thousand in revenue for the year ended December 31, 2016.
17. Loss on Long-Term Contract
During the second quarter of 2014, the Company updated its analysis of a long-term partner related contract that originated in 2013. 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 June 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 |
|
$ |
|
Revenue reduction |
|
|
|
Total |
|
$ |
|
The Company continues to re-evaluate this loss contract status. During 2015, the Company reassessed its future revenue projections and operating costs for the remainder of the contract until it terminated on December 31, 2016. Based on lower revenue and operating expense projections, the Company revised its loss contract estimates during the year ended December 31, 2015, which resulted in a net gain of $0.4 million and the remaining balance on the loss on long-term contract was $0.6 million. The Company evaluated its loss contract estimates during the year ended December 31, 2016, which resulted in no net change on the long-term contract. The contract terminated on December 31, 2016 with no remaining obligation or liability.
18. Subsequent Event
On March 1, 2017, the Company entered into the Fourth Amendment (the “Fourth Amendment”) to the Loan Agreement. The Fourth Amendment modifies, effective with the month ended January 2017, the minimum amounts of adjusted EBITDA that the Borrowers are required to maintain pursuant to a covenant contained in the Loan Agreement. Other than such change, the Fourth Amendment does not modify the terms of the Loan Agreement.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 |
|
|
Chief Executive Officer |
Date: March 2, 2017
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert Michelson and Robert Robinson, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Gregory H. Sachs |
|
Executive Chairman |
|
March 2, 2017 |
Gregory H. Sachs |
|
|
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|
|
|
|
|
|
/s/ Robert Michelson |
|
Chief Executive Officer and Director |
|
March 2, 2017 |
Robert Michelson |
|
(Principal Executive Officer) |
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|
|
|
|
|
|
/s/ Jana Ahlfinger Bell |
|
Chief Financial Officer |
|
March 2, 2017 |
Jana Ahlfinger Bell |
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
/s/ Marvin Shrear |
|
Director |
|
March 2, 2017 |
Marvin Shrear |
|
|
|
|
|
|
|
|
|
/s/ Jonathan Trutter |
|
Director |
|
March 2, 2017 |
Jonathan Trutter |
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|
|
|
|
|
|
|
|
/s/ Alan Swimmer |
|
Director |
|
March 2, 2017 |
Alan Swimmer |
|
|
|
|
|
|
|
|
|
/s/ Jeffrey Hayzlett |
|
Director |
|
March 2, 2017 |
Jeffrey Hayzlett |
|
|
|
|
62
INDEX TO EXHIBITS
Exhibit No. |
|
Description |
|
|
|
3.1 |
|
Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 12, 2013 (1) |
3.2 |
|
Amended and Restated Bylaws (3) |
4.1 |
|
Specimen Unit Certificate (2) |
4.2 |
|
Specimen Common Stock Certificate (2) |
4.3 |
|
Specimen Warrant Certificate (10) |
4.4 |
|
Warrant Agreement, dated April 12, 2011, by and between SCG Financial Acquisition Corp. and Continental Stock Transfer & Trust company (4) |
10.1 |
|
Registration Rights Agreement, dated April 12, 2011, by and between SCG Financial Acquisition Corp. and SCG Financial Holdings LLC (4) |
10.2 |
|
Form of Indemnity Agreement (2) |
10.3 |
|
Registration Rights Agreement, dated April 8, 2013, by and among SCG and the former RMG stockholders party thereto (5) |
10.4 |
|
Registration Rights Agreement, dated April 8, 2013, by and among SCG, Special Value Opportunities Fund, LLC, Special Value Expansion Fund, LLC and Tennenbaum Opportunities Partners V, LP (5) |
10.5 |
|
Investor Rights Agreement, dated April 19, 2013, by and among SCG Financial Acquisition Corp., Plexus Fund II, L.P., Kayne Anderson Mezzanine Partners (QP), LP, KAMPO US, LP and Kayne Anderson Mezzanine Partners, LP (6) |
10.6 |
|
Registration Rights Agreement, dated April 19, 2013, by and between SCG Financial Acquisition Corp. and DRW Commodities, LLC (6) |
10.7 |
|
Executive Employment Agreement, dated as of August 13, 2013, between RMG Networks Holding Corporation and Gregory H. Sachs (7) |
10.8 |
|
