TMCnet News
RMG NETWORKS HOLDING CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2013. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors" in Item 1A of Part II. Overview The Company was formed on January 5, 2011 for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets. The Company consummated the acquisition of Reach Media Group Holdings, Inc. ("RMG") on April 8, 2013 and on April 19, 2013 acquired Symon Holdings Corporation ("Symon"). Symon is considered to be the Company's predecessor corporation for accounting purposes. As a result of its two acquisitions, the Company is a global provider of media applications and enterprise-class digital signage solutions. Through an extensive suite of products, including media services, proprietary software, software-embedded hardware, maintenance and creative content service, installation services, and third-party displays, the Company delivers complete end-to-end intelligent visual communication solutions to its clients. The Company is one of the largest integrated digital signage solution providers globally and conducts operations through its RMG Media Networks and its RMG Enterprise Solutions business units. The RMG Media Networks business unit engages elusive audience segments with relevant content and advertising delivered through digital place-based networks. These networks include the RMG Airline Media Network. The RMG Airline Media Network is a U.S.-based network focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment, or IFE, systems, on in-flight Wi-Fi portals and in private airport terminals. The network, which spans almost all major commercial passenger airlines in the United States, delivers advertising to an audience of affluent travelers and business decision makers in a captive and distraction-free video environment. The RMG Enterprise Solutions business unit provides end-to-end digital signage applications to power intelligent visual communication implementations for critical contact center, supply chain, employee communications, hospitality, retail and other applications with a large concentration of customers in the financial services, telecommunications, manufacturing, healthcare, pharmaceutical, utility and transportation industries, and in federal, state and local governments. These solutions are relied upon by approximately 70% of the North American Fortune 100 companies and thousands of overall customers in locations worldwide. The installations of Enterprise Solutions deliver real-time intelligent visual content that enhance the ways in which organizations communicate with employees and customers. The solutions are designed to integrate seamlessly with a customer's IT infrastructure and data and security environments. Revenue The Company derives its revenue as follows: ? Advertising ? Product sales: ? Licenses to use its proprietary software products; ? Proprietary software-embedded media players; ? Proprietary LED displays; and ? Third-party flat screen displays and other third-party hardware. ? Customer support services: ? Product maintenance services; and ? Subscription-based and custom creative content services. ? Professional installation and training services Revenue is recognized as outlined in "Critical Accounting Policies - Revenue Recognition" below. 29 -------------------------------------------------------------------------------- RMG Media Networks Revenues The Company sells advertising through agencies and directly to a variety of customers under contracts ranging from one month to one year. Contracts usually specify the network placement, the expected number of impressions (determined by passenger or visitor counts), and the cost per thousand impressions ("CPM") over the contract period to arrive at a contract amount. The Company bills for these advertising services as required by the customer, but most frequently on a monthly basis following the delivery of the contracted ad insertions. Revenue is recognized at the end of the month in which fulfillment of the advertising orders occurred. RMG Enterprise Solutions Revenues The Company sells its Enterprise products and services through its global sales force and through a select group of resellers and business partners. In the United States, approximately 90% or more of its enterprise sales are generated solely by the Company's sales team, with 10% or less through resellers in 2013. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of the Company's global enterprise revenues are derived from direct sales, with the remaining 33% generated through indirect partner channels. The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties, and product returns from resellers have been insignificant to date. The Company sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies. The Company bills resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users. Cost of Revenue RMG Media Networks Cost of Revenue The cost of revenue associated with RMG Media Networks revenues consists primarily of revenue sharing with the Company's airline and other business partners. Revenue sharing payments to airlines and other business partners are made on a monthly basis under either under minimum annual guarantees, or as a percentage of advertising revenues following collection from customers. The portion of revenue shared with partners ranges from 25% to 80% depending on the partner and the media asset. The Company makes minimum annual payments to three partners and revenue sharing payments to all other partners. The Company's partnership agreements have terms generally ranging from one to five years. Four of the Company's partnership agreements renew automatically unless terminated prior to renewal, and the remaining agreements have no obligation to renew. RMG Enterprise Solutions Cost of Revenue The cost of revenue associated with RMG Enterprise Solutions product sales consist primarily of the costs of media players, the costs of third-party flat screen displays and the operating costs of the Company's assembly and distribution center. The cost of revenue of professional services is the salary and related benefit costs of the Company's employees and the travel costs of personnel providing installation and training services. The cost of revenue of maintenance and content services consists of the salary and related benefit costs of personnel engaged in providing maintenance and content services and the annual costs associated with acquiring data from third-party content providers. Operating Expenses The Company's operating expenses are comprised of the following components: ? Sales and marketing expenses include