Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies
Description of the Company
RMG Networks Holding Corporation (RMG or the Company) is a holding company which owns 100% of the capital stock of Reach Media Group Holdings, Inc. and its subsidiaries and Symon Holdings Corporation and its subsidiaries.
RMG (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 Companys 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 $82,566,000, 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 Companys 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 that had been placed in a Trust Account (Trust Account) was invested, as provided in the Companys 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 Companys common stock currently trades on The Nasdaq Capital 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. (Reach Media). As a result of the acquisition, RMG is no longer considered a Development Stage Entity. In addition, on April 19, 2013, RMG acquired Symon Holdings Corporation (Symon). Symon is considered to be the Company's predecessor corporation for accounting purposes.
In connection with the acquisition of Reach Media, 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.
F-6
RMG Networks Holding Corporation
Notes to 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 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 customers IT infrastructure and data and security environments.
Acquisition of Reach Media
On April 8, 2013, RMG acquired Reach Media for a total purchase price of $27,512,010. The amount paid for Reach Media was comprised of (i) 400,001 shares of RMG 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, RMG paid, on behalf of Reach Media, all indebtedness of Reach Media under Reach Medias 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 RMG common stock.
RMG management has estimated the preliminary values of the assets and liabilities and determined the purchase price allocation to be as follows:
|
|
|
|
Tangible Assets
|
|
$
|
6,440,019
|
Intangible Assets
|
|
|
18,475,000
|
Goodwill
|
|
|
9,826,403
|
Liabilities
|
|
|
(7,229,412)
|
Total Purchase Price
|
|
$
|
27,512,010
|
The primary tangible assets acquired were cash of $739,052, accounts receivable of $4,755,509, and property, plant, and equipment of $514,280.
The primary liabilities acquired were accounts payable of $2,270,858, accrued liabilities of $1,401,738, and revenue share liabilities of $2,721,121.
The Company has engaged outside consultants to assist with the final valuation of the assets and liabilities at the acquisition date and will finalize the purchase price allocation once the valuation is completed.
F-7
RMG Networks Holding Corporation
Notes to Financial Statements
Acquisition of Symon
On April 19, 2013, RMG acquired Symon for $43,685,828 in cash. RMG management has estimated the preliminary values of the assets and liabilities and determined the purchase price allocation to be as follows:
|
|
|
|
Tangible Assets
|
|
$
|
17,581,840
|
Intangible Assets
|
|
|
21,326,000
|
Goodwill
|
|
|
21,241,994
|
Liabilities
|
|
|
(16,464,006)
|
Total Purchase Price
|
|
$
|
43,685,828
|
The primary tangible assets acquired were cash of $5,666,273, accounts receivable of $6,422,976, inventory of $3,477,488, and property, plant, and equipment of $918,768.
The primary liabilities acquired were accounts payable of $1,171,922, accrued liabilities of $1,085,240, and deferred revenue of $7,182,120 and deferred tax liabilities of $7,024,824.
The Company has engaged outside consultants to assist with the final valuation of the assets and liabilities at the acquisition date and will finalize the purchase price allocation once the valuation is complete.
Principles of Consolidation
The consolidated financial statements of RMG Networks Holding Corporation include the accounts of Reach Media 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.
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 January 31, 2013 balance sheet amounts of the Predecessor Company (as defined below) were derived from the audited consolidated financial statements, but do not include all disclosures required by GAAP for annual periods. 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 Companys 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.
The unaudited consolidated Statements of Comprehensive Income (Loss) and the unaudited consolidated Statements of Cash Flows have been prepared based on required company groupings and reporting periods.
Amounts shown for the Successor Company for the period April 20, 2013 through June 30, 2013 represent the consolidated transactions for RMG Networks Holding Corporation, Reach Media and Symon for that period.
Amounts shown for RMG for the period January 1, 2013 through April 19, 2013 consist of the transactions for RMG Networks Holding Corporation for the period January 1, 2013 through April 19, 2013 and the transactions of Reach Media for the period April 1, 2013 through April 19, 2013. Amounts shown for RMG for the period April 1, 2013 through April 19, 2013 represent of the transactions for RMG Networks Holding Corporation and the transactions of Reach Media for the period April 1, 2013 through April 19, 2013.