Employment Agreement, dated as of July 22, 2014, by and between SCG Financial Merger I Corp. and Robert Michelson (3) |
10.9 |
|
Confidential Separation Agreement and General Release, dated as of July 23, 2014, by and between the Company and Garry K. McGuire, Jr. (3) |
10.10 |
|
Purchase Agreement, dated March 25, 2015, among the Company and the Investors party thereto (8) |
10.11 |
|
Registration Rights Agreement, dated March 25, 2015, among the Company and the Investors party thereto (8) |
10.12 |
|
Form of Lock-Up Agreement entered into in March 2015 (8) |
10.13 |
|
Form of Support Agreement entered into in March 2015 (8) |
10.14 |
|
Loan and Security Agreement, dated as of October 13, 2015 (9) |
10.15 |
|
First Amendment to Loan and Security Agreement, dated as of November 17, 2015. * |
10.16 |
|
Second Amendment to Loan and Security Agreement, dated as of March 9, 2016. * |
10.17 |
|
Third Amendment to Loan and Security Agreement, dated September 30, 2016 (11) |
10.18 |
|
Fourth Amendment to Loan and Security Agreement, dated March 1, 2017 * |
10.19 |
|
Standby Purchase Agreement, dated November 30, 2016, by and among RMG Networks Holding Corporation, 2012 DOOH Investments LLC, DRW Commodities, LLC and Children’s Trust C/U The Donald R. Wilson 2009 GRAT #1 (12) |
10.20 |
|
Registration Rights Agreement, dated December 29, 2016, by and among RMG Networks Holding Corporation, 2012 DOOH Investments LLC, DRW Commodities, LLC and Children’s Trust C/U The Donald R. Wilson 2009 GRAT #1 (13) |
14.1 |
|
Code of Conduct (2) |
21.1 |
|
List of subsidiaries* |
23.1 |
|
Consent of Whitley Penn, LLP* |
24.1 |
|
Power of Attorney (included on the signature page to this report)* |
31.1 |
|
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).* |
31.2 |
|
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).* |
32.1 |
|
Certification of the Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.** |
101.INS* |
|
XBRL Instance Document |
101.SCH* |
|
XBRL Taxonomy Extension Schema |
101.CAL* |
|
XBRL Taxonomy Calculation Linkbase |
63
101.LAB* |
|
XBRL Taxonomy Label Document |
101.PRE* |
|
XBRL Definition Linkbase Document |
101.DEF* |
|
XBRL Definition Linkbase Document |
|
(1) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by the registrant on July 18, 2013. |
|
(2) |
|
Incorporated by reference to an exhibit to the Registration Statement on Form S-1 filed by the registrant on March 24, 2011. |
|
(3) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by the registrant on July 24, 2014. |
|
(4) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by the registrant on April 18, 2011. |
|
(5) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by the registrant on April 12, 2013. |
|
(6) |
|
Incorporated by reference to an exhibit to the Registration Statement on Form S-1 filed by the registrant on June 28, 2013. |
|
(7) |
|
Incorporated by reference to an exhibit to the Quarterly Report on Form 10-Q filed by the registrant on August 14, 2013. |
|
(8) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by the registrant on March 25, 2015. |
|
(9) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by the registrant on November 4, 2015. |
|
(10) |
|
Incorporated by reference to an exhibit to the Registration Statement on Form S-1 filed by the registrant on March 8, 2011. |
|
(11) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by the registrant on September 30, 2016. |
|
(12) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by the registrant on November 30, 2016. |
|
(13) |
|
Incorporated by reference to an exhibit to the Current Report on Form 8-K by the registrant on January 3, 2017. |
* Filed herewith
** Furnished herewith
64
Exhibit 10.15
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “ Amendment ”) is entered into effective as of November 17, 2015, by and among SILICON VALLEY BANK , a California corporation (“ Bank ”), and RMG NETWORKS HOLDING CORPORATION , a Delaware corporation, RMG NETWORKS, INC. , a Delaware corporation, RMG ENTERPRISE SOLUTIONS, INC. , a Delaware corporation, RMG NETWORKS LIMITED , a corporation formed under the laws of the United Kingdom, and RMG NETWORKS MIDDLE EAST, LLC , a Nevada limited liability company (collectively, “ Borrower ”).