salaries and related benefit costs of sales personnel, sales commissions, travel by sales and sales support personnel, and marketing and advertising costs. ? Research and development ("R&D") costs consist of salaries and related benefit costs of R&D personnel and expenditures to outside third-party contractors. To date, all R&D expenses are expensed as incurred. ? General and administrative expenses consist primarily of salaries and related benefit costs of executives, accounting, finance, administrative, and IT personnel. Also included in this category are other corporate expenses such as rent, utilities, insurance, professional service fees, office expenses, travel by general and administrative personnel and meeting expenses. ? Acquisition expenses are comprised of the following: ? Professional fees paid to attorneys, accountants, consultants and other professionals in connection with the acquisitions of RMG and Symon. ? All costs associated with integrating and restructuring the operations of the acquired companies. ? Expenses incurred by the Company prior to the acquisitions while still a development stage company. ? Depreciation and amortization costs include depreciation of the Company's office furniture, fixtures and equipment and amortization of intangible assets. 30--------------------------------------------------------------------------------Given the nature of the formation of the Company, its financial results are required to be reported on a basis that includes the three companies' (RMG Networks Holding Corporation, RMG and Symon) operations and for different time periods. Results of Operations Comparison of the six months ended June 30, 2014 to the period April 20, 2013 through June 30, 2013 As discussed above, the Company acquired RMG on April 8, 2013 and Symon on April 19, 2013. The financial statements for the six months ended June 30, 2014 include the results of operations of RMG Networks, RMG, and Symon (the "Successor Company") for the entire six-month period. The financial statements for the period April 20 through June 30, 2013 present the operations of the Successor Company for only 72 days. As a result, the financial results shown are not generally comparable on a meaningful basis. Successor Successor Company Company Six Months April 20, Ended 2013 through June 30, June 30, Change 2014 2013 Dollars % Revenue $ 25,151,515 $ 15,050,027 $ 10,101,488 67.1 % Cost Of Revenue 18,942,834 8,387,112 10,555,722 125.9 % Gross Profit 6,208,681 6,662,915 (454,234 ) -6.8 % Operating Expenses - Sales and marketing 10,636,104 3,351,286 7,284,818 217.4 % General and administrative 10,490,344 2,585,983 7,904,361 305.7 % Research and development 2,120,037 806,401 1,313,636 162.9 % Acquisition expenses - 1,485,566 (1,485,566 ) -100.0 % Impairment of intangible assets and goodwill 7,245,359 - 7,245,359 - % Depreciation and amortization 3,800,818 1,292,276 2,508,542 194.1 % Total Operating Expenses 34,292,662 9,521,512 24,771,150 260.2 % Operating Income (Loss) (28,083,981 ) (2,858,597 ) (25,225,384 ) -882.4 % Warrant liability expense (589,009 ) (3,920,000 ) (3,330,991 ) -85.0 % Interest expense and other - net (114,691 ) (495,880 ) (381,189 ) -76.9 % Income (Loss) Before Income Taxes (28,787,681 ) (7,274,477 ) (21,513,204 ) -295.7 % Income Tax Expense (Benefit) (328,860 ) - 328,860 - % Net Income (Loss) $ (28,458,821 ) $ (7,274,477 ) $ (21,184,344 ) -291.2 % Revenue Revenue was $25,151,515 and $15,050,027 for the six months ended June 30, 2014 and the period April 20, 2013 through June 30, 2013, respectively. This represents a $10,101,488, or 67.1%, increase. This difference in revenue is due to the fact that operations for the six months ended June 30, 2014 include revenue for the Successor Company for the entire six-month period, while operations for the period April 20 through June 30, 2013 include revenue of the Successor Company for only 72 days. 31 --------------------------------------------------------------------------------During the six months ended June 30, 2014 and the period April 20, 2013 through June 30, 2013, the Company's revenue was derived as follows. Successor Successor Company Company Six Months April 20 ended through Change June 30, June 30, 2014 % 2013 % Dollars % Revenue - Advertising $ 7,417,237 29.5 % $ 5,556,557 36.9 % $ 1,860,680 33.5 % Products 5,589,302 22.2 % 5,069,160 33.7 % 520,142 10.3 % Maintenance and content services 7,904,287 31.4 % 2,572,555 17.1 % 5,331,732 207.3 % Professional services 4,240,689 16.9 % 1,851,755 12.3 % 2,388,934 129.0 % Total $ 25,151,515 100.0 % $ 15,050,027 100.0 % $ 10,101,488 100.0 % The fluctuations in the components of revenue between the two periods are due to the same reasons as stated above with respect to total revenue. Specifically, operations for the six months ended June 30, 2014 include revenue for the Successor Company for the entire six-month period while operations for the period April 20 through June 30, 2013 include revenue for the Successor Company for only 72 days. The following table reflects the Company's revenue on a geographic basis. Successor Company Successor Company Six Months Ended April 20, 2013 through Region June 30, 2014 June 30, 2013 North America $ 18,304,943 72.8 % $ 11,681,562 77.6 % International- United Kingdom 3,419,509 13.6 % 2,344,474 15.6 % Middle East 1,572,101 6.2 % 702,568 4.6 % Europe 1,272,119 5.1 % 266,703 1.8 % Other 582,843 2.3 % 54,720 0.4 % Total International 6,846,572 27.2 % 3,368,465 22.4 % Total $ 25,151,515 100.0 % $ 15,050,027 100.0 % The higher level of revenue for each region for the six months ended June 30, 2014 was due to the fact that revenue for the Successor Company are included for the entire six-month period while operations for the period April 20 through June 30, 2013 include revenue for the Successor Company for only 72 days. We believe that a better basis for comparing the Company's financial results can be found in Note 15 to the Company's unaudited consolidated financial statements located elsewhere in this filing that provides unaudited "pro-forma" financial results for the six months ended June 30, 2014 and 2013. These Pro-Forma financial results present the Company's results of operations assuming the acquisitions of RMG and Symon had occurred on January 1, 2012 and the Company had operated as a combined entity since that date. The financial results include the following entries required under GAAP purchase accounting guidelines: ? Amortization expense includes amortization of the fair value of intangible assets that were acquired. ? Revenues have been reduced based on the adjustment to market value of the Predecessor Company's deferred revenue that existed at the acquisition date. Pro-Forma Operating Expenses do not include any acquisition related expenses. In addition, revenue has been adjusted to reflect the reclassification of certain charges (reductions) of revenue. These reductions of revenue have been reclassified as cost of revenue. This reclassification does not affect gross profit or operating income (loss). The pro-forma financial results reflect revenue of $28,976,704 and $33,550,811 for the six months ended June 30, 2014 and 2013, respectively. 