Amounts shown for the Predecessor Company represent the transactions of Symon for the periods shown. Symon is the predecessor due to the significance of its business compared to the other companies.
F-8
RMG Networks Holding Corporation
Notes to Financial Statements
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.
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 $186,000 at June 30, 2013 and $223,458 at January 31, 2013. As of and for the periods presented, no single customer accounted for more than 10% of accounts receivable or revenues.
Inventory
Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Writeoffs of slow moving and obsolete inventories are provided based on historical experience and estimated future usage.
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 Reach Media and Symon. Goodwill is tested annually 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 assets fair value. 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 units 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. Completion of the Companys most recent annual impairment test at January 31, 2013 indicated that no impairment of its goodwill balances exists. The Companys annual impairment test will be December 31 going forward.
Intangible assets include software, customer relationships, trademarks and trade names, and covenants not-to-compete acquired in purchase business combinations. Certain trademarks and trade names have been determined to have an indefinite life and are not amortized. Software, customer relationships, and definite lived trademarks and trade names are amortized on a straight-line basis, which approximates the customer attrition for customer relationships, over their estimated useful lives. Covenants not-to-compete are amortized over the non-compete period.
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 that have indefinite lives 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. There was no impairment of intangible assets at June 30, 2013.
F-9
RMG Networks Holding Corporation
Notes to Financial Statements
The Companys acquired Intangible Assets with definite lives are being amortized as follows:
|
|
|
|
|
Acquired Intangible Asset:
|
|
Amortization Period:
(years)
|
Software and technology
|
|
|
5
|
|
Customer relationships
|
|
6
|
to
|
8
|
Tradenames and trademarks
|
|
|
5
|
|
Partner relationships
|
|
|
7
|
|
Covenant Not-To-Compete
|
|
|
4
|
|
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, 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 managements 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 us to change our assessment of the appropriate accrual amount (see Note 5). U.S. income taxes have not been provided on $3.8 million of undistributed earnings of foreign subsidiaries as of January 31, 2013. The Company reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign operations indefinitely. The Company has elected to recognize accrued interest and penalties related to income tax matters as a component of income tax expense if incurred.
Revenue Recognition
The Company recognizes revenue primarily from these sources:
·
Advertising
·
Products
·
Maintenance and content services
·
Professional services
The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, which is when product title transfers to the customer, or services have been rendered; (iii) customer payment is deemed fixed or
F-10
RMG Networks Holding Corporation
Notes to Financial Statements
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 customers 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 Boards (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 four agreements (three to airline partners and one to another travel partner). Payments to all other partners are calculated on a revenue sharing basis. The Companys 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.
Prior to February 1, 2011, the Company recognized revenue in accordance with the provisions of ASC 985-605,
Software Revenue Recognition
. Revenue was allocated among the multiple-elements based on vendor-specific objective evidence (VSOE) of fair value of the undelivered elements and the application of the residual method for arrangements in which the Company has established VSOE of fair value for all undelivered elements.
VSOE of fair value is considered the price a customer would be required to pay if the element was sold separately based on the Company's historical experience of stand-alone sales of these elements to third parties. For maintenance and content services the Company used renewal rates for continued support arrangements to determine fair value. In situations where the Company had fair value of all undelivered elements but not of a delivered element, the Company applied the residual method. Under the residual method, if the fair value of the undelivered elements is determinable, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue assuming the other revenue recognition criteria are met.
On February 1, 2011, the Company adopted an accounting update regarding revenue recognition for multiple arrangements, referred to as multiple element arrangements (MEAs) and an accounting update for certain revenue arrangements that include tangible products containing essential software on a prospective basis for applicable transactions originating or materially modified after February 1, 2011.