RECITALS
A. Bank and Borrower entered into that certain Loan and Security Agreement dated October 13, 2015 (as amended from time to time, the “ Loan Agreement ”).
B. Bank has extended credit to Borrower for the purposes permitted in the Loan Agreement.
C. Bank and Borrower have agreed to amend the definition of “Borrowing Base” to correct a scrivener’s error.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement
2.1 Definition of “Borrowing Base”. The definition of the term “Borrowing Base” set forth in Section 13.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:
“ Borrowing Base ” is the sum of (a) eighty percent (80%) of Eligible Accounts, plus (b) the lesser of (i) seventy percent (70%) of Eligible Foreign Accounts, or (ii) $500,000, all as determined by Bank from Borrower’s most recent Transaction Report; provided, however, that Bank has the right to decrease the foregoing percentage in its good faith business judgment to mitigate the impact of events, conditions, contingencies, or risks which may adversely affect the Collateral or its value; any such change to be effective not earlier than five (5) Business Days following written notice by Bank to Borrower describing the reduction and reason(s) therefor. Notwithstanding the foregoing, Eligible Accounts due and owing to RMG Network Limited shall be excluded from the Borrowing Base until such time as the Debenture has been executed and Bank has a first priority, perfected security interest or other enforceable Lien in such Eligible Accounts under all applicable laws.
2.2 Limitation of Amendment. The amendment set forth in Section 2.1 , above, is effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed (a) to be a consent to any amendment, waiver or modification of any other term or condition of any Loan Document, or (b) to otherwise prejudice any right or remedy which Bank may now have or may have in the future under or in connection with any Loan Document.
3. Counterparts. This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.
4. Effectiveness . This Amendment shall be effective upon the due execution and delivery to Bank of this Amendment by each party hereto.
5. Binding Loan Agreement . This Amendment shall be binding upon, and shall inure to the benefit of, the parties’ respective representatives, successors and assigns.
6. Further Assurances . The parties hereto shall execute such other documents as may be necessary or as may be required, in the opinion of counsel to Bank, to effect the transactions contemplated hereby and the liens and/or security interests of all other collateral instruments, as modified by this Amendment. Borrower also agrees to provide to Bank such other documents and instruments as Bank reasonably may request in connection with the modification effected hereby.
Page 1
7. Enforceability . In the event the enforceability or validity of any portion of this Amendment, the Loan Agreement or any of the other Loan Documents is challenged or questioned, such provision shall be construed in accordance with, and shall be governed by, whichever applicable federal law or law of the State of Texas would uphold or would enforce such challenged or questioned provision.
8. Choice of Law . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF TEXAS.
9. Future Amendments . This Amendment and the other Loan Documents may be amended, revised, waived, discharged, released or terminated only by a written instrument or instruments, executed by the party against which enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination which is not so documented shall not be effective as to any party.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL LOAN AGREEMENT BETWEEN THE PARTIES RELATED TO THE SUBJECT MATTER HEREIN CONTAINED AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[Signature page follows.]
Page 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first written above.
Page 3
Exhibit 10.16
SECOND AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “ Amendment ”) is entered into effective as of March 9, 2016, by and among SILICON VALLEY BANK , a California corporation (“ Bank ”), and RMG NETWORKS HOLDING CORPORATION , a Delaware corporation, RMG NETWORKS, INC. , a Delaware corporation, RMG ENTERPRISE SOLUTIONS, INC. , a Delaware corporation, RMG NETWORKS LIMITED , a corporation formed under the laws of the United Kingdom, and RMG NETWORKS MIDDLE EAST, LLC , a Nevada limited liability company (collectively, “ Borrower ”).
RECITALS
A. Bank and Borrower entered into that certain Loan and Security Agreement dated October 13, 2015 as amended by that certain First Amendment to Loan and Security Agreement dated November 17, 2015 (as may be further amended from time to time, the “ Loan Agreement ”).
B. Bank has extended credit to Borrower for the purposes permitted in the Loan Agreement.
C. Borrower has requested that Bank amend the Loan Agreement to revise the Minimum EBITDA financial covenant set forth in section 6.7 of the Loan Agreement.
