NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Description of the Company
RMG Networks Holding Corporation (“RMG Networks” or the “Company”) is a holding company which owns 100% of the capital stock of RMG Networks Holding, Inc. (formerly Reach Media Group Holdings, Inc.) and its subsidiaries and RMG Enterprise Solutions Holdings Corporation and its subsidiaries (formerly Symon Holdings Corporation).
RMG Networks (formerly SCG Financial Acquisition Corp.) was incorporated in Delaware on January 5, 2011. The Company was formed for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets (“Initial Business Combination”). The Company had neither engaged in any operations nor generated any income, other than interest on the Trust Account assets (the “Trust Account”). Until its initial acquisition, the Company was considered to be in the development stage as defined in FASB Accounting Standards Codification 915, or FASB ASC 915, “Development Stage Entities,” and was subject to the risks associated with activities of development stage companies. The Company selected December 31 as its fiscal year end. All activity through April 8, 2013 was related to the Company’s formation, initial public offering (“Offering”) and identification and investigation of prospective target businesses with which to consummate an Initial Business Combination.
The registration statement for the Offering was declared effective April 8, 2011. The Company consummated the Offering on April 18, 2011 and received gross proceeds of approximately $80,000,000, before deducting underwriting compensation of $4,000,000 (which included $2,000,000 of deferred contingent underwriting compensation payable upon consummation of an Initial Business Combination) and including $3,000,000 received for the purchase of 4,000,000 warrants by SCG Financial Holdings LLC (the “Sponsor”), as described in the next paragraph. Total offering costs (excluding $2,000,000 in underwriting fees) were $433,808.
On April 12, 2011, the Sponsor purchased 4,000,000 warrants (“Sponsor Warrants”) from the Company for an aggregate purchase price of $3,000,000. The Sponsor Warrants were identical to the warrants sold in the Offering, except that if held by the original holder or its permitted assigns, they (i) could be exercised for cash or on a cashless basis and (ii) were not subject to being called for redemption.
The Company sold 8,000,000 units in the Offering with total gross proceeds to the Company of $80,000,000. Each unit consisted of one share of common stock and one Warrant (the "Public Warrants"). The Company’s management had broad discretion with respect to the specific application of the net proceeds of the Offering, although substantially all of the net proceeds of the Offering were intended to be generally applied toward consummating an Initial Business Combination.
On April 27, 2011, $80,000,000 from the Offering and Sponsor Warrants that had been placed in a Trust Account (“Trust Account”) was invested, as provided in the Company’s registration statement. The Company was permitted to invest the proceeds of the Trust Account in U.S. “government securities,” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 (the “1940 Act”) with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the 1940 Act. The Trust Account assets were required to be maintained until the earlier of (i) the consummation of an Initial Business Combination or (ii) the distribution of the Trust Account as required if no acquisition was consummated.
The Company’s common stock currently trades on The Nasdaq Global Market (“Nasdaq”), under the symbol “RMGN”. The warrants are quoted on the Over-the-Counter Bulletin Board quotation system under the symbol “RMGNW”.
On April 8, 2013, the Company consummated the acquisition of Reach Media Group Holdings, Inc. (“RMG”). As a result of the acquisition, the Company is no longer considered a Development Stage Entity. In addition, on April 19, 2013, the Company acquired Symon Holdings Corporation (“Symon”). Symon is considered to be the Company's predecessor corporation for accounting purposes.
In connection with the acquisition of RMG, the Company provided its stockholders with the opportunity to redeem their shares of common stock for cash equal to $10.00 per share, upon the consummation of the acquisition, pursuant to a tender offer. The tender offer expired at 5:00 p.m. Eastern Time on April 5, 2013, and the Company promptly purchased the 4,551,228 shares of common stock validly tendered and not withdrawn pursuant to the tender offer, for an aggregate purchase price of approximately $45.5 million.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Description of the Business
The Company is a global provider of media applications and enterprise-class digital signage solutions. Through an extensive suite of products, including media services, proprietary software, software-embedded hardware, maintenance and creative content service, installation services, and third-party displays, the Company delivers complete end-to-end intelligent visual communication solutions to its clients. The Company is one of the largest integrated digital signage solution providers globally and conducts operations through its RMG Media Networks and its RMG Enterprise Solutions business units.
The RMG Media Networks business unit engages elusive audience segments with relevant content and advertising delivered through digital place-based networks. These networks include the RMG Airline Media Network. The RMG Airline Media Network is primarily a U.S.-based network focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment, or IFE, systems, on in-flight Wi-Fi portals and in private airport terminals. The network, which spans almost all major commercial passenger airlines in the United States, delivers advertising to an audience of affluent travelers and business decision makers in a captive and distraction-free video environment.
The RMG Enterprise Solutions business unit provides end-to-end digital signage applications to power intelligent visual communication implementations for critical contact center, supply chain, employee communications, hospitality, retail and other applications with a large concentration of customers in the financial services, telecommunications, manufacturing, healthcare, pharmaceutical, utility and transportation industries, and in federal, state and local governments. These solutions are relied upon by approximately 70% of the North American Fortune 100 companies and thousands of overall customers in locations worldwide. The installations of Enterprise Solutions deliver real-time intelligent visual content that enhance the ways in which organizations communicate with employees and customers. The solutions provided are designed to integrate seamlessly with a customer’s IT infrastructure and data and security environments.
Principles of Consolidation
The unaudited consolidated financial statements of RMG Networks Holding Corporation include the accounts of RMG and its wholly-owned subsidiaries and the accounts of Symon and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Amounts shown for the “Predecessor Company” represent the transactions of Symon for the period shown. Symon is the predecessor due to the significance of its business compared to the other companies.
Basis of Presentation for Interim Financial Statements
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and the notes required by GAAP for complete financial statements. The Balance Sheet at December 31, 2013 and the Statements of Comprehensive Income and Cash Flows for the Successor Company for the period April 20 through June 30, 2013, the Statements of Comprehensive Income and Cash Flows for the Predecessor Company for the period February 1, 2013 through April 19, 2013 have been derived from the Company’s audited financial statements, but do not include all disclosures required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed interim consolidated financial statements reflect all adjustments and disclosures necessary for a fair presentation of the results of the reported interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements and notes there to. The interim results of operations are not necessarily indicative of the results to be expected for the full year.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents include demand deposits in financial institutions and investments with an original maturity of three months or less from the date of purchase.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable are comprised of sales made primarily to entities located in the United States of America, EMEA and Asia. Accounts receivable are recorded at the invoiced amounts and do not bear interest. The allowance for doubtful accounts is reviewed monthly and the Company establishes reserves for doubtful accounts on a case-by-case basis based on a current review of the collectability of accounts and historical collection experience. The allowance for doubtful accounts was $248,423 at June 30, 2014 and $241,535 at December 31, 2013. As of June 30, 2014 and December 31, 2013, no single customer accounted for more than 10% of accounts receivable or revenues.
Inventory
Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Writeoffs of slow moving and obsolete inventories are provided based on historical experience and estimated future usage.
The composition of inventory at June 30, 2014 and December 31, 2013 was as follows:
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June 30, 2014
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|
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December 31, 2013
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|
|
|
|
|
|
|
|
|
|
Raw Materials
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$
|
365,791
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|
|
$
|
535,830
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|
Finished Goods
|
|
|
3,221,475
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|
|
|
4,097,383
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Total
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$
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3,587,266
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|
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$
|
4,633,213
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Property and Equipment
The Company records purchases of property and equipment at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets resulting from the acquisitions of RMG and Symon. Goodwill is tested annually at December 31 for impairment or tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying value exceeds the fair value of the assets of the reporting unit. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying value. Second, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Accounting Standards Codification (ASC) 805,
Business Combinations
. The residual fair value after this allocation is the implied fair value of the reporting unit's goodwill.
In performing the impairment test at December 31, 2013, there was some indication that there could be impairment at that date. The Company engaged an independent specialist to assist the Company in completing an impairment test as of December 31, 2013 and, based on the results of the testing, the Company has concluded there was no impairment. The Media reporting unit’s fair value exceeded its carrying value by $1,578,000 or 5.7% and the Enterprise reporting unit’s fair value exceeded it carrying value by $6,500,000, or 13%. The Company's impairment analysis contained certain assumptions, such as the discount rate, that are subject to change. Changes in the assumptions could have a material impact on the impairment analysis.