32 --------------------------------------------------------------------------------Differences in the composition of the Company's revenues for the two pro-forma periods are as follows: ? Advertising revenue for the Company's Media business unit totaled $7,417,237 and $12,510,676 for the six months ended June 30, 2014 and 2013, respectively. This is a $5,093,439, or 40.7%, decrease. The decrease in advertising revenue was due to a decline in demand for the Company's advertising services and a general decline in demand for advertising services in the out-of-home market. ? Revenue from sales of products of the Enterprise Solutions business unit totaled $7,958,302 and $8,709,347 for the six months ended June 30, 2014 and 2013, respectively. This is a $751,045, or 8.6%, decrease. ? Maintenance and content services revenue for the Enterprise Solutions business unit totaled $8,672,688 and $7,844,071 for the six months ended June 30, 2014 and 2013, respectively. This is $828,617, or 10.6%, increase. ? The Company's professional services revenue totaled $4,928,478 and $4,486,717 for the six months ended June 30, 2014 and 2013, respectively. This is a $441,761, or 9.8%, increase and was due to improved productivity and increased use of third-party contractors for installation services. Cost of Revenue Cost of revenue totaled $18,942,834 and $8,387,112 for the six months ended June 30, 2014 and for the period April 20, 2013 through June 30, 2013, respectively. This $10,555,722, or 125.9%, increase in cost of revenue is directly attributable to the previous explanations given for the fluctuations in revenue, i.e., the cost of revenue is comprised of amounts for different time periods. In addition, cost of revenue for the six months ended June 30, 2014 includes a loss on a long-term contract of $4,130,104. The following table summarizes the composition of the Company's cost of revenue for the six months ended June 30, 2014 and for the period April 20 through June 30, 2013. Successor Successor Company Company Six Months April 20 ended through Change June 30, June 30, 2014 % 2013 % Dollars % Cost of Revenue - Advertising $ 5,789,910 30.6 % $ 3,355,883 40.0 % $ 2,434,027 72.5 % Products 4,421,768 23.3 % 3,261,492 38.9 % 1,160,276 35.6 % Maintenance and content services 1,516,084 8.0 % 572,433 6.8 % 943,651 164.8 % Professional services 3,084,968 16.3 % 1,197,304 14.3 % 1,887,664 157.7 % Loss on long-term contract 4,130,104 21.8 % - - % 4,130,104 - % Total $ 18,942,834 100.0 $ 8,387,112 100.0 % $ 10,555,722 125.9 % The fluctuations in the components of cost of revenue between the two periods are due to the same reasons stated above with respect to total revenue. Specifically, operations for the six months ended June 30, 2014 include the cost of revenue for the entire six-month period, while operations for the period April 20, 2013 through June 30, 2013, include the cost of revenue for only 72 days. In addition, cost of revenue for the six months ended June 30, 2014 includes a loss on a long-term contract of $4,130,104. The following table reflects the Company's gross margins for the six months ended June 30, 2014 and for the period April 20, 2013 through June 30, 2013: Successor Company Successor Company Six Months Ended April 20, 2013 through June 30, 2014 June 30, 2013 $ % $ % Advertising $ 1,627,327 21.9 % 2,200,674 39.6 % Products 1,167,534 20.9 % 1,807,668 35.7 % Maintenance and content services 6,388,203 80.8 % 2,000,122 77.7 % Professional services 1,155,721 27.3 % 654,451 35.3 % 10,338,785 41.1 % 6,662,915 44.3 % Loss on long-term contract (4,130,104 ) -16.4 % - - Total 6,208,681 24.7 % 6,662,915 44.3 % 33-------------------------------------------------------------------------------- The Company's overall gross margin for the six months ended June 30, 2014 decreased to 24.7% from 44.3% for the period April 20, 2013 through June 30, 2013. The lower gross margin was primarily attributable to the fact that the Company's cost of revenue for the six months ended June 30, 2014 includes a loss on a long-term contract of $4,130,104. There was not a loss on a long-term contract in cost of revenue for the period April 20, 2013 through June 30, 2013. Operating Expenses Operating expenses totaled $34,292,662 and $9,521,512 for the six months ended June 30, 2014 and for the period April 20, 2013 through June 30, 2013, respectively. This $24,771,150, or 260.2%, increase in operating expenses is primarily attributable to the following items: ? Operations for the six months ended June 30, 2014 include operating expenses for the Successor Company for the entire six-month period while operations for the period April 20 through June 30, 2013 include operating expenses for the Successor Company for only 72 days. ? Operating expenses for the six months ended June 30, 2014 include an impairment charge of $7,245,359 related to intangible assets and goodwill. ? Depreciation and amortization expense for the six months ended June 30, 2014 was $3,800,818 which was $2,508,542 higher than depreciation and amortization expense for the period April 20, 2013 through June 30, 2013. ? Operating expenses for the six months ended June 30, 2014 included stock-based compensation of $1,743,837 and reorganization expenses of $579,029. ? The Company also incurred significant increases in operating expenses due to expenditures made in connection with its growth initiatives, which includes additional sales and sales support personnel and marketing programs, and expenditures for enhanced infrastructure, i.e., systems and personnel. A comparison of operating expenses shown in the pro-forma financial results reflects that pro-forma operating expenses totaled $33,905,162 and $21,047,895 for the six months ended June 30, 2014 and 2013, respectively. The increase in operating expenses of $12,857,267, or 61.1%, was primarily due to the impairment charge, the higher depreciation and amortization expense, the stock-based compensation and reorganization expenses, and the expenditures made in connection with the Company's growth initiatives as discussed