D. Bank has agreed to so amend certain provisions of the Loan Agreement, but only to the extent, in accordance with the terms, subject to the conditions and in reliance upon the representations and warranties set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement
2.1 Financial Covenants (Section 6.9). Section 6.9(a) of the Loan Agreement is hereby amended and restated in its entirety with the following:
(a) EBITDA . As measured as of the end of each fiscal month as indicated below for the three (3) month period then ending, EBITDA, plus the amount of (a) non-cash stock compensation expense, (b) non-cash warrant adjustments, (c) non-cash gain or loss from discontinued operations, and (d) non-cash long term contract adjustments, each as determined by Bank, of at least the following:
Notwithstanding the foregoing, in the event Borrower fails to satisfy the covenant set forth above but the sum of (i) Borrower’s cash on deposit with Bank, plus (ii) the Availability Amount exceeds $7,500,000 as of the date of testing and at all times during the thirty (30) day period preceding such testing date, such failure to satisfy the covenant shall not constitute an Event of Default hereunder.
Page 1
2.2 Compliance Certificate (Exhibit C) . The form of Compliance Certificate attached to the Loan Agreement as Exhibit C is hereby replaced in its entirety with the form of Compliance Certificate attached hereto as Annex I .
3. Limitation of Amendments. The amendments set forth in Section 2 , above, are effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed (a) to be a consent to any amendment, waiver or modification of any other term or condition of any Loan Document, or (b) to otherwise prejudice any right or remedy which Bank may now have or may have in the future under or in connection with any Loan Document.
4. Counterparts. This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.
5. Effectiveness . This Amendment shall be effective upon (a) the due execution and delivery to Bank of this Amendment by each party hereto and (b) Borrower’s payment of an amendment fee in an amount equal to $10,000.
6. Binding Loan Agreement . This Amendment shall be binding upon, and shall inure to the benefit of, the parties’ respective representatives, successors and assigns.
7. Further Assurances . The parties hereto shall execute such other documents as may be necessary or as may be required, in the opinion of counsel to Bank, to effect the transactions contemplated hereby and the liens and/or security interests of all other collateral instruments, as modified by this Amendment. Borrower also agrees to provide to Bank such other documents and instruments as Bank reasonably may request in connection with the modification effected hereby.
8. Enforceability . In the event the enforceability or validity of any portion of this Amendment, the Loan Agreement or any of the other Loan Documents is challenged or questioned, such provision shall be construed in accordance with, and shall be governed by, whichever applicable federal law or law of the State of Texas would uphold or would enforce such challenged or questioned provision.
9. Choice of Law . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF TEXAS.
10. Future Amendments . This Amendment and the other Loan Documents may be amended, revised, waived, discharged, released or terminated only by a written instrument or instruments, executed by the party against which enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination which is not so documented shall not be effective as to any party.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL LOAN AGREEMENT BETWEEN THE PARTIES RELATED TO THE SUBJECT MATTER HEREIN CONTAINED AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[Signature page follows.]
Page 2
IN WITNESS WHEREOF , the parties hereto have caused this Amendment to be duly executed and delivered as of the date first written above.
Page 3
ANNEX I
COMPLIANCE CERTIFICATE
TO: |
SILICON VALLEY BANK |
Date: |
FROM: |
RMG NETWORKS HOLDING CORPORATION |
|
The undersigned, solely in his or her capacity as an authorized officer of RMG Networks Holding Corporation, certifies on behalf of RMG Networks Holding Corporation and the other borrower entities (collectively, the “ Borrower ”) from time to time a party to that certain of the Loan and Security Agreement between Borrower and Bank dated October 13, 2015 (the “ Agreement ”) as follows:
(1) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below; (2) there are no Events of Default; (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; (4) Borrower, and each of its Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement; and (5) no Liens have been levied or claims made against Borrower or any of its Subsidiaries relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank.
Attached are the required documents supporting the certifications. The undersigned certifies that these are prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.
Reporting Covenant |
Required |
Complies |
|
|
|
|
|
Transaction Report |
Weekly (Non-Streamline) Monthly within 30 days (Streamline) |
Yes No |
|
Monthly financial statements with Compliance Certificate |
Monthly within 30 days |
Yes No |
|
Annual financial statement (CPA Audited) + CC |
FYE within 150 days |
Yes No |
|
10-Q, 10-K and 8-K |
Within 5 days after filing with SEC |
Yes No |
|
R & A/P Agings, Deferred Revenue Report |
Monthly within 20 days |
Yes No |
|
Budget and Projections |
Annually within 45 days of FYE |
Yes No |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Covenant |
Required |
Actual |
Complies |
|
|
|
|
EBITDA |
See attached worksheet |
$_______ |
Yes No |
The following financial covenant analysis and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.