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
F-11
RMG Networks Holding Corporation
Notes to Financial Statements
software and non-software components that function together to deliver the products 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 VSOE if it exists, second on third-party evidence (TPE) if it exists, and on estimated selling price (ESP) if neither VSOE or TPE of selling price of the Company's various applicable tangible products containing essential software products and services. The Company establishes the pricing for its units of accounting as follows:
·
VSOE For certain elements of an arrangement, VSOE is based upon the pricing in comparable transactions when the element is sold separately. The Company determines VSOE based on its pricing and discounting practices for the specific product or service when sold separately, considering geographical, customer, and other economic or marketing variables, as well as renewal rates or standalone prices for the service element(s).
·
TPE If the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, it uses third-party evidence of selling price. The Company determines TPE based on sales of comparable amounts of similar products or services offered by multiple third parties considering the degree of customization and similarity of the product or service sold.
·
ESP The estimated selling price represents the price at which the Company would sell a product or service if it were sold on a stand-alone basis. When VSOE or TPE does not exist for an element, the Company determines ESP for the arrangement element based on sales, cost and margin analysis, as well as other inputs based on its pricing practices. Adjustments for other market and Company-specific factors are made as deemed necessary in determining ESP.
The Company prospectively adopted the new rules and the adoption of the amended revenue recognition rules, consisting primarily of the change from the residual method to the RSP method to allocate the arrangement fee, did not significantly change the timing of revenue recognition nor did it have a material impact on the consolidated financial statements for periods subsequent to January 31, 2011.
Upon the adoption of the new revenue recognition rules the Company re-evaluated its allocation of revenue and determined that it still had similar units of accounting and nearly all of its products and services qualify as separate units of accounting. The Company has established VSOE for its professional services and maintenance and content services of accounting based on the same criteria as previously used under the software revenue recognition rules.
Previously, the Company rarely sold its product 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 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 are generated solely by the Companys 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 in 2013. Overall, approximately 67% of the Companys global revenues are derived from direct sales, with the remaining 33% generated through indirect partner channels in 2013.
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.
F-12
RMG Networks Holding Corporation
Notes to Financial Statements
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 Companys hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customers network to supporting a sophisticated web-portal.
Professional services revenue
Professional services consist primarily of installation and training services. Installation fees are recognized either on a fixed-fee basis or on a time-and-materials basis. For time-and materials contracts, the Company recognizes revenue as services are performed. For fixed-fee contracts, the Company recognizes revenue upon completion of the installation which is typically completed within five business days. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Training services are also not considered essential to the functionality of the product and have historically been insignificant; the fee allocable to training is recognized as revenue as the Company performs the services
Research and Development Costs
Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20,
Costs of Software to be Sold, Leased, or Marketed
. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.
Advertising
Advertising costs, which are included in selling, general and administrative expense, are expensed as incurred and are not material to the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
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 debts carrying value approximates its fair value due to the variable market interest rate of the debt.
F-13
RMG Networks Holding Corporation
Notes to Financial Statements
The Company does not generally require collateral or other security for accounts receivable. However, credit risk is mitigated by the Companys ongoing evaluations of customer creditworthiness. The Company maintains an allowance for doubtful accounts receivable balances.
The Company maintains its cash and cash equivalents in the United States with three financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation insurable limit. Cash and cash equivalents of $1,866,060 held in foreign countries as of June 30, 2013 were not insured.
Net Income (Loss) per 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) available to the common stockholders, based upon their distribution rights, 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 and January 31, 2013 that had a dilutive effect on net income (loss) per share.
Foreign Currency Translation
The functional currency of the Companys United Kingdom subsidiary is the British pound sterling. All assets and all liabilities of the subsidiary are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated to U.S. dollars at the weighted-average rate of exchange prevailing during the year. Resultant translation adjustments are recorded in accumulated other comprehensive 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 that is evaluated regularly by a companys chief operating decision maker (the Companys Chief Executive Officer (CEO)) in assessing performance and deciding how to allocate resources. The Companys business is conducted in a single operating segment. The CEO reviews a single set of financial data that encompasses the Companys entire operations for purposes of 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.