above. Warrant Liability Expense The Company calculates its warrant liability based on the quoted market value of its outstanding warrants. The warrant liability expense for the six months ended June 30, 2014 of $589,009 represents the costs associated with the increase in the Company's warrant liability for warrants that were exchanged for common stock during the first quarter of 2014 and the change in the Company's liability for warrants that remain outstanding at June 30, 2014. Interest and other - Net Interest expense and other - net for the six months ended June 30, 2014 decreased by $381,189 compared to the period April 20 through June 30, 2013. For the six months ended June 30, 2014, interest expense and other- net was comprised primarily of the following items: ? Interest expense of $370,778 related to the Company's outstanding debt. ? Loan origination fees of $114,322. ? Other income of $480,000 related to the receipt of 300,000 shares of the Company's common stock in connection with a claim for damages filed by the Company. The stock was valued at $480,000 which represents its market value on the day it was received. Comparison of the three months ended June 30, 2014 to the period April 20, 2013 through June 30, 2013 The financial statements for the three months ended June 30, 2014 include the results of operations of the Successor Company for the entire three-month period, while operations for the period April 20 through June 30, 2013 include operations of the Successor Company for only 72 days. As a result, the financial results shown are not generally comparable on a meaningful basis. 34 -------------------------------------------------------------------------------- Successor Successor Company Company Three Months April 20, Ended 2013 through June 30, June 30, Change 2014 2013 Dollars % Revenue $ 13,376,386 $ 15,050,027 $ (1,673,641 ) -11.1 % Cost Of Revenue 12,327,192 8,387,112 3,940,080 47.0 % Gross Profit 1,049,194 6,662,915 (5,613,721 ) -84.3 % Operating Expenses - Sales and marketing 5,402,824 3,351,286 2,051,538 61.2 % General and administrative 5,084,576 2,585,983 2,498,593 96.6 % Research and development 1,028,111 806,401 221,710 27.5 % Acquisition expenses - 1,485,566 (1,485,566 ) -100.0 % Depreciation and amortization 1,880,785 1,292,276 588,509 45.5 % Impairment of intangible assets and goodwill 7,245,359 - 7,245,359 - % Total Operating Expenses 20,641,655 9,521,512 11,120,143 116.8 % Operating Income (Loss) (19,592,461 ) (2,858,597 ) (16,733,864 ) -585.4 Warrant liability income (expense) 4,052,462 (3,920,000 ) 7,972,462 203.4 % Interest expense and other - net 134,048 (495,880 ) 629,928 127.0 % Income (Loss) Before Income Taxes (15,405,951 ) (7,274,477 ) (8,131,474 ) -111.8 % Income Tax Expense (Benefit) 621,219 - 621,219 - % Net Income (Loss) $ (16,027,170 ) $ (7,274,477 ) $ (8,752,693 ) -120.3 % Revenue Revenue was $13,376,386 and $15,050,027 for the three months ended June 30, 2014 and the period April 20, 2013 through June 30, 2013, respectively. This represents a $1,673,641, or 11.1%, decrease. The decrease in revenue is primarily attributable to the fact that, due to revenue shortfall on a long-term contract, the Company was required under GAAP to record charges (reductions) to revenue totaling $2,069,896 rather than recording this amount as a cost of revenue. In addition, the Company generated less revenue from product sales during the three months ended June 30, 2014. During the three months ended June 30, 2014 and the period April 20 through June 30, 2013, the Company's revenue was derived as follows. Successor Successor Company Company Three Months April 20 ended through Change June 30, June 30, 2014 % 2013 % Dollars % Revenue - Advertising $ 4,871,146 36.4 % $ 5,556,557 36.9 % $ (685,411 ) -12.3 % Products 3,301,555 24.7 % 5,069,160 33.7 % (1,767,605 ) -34.9 % Maintenance and content services 3,601,562 26.9 % 2,572,555 17.1 % 1,029,007 40.0 % Professional services 1,602,123 12.0 % 1,851,755 12.3 % (249,632 ) -13.5 % Total $ 13,376,386 100.0 % $ 15,050,027 100.0 % $ (1,673,641 ) -11.1 % The fluctuations in the components of revenue between the two periods are due to the same reasons as stated above with respect to total revenue. 35 --------------------------------------------------------------------------------The following table reflects the Company's revenue on a geographic basis. Successor Company Successor Company Three Months Ended April 20, 2013 through Region June 30, 2014 June 30, 2013 North America $ 9,995,480 74.7 % $ 11,681,562 77.6 % International- United Kingdom 1,847,816 13.8 % 2,344,474 15.6 % Middle East 668,390 5.0 % 702,568 4.7 % Europe 644,646 4.8 % 266,703 1.8 % Other 220,054 1.7 % 54,720 .3 % Total International 3,380,906 25.3 % 3,368,465 22.4 % Total $ 13,376,386 100.0 % $ 15,050,027 100.0 % The lower level of revenue for North America for the three months ended June 30, 2014 was due primarily to the same reasons as stated above with respect to total revenue. Cost of Revenue Cost of revenue totaled $12,327,192 and $8,387,112 for the three months ended June 30, 2014 and for the period April 20 through June 30, 2013, respectively. This $3,940,080, or 47.0%, increase in cost of revenue is primarily attributable to a loss on a long-term contract of $4,130,104 that is included in cost of revenue for the three months ended June 30, 2014. The following table summarizes the composition of the Company's cost of revenue for the three months ended J32.1ne 30, 2014 and for the period April 20 through June 30, 2013. Successor Successor Company Company Three Months April 20 ended through Change June 30, June 30, 2014 % 2013 % Dollars % Cost of Revenue - Advertising $ 3,454,167 28.0 % $ 3,355,883 40.0 % $ 98,284 2.9 % Products 2,511,845 20.4 % 3,261,492 38.9 % (749,647 ) -23.0 % Maintenance and content services 755,938 6.1 % 572,433 6.8 % 183,505 32.1 % Professional services 1,475,138 12.0 % 1,197,304 14.3 % 277,834 23.2 % 8,197,088 66.5 % 8,387,112 100.0 % (190,024 ) -2.3 % Loss on long-term contract 4,130,104 33.5 % - - 4,130,104 - % Total $ 12,327,192 100.0 % $ 8,387,112 100.0 % $ 3,940,080 47.0 % The fluctuations in the components of cost of revenue between the two periods are due to the fact that operations for the three months ended June 30, 2014 include revenue for the entire three-month period, while operations for the period April 20 through June 30, 2013 include revenue for only 72 days. In addition, the cost of revenue for the three months ended June 30, 2014 includes a loss on a long-term contract of $4,130,104. The following table reflects the Company's gross margins for the three