The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)
|
|
|
1
RMG NETWORKS HOLDING CORPORATION, |
|
BANK USE ONLY |
||
a Delaware corporation |
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|
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By: |
|
|
Received by: |
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Name: |
|
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|
AUTHORIZED SIGNER |
Title: |
|
|
Date: |
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Verified: |
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Date: |
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AUTHORIZED SIGNER |
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Compliance Status: Yes No |
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2
Schedule 1 to Compliance Certificate
Financial Covenants of Borrower
In the event of a conflict between this Schedule and the Loan Agreement, the terms of the Loan Agreement shall govern.
Dated: ____________________
I. EBITDA
Required: As measured as of the end of each fiscal month as indicated below for the three (3) month period then ending, EBITDA, plus the amount of (a) non-cash stock compensation expense, (b) non-cash warrant adjustments, (c) non-cash gain or loss from discontinued operations, and (d) non-cash long term contract adjustments, each as determined by Bank, of at least the following:
February 29, 2016 |
|
($750,000) |
March 31, 2016 |
|
($1,500,000) |
April 30, 2016 |
|
($1,000,000) |
May 31, 2016 |
|
($750,000) |
June 30, 2016 |
|
($500,000) |
July 31, 2016 |
|
($250,000) |
August 31, 2016 |
|
$1 |
September 30, 2016 |
|
$1 |
October 31, 2016 |
|
$500,000 |
November 30, 2016 |
|
$500,000 |
December 31, 2016 and each month thereafter |
|
$500,000 |
Notwithstanding the foregoing, in the event Borrower fails to satisfy the covenant set forth above but the sum of (i) Borrower’s cash on deposit with Bank, plus (ii) the Availability Amount exceeds $7,500,000 as of the date of testing and at all times during the thirty (30) day period preceding such testing date, such failure to satisfy the covenant shall not constitute an Event of Default hereunder.
[Actual calculations on next page]
3
Actual:
A. |
Net Income |
$ |
|
B. |
Interest Expense |
$ |
|
C. |
Depreciation |
$ |
|
D. |
Amortization |
$ |
|
E. |
Taxes |
$ |
|
F. |
Non-Cash Stock Compensation |
$ |
|
G. |
Non-Cash Warrant Adjustments |
$ |
|
H. |
Non-Cash Gain or Loss from Discontinued Operations |
$ |
|
I. |
Non-Cash Long Term Contract Adjustments |
$ |
|
J. |
EBITDA (Line A, plus lines B, C, D, E, F, G, H and I) |
$ |
|
Is line J equal to or greater than the amount required above?
_____ No, not in compliance _____ Yes, in compliance
4
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
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BORROWER: |
RMG Networks Holdings Corporation |
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LOAN OFFICER: |
Jordan Rigberg |
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DATE: |
March 9, 2016 |
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|
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|
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Amendment Fee |
$ |
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Documentation Fee |
$ |
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TOTAL FEES DUE |
$ |
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[ ] A check for the total amount is attached. |
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[ ] Debit DDA # xxxxxxx130 for the total amount. |
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5
Exhibit 10.18
FOURTH AMENDMENT to
Loan and security agreement
THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “ Amendment ”) is entered into effective as of January 31, 2017, by and among SILICON VALLEY BANK , a California corporation (“ Bank ”), and RMG NETWORKS HOLDING CORPORATION , a Delaware corporation, RMG NETWORKS, INC. , a Delaware corporation, RMG ENTERPRISE SOLUTIONS, INC. , a Delaware corporation, RMG NETWORKS LIMITED , a corporation formed under the laws of the United Kingdom, and RMG NETWORKS MIDDLE EAST, LLC , a Nevada limited liability company (collectively, “ Borrower ”).
RECITALS
A. Bank and Borrower entered into that certain Loan and Security Agreement dated October 13, 2015 as amended by (i) that certain First Amendment to Loan and Security Agreement dated November 17, 2015 (ii) that certain Second Amendment to Loan and Security Agreement dated March 9, 2016, and (iii) that certain Third Amendment to Loan and Security Agreement dated September 30, 2016 (as may be further amended from time to time, the “ Loan Agreement ”).