2. Property and Equipment
Property and equipment consist of the following at June 30, 2013 and January 31, 2013:
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
January 31,
2013
|
Machinery and equipment
|
|
$
|
873,874
|
|
$
|
2,424,874
|
Furniture and fixtures
|
|
|
127,773
|
|
|
646,643
|
Software
|
|
|
640,516
|
|
|
1,828,705
|
Leasehold improvements
|
|
|
18,016
|
|
|
269,087
|
|
|
|
1,660,179
|
|
|
5,169,309
|
Less accumulated depreciation and amortization
|
|
|
141,571
|
|
|
4,206,240
|
Property and equipment, net
|
|
$
|
1,518,608
|
|
$
|
963,069
|
Depreciation and expense for the period April 20, 2013 through June 30, 2013 was $127,431. Depreciation expense for the Predecessor Company for the six months ended July 31, 2012 was $321,768.
F-14
RMG Networks Holding Corporation
Notes to Financial Statements
3. Goodwill and Intangible Assets
The carrying amount of goodwill at June 30, 2013, represents the valuation resulting from the acquisitions of Reach Media 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 Reach Media 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 following table shows the carrying amount of Goodwill for the period ended June 30, 2013:
|
|
|
|
Balance beginning
|
|
$
|
0
|
Goodwill resulting from acquisitions occurring in April 2013
|
|
|
31,037,564
|
Balance - June 30, 2013
|
|
$
|
31,037,564
|
The carrying values of the Companys definite-lived intangible assets at June 30, 2013, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Years
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net carrying Amount
|
Software and technology
|
|
|
5
|
|
|
$
|
9,607,000
|
|
|
|
(380,494)
|
|
|
|
9,226,506
|
Customer relationships
|
|
|
7
|
|
|
|
17,276,000
|
|
|
|
(461,830)
|
|
|
|
16,814,170
|
Partner relationships
|
|
|
7
|
|
|
|
8,000,000
|
|
|
|
(225,320)
|
|
|
|
7,774,680
|
Tradenames and trademarks
|
|
|
5
|
|
|
|
3,318,000
|
|
|
|
(29,589)
|
|
|
|
3,288,411
|
Covenant not-to-compete
|
|
|
4
|
|
|
|
1,600,000
|
|
|
|
(78,904)
|
|
|
|
1,521,096
|
Total
|
|
|
|
|
|
$
|
39,801,000
|
|
|
|
(1,164,845)
|
|
|
|
38,624,863
|
The carrying values of the Predecessor Companys definite-lived intangible assets at January 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Years
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net
carrying Amount
|
Software and technology
|
|
|
5
|
|
|
$
|
6,430,000
|
|
|
$
|
(6,430,000)
|
|
|
|
|
Customer relationships
|
|
|
8
|
|
|
|
4,921,204
|
|
|
|
(4,399,984)
|
|
|
|
521,220
|
Tradenames and trademarks
|
|
|
7
|
|
|
|
463,068
|
|
|
|
(299,845)
|
|
|
|
163,223
|
Covenant not-to-compete
|
|
|
5
|
|
|
|
270,952
|
|
|
|
(270,952)
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
12,085,224
|
|
|
$
|
(11,400,781)
|
|
|
$
|
684,443
|
Amortization expense for the period April 20, 2013 through June 30, 2013 was $1,164,845. Amortization expense for the Predecessor Company for the six months ended July 31, 2012 was $329,594.
Projected amortization expense for these assets for the five years ending December 31 is as follows:
|
|
|
|
2013
|
|
$
|
4,138,082
|
2014
|
|
|
5,900,000
|
2015
|
|
|
5,900,000
|
2016
|
|
|
5,900,000
|
2017
|
|
|
5,900,000
|
Thereafter
|
|
|
12,062,918
|
|
|
$
|
39,801,000
|
F-15
RMG Networks Holding Corporation
Notes to Financial Statements
4. Notes Payable
On April 19, 2013, the Company entered into a Credit Agreement (the Senior Credit Agreement) by and among it and certain of its direct and indirect domestic subsidiaries party thereto from time to time (including Reach Media 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 provides 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 bears 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 has occurred and is continuing under the Senior Credit Agreement, the interest rate applicable to borrowings under the Senior Credit Agreement will automatically be increased by 2% per annum. The Base Rate and the LIBOR Rate are defined in a manner customary for credit facilities of this type. The LIBOR Rate is subject to a floor of 1.5%.