In the second quarter of 2014, as a result of the continued decline in the Company’s stock price, coupled with lower than anticipated operating results for the quarter ended June 30, 2014 and a change in the estimate of future operating results for the Media unit, goodwill was tested for impairment as of June 30, 2014.
The Company engaged an independent specialist to assist in determining if goodwill was impaired at June 30, 2014. Based on the impairment testing performed, it was determined that goodwill of RMG was impaired and the Company recorded an impairment charge of $1,332,359 at June 30, 2014. This impairment is reflected in Note 4.
The impairment testing concluded there was no impairment of goodwill at the Enterprise reporting unit. The Enterprise reporting unit’s fair value exceeded its carrying value by $4,718,000 or 10.4%. The Company’s impairment analysis contained certain assumptions, such as the discount rate, that are subject to change. Changes in the assumptions could
have a material impact on the impairment analysis.
The Company’s market capitalization could fluctuate in the future. As a result, it will continue to treat this data as an indicator of possible impairment if its market capitalization falls below its book value. If this situation occurs, it will perform the required detailed analysis to determine if there is impairment.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets include software and technology, customer relationships, partner relationships, trademarks and trade names, customer order backlog and covenants not-to-compete associated with the acquisitions of RMG and Symon. The intangible assets are being amortized over their estimated useful lives.
The definite lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis, and, if the asset is not recoverable, recognizing an impairment charge, if necessary, to reduce the asset's carrying amount to its fair value. Intangible assets are evaluated for impairment annually and on an interim basis as events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount.
In the second quarter of 2014, as a result of the continued decline in the Company’s stock price, coupled with lower than anticipated operating results for the quarter ended June 30, 2014 and a change in the estimate of future operating results for the Media unit,
intangible assets were tested for impairment as of June 30, 2014. The Company engaged an independent specialist to assist it in determining if intangible assets were impaired at June 30, 2014. Based on the impairment testing performed, it was determined that some intangible assets of RMG were impaired, specifically Customer Relationships, Partner Relationships, and Covenant Not-to-Compete, and the Company recorded an impairment charge of $5,913,000. See Note 4.
The impairment testing concluded there was no impairment of intangible assets at the Enterprise reporting unit. The Enterprise reporting unit’s fair value exceeded its carrying value by $4,718,000 or 10.4%. The Company’s impairment analysis contained certain assumptions, such as the discount rate, that are subject to change. Changes in the assumptions could have a material impact on the impairment analysis.
The Company’s Intangible Assets are being amortized as follows:
Acquired Intangible Asset:
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Amortization
Period:
(years)
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Software and technology
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|
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5
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Customer relationships
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|
|
8
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|
Partner relationships
|
|
|
10
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|
Tradenames and trademarks
|
|
|
10
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|
Customer order backlog
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|
|
3
|
|
Covenant Not-To-Compete
|
|
|
2
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|
Deferred Revenue
Deferred revenue consists of billings or payments received in advance of revenue recognition from professional service agreements. Deferred revenue is recognized as the revenue recognition criteria are met. The Company generally invoices the customer in annual advance for professional services.
Impairment of Long-lived Assets
In accordance with ASC 360,
Property, Plant, and Equipment
, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset.
There was no impairment of long-lived assets at June 30, 2014 and December 31, 2013.
Income Taxes
The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. The Company recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.
Under ASC 740,
Income Taxes
(“ASC 740”), the Company recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized. It also requires the Company to accrue interest and penalties where there is an underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause it to change its assessment of the appropriate accrual amount (see Note 6). U.S. income taxes have not been provided on $4.0 and $3.9 million of undistributed earnings of foreign subsidiaries as of June 30, 2014 December 31, 2013, respectively. The Company reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign operations indefinitely. The Company has elected to recognize accrued interest and penalties related to income tax matters as a component of income tax expense if incurred.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
The Company recognizes revenue primarily from these sources:
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●
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Maintenance and content services
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The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, which is when product title transfers to the customer, or services have been rendered; (iii) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (iv) collection is reasonably assured. The Company assesses collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.
Advertising
The Company sells advertising through agencies and directly to a variety of customers under contracts ranging from one month to one year. Contracts usually specify the network placement, the expected number of impressions (determined by passenger or visitor counts) and the cost per thousand impressions (“CPM”) over the contract period to arrive at a contract amount. The Company bills for these advertising services as requested by the customer, generally on a monthly basis following delivery of the contracted number of impressions for the particular ad insertion. Revenue is recognized at the end of the month in which fulfillment of the advertising order occurred. Although the Company typically presents invoices to an advertising agency, collection is reasonably assured based upon the customer placing the order.
Under Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 605-45
Principal Agent Considerations (Reporting Revenue Gross as a Principal versus Net as an Agent)
, the Company has recorded its advertising revenues on a gross basis.
Payments to airline and other partners for revenue sharing are paid on a monthly basis either under a minimum annual guarantee (based upon estimated advertising revenues), or as a percentage of the advertising revenues following collection from customers. The portion of revenue that the Company shares with its partners ranges from 25% to 80% depending on the partner and the media asset. The Company makes minimum annual guarantee payments under three agreements (two to airline partners and one to another partner). Payments to all other partners are calculated on a revenue sharing basis. The Company’s partnership agreements have terms ranging from one to five years. Four partnership agreements renew automatically unless terminated prior to renewal and the other partners have no obligation to renew.
Multiple-Element Arrangements
Products consist of proprietary software and hardware equipment. The Company considers the sale of software more than incidental to the hardware as it is essential to the functionality of the hardware products. The Company enters into multiple-product and services contracts, which may include any combination of equipment and software products, professional services, maintenance and content services.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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●
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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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●
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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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●
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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.
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The Company has also established VSOE for its professional services and maintenance and content services based on the same criteria as previously discussed under the software revenue recognition rules.
The Company uses the estimated selling price to determine the relative sales price of its products. Revenue for elements that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement has been met or over the period that our last remaining obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria.
The Company sells its products and services through its global sales force and through a select group of resellers and business partners. In North America, approximately 90% or more of sales have historically been generated solely by the Company’s sales team, with 10% or less through resellers. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales historically coming from the reseller channel. Overall, approximately 67% of the Company’s global revenues have historically been derived from direct sales, with the remaining 33% generated through indirect partner channels.
The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties and product returns from resellers have be insignificant to date. The Company therefore sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies as discussed above. The Company bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users.
The Company recognizes revenue on sales to resellers consistent with its recognition policies as discussed below.
Product revenue
The Company recognizes revenue on product sales generally upon delivery of the product or customer acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue.
Maintenance and content services revenue
Maintenance support consists of hardware maintenance and repair and software support and updates. Software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Support includes access to technical support personnel for software and hardware issues. Content services consist of providing customers live and customized news feeds.
Maintenance and content services revenue is recognized ratably over the term of the contracts, which is typically one to three years. Maintenance and support is renewable by the customer annually. Rates, including subsequent renewal rates, are typically established based upon specified rates as set forth in the arrangement. The Company’s hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Professional services revenue
Professional services consist primarily of installation and training services. Installation fees are recognized either on a fixed-fee basis or on a time-and-materials basis. For time-and materials contracts, the Company recognizes revenue as services are performed. For fixed-fee contracts, the Company recognizes revenue upon completion of the installation which is typically completed within five business days. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Training services are also not considered essential to the functionality of the product and have historically been insignificant; the fee allocable to training is recognized as revenue as the Company performs the services.
Research and Development Costs
Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20,
Costs of Software to be Sold, Leased, or Marketed
. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.
Advertising
Advertising costs, which are included in selling, general and administrative expense, are expensed as incurred and are not material to the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities reflected in the financial statements approximates fair value due to the short-term maturity of these instruments; the short term debt and the long-term debt’s carrying value approximates its fair value due to the variable market interest rate of the debt.
The Company does not generally require collateral or other security for accounts receivable. However, credit risk is mitigated by the Company’s ongoing evaluations of customer creditworthiness. The Company maintains an allowance for doubtful accounts receivable balances.
The Company maintains its cash and cash equivalents in the United States with three financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation insurable limit. Cash and cash equivalents of $985,145 and $1,696,475 held in foreign countries as of June 30, 2014 and December 31, 2013, respectively, were not insured.