B. Bank has extended credit to Borrower for the purposes permitted in the Loan Agreement.
D. Borrower has requested that Bank (i) amend the Loan Agreement to revise the Minimum EBITDA financial covenant set forth in Section 6.9(a) of the Loan Agreement and (ii) make other certain changes to the Loan Agreement, as more specifically set forth herein.
E. Bank has agreed to so amend certain provisions of the Loan Agreement, but only to the extent, in accordance with the terms, subject to the conditions and in reliance upon the representations and warranties set forth below.
AGREEMENT
Now, Therefore, in consideration of the foregoing recitals and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement
2.1 Financial Covenants (Section 6.9). Section 6.9(a) of the Loan Agreement is hereby amended and restated in its entirety with the following:
(a) EBITDA . As measured as of the end of each fiscal month as indicated below for the three (3) month period then ending, EBITDA, plus the amount of (a) non-cash stock compensation expense, (b) non-cash warrant adjustments, (c) non-cash gain or loss from discontinued operations, and (d) non-cash long term contract adjustments, each as determined by Bank, of at least the following:
Period |
|
Minimum EBITDA |
January 31, 2017 |
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($450,000) |
|
|
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February 28, 2017 |
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($525,000) |
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|
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March 31, 2017 |
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($1,000,000) |
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April 30, 2017 |
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($850,000) |
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May 31, 2017 |
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($500,000) |
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June 30, 2017 |
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($350,000) |
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July 31, 2017 and August 31, 2017 |
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($250,000) |
|
|
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September 30, 2017 |
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$1.00 |
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|
|
October 31, 2017, November 30, 2017 and December 31, 2017 |
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$250,000 |
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Continuing thereafter |
|
To be determined based on Borrower’s 2018 financial forecast as approved by the Board of Directors |
Notwithstanding the foregoing, in the event Borrower fails to satisfy the covenant set forth above but the sum of (i) Borrower’s cash on deposit with Bank, plus (ii) the Availability Amount exceeds $7,500,000 as of the date of testing and at all times during the thirty (30) day period preceding such testing date, such failure to satisfy the covenant shall not constitute an Event of Default hereunder.
2.2 Compliance Certificate (Exhibit C) . The form of Compliance Certificate attached to the Loan Agreement as Exhibit C is hereby replaced in its entirety with the form of Compliance Certificate attached hereto as Annex I .
3. Limitation of Amendments. The amendments set forth in Section 2 , above, are effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed (a) to be a consent to any amendment, waiver or modification of any other term or condition of any Loan Document, or (b) to otherwise prejudice any right or remedy which Bank may now have or may have in the future under or in connection with any Loan Document.
4. Counterparts. This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.
5. Effectiveness . This Amendment shall be effective upon the due execution and delivery to Bank of this Amendment by each party hereto.
6. Binding Loan Agreement . This Amendment shall be binding upon, and shall inure to the benefit of, the parties’ respective representatives, successors and assigns.
7. Further Assurances . The parties hereto shall execute such other documents as may be necessary or as may be required, in the opinion of counsel to Bank, to effect the transactions contemplated hereby and the liens and/or security interests of all other collateral instruments, as modified by this Amendment. Borrower also agrees to provide to Bank such other documents and instruments as Bank reasonably may request in connection with the modification effected hereby.
8. Enforceability . In the event the enforceability or validity of any portion of this Amendment, the Loan Agreement or any of the other Loan Documents is challenged or questioned, such provision shall be construed in accordance with, and shall be governed by, whichever applicable federal law or law of the State of Texas would uphold or would enforce such challenged or questioned provision.
9. Choice of Law . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF TEXAS.
10. Future Amendments . This Amendment and the other Loan Documents may be amended, revised, waived, discharged, released or terminated only by a written instrument or instruments, executed by the party against which enforcement of the amendment, revision, waiver, discharge, release or termination is asserted. Any alleged amendment, revision, waiver, discharge, release or termination which is not so documented shall not be effective as to any party.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL LOAN AGREEMENT BETWEEN THE PARTIES RELATED TO THE SUBJECT MATTER HEREIN CONTAINED AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[Signature page follows.]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first written above.