The Company is 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 may prepay the principal of the Senior Credit Facility in whole or in part. In addition, the Company is 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 is 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 will be deferred and shall 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 would exceed or equal $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 will be 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 (see Note 14), 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 retire to pay down the Senior Credit facility. The remaining proceeds will be available for general corporate purposes, which may include the funding of growth initiatives in sales and marketing, capital expenditures, working capital, and/or strategic acquisitions.
F-16
RMG Networks Holding Corporation
Notes to 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 provides 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 are guaranteed jointly and severally by the Guarantors.
The Term Loan A bears interest at a fixed rate of 12% per annum and the Term Loan B bears 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 shall be paid quarterly in arrears of which 12% will be paid in cash and the remaining amount owed will be paid in kind If an event of default has occurred and is continuing under the Junior Credit Agreement, borrowings under the Junior Credit Agreement will automatically be subject to an additional 2% per annum interest charge.
Borrowings under the Junior Credit Agreement are generally due and payable on the maturity date, October 19, 2018. Following the repayment in full of the Senior Credit Facility, the Company may voluntarily prepay the principal of the Junior Loans in whole or in part. In addition, the Company will be 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 Companys 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 Companys current Executive Chairman (unless a successor reasonably acceptable to the Junior Lenders is appointed on terms reasonably acceptable to such parties within 90 days of such cessation); (iv) the listing of any person who owns 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 will be 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 occurs prior to the thirteenth month following April 19, 2013; 4% if such prepayment or termination occurs from the thirteenth month following April 19, 2013 but prior to the twenty-fifth month thereafter; 3% if such prepayment or termination occurs from the twenty-fifth month following April 19, 2013 but prior to the thirty-first month thereafter; 2% if such prepayment or termination occurs from the thirty-first month following April 19, 2013 but prior to the thirty seventh-month thereafter; and 1% if such prepayment or termination occurs 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 will not be available for borrowing.
The Junior Credit Agreement contains 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 are 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 includes 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 contains substantially the same events of default as under the Senior Credit Agreement, except that the thresholds included in the Junior Credit Agreement are generally higher than under the Senior Credit Agreement. The Junior Credit Agreement includes 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.
F-17
RMG Networks Holding Corporation
Notes to Financial Statements
The loans under the Junior Credit Agreement are subordinated to the Senior Credit Facility pursuant to the terms of a Subordination Agreement dated as of April 19, 2013 between the Junior Lenders and the Loan Parties.
In consideration for the Term Loan A under the Junior Credit Agreement, the Company issued to the Junior Lenders an aggregate of 31,500 shares of its common stock on April 19, 2013. In addition, on April 19, 2013, the Company also issued an aggregate of 31,500 shares of its common stock to certain affiliates of the Senior Lenders for their services in connection with arranging and structuring the financing provided under the Junior Credit Agreement.
5. Income Taxes
Although the Company recognized a net loss before provision for income taxes for the period ended June 30, 2013, no tax benefit related to the loss has been recognized because the realization of the tax benefit is uncertain.
The Company has recorded a valuation allowance of 100% of the tax benefit of $770,000 applicable to the net loss at June 30, 2013 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.
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.
6. Common Stock
The Company is authorized to issue up to 250,000,000 shares of common stock, par value $0.00001 per share. As of June 30, 2013, the Company had 6,284,583 outstanding shares of common stock.
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 Companys 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 Companys common stock.
7. Warrants
At June 30, 2013, the Company had 13,066,667 warrants outstanding. Each warrant entitles the registered holder to purchase one share of common stock at an exercise price of $11.50 per share.
Public Warrants
Each Warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment as discussed below, and are currently exercisable, provided that there is an effective registration statement under the Securities