months ended June 30, 2014 and the period April 20 through June 30, 2013: Successor Company Successor Company Three Months Ended April 20, 2013 through June 30, 2014 June 30, 2013 $ % $ % Advertising $ 1,416,979 29.1 % 2,200,674 39.6 % Products 789,710 23.9 % 1,807,668 35.7 % Maintenance and content services 2,845,624 79.0 % 2,000,122 77.7 % Professional services 126,985 7.9 % 654,451 35.3 % 5,179,298 38.7 % 6,662,915 44.3 % Loss on long-term contract (4,130,104 ) -30.9 % - - % Total 1,049,194 7.8 % 6,662,915 44.3 % 36--------------------------------------------------------------------------------The Company's overall gross margin for the three months ended June 30, 2014 decreased to 7.8% from 44.3% for the period April 20 through June 30, 2013. The lower gross margin was primarily attributable to the following: ? Cost of revenue for the three months ended June 30, 2014 includes a loss on a long-term contract of $4,130,104. Without this item included in cost of revenue, the gross margin for the three months ended June 30, 2014 would be 38.7%. ? The Company realized a lower gross margin on professional services for the three months ended June 30, 2014 due primarily to a decrease in total professional services revenue and very low margin services on a large project. Operating Expenses Operating expenses totaled $20,641,655 and $9,521,512 for the three months ended June 30, 2014 and for the period April 20 through June 30, 2013, respectively. This $11,120,143, or 116.8%, increase in operating expenses is due primarily to the following: ? Operating expenses for the three months ended June 30, 2014 include an impairment charge of $7,245,359 related to intangible assets and goodwill. ? Operating expenses for the three months ended June 30, 2014 included stock-based compensation of $714,148 and reorganization expenses of $579,029. ? Operating expenses for the three months ended June 30, 2014 include operating expenses for the full three months. Operating expenses for the period April 20, 2013 through June 30, 2013 include operating expenses for only 72 days. ? The Company also incurred significant increases in operating expenses due to expenditures made in connection with its growth initiatives, which includes additional sales and sales support personnel and marketing programs, and expenditures for enhanced infrastructure, i.e., systems and personnel. Warrant Liability Expense The Company calculates its warrant liability based on the quoted market value of its outstanding warrants. The Company recorded an income credit related to the warrant liability for the three months ended June 30, 2014 of $4,052,462 which represented a decrease in the Company's warrant liability at June 30, 2014. At June 30, 2013 the Company recorded warrant liability expense of $3,920,000 which represented an increase in its warrant liability. Interest and other - Net Interest expense and other - net for the three months ended June 30, 2014 decreased by $629,928 compared to the period April 20 through June 30, 2013 due primarily to the following items: ? Other income of $480,000 related to the receipt of 300,000 shares of the Company's common stock in connection with a claim for damages filed by the Company. The stock was valued at $480,000 which represents its market value on the day it was received. ? Lower interest expense for the three months ended June 30, 2014. Liquidity and Capital Resources The Company's primary source of liquidity prior to acquiring RMG and Symon had been the cash generated from its initial public offering. Historically, Symon has generated cash from the sales of its products and services to its global customers. In addition, both RMG and Symon had realized cash through debt agreements with lenders. In April 2013, the Company entered into two debt agreements whereby it received $34,000,000 of cash. These funds were used to finance the acquisition of Symon. In August 2013, the Company completed a public offering of 5,365,000 shares of its common stock at a public offering price of $8.00 per share, minus the underwriters' discount of $0.56 per share. The Company received net proceeds of approximately $39.1 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company used substantially all of the net proceeds of the offering to prepay a portion of its outstanding senior indebtedness. The Company has entered into revenue sharing agreements with certain customers that require the Company to make minimum revenue sharing payments of $7,842,448 in 2014, $8,619,842 in 2015, and $6,000,000 in 2016. 37 -------------------------------------------------------------------------------- At June 30, 2014, the Company's cash and cash equivalents balance was $3,087,094. This included cash and cash equivalents of $985,145 held in bank accounts of its subsidiaries located outside the United States. The Company currently plans to use this cash to fund its ongoing foreign operations. If the Company were to repatriate the cash held by its subsidiary located outside the United States, it may incur tax liabilities. Management feels that the Company has an adequate amount of cash to operate the Company for at least twelve months. Despite our present liquidity position, however, if we fail to achieve the level of revenues that we forecast, including as a result of an extended downturn or lower than expected demand for our products and services, we could generate less cash flow than we have budgeted. Under those circumstances, our cash on hand and funds from operations may not be sufficient to fund our operations or pursue strategic transactions, and we may be required to seek alternative sources of financing. There is no assurance, however, that we will be able to obtain financing on acceptable terms, or at all. At June 30, 2014 and December 31, 2013 the Company had outstanding debt of $8,000,000. This debt represents the remaining balance of the borrowings the Company made in connection with the acquisition of Symon as discussed above and the additional funds borrowed when the Company refinanced its debt on November 14, 2013. The Company has generated and used cash as follows: Successor Successor Company Company Six Months Ended April 20, 2013 June 30, through June 30, 2014 2013Operating cash flow $ (3,580,126 ) $ (3,877,514 ) Investing cash flow (1,670,134 ) (381,323 ) Financing cash flow - (600,000 ) Operating Activities The decrease in cash from operating activities of the Successor Company of $3,580,126 for the six months ended June 30, 2014 is primarily due to the Company's net loss of $28,458,821. This decrease in cash flow caused by the net loss is offset somewhat by