BORROWER: |
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BANK: |
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RMG NETWORKS HOLDING CORPORATION , |
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SILICON VALLEY BANK |
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a Delaware corporation |
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By: |
/s/ Krista Estep |
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By: |
/s/ Jana Bell |
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Name: Krista Estep |
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Name: Jana Bell |
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Title: Vice President |
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Title: EVP and CFO |
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RMG NETWORKS, INC. , |
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a Delaware corporation |
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By: |
/s/ Jana Bell |
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Name: Jana Bell |
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Title: CFO |
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RMG ENTERPRISE SOLUTIONS, INC. , |
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a Delaware corporation |
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By: |
/s/ Jana Bell |
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Name: Jana Bell |
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Title: CFO |
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RMG NETWORKS MIDDLE EAST, LLC, |
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a Nevada limited liability company |
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By: |
/s/ Jana Bell |
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Name: Jana Bell |
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Title: CFO |
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RMG NETWORKS LIMITED , |
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a corporation formed under the laws of the United Kingdom |
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By: |
/s/ Jana Bell |
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Name: Jana Bell |
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Title: Director |
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ANNEX I
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK |
Date: |
FROM: RMG NETWORKS HOLDING CORPORATION |
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The undersigned, solely in his or her capacity as an authorized officer of RMG Networks Holding Corporation, certifies on behalf of RMG Networks Holding Corporation and the other borrower entities (collectively, the “ Borrower ”) from time to time a party to that certain of the Loan and Security Agreement between Borrower and Bank dated October 13, 2015 (the “ Agreement ”) as follows:
(1) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below; (2) there are no Events of Default; (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; (4) Borrower, and each of its Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement; and (5) no Liens have been levied or claims made against Borrower or any of its Subsidiaries relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank.
Attached are the required documents supporting the certifications. The undersigned certifies that these are prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.
Reporting Covenant |
Required |
Complies |
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|
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Transaction Report |
Weekly (Non-Streamline) Monthly within 30 days (Streamline) |
Yes No |
Monthly financial statements with Compliance Certificate |
Monthly within 30 days |
Yes No |
Annual financial statement (CPA Audited) + CC |
FYE within 150 days |
Yes No |
10‑Q, 10‑K and 8-K |
Within 5 days after filing with SEC |
Yes No |
R & A/P Agings, Deferred Revenue Report |
Monthly within 20 days |
Yes No |
Budget and Projections |
Annually within 45 days of FYE |
Yes No |
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Financial Covenant |
Required |
Actual |
Complies |
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EBITDA |
See attached worksheet |
$ |
Yes No |
The following financial covenant analysis and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.
1
The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)
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RMG NETWORKS HOLDING CORPORATION, |
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BANK USE ONLY |
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a Delaware corporation |
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By: |
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Name: |
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Received by: |
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Title: |
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AUTHORIZED SIGNER |
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Date: |
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Verified: |
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AUTHORIZED SIGNER |
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Date: |
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Compliance Status: Yes No |
2
Schedule 1 to Compliance Certificate
Financial Covenants of Borrower
In the event of a conflict between this Schedule and the Loan Agreement, the terms of the Loan Agreement shall govern.
Dated: ____________________
I. EBITDA
Required: As measured as of the end of each fiscal month as indicated below for the three (3) month period then ending, EBITDA, plus the amount of (a) non-cash stock compensation expense, (b) non-cash warrant adjustments, (c) non-cash gain or loss from discontinued operations, and (d) non-cash long term contract adjustments, each as determined by Bank, of at least the following:
Period |
|
Minimum EBITDA |
|
|
|
January 31, 2017 |
|
($450,000) |
|
|
|
February 28, 2017 |
|
($525,000) |
|
|
|
March 31, 2017 |
|
($1,000,000) |
|
|
|
April 30, 2017 |
|
($850,000) |
|
|
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May 31, 2017 |
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($500,000) |
|
|
|
June 30, 2017 |
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($350,000) |
|
|
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July 31, 2017 and August 31, 2017 |
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($250,000) |
|
|
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September 30, 2017 |
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$1.00 |
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|
|
October 31, 2017, November 30, 2017 and December 31, 2017 |
|
$250,000 |
|
|
|
Continuing thereafter |
|
To be determined based on Borrower’s 2018 financial forecast as approved by the Board of Directors |
Notwithstanding the foregoing, in the event Borrower fails to satisfy the covenant set forth above but the sum of (i) Borrower’s cash on deposit with Bank, plus (ii) the Availability Amount exceeds $7,500,000 as of the date of testing and at all times during the thirty (30) day period preceding such testing date, such failure to satisfy the covenant shall not constitute an Event of Default hereunder.