Net Income (Loss) per Common Share
Basic net income (loss) per share for each class of participating common stock, excluding any dilutive effects of stock options, warrants and unvested restricted stock, is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is computed similar to basic; however diluted income (loss) per share reflects the assumed conversion of all potentially dilutive securities. There were no stock options, warrants, or other equity instruments outstanding at June 30, 2014 and December 31, 2013 that had a dilutive effect on net income (loss) per share.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
The functional currency of the Company’s United Kingdom subsidiary is the British pound sterling. All assets and all liabilities of the subsidiary are translated to U.S. dollars at period-ending exchange rates. Income and expense items are translated to U.S. dollars at the weighted-average rate of exchange prevailing during the period. Resultant translation adjustments are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.
The Company includes currency gains and losses on temporary intercompany advances in the determination of net income. Currency gains and losses are included in interest and other expenses in the consolidated statements of income and comprehensive income.
Business Segment
Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (the Company’s Chief Executive Officer (“CEO”)) in assessing performance and deciding how to allocate resources. The Company’s business is comprised of two operating segments, media advertising and enterprise solutions. The CEO reviews financial data that encompasses the Company’s media advertising and enterprise solutions revenues, cost of revenues, and gross profit. Since the Company operates as a single entity globally, it does not allocate operating expenses to each segment for purposes of calculating operating income, EBITDA, or other financial measurements for use in making operating decisions and assessing financial performance. The CEO manages the business based primarily on broad functional categories of sales, marketing and technology development and strategy.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC No. 718-10 - "Compensation – Stock Compensation”. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based awards that are ultimately expected to vest during the period. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of share granted and the closing price of the Company's common stock on the date of grant. Compensation expense for all share-based payment awards is recognized using the straight-line amortization method over the vesting period.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification ("ASC") Section 606, "Revenue from Contracts with Customers". The new section will replace Section 605, "Revenue Recognition" and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. The Company will adopt the new provisions of this accounting standard at the beginning of fiscal year 2017, given that early adoption is not an option. The Company will further study the implications of this statement in order to evaluate the expected impact on the consolidated financial statements.
2. Acquisitions
Acquisition of RMG
On April 8, 2013, the Company acquired RMG for a total purchase price of $27,516,010. The amount paid for RMG was comprised of (i) 400,001 shares of Company common stock valued at $9.98 per share on March 31, 2013, (ii) $10,000 in cash, and (iii) $10,000 deposited into an escrow account. Additionally, the Company paid, on behalf of RMG, all indebtedness of RMG under RMG's credit agreement at a discounted amount equal to $23,500,000, paid with $21,000,000 of cash and $2,500,000 of shares of Company common stock.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for as an acquisition of a business and, accordingly, the results of its operations have been included in the Company’s consolidated results of operations from the date of acquisition.
The Company engaged an independent specialist to assist the Company in calculating the fair value of the assets and liabilities acquired. The allocation of the total purchase price to the net tangible and identifiable intangible assets was based on the fair value at the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets was allocated to goodwill, which is deductible for tax purposes. Qualitatively, goodwill represents the market position and the collective expertise of Reach Media with respect to advertising services. The purchase price allocation was preliminary as of December 31, 2013 pending the final determination of the fair value of certain acquired assets and assumed liabilities. The purchase price allocation was finalized as of March 31, 2014.
The valuation of the identifiable intangible assets was performed using the following methodologies:
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Partner relationships
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With-and-Without Method
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●
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Customer relationships
|
Income Method – Multi-Period Excess Earnings
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●
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Tradename and trademarks
|
Income Method – Relief from Royalty
|
●
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Developed technology
|
Income Method – Relief from Royalty
|
●
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Non-compete agreements
|
Income Method – Avoided Loss of Income
|
The fair values were based on significant inputs that were not observable in the market and thus represent Level 3 measurements under the fair value hierarchy. The significant unobservable inputs include the discount rate of 19.5% which was based on the estimated weighted cost of capital.
The purchase price allocation was as follows:
Tangible Assets
|
|
$
|
6,498,063
|
|
Intangible Assets
|
|
|
19,460,000
|
|
Goodwill
|
|
|
8,461,359
|
|
Liabilities
|
|
|
(6,903,412
|
)
|
Total Purchase Price
|
|
$
|
27,516,010
|
|
Intangible assets acquired count of the following:
Partner relationships
|
|
$
|
8,800,000
|
|
Customer relationships
|
|
|
6,500,000
|
|
Trade name and trademarks
|
|
|
1,700,000
|
|
Developed technology
|
|
|
1,600,000
|
|
Non-compete agreements
|
|
|
860,000
|
|
Total
|
|
$
|
19,460,000
|
|
The primary tangible assets acquired were cash of $819,052, accounts receivable of $4,813,553, and property and equipment of $514,280. The primary liabilities assumed were accounts payable of $2,220,858, accrued liabilities of $1,075,736, and revenue share liabilities of $2,721,121.
Acquisition of Symon
On April 19, 2013, the Company acquired Symon for $43,685,828 in cash. The acquisition was accounted for as an acquisition of a business and, accordingly, the results of its operations have been included in the Company’s consolidated results of operations from the date of acquisition.
The Company engaged an independent specialist to assist Company in calculating the fair value of the assets and liabilities acquired. The allocation of the total purchase price to the net tangible and identifiable intangible assets was based on the fair value at the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets was allocated to goodwill (which is not deductible for tax purposes). Qualitatively, goodwill represents the market position and the global operating experience of Symon. The purchase price allocation was preliminary as of December 31, 2013 pending the final determination of the fair value of certain acquired assets and assumed liabilities. The purchase price allocation was finalized as of March 31, 2014.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation of the identifiable intangible assets was performed using the following methodologies:
●
|
Customer relationships
|
Income Method – Multi-Period Excess Earnings
|
●
|
Developed technology
|
Income Method – Relief from Royalty
|
●
|
Customer order backlog
|
Income Method – Multi-Period Excess Earnings
|
●
|
Non-compete agreements
|
Income Method – Avoided Loss of Income
|
The fair values were based on significant inputs that were not observable in the market and thus represent Level 3 measurements under the fair value hierarchy. The significant unobservable inputs include the discount rate of 21.0% which was based on the estimated weighted cost of capital.
The purchase price allocation was as follows:
Tangible Assets
|
|
$
|
17,807,856
|
|
Intangible Assets
|
|
|
23,990,000
|
|
Goodwill
|
|
|
20,798,027
|
|
Liabilities
|
|
|
(18,910,055
|
)
|
Total Purchase Price
|
|
$
|
43,685,828
|
|
Intangible assets acquired consist of:
Customer relationships
|
|
$
|
15,700,000
|
|
Developed technology
|
|
|
7,600,000
|
|
Customer order backlog
|
|
|
400,000
|
|
Non-compete agreements
|
|
|
290,000
|
|
Total
|
|
$
|
23,990,000
|
|
The primary tangible assets acquired were cash of $5,666,273, accounts receivable of $6,423,976, inventory of $3,477,488, and property and equipment of $918,768. The primary liabilities assumed were accounts payable of $1,171,922, accrued liabilities of $1,160,240, deferred revenue of $6,200,000, and deferred tax liabilities of $10,377,893.