the non-cash expenses of $3,800,818 for depreciation and amortization, $7,245,359 for impairment of intangible assets and goodwill, and $1,743,836 for stock-based compensation. In addition, the following changes in assets and liabilities affected cash from operating activities during the period: ? Accounts receivable decreased by $6,525,241 due to more focused and improved collections and a decrease in revenues. ? Inventory decreased by $1,045,947 due to better alignment of inventory with sales volume. ? Accounts payable decreased by $3,404,430 due primarily to payment of amounts owed for equipment purchased from third-party vendors and other operating expenses. ? Accrued liabilities increased by $6,130,908 due primarily to the accrued loss on a long-term contract of $6,200,000. The decrease in cash from operating activities of the Successor Company of $3,877,514 for the period April 20 through June 30, 2013 was primarily due to the net loss of $7,274,477 for the period. The effect of net loss on cash from operating activities was decreased by the non-cash charge for the change in the Company's warrant liability of $3,920,000 and by the non-cash charge for depreciation and amortization for the period of $1,292,276. In addition, the following changes in assets and liabilities affected cash from operating activities during the period: ? Accounts receivable increased by $4,412,699 due to the very high sales level by the Enterprise Solutions business unit in June 2013. ? Accounts payable increased by $1,708,576 as improved payments terms were negotiated with certain vendors. Investing Activities The decrease in cash from investing activities of $1,670,134 during the six months ended June 30, 2014 was due to expenditures for property and equipment. The decrease in cash from investing activities of $381,323 from investing activities during the period April 20 through June 30, 2013 was due to an additional payment of $209,079 in connection with the acquisition of Symon and expenditures of $172,244 for property and equipment. 38 -------------------------------------------------------------------------------- Financing Activities The decrease in cash from financing activities of $600,000 for the period April 20 through June 30, 2013 was due to a quarterly principal payment of the Company's debt. Incentive Stock Option Plan On July 12, 2013, the Company's stockholders approved the Company's 2013 Equity Incentive Plan (the "2013 Plan") and the reservation of 2,500,000 shares of the Company's common stock for issuance under the 2013 Plan. The 2013 Plan is intended to promote the interests of the Company and its stockholders by providing the Company's employees, directors and consultants with incentives and rewards to encourage them to continue in the Company's service and with a proprietary interest in pursuing the Company's long-term growth, profitability and financial success. Equity awards available under the 2013 Plan include stock options, stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units, share-denominated performance units and cash awards. The 2013 Plan is administered by the compensation committee of the board of directors of the Company, which has the authority to designate the employees, consultants and members of the board of directors who will be granted awards under the 2013 Plan, and to designate the amount, type and other terms and conditions of such awards, and to interpret any and all provisions of the 2013 Plan and the terms of any awards under the 2013 Plan. The 2013 Plan will terminate on the tenth anniversary of its effective date. In August 2013 the Company awarded 1,660,000 stock options and 350,000 shares of restricted stock to its employees. 178,333 stock options have been subsequently cancelled. Critical Accounting Policies The Company's significant accounting policies are described in Note 1 of the Company's consolidated financial statements included elsewhere in this filing. The Company's financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Accounts Receivable Accounts receivable are comprised of sales made primarily to entities located in the United States, EMEA and Asia. Accounts receivable are recorded at the invoiced amounts and do not bear interest. The allowance requires judgment and is reviewed monthly, and the Company establishes reserves for doubtful accounts on a case-by-case basis based on historical collection experience and a current review of the collectability of accounts. The Company's collection experience has been consistent with our estimates. Inventory Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Slow moving and obsolete inventories are written off based on historical experience and estimated future usage. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in a purchase business combination and is tested annually at December 31 for impairment or tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying value exceeds the asset's fair value. The Company has two reporting units and this determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying value. Second, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. The fair values calculated in the Company's impairment tests are determined using discounted cash flow models involving several assumptions. These assumptions include, but are not limited to, anticipated operating income growth rates, the Company's long-term anticipated operating income growth rate and the discount rate. The Company's cash flow forecasts are based on assumptions that are consistent with the plans and estimates the Company is using to manage the underlying businesses. The assumptions that are used are based upon what the Company believes a hypothetical marketplace participant would use in estimating fair value. The Company evaluates the reasonableness of the fair value calculations of its reporting units by comparing the total of the fair value of all of the Company's reporting units to the Company's total market capitalization. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. 