[Actual calculations on next page]
3
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Actual: |
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|
|
|
|
|
A. |
Net Income |
|
$ |
|
|
|
|
B. |
Interest Expense |
|
$ |
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|
|
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C. |
Depreciation |
|
$ |
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|
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D. |
Amortization |
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$ |
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E. |
Taxes |
|
$ |
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F. |
Non-Cash Stock Compensation |
|
$ |
|
|
|
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G. |
Non-Cash Warrant Adjustments |
|
$ |
|
|
|
|
H. |
Non-Cash Gain or Loss from Discontinued Operations |
|
$ |
|
|
|
|
I. |
Non-Cash Long Term Contract Adjustments |
|
$ |
|
|
|
|
J. |
EBITDA (Line A, plus lines B, C, D, E, F, G, H and I) |
|
$ |
Is line J equal to or greater than the amount required above?
No, not in compliance Yes, in compliance
4
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: |
RMG Networks Holdings Corporation |
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|
|
LOAN OFFICER: |
Krista Estep |
|
|
|
|
DATE: |
February 28, 2017 |
|
|
|
|
|
Documentation Fee |
$500.00 |
|
|
|
|
TOTAL FEES DUE |
$500.00 |
|
|
|
{ } A check for the total amount is attached. |
|
|
|
|
|
{ } Debit DDA # xxxxxxx 130 for the total amount. |
|
5
Exhibit 21.1
Entity Name |
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Jurisdiction of Organization |
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RMG Networks Holding Corporation
|
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Delaware |
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SCG Financial Merger I Corp. |
|
Delaware |
|
RMG Networks Holdings, Inc.
|
|
Delaware |
|
RMG Networks, Inc. |
|
Delaware |
|
RMG Media Networks, Inc. |
|
Delaware |
|
EMN Acquisition Corporation |
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Delaware |
|
Executive Media Network, Inc. |
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New York |
|
Corporate Image Media, Inc. |
|
New York |
|
Prophet Media, LLC |
|
New York |
|
RMG Enterprise Solutions Holdings Corporation
|
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Delaware |
|
RMG Enterprise Solutions, Inc.
|
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Delaware |
|
Symon LV, LLC |
|
Nevada |
|
RMG EMEA Holdings Limited
|
|
United Kingdom |
|
RMG Networks Limited
|
|
United Kingdom |
|
RMG Media Networks Limited |
|
United Kingdom |
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RMG Networks Brasil, Ltda. |
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Brasil |
|
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-203582, 333-214043 and 333-215673) and Form S-8 (File No. 333-190526) of RMG Networks Holding Corporation of our report dated March 2, 2017, relating to the consolidated financial statements included in this annual report on Form 10-K for the year ended December 31, 2016.
/s/ WHITLEY PENN LLP
Dallas, Texas
March 2, 2017
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert Michelson, certify that:
1. I have reviewed this annual report on Form 10-K of RMG Networks Holding Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a) |
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a) |
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 2, 2017
/s/ Robert Michelson |
|
Robert Michelson |
|
Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jana Ahlfinger Bell, certify that:
1. I have reviewed this annual report on Form 10-K of RMG Networks Holding Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a) |
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a) |
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 2, 2017
/s/ Jana Ahlfinger Bell |
|
Jana Ahlfinger Bell |
|
Interim Chief Financial Officer |
|
CERTIFICATIONS OF
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
In connection with the Annual Report of RMG Networks Holding Corporation (the “Company”) on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Robert Michelson, Chief Executive Officer of the Company, and Jana Ahlfinger Bell, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our best knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 2, 2017 |
|
|
|
|
/s/ Robert Michelson |
|
Robert Michelson |
|
Chief Executive Officer |
|
|
Date: March 2, 2017 |
|
|
|
|
/s/ Jana Ahlfinger Bell |
|
Jana Ahlfinger Bell |
|
Chief Financial Officer |