3. Property and Equipment
Property and equipment consist of the following:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Machinery and equipment
|
|
$
|
2,790,760
|
|
|
$
|
2,058,217
|
|
Furniture and fixtures
|
|
|
1,030,157
|
|
|
|
1,019,082
|
|
Software
|
|
|
695,296
|
|
|
|
567,900
|
|
Leasehold improvements
|
|
|
1,291,526
|
|
|
|
492,408
|
|
|
|
|
5,807,739
|
|
|
|
4,137,607
|
|
Less accumulated depreciation and amortization
|
|
|
1,169,438
|
|
|
|
588,622
|
|
Property and equipment, net
|
|
$
|
4,638,301
|
|
|
$
|
3,548,985
|
|
Depreciation expense for the six months ended June 30, 2014 was $580,818. Depreciation expense for the period April 20 through June 30, 2013 was $127,431 and for the period February 1 through April 19, 2013 was $130,771. Depreciation expense for the three months ended June 30, 2014 was $320,785
4. Goodwill and Intangible Assets
The carrying amount of goodwill and intangible assets, resulted from the valuation related to the acquisitions of RMG and Symon and the application of Financial Accounting Standards Board Standard Codification 805, “Business Combinations”. As a result, the basis of the net assets and liabilities of RMG and Symon were adjusted to reflect their fair values and the appropriate amount of goodwill was recorded for the consideration given in excess of the fair values assigned to the net identifiable assets. The carrying value of goodwill and certain intangible assets has subsequently been reduced due to an impairment charge of $1,332,359 and $5,913,000, respectively.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the carrying amount of goodwill:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Balance - beginning
|
|
$
|
28,642,398
|
|
|
$
|
-
|
|
Goodwill resulting from acquisitions occurring in April 2013
|
|
|
-
|
|
|
|
28,642,398
|
|
Purchase price accounting adjustment
|
|
|
616,988
|
|
|
|
-
|
|
Impairment
|
|
|
(1,332,359
|
)
|
|
|
-
|
|
Balance - ending
|
|
$
|
27,927,027
|
|
|
$
|
28,642,398
|
|
The carrying value of the Company’s intangible assets at June 30, 2014 were as follows:
|
|
Weighted
Average
Amortization
Years
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Charge for Impairments
|
|
|
Net carrying
Amount
|
|
Software and technology
|
|
|
5
|
|
|
$
|
9,200,000
|
|
|
$
|
(2,208,000
|
)
|
|
$
|
-
|
|
|
$
|
6,992,000
|
|
Customer relationships
|
|
|
8
|
|
|
|
22,200,000
|
|
|
|
(3,330,000
|
)
|
|
|
(2,925,000
|
)
|
|
|
15,945,000
|
|
Partner relationships
|
|
|
10
|
|
|
|
8,800,000
|
|
|
|
(1,056,000
|
)
|
|
|
(2,644,000
|
)
|
|
|
5,100,000
|
|
Tradenames and trademarks
|
|
|
10
|
|
|
|
1,700,000
|
|
|
|
(204,000
|
)
|
|
|
-
|
|
|
|
1,496,000
|
|
Covenant not-to-compete
|
|
|
2
|
|
|
|
1,150,000
|
|
|
|
(690,000
|
)
|
|
|
(344,000
|
)
|
|
|
116,000
|
|
Customer order backlog
|
|
|
1
|
|
|
|
400,000
|
|
|
|
(400,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
$
|
43,450,000
|
|
|
$
|
(7,888,000
|
)
|
|
$
|
(5,913,000
|
)
|
|
$
|
29,649,000
|
|
The carrying values of the Company’s intangible assets at December 31, 2013, were as follows:
|
|
Weighted
Average
Amortization
Years
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net carrying
Amount
|
|
Software and technology
|
|
|
5
|
|
|
$
|
9,200,000
|
|
|
$
|
(1,288,000
|
)
|
|
$
|
7,912,000
|
|
Customer relationships
|
|
|
8
|
|
|
|
22,200,000
|
|
|
|
(1,942,500
|
)
|
|
|
20,257,500
|
|
Partner relationships
|
|
|
10
|
|
|
|
8,800,000
|
|
|
|
(616,000
|
)
|
|
|
8,184,000
|
|
Tradenames and trademarks
|
|
|
10
|
|
|
|
1,700,000
|
|
|
|
(119,000
|
)
|
|
|
1,581,000
|
|
Covenant not-to-compete
|
|
|
2
|
|
|
|
1,150,000
|
|
|
|
(402,500
|
)
|
|
|
747,500
|
|
Customer order backlog
|
|
|
1
|
|
|
|
400,000
|
|
|
|
(300,000
|
)
|
|
|
100,000
|
|
Total
|
|
|
|
|
|
$
|
43,450,000
|
|
|
$
|
(4,668,000
|
)
|
|
$
|
38,782,000
|
|
Amortization expense for the six months ended June 30, 2014 was $3,220,000. Amortization expense for the period April 20 through June 30, 2013 was $1,164,845 and for the period February 1 through April 19, 2013 was $9,522. Amortization expense for the three months ended June 30, 2014 was $1,560,000.
Projected amortization expense for these assets for the five years ending December 31 and thereafter is as follows:
2014 (remainder)
|
|
$
|
2,542,770
|
|
2015
|
|
|
4,984,040
|
|
2016
|
|
|
4,940,540
|
|
2017
|
|
|
4,940,540
|
|
2018
|
|
|
3,652,540
|
|
Thereafter
|
|
|
8,588,570
|
|
Total
|
|
$
|
29,649,000
|
|
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Notes Payable
Senior Credit Agreement
On April 19, 2013, the Company entered into a Credit Agreement (the “Senior Credit Agreement”) by and among it and certain of its direct and indirect domestic subsidiaries party thereto from time to time (including RMG and Symon) as borrowers (the “Borrowers”), certain of its direct and indirect domestic subsidiaries party thereto from time to time as guarantors (the “Guarantors” and, together with the Borrowers, collectively, the “Loan Parties”, and the financial institutions from time to time party thereto as lenders (the “Senior Lenders”).
The Senior Credit Agreement provided for a five-year $24 million senior secured term loan facility (the “Senior Credit Facility”), which was funded in full on April 19, 2013. The Senior Credit Facility is guaranteed jointly and severally by the Guarantors, and is secured by a first-priority security interest in substantially all of the existing and future assets of the Loan Parties (the “Collateral”).
The Senior Credit Facility bore interest at a rate per annum equal to the Base Rate plus 7.25% or the LIBOR Rate plus 8.5%, at the election of the Borrowers. If an event of default occurred and was continuing under the Senior Credit Agreement, the interest rate applicable to borrowings under the Senior Credit Agreement would automatically be increased by 2% per annum. The “Base Rate” and the “LIBOR Rate” were defined in a manner customary for credit facilities of this type. The LIBOR Rate was subject to a floor of 1.5%.
The Company was required to make quarterly principal amortization payments in the amount of $600,000 (subject to adjustment as provided in the Senior Credit Agreement), with the first such amortization payment due on July 1, 2013. Subject to certain conditions contained in the Senior Credit Agreement, the Company could prepay the principal of the Senior Credit Facility in whole or in part. In addition, the Company was required to prepay the principal of the Senior Credit Facility (subject to certain basket amounts and exceptions) in amounts equal to (i) 50% of the “Excess Cash Flow” of the Company and its subsidiaries for each fiscal year (as defined in the Senior Credit Agreement); (ii) 100% of the net cash proceeds from asset sales, debt issuances or equity issuances by the Company or any of the other Loan Parties; and (iii) 100% of any cash received by the Company or any of the other Loan Parties not in the ordinary course of business (excluding cash from asset sales and debt and equity issuances), net of reasonable collection costs.
The Company was not required to make any mandatory prepayment to the extent that, after giving effect to such mandatory prepayment, the unrestricted cash on hand of the Loan Parties would be less than $5 million. The amount of any mandatory prepayment not prepaid as a result of the foregoing sentence would be deferred and would be due and owing on the last day of each month thereafter, but in each case solely to the extent that unrestricted cash on hand of the Loan Parties exceeds or equals $5 million after giving effect thereto.
In the event of any mandatory or optional prepayment under the Senior Credit Agreement or the termination of the Senior Credit Agreement prior to April 19, 2018, the Company is required to pay the Senior Lenders a prepayment fee equal to the following percentage of the amount repaid or prepaid: 3% if such prepayment or termination occurs prior to April 19, 2014; 2% if such prepayment or termination occurs prior to April 19, 2015; and 1% if such prepayment or termination occurs prior to April 19, 2016. Amounts repaid or prepaid under the Senior Credit Agreement will not be available for borrowing.
The Senior Credit Agreement includes customary representations and warranties, restrictive covenants, including covenants limiting the ability of the Company to incur indebtedness and liens; merge with, make an investment in or acquire any property or assets of another entity; pay cash dividends; repurchase shares of its outstanding stock; make loans and other investments; dispose of assets (including the equity securities of its subsidiaries); prepay the principal on any subordinate indebtedness; enter into certain transactions with its affiliates; or change its principal business (in each case, subject to certain basket amounts and exceptions). The Senior Credit Agreement also includes customary financial covenants, including minimum Consolidated EBITDA (as defined in the Senior Credit Agreement) requirements, and maximum leverage ratios, tested quarterly, as well as customary events of default.
In connection with the Company's public offering of common stock in July 2013, the Company received a waiver from the Senior Lenders, pursuant to which the first $10,000,000 of proceeds from that offering were required to be used to pay down the Senior Credit facility. The remaining proceeds were available for general corporate purposes, which included the funding of growth initiatives in sales and marketing, capital expenditures, working capital, and/or strategic acquisitions.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Junior Credit Agreement
On April 19, 2013, the Company entered into a Junior Credit Agreement by and among the Borrowers, the Guarantors, and the financial institutions from time to time party thereto as lenders (the “Junior Lenders”).
The Junior Credit Agreement provided for a five and a half year unsecured $2.5 million junior Term Loan A (issued with an original issue discount of $315,000) and a five and a half year unsecured $7.5 million junior Term Loan B (the “Junior Loans”). Each of the Junior Loans were funded in full on April 19, 2013. The Junior Loans were guaranteed jointly and severally by the Guarantors.
The Term Loan A bore interest at a fixed rate of 12% per annum and the Term Loan B bore interest at a fixed rate equal to the greater of 16% per annum and the current rate of interest under the Senior Credit Agreement relating to the Senior Credit Facility plus 4%. Interest owing under the Term B Loan was paid quarterly in arrears of which 12% was paid in cash and the remaining amount owed paid in kind If an event of default occurred and was continuing under the Junior Credit Agreement, borrowings under the Junior Credit Agreement would automatically be subject to an additional 2% per annum interest charge.
Borrowings under the Junior Credit Agreement were due and payable on the maturity date, October 19, 2018. Following the repayment in full of the Senior Credit Facility, the Company could voluntarily prepay the principal of the Junior Loans in whole or in part. In addition, the Company was required to prepay the Junior Loans in full upon the occurrence of a “change of control” under the Junior Credit Agreement (generally defined as (i) the acquisition by any person or “group” (within the meaning of Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934 as in effect on April 19, 2013), other than certain named parties and their respective controlled affiliates, of more than 45% of the outstanding shares of the Company’s common stock; (ii) subject to certain exceptions, the failure by the Company to directly or indirectly own 100% of the issued and outstanding capital stock of each other Loan Party and its subsidiaries, free and clear of all liens other than the liens created under the Senior Credit Agreement); (iii) the cessation of the Company’s current Executive Chairman (unless a successor reasonably acceptable to the Junior Lenders was appointed on terms reasonably acceptable to such parties within 90 days of such cessation); (iv) the listing of any person who owned a controlling interest in or otherwise controls a Loan Party on the Specially Designated Nationals and Blocked Person List maintained by the Office of Foreign Assets Control (“OFAC”), Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (B) a person designated under Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders or law; or (v) the occurrence of a “Change of Control” as defined in the Senior Credit Agreement).
In the event of any mandatory or optional prepayment under the Junior Credit Agreement or the termination of the Junior Credit Agreement prior to October 19, 2018, the Company was required to pay the Junior Lenders a prepayment fee equal to the following percentage of the amount repaid or prepaid: 5% if such prepayment or termination occurred prior to the thirteenth month following April 19, 2013; 4% if such prepayment or termination occurred from the thirteenth month following April 19, 2013 but prior to the twenty-fifth month thereafter; 3% if such prepayment or termination occurred from the twenty-fifth month following April 19, 2013 but prior to the thirty-first month thereafter; 2% if such prepayment or termination occurred from the thirty-first month following April 19, 2013 but prior to the thirty seventh-month thereafter; and 1% if such prepayment or termination occurred from the thirty-seventh month following April 19, 2013 but prior to the forty-third month thereafter. Amounts repaid or prepaid under the Junior Credit Agreement were not available for borrowing.
The Junior Credit Agreement contained substantially the same representations and warranties, affirmative and negative covenants and financial covenants as the Senior Credit Agreement, except that the permitted baskets in the Junior Credit Agreement were generally higher than under the Senior Credit Agreement, and the financial covenant requirements and ratios are 15% looser than under the Senior Credit Agreement. In addition, the Junior Credit Agreement included additional covenants intended to ensure that any Junior Lender that is a small business investment company complies with the applicable rules and regulations of the Small Business Administration, including a covenant granting the Junior Lenders Board of Director observation rights.
The Junior Credit Agreement also contained substantially the same events of default as under the Senior Credit Agreement, except that the thresholds included in the Junior Credit Agreement were generally higher than under the Senior Credit Agreement. The Junior Credit Agreement included cross-default provisions tied to either (1) the acceleration of the indebtedness under the Senior Credit Agreement or (2) the occurrence of an event of default under any of our other indebtedness or of any of the other Loan Parties having a principal balance in excess of $575,000.
The loans under the Junior Credit Agreement were subordinated to the Senior Credit Facility pursuant to the terms of a Subordination Agreement dated as of April 19, 2013 between the Junior Lenders and the Loan Parties.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In consideration for the Term Loan A under the Junior Credit Agreement, the Company issued to the Junior Lenders an aggregate of 31,500 shares of its common stock on April 19, 2013. In addition, on April 19, 2013, the Company also issued an aggregate of 31,500 shares of its common stock to certain affiliates of the Senior Lenders for their services in connection with arranging and structuring the financing provided under the Junior Credit Agreement. These shares were capitalized as loan origination fees and are being amortized over the life of the debt.
Debt Refinancing
On November 14, 2013, the Administrative Agent resigned as administrative agent under the Senior Credit Agreement and Comvest Capital II, L.P. (the "New Administrative Agent") was appointed administrative agent. Immediately after the appointment, the Loan Parties entered into a Second Amendment to Credit Agreement with the New Administrative Agent (the "Second Amendment"). The Second Amendment amended certain provisions of the Senior Credit Agreement and provided for a new $8 million term loan facility (the "Term Loan Facility"). The proceeds of the Term Loan Facility, along with cash on hand, were used to (i) repay certain lenders under the Senior Credit Agreement and (ii) repay in full all the obligations owed by the Loan Parties to Plexus Fund II, L.P. pursuant to the Company's Junior Credit Agreement.
Pursuant to the terms of Second Amendment, the Term Loan Facility bears interest at a rate per annum equal to the Base Rate plus 6.25% or the LIBOR Rate plus 7.5%, at the election of the Borrowers. The Company is no longer required to make quarterly principal amortization payments, and the entire unpaid portion of the Term Loan Facility is due on the termination date (April 19, 2018). The Second Amendment also includes, among other things, revisions to the financial covenants contained in the Senior Credit Agreement.
The covenants include requirements that the Company must achieve specified levels of consolidated EBITDA and must maintain a minimum fixed charge coverage ratio, which requirements are tested quarterly (beginning with the quarter ending December 31, 2014). There is also a limit on the amount of capital expenditures in any fiscal year. In addition, the Company is required to maintain Specified Coverage Assets, consisting of eligible receivables and unrestricted cash, equal to or exceeding the outstanding principal balance of the loan. The Company cannot have less than $1,500,000 of unrestricted cash at any time. Failure to comply with these or other covenants will result in an event of default. In the event of any default, the lenders could elect to declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be immediately due and payable and could foreclose on the Company's assets. The Company was in compliance with its debt covenants at June 30, 2014 and December 31, 2013.
6. Income Taxes
The following table summarizes the tax provision (benefit) for U.S. federal, state, and foreign taxes on income for the six months and three months ended June 30, 2014, for the period April 20 through June 30, 2013, and for the period February 1 through April 19, 2013:
|
|
Sucessor
Company
|
|
|
Sucessor
Company
|
|
|
Predecessor
Company
|
|
|
Sucessor
Company
|
|
|
|
Six Months
Ended
June 30,
2014
|
|
|
April 20, 2013
Through
June 30,
2013
|
|
|
February 1, 2013
Through
April 19,
2013
|
|
|
Three Months
Ended
June 30,
2014
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(667,878
|
)
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
92,852
|
|
|
|
-
|
|
Foreign
|
|
|
29,369
|
|
|
|
-
|
|
|
|
34,129
|
|
|
|
29,369
|
|
Total Current
|
|
|
29,369
|
|
|
|
-
|
|
|
|
(540,897
|
)
|
|
|
29,369
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(221,926
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
608,267
|
|
State
|
|
|
(136,303
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,417
|
)
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Deferred
|
|
|
(358,229
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
591,850
|
|
Total Provision (Benefit)
|
|
$
|
(328,860
|
)
|
|
$
|
-
|
|
|
$
|
(540,897
|
)
|
|
$
|
621,219
|
|
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although the Company recognized a loss before provision for income taxes for the six months ended June 30, 2014, no tax benefit related to the loss has been recognized because the realization of the tax benefit is uncertain. The Company has, however, recognized the tax benefit of the rollover of deferred taxes.
Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes that, except for the benefit of the net operations loss carry forwards, it is more likely than not that the Company will realize the benefits of these deductible differences. The Company has recorded a valuation allowance of 100% of the tax benefit applicable to the net operating loss carry forwards at June 30, 2014 because the realization of the benefit of these losses is uncertain.
The IRS completed an examination of Symon's income tax returns for the years ended January 31, 2009 and 2010 during 2012. The examination did not result in any material adjustments to Symon's tax returns. Subsequent to the examinations, the Company has determined that there are no uncertain tax positions and therefore no accruals have been made. There are no uncertain tax positions related to the successor. Symon's open tax years are 2011 through 2013. RMG's open tax years are 2008 through 2013.
With respect to state and local jurisdictions and countries outside of the United States, the Company and its subsidiaries are typically subject to examination for three to six years after the income tax returns have been filed.
7. Common Stock
The Company is authorized to issue up to 250,000,000 shares of common stock, par value $0.0001 per share. As of June 30, 2014 and December 31, 2013, the Company had 12,367,756 and 11,920,583, respectively, outstanding shares of common stock.
In February 2014, the Company commenced an offer to exchange one share of its common stock for every eight of its outstanding warrants tendered by the holder for exchange pursuant to the offer. The exchange offer expired on March 26, 2014, at 11:59 p.m. Eastern Time. A total of 3,417,348 Public Warrants, or approximately 26% of the 13,066,067 outstanding Warrants (and approximately 43% of the 8,000,000 outstanding Public Warrants), were properly tendered and not withdrawn in the offer.
Under the terms of the offer, the Company accepted all tendered Warrants, and issued an aggregate of 427,169 shares of common stock in exchange.
Stockholders of record are entitled to one vote for each share of common stock held on all matters to be voted on. Stockholders are entitled to receive ratable dividends when, as and if declared, by the Company’s Board of Directors out of funds legally available. In the event of a liquidation, dissolution, or winding up of the Company, stockholders are entitled to share ratably in all assets remaining available for distribution after payment of all liabilities of the Company, and after all provisions are made for each class of stock, if any, having preference over the common stock. Common stockholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the Company’s common stock.
8. Warrants
At June 30, 2014 and December 31, 2013, the Company had 9,648,719 and 13,066,067 warrants outstanding, respectively. As of June 30, 2014, 4,582,652 of these were public warrants. Each warrant entitles the registered holder to purchase one share of common stock at an exercise price of $11.50 per share. During the three months ended March 31, 2014, the Company redeemed 3,417,348 Public Warrants in connection with the common stock exchange discussed in Note 7.
Public Warrants
Each Warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment as discussed below, and are currently exercisable, provided that there is an effective registration statement under the Securities Act covering the underlying shares and a current prospectus relating to them is available.
The Warrants issued as part of the Offering expire on April 8, 2018 or earlier upon redemption or liquidation. The Company may call Warrants for redemption:
|
●
|
in whole and not in part;
|
|
●
|
at an exercise price of $0.01 per Warrant;
|
|
●
|
upon not less than 30 days’ prior written notice of redemption, or the 30-day redemption period, to each Warrant holder; and
|
|
●
|
if, and only if, the last sale price of the Company’s common stock equals or exceeds $17.50 per share for any 20 trading days within a 30-day trading period ending on the third business day before the Company sends notice of redemption to the Warrant holders.
|
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Company calls the Public Warrants for redemption as described above, it will have the option to require any holder of Warrants that wishes to exercise his, her or its Warrant to do so on a “cashless basis”. If the Company takes advantage of this option, all holders of Public Warrants would pay the exercise price by surrendering his, her or its Warrants for that number of shares of our common stock equal to, but in no case less than $10.00, the quotient obtained by dividing (x) the product of the number of shares of the Company’s common stock underlying the Warrants, multiplied by the difference between the exercise price of the Warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the Company’s common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Warrants. If the Company takes advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of common stock to be received upon exercise of the Warrants, including the “fair market value” in such case. Requiring a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the dilutive effect of a Warrant redemption. If the Company calls the Warrants for redemption and the Company’s management does not take advantage of this option, the Sponsor and its permitted transferees would still be entitled to exercise their Sponsor Warrants for cash or on a cashless basis using the same formula described above that holders of Public Warrants would have been required to use had all Warrant holders been required to exercise their Warrants on a cashless basis, as described in more detail below.
The exercise price, the redemption price and number of shares of common stock issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a stock dividend, stock split, extraordinary dividend, or recapitalization, reorganization, merger or consolidation. However, the exercise price and number of Common Shares issuable on exercise of the Warrants will not be adjusted for issuances of common stock at a price below the Warrant exercise price.
The Public Warrants were issued in registered form under a Warrant Agreement between the Company’s transfer agent (in such capacity, the “Warrant Agent”), and the Company (the “Warrant Agreement”). The Warrants may be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to the Company for the number of Warrants being exercised. The Warrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their Warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the Warrants, each holder will be entitled to one vote for each share of common stock held of record on all matters to be voted on by our stockholders.
No Public Warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the Warrants is current and available throughout the 30-day redemption period and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the Warrants.
No fractional shares of common stock will be issued upon exercise of the Public Warrants. If, upon exercise of the Warrants, a holder would be entitled to receive a fractional interest in a share of common stock, the Company will, upon exercise, round up to the nearest whole number the number of shares of common stock to be issued to the Warrant holder.
Sponsor Warrants
The Sponsor purchased an aggregate of 4,000,000 Sponsor Warrants from the Company at a price of $0.75 per Warrant in a private placement completed on April 12, 2011. In addition, on April 8, 2013, the Company issued to the Company's Executive Chairman and a significant stockholder Sponsor Warrants exercisable for a total of 1,066,666 shares of the Company’s common stock. These Warrants were issued upon the conversion by each of the parties of a Promissory Note issued by the Company to the Sponsor and in the aggregate principal amount of $800,000, which Promissory Note was subsequently assigned by the Sponsor to the Executive Chairman and significant stockholder in the aggregate principal amount of $400,000 each. The conversion price of the Promissory Notes was $0.75 per Warrant. The Sponsor Warrants (including the shares of Company common stock issuable upon exercise of the Sponsor Warrants) were not transferable, assignable or salable (other than to the Company’s officers and directors and other persons or entities affiliated with the Sponsor) until May 8, 2013, and they will not be redeemable by the Company so long as they are held by the Sponsor or its permitted transferees. Otherwise, the Sponsor Warrants have terms and provisions that are identical to the Public Warrants, except that such Sponsor Warrants may be exercised by the holders on a cashless basis. If the Sponsor Warrants are held by holders other than the Sponsor or its permitted transferees, the Sponsor Warrants will be redeemable by the Company and exercisable by the holders on the same basis as the Public Warrants. The Sponsor Warrants expire on April 8, 2018.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. As of June 30, 2014 and December 31, 2013, the Company has not issued any shares of preferred stock.
10. Treasury Stock
In settlement of a claim for damages, the Company received 300,000 shares of its common stock, which was recorded at cost as Other Income per the guidance under ASC 450. The stock was valued at $480,000 which represents its market price on the day it was received.
11
.
Warrant Liability
Pursuant to the Company's Offering, the Company sold 8,000,000 units, which subsequently separated into one warrant at an initial exercise price of $11.50 and one share of common stock. The Sponsor also purchased 4,000,000 warrants in a private placement in connection with the initial public offering. The warrants expire on April 8, 2018. The warrants issued contain a cashless exercise feature and a restructuring price adjustment provision in the event of any merger or consolidation of the Company with or into another corporation, subsequent to the initial business combination, where the surviving entity is not the Company and whose stock is not listed for trading on a national securities exchange or on the OTC Bulletin Board, or is not to be so listed for trading immediately following such event (the "Applicable Event"). The exercise price of the warrant is decreased immediately following an Applicable Event by a formula that causes the warrants to not be indexed to the Company's own stock. As a result, the warrants are considered a derivative and the liability has been classified as a liability on the Balance Sheet. Management uses the quoted market price of the warrants to calculate the warrant liability which was determined to be $2,701,641 at June 30, 2014 and $4,573,123 at December 31, 2013. This valuation is revised on a quarterly basis until the warrants are exercised or they expire with the changes in fair value recorded in the statement of operations. Any change in the market value of the warrant liability is recorded as Other Income (Expense) in the Statement of Comprehensive Income (Loss).
The fair value of the derivative warrant liability was determined by the Company using the quoted market prices for the publicly traded warrants. On reporting dates where there are no active trades the Company uses the last reported closing trade price of the warrants to determine the fair value (Level 2). There were no transfers between Level 1, 2 or 3 during the six months ended June 30, 2014 and the year ended December 31, 2013.
The following table presents information about the Company's warrant liability that is measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:
Description
|
|
Fair Value
|
|
|
Quoted Prices
In
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Other
Unobservable Inputs
(Level 3)
|
|
Warrant Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
$
|
4,573,123
|
|
|
|
-
|
|
|
$
|
4,573,123
|
|
|
|
-
|
|
March 31, 2014
|
|
$
|
6,754,103
|
|
|
|
-
|
|
|
$
|
6,754,103
|
|
|
|
-
|
|
June 30, 2014
|
|
$
|
2,701,641
|
|
|
|
-
|
|
|
$
|
2,701,641
|
|
|
|
-
|
|
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and Contingencies
Office Lease Obligations –
The Company currently leases office space and manufacturing facilities in Dallas, Texas. The office space lease that expires on March 1, 2025 and the manufacturing facilities lease expires on April 30, 2015.
The Company also leases office space in San Francisco and Los Angeles, California, New York, New York, Chicago, Illinois, and Pittsford, New York, under leases that expire at various dates through 2020.
In addition, the Company leases office space in London, England under a lease agreement that expires in August 2016; in Dubai, UAE under a lease agreement that expires in August 2014; in Singapore under a lease that expires in September 2015; and in Sao Paulo, Brazil under a lease that expires in November 2016.
Future minimum rental payments under these leases are as follows:
|
|
Amount
|
|
Fiscal year ending December 31:
|
|
|
|
|
2014 (remainder)
|
|
$
|
871,893
|
|
2015
|
|
|
2,007,974
|
|
2016
|
|
|
1,667,595
|
|
2017
|
|
|
1,473,964
|
|
2018
|
|
|
1,236,023
|
|
Thereafter
|
|
|
6,423,579
|
|
|
|
$
|
13,681,028
|
|
Total rent expense under all operating leases for the six months ended June 30, 2014 was $1,132,947. Total rent expense for the period April 20 through June 30, 2013 was $346,768, and for the period February 1 through April 19, 2013 was $102,704. Total rent expense for the three months ended June 30, 2014 was $575,207.
Capital Lease Commitments -
The Company has entered into capital lease agreements with leasing companies for the financing of equipment and furniture purchases. The capital lease payments expire at various dates through June 2017. Future minimum lease payments under non-cancelable capital lease agreements consist of the following amounts for the year ending December 31:
|
|
Capital
Leases
|
|
2014
|
|
$
|
118,514
|
|
2015
|
|
|
232,664
|
|
2016
|
|
|
230,274
|
|
2017
|
|
|
86,227
|
|
Total minimum lease payments
|
|
|
667,679
|
|
Less amount representing interest
|
|
|
(65,302
|
)
|
Present value of capital lease obligations
|
|
|
602,377
|
|
Less current portion
|
|
|
(200,150
|
)
|
Non-current portion
|
|
$
|
402,227
|
|
The Company is currently subleasing two facilities and receiving monthly payments which are less than the Company’s monthly lease obligations. Based upon the then current real estate market conditions, the Company believed that these leases had been impaired and accrued lease impairment charges. The impairment charges were calculated based on future lease commitments less estimated future sublease income. The leases expire in February 28, 2021 and August 31, 2017, respectively.
Revenue Share Commitments
The Company has entered into revenue sharing agreements with certain customers, requiring the Company to make minimum yearly revenue sharing payments.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum payments under these agreements consist of the following amounts for the years ending December 31:
2014
|
|
$
|
7,842,448
|
|
2015
|
|
|
8,619,842
|
|
2016
|
|
|
6,000,000
|
|
Total minimum revenue share commitments
|
|
$
|
22,462,290
|
|
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.
13. Accrued Liabilities
Accrued liabilities are as follows:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Professional fees
|
|
$
|
761,486
|
|
|
$
|
460,924
|
|
Accrued sales commissions
|
|
|
524,262
|
|
|
|
619,186
|
|
Accrued bonuses and severance
|
|
|
607,127
|
|
|
|
467,701
|
|
Accrued capital expenditures
|
|
|
61,707
|
|
|
|
828,716
|
|
Taxes payable
|
|
|
3,541
|
|
|
|
(279,391
|
)
|
Accrued expenses
|
|
|
1,052,131
|
|
|
|
807,884
|
|
Accrued interest
|
|
|
180,778
|
|
|
|
-
|
|
Other
|
|
|
1,290,619
|
|
|
|
1,518,876
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,481,651
|
|
|
$
|
4,423,896
|
|
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Geographic Information
Revenue by geographic area are based on the deployment site location of end-user customers. Substantially all of the revenue from North America are generated from the United States of America. Geographic area information related to revenue from customers is as follows:
|
|
Successor
Company
|
|
|
Successor
Company
|
|
|
Predecessor
Company
|
|
|
Successor
Company
|
|
Region
|
|
Six Months
Ended June 30,
2014
|
|
|
April 20
Through June 30,
2013
|
|
|
February 1
Through April 19,
2013
|
|
|
Three Months
Ended June 30,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
18,304,943
|
|
|
$
|
11,681,562
|
|
|
$
|
5,137,363
|
|
|
$
|
9,995,480
|
|
International -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
3,419,509
|
|
|
|
2,344,474
|
|
|
|
911,879
|
|
|
|
1,847,816
|
|
Middle East
|
|
|
1,572,101
|
|
|
|
702,568
|
|
|
|
485,712
|
|
|
|
668,390
|
|
Europe
|
|
|
1,272,119
|
|
|
|
266,703
|
|
|
|
616,710
|
|
|
|
644,646
|
|
Other
|
|
|
582,843
|
|
|
|
54,720
|
|
|
|
5,652
|
|
|
|
220,054
|
|
Total International
|
|
$
|
6,846,572
|
|
|
$
|
3,368,465
|
|
|
$
|
2,019,953
|
|
|
$
|
3,380,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,151,515
|
|
|
$
|
15,050,027
|
|
|
$
|
7,157,315
|
|
|
$
|
13,376,386
|
|
The vast majority of the Company's long-lived assets are located in the United States.
15. Unaudited Pro- Forma Operating Income for the Six Months Ended June 30, 2014 and 2013
The following table presents Unaudited Pro-Forma Operating Income (Loss) for the Company for the six months ended June 30, 2014 and 2013 based on the assumption that both RMG and Symon had been acquired on January 1, 2012. These results are not, however, intended to reflect actual operations of the Company had the acquisitions occurred on January 1, 2012. Operating expenses do not included any acquisition related expenses.
In addition, Revenue has been adjusted to reflect the reclassification of certain charges (reductions) of Revenue. These reductions of revenue have been reclassified as Cost of Revenue. This reclassification does not affect Gross Profit or Operating Income (Loss).
The analysis includes the effect of the following entries required under GAAP purchase accounting guidelines:
|
●
|
Amortization expense includes amortization of the fair value Intangible Assets that were acquired.
|
|
●
|
Revenues have been reduced due to an adjustment of deferred revenue existing at the acquisition date to market value at the acquisition date.
|
|
|
Six Months
Ended June 30,
2014
|
|
|
Six Months
Ended June 30,
2013
|
|
Revenue
|
|
$
|
28,976,704
|
|
|
$
|
33,550,811
|
|
Cost of Revenue
|
|
|
22,394,188
|
|
|
|
17,368,595
|
|
Gross Profit
|
|
|
6,582,516
|
|
|
|
16,182,216
|
|
Operating Expenses
|
|
|
33,905,162
|
|
|
|
21,047,895
|
|
Operating Income (Loss)
|
|
|
(27,322,646
|
)
|
|
|
(4,865,679
|
)
|
During the six months ended June 30, 2014, Cost of Revenue includes a charge of $6,200,000 related to a loss recorded on a long-term contract and Operating Expenses include a charge of $7,245,349 related to the impairment of intangible assets and goodwill.
16. Equity Incentive Plan
On July 12, 2013, the Company’s stockholders approved the Company’s 2013 Equity Incentive Plan (the “2013 Plan”) and the reservation of 2,500,000 shares of the Company’s common stock for issuance under the 2013 Plan. The 2013 Plan is intended to promote the interests of the Company and its stockholders by providing the Company’s employees, directors and consultants with incentives and rewards to encourage them to continue in the Company’s service and with a proprietary interest in pursuing the Company’s long-term growth, profitability and financial success. Equity awards available under the 2013 Plan include stock options, stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units, share-denominated performance units and cash awards. The 2013 Plan is administered by the compensation committee of the board of directors of the Company, which has the authority to designate the employees, consultants and members of the board of directors who will be granted awards under the 2013 Plan, to designate the amount, type and other terms and conditions of such awards and to interpret any and all provisions of the 2013 Plan and the terms of any awards under the 2013 Plan. The 2013 Plan will terminate on the tenth anniversary of its effective date. In August 2013 the Company awarded 1,660,000 options to its employees. 178,333 stock options have been subsequently cancelled. The options have an exercise price of $8.10 and vest over a three-year period. The cost associated with these options for the six months and the three months ended June 30, 2014 was $1,159,679 and $481,454, respectively. The unamortized cost of the options at June 30, 2014 was $3,308,185 to be recognized over a weighted-average life of 1.8 years. The unamortized cost of the options at December 31, 2013 was $4,467,863. At June 30, 2014 and December 31, 2013, none of the options were exercisable. In addition, there was no intrinsic value associated with the options as of June 30, 2014 and December 31, 2013. The weighted-average remaining contractual life of the options outstanding is 9.1 years.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company estimated the fair value of the stock-based rights granted to employees using the Black-Scholes option pricing model with the following weighted-average assumptions: expected life of 6.0 years, expected volatility of 48.9%, dividend yield of 0%, and risk-free interest rate of 1.97%. The average fair value of options granted during 2013 was $3.91.
On August 13, 2013 the Company granted its Chief Executive Officer 350,000 shares of common stock under its Equity Incentive Plan. The shares vest over a three-year period beginning in April 2014. The cost associated with the restricted stock grant for the six months and the three months ended June 30, 2014 was $584,158 and $232,694, respectively. The unamortized cost of the grant at June 30, 2014 and December 31, 2013 was $1,665,175 and $2,249,333, respectively. As of June 30, 2014 and December 31, 2013, none of the stock had vested. In addition, there was no intrinsic value associated with the stock as of June 30, 2014 and December 31, 2013.
17. Related Party Transactions
In August 2013 the Company entered into a two-year Management Services Agreement with 2012 DOOH Investments, LLC (the "Consultant"), an entity managed by Mr. Donald R. Wilson, a major stockholder. Under the agreement, the Consultant provides management consulting services to the Company and its subsidiaries with respect to financing, acquisitions, sourcing, diligence, and strategic planning.
In consideration for its services, the Consultant received a one-time payment of 120,000 shares of the common stock of the Company which had a market value of $960,000 when issued in August 2013. The value of the common stock will be amortized over the term of the agreement with related charges to operations for the six months and three months ended June 30, 2014 were $264,750 and $120,000, respectively. The unamortized value of the common stock was $520,000 and $784,750 at June 30, 2014 and December 31, 2013, respectively. $480,000 of the unamortized balance of the common stock at June 30, 2014 and December 31, 2013 is included in other current assets. The remainder of the unamortized balance of the common stock is included in other assets. Under the Agreement, the Consultant also receives an annual services fee of $50,000.
In addition, the Company provides consulting services to an entity owned by Mr. Wilson for which it has recognized related consulting fees during the six months and three months ended June 30, 2014 of $287,500 and $112,500, respectively.
The Company also has an agreement with a company owned by a board member under which it pays $15,000 a month for public relations services. Under this agreement the Company has incurred charges for the six months and three months ended June 30, 2014 of $90,000 and $45,000, respectively.
18. Loss on Long-Term Contract
In 2013 the Company entered into a long-term contract with a partner under which it agreed to share revenue generated under the contract with the partner. The revenue sharing arrangement included minimum annual guarantees payable to the partner over the term of the contract.
During the second quarter of 2014, the Company updated its analysis of the long-term contract. Based on results to date and a current estimate of revenue to be generated in the future under the contract, the Company has determined that sufficient revenue will not be generated under the contract for it to meet its minimum annual guarantees of revenue sharing to its partner.
As a result, the Company recorded a $6,200,000 loss on the long-term contract at June 30, 2014 which represents the amount it expects that the total minimum annual guarantees payable to the partner will exceed the revenue generated under the contract. The loss on the long-term contract has been recorded as follows:
Loss on Long-Term Contract
|
|
$
|
4,130,104
|
|
Revenue reduction
|
|
|
2,069,896
|
|
Total
|
|
$
|
6,200,000
|
|
19. Segment Reporting
The Company provides advertising services through digital place-based networks and sells enterprise-class digital signage solutions to customers worldwide. The Company has two separate reporting business segments - Media and Enterprise - for the following reasons:
|
●
|
The segments have different business models. The Media segment sells advertising to major corporate advertisers and the advertising is placed on screens owned by business partners. In return for the use of their screens, the business partners share in the advertising revenue. The Enterprise segment sells intelligent visual solutions that consist of its proprietary software and hardware products and third-party displays. The Enterprise segment also provides installation services and maintenance and support services to corporate customers.
|
|
●
|
The segments have different economic characteristics. The Media segment is projected to have a higher rate of sales growth than the Enterprise segment. The Enterprise segment realizes a higher gross margin on revenues than the Media segment.
|
|
●
|
Each segment has a different head of operations that manages the segment. Each segment head utilizes discrete financial information about his individual segment and regularly reviews the operating results of that component.
|
Since the Company operates as a highly integrated entity which is characterized by substantial inter-segment cooperation and sharing of personnel and assets, it limits its segment reporting to revenues, cost of revenues, and gross profit by segment.
RMG Networks Holding Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An analysis of the two reporting business segments follows:
|
|
Successor Company
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
|
|
Six Months
Ended
June 30,
2014
|
|
|
April 20, 2013
Through
June 30,
2013
|
|
|
February 1, 2013
Through
June 30,
2013
|
|
|
|
Media
|
|
|
Enterprise
|
|
|
Media
|
|
|
Enterprise
|
|
|
Media
|
|
|
Enterprise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
7,417,237
|
|
|
|
17,734,278
|
|
|
$
|
5,556,557
|
|
|
$
|
9,493,470
|
|
|
|
-
|
|
|
$
|
7,157,315
|
|
Cost of Revenue
|
|
|
9,920,014
|
|
|
|
9,022,820
|
|
|
|
3,355,883
|
|
|
|
5,031,229
|
|
|
|
-
|
|
|
|
2,971,467
|
|
Gross Profit
|
|
|
(2,502,777
|
)
|
|
|
8,711,458
|
|
|
|
2,200,674
|
|
|
|
4,462,241
|
|
|
|
-
|
|
|
|
4,185,848
|
|
Gross Profit %
|
|
|
-33.7
|
%
|
|
|
49.1
|
%
|
|
|
39.6
|
%
|
|
|
47.0
|
%
|
|
|
-
|
|
|
|
58.5
|
%
|
|
|
Successor Company
|
|
|
|
Three Months
Ended
June 30,
2014
|
|
|
|
Media
|
|
|
Enterprise
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,871,146
|
|
|
$
|
8,505,240
|
|
Cost of Revenues
|
|
|
7,584,271
|
|
|
|
4,742,921
|
|
Gross Profit
|
|
|
(2,713,125
|
)
|
|
|
3,762,319
|
|
Gross Profit %
|
|
|
-55.7
|
%
|
|
|
44.2
|
%
|
For the six months ended June 30, 2014 and the three months ended June 30, 2014, the Media segment’s Cost of Revenue includes a charge of $4,130,104 related to a loss recognized on a long-term contract. Without the inclusion of this loss, the Media segment’s gross margin for the six months ended June 30, 2014 and for the three months ended June 30, 2014 was 21.9% and 29.1%, respectively.
During the period February 1, 2013 through April 19, 2013, the Enterprise segment realized a gross margin of 58.5%. The Predecessor Company consisted only of the Enterprise segment during this period, and, as a result, there were no advertising segment revenues.
19. Subsequent Event
On July 16, 2014 the Company amended its Senior Credit Facility to increase the amount borrowed under the facility to $12,000,000, adding approximately $3,400,000 in net cash proceeds to its Balance Sheet. The amendment also eliminates financial covenants until at least mid-year 2015. The amended Senior Credit Facility, which matures in July 2017, bears interest at a fixed rate of 12% and continues to defer principal payments until maturity.
Prior to the amendment, the Company’s prior senior lender, Comvest Capital II, L.P., sold its interest in the Senior Credit Facility to a new lender group that includes an affiliate of the Company’s Executive Chairman and an affiliate of the Company’s largest shareholder. After acquiring the Senior Credit Facility, the new lender group entered into a Third Amendment to the Credit Agreement and funded the $4,000,000 increase in the Senior Credit Facility.