39 -------------------------------------------------------------------------------- In performing the impairment test at December 31, 2013, there was some indication that there could be impairment at that date. The Company engaged an independent specialist to assist the Company in completing an impairment test as of December 31, 2013 and, based on the results of the testing, the Company has concluded there was no impairment. The Media reporting unit's fair value exceeded its carrying value by $1,578,000 or 5.7% and the Enterprise reporting unit's fair value exceeded its carrying value by $6,500,000, or 13%. The Company's impairment analysis contains certain assumptions, such as the discount rate, that are subject to change. Changes in the assumptions could have a material impact on the impairment analysis. As a result of a decline in the Company's stock price, goodwill and intangible assets were tested for impairment as of June 30, 2014. The Company engaged an independent specialist to assist it in determining if goodwill and intangible assets were impaired at June 30, 2014. Based on this impairment testing, it was determined that there was impairment of goodwill and certain intangible assets, specifically Customer Relationships, Partner Relationships, and Covenant Not-to-Compete. As a result, the Company recorded an impairment charge of $1,332,359 related to goodwill and an impairment charge of $5,913,000 related to intangible assets. The Company's market capitalization could fluctuate in the future. As a result, we will continue to treat this data as an indicator of possible impairment if the Company's market capitalization falls below its book value. If this situation occurs, we will perform the required detailed analysis to determine if there is impairment. Intangible assets include software and technology, customer relationships, partner relationships, trademarks and trade names, customer order backlog and covenants not-to-compete associated with the acquisitions of RMG and Symon. The intangible assets are being amortized over their estimated useful lives as follows: Weighted Average Acquired Intangible Asset: Amortization Period: (years) Software and technology 5 Customer relationships 8 Partner relationships 10 Tradenames and trademarks 10 Customer order backlog 3 Covenant Not-To-Compete 2 Intangible assets are evaluated for impairment annually and on an interim basis if events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount. The impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis, and, if the asset is not recoverable, recognizing an impairment charge, if necessary, to reduce the asset's carrying amount to its fair value. Impairment of Long-lived Assets In accordance with ASC 360, Property, Plant, and Equipment, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset. Income Taxes The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. The Company recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date. As a result of the Company's operations outside of the United States, its global tax rate is derived from a combination of applicable tax rates in the various jurisdictions in which the Company operates. The Company bases its estimate of an annual effective tax rate at any given point in time on a calculated mix of the tax rates applicable to the Company and to estimates of the amount of income to be derived in any given jurisdiction. 40 -------------------------------------------------------------------------------- Under ASC 740, Income Taxes ("ASC 740"), the Company recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized. It also requires the Company to accrue interest and penalties where there is an underpayment of taxes, based on management's best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause a change in the Company's assessment of the appropriate accrual amount. The Company reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign operations indefinitely. Significant judgment is required to evaluate uncertain tax positions. The Company files its tax returns based on its understanding of the appropriate tax rules and regulations. However, complexities in the tax rules and the Company's operations, as well as positions taken publicly by the taxing authorities, may lead the Company to conclude that accruals for uncertain tax positions are required. Changes in facts and circumstances could have a material impact on the Company's effective tax rate and results of operations. Revenue Recognition The Company recognizes revenue primarily from these sources: ? Advertising; ? Products; ? Professional services; and ? Maintenance and content services. The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, which is when product title transfers to the customer, or services have been rendered; (iii) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (iv) collection is reasonably assured. The Company assesses collectability based on a number of factors, including the customer's past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue. Advertising The Company sells advertising through agencies and directly to a variety of customers under contracts ranging from one month to one year. Contracts usually specify the network placement, the expected number of impressions (determined by passenger or visitor counts) and the cost per thousand impressions ("CPM") over the contract period to arrive at a contract amount. The Company bills for these advertising services as requested by the customer, generally on a monthly basis following delivery of the contracted number of impressions for the particular ad insertion. Revenue is recognized at the end of the month in which fulfillment of the advertising order occurred. Although the Company typically presents invoices to an advertising agency, collection is reasonably assured based upon the customer placing the order. Under Financial Accounting Standards Board's ("FASB") ASC 605-45 Principal Agent Considerations (Reporting Revenue Gross as a Principal versus Net as an Agent), the Company has recorded its advertising revenues on a gross basis. Payments to airline and other partners for revenue sharing are paid on a monthly basis either under a minimum annual guarantee (based upon estimated advertising revenues), or as a percentage of the advertising revenues following collection from customers. The portion of revenue that the Company shares with its partners ranges from 25% to 80% depending on the partner and the media asset. The Company makes minimum annual guarantee payments under three agreements (two to airline partners and one to another partner). Payments to all other partners are calculated on a revenue sharing basis. The Company's partnership agreements have terms ranging from one to five years. Four partnership agreements renew automatically unless terminated prior to renewal and the other partners have no obligation to renew. 41-------------------------------------------------------------------------------- Multiple-element arrangements Products consist of proprietary software and hardware equipment. The Company considers the sale of its software more than incidental to the hardware as it is essential to the functionality of the product and is classified as part of the Company's products. The Company enters into multiple-product and services contracts, which may include any combination of equipment and software products, professional services, maintenance and content services. Multiple Element Arrangements ("MEAs") are arrangements with customers which include multiple deliverables, including a combination of equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the Company's control. Revenue from arrangements for the sale of tangible products containing both software and non-software components that function together to deliver the product's essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price ("RSP") method for each unit of accounting based first on Vendor Specific Objective Evidence ("VSOE") if it exists, second on third-party evidence ("TPE") if it exists, and on estimated selling price ("ESP") if neither VSOE or TPE of selling price of the Company's various applicable tangible products containing essential software products and services. The Company establishes the pricing for its units of accounting as follows: ? VSOE- For certain elements of an arrangement, VSOE is based upon the pricing in comparable transactions when the element is sold separately. The Company determines VSOE based on its pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or standalone prices for the service element(s). ? TPE- If the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, the Company uses third-party evidence of selling price. The Company determines TPE based on sales of comparable amounts of similar products or services offered by multiple third parties considering the degree of customization and similarity of the product or service sold. ? ESP- The estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When VSOE or TPE does not exist for an element, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on its pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP. The Company has also established VSOE for its professional services and maintenance and content services based on the same criteria as previously discussed under the software revenue recognition rules. Previously, the Company rarely sold its products without maintenance and therefore the residual value of the sales arrangement was allocated to the products. The Company now uses the estimated selling price to determine the relative sales price of its products. Revenue for elements that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement has been met or over the period that the Company's last remaining obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria. Judgment is required in the determination of company-specific objective evidence of fair value, which may impact the timing and amount of revenue recognized depending on whether company-specific objective evidence of fair value can be demonstrated for the undelivered elements of an arrangement and the approaches used to demonstrate company-specific objective evidence of fair value. The Company's process for determining ESPs involves management's judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change, the Company's ESPs and the future rate of related maintenance could change. The Company sells its products and services through its global sales force and through a select group of resellers and business partners. In North America, approximately 90% or more of sales are generated solely by the Company's sales team, with 10% or less through resellers. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of the Company's global revenues are derived from direct sales, with the remaining 33% generated through indirect partner channels. The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties and product returns from resellers have been insignificant to date. The Company therefore sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies as discussed above. The Company bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users. 42--------------------------------------------------------------------------------The Company recognizes revenue on sales to resellers consistent with its recognition policies as discussed below. Product revenue The Company recognizes revenue on product sales generally upon delivery of the product or customer acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in revenue, and the related shipping costs are included in cost of revenue. Professional services revenue Professional services consist primarily of installation and training services. Installation fees are recognized either on a fixed-fee basis or on a time-and-materials basis. For time-and materials contracts, the Company recognizes revenue as services are performed. For fixed-fee contracts, the Company recognizes revenue upon completion of the installation which is typically completed within five business days. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Training services are also not considered essential to the functionality of the product and have historically been insignificant. The fee allocable to training is recognized as revenue as the Company performs the services. Maintenance and content services revenue Maintenance support consists of hardware maintenance and repair and software support and updates. Software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Support includes access to technical support personnel for software and hardware issues. Content services consist of providing customers live and customized news feeds. Maintenance and content services revenue is recognized ratably over the term of the contracts, which is typically one to three years. Maintenance and support is renewable by the customer annually. Rates, including subsequent renewal rates, are typically established based upon specified rates as set forth in the arrangement. The Company's hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customer's network to supporting a sophisticated web-portal. Research and Development Costs Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date. Net Income (Loss) per Common Share Basic net income (loss) per share for each class of participating common stock, excluding any dilutive effects of stock options, warrants and unvested restricted stock, is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is computed similar to basic; however diluted income (loss) per share reflects the assumed conversion of all potentially dilutive securities. There are no stock options, warrants, or other equity instruments outstanding that are dilutive. 43-------------------------------------------------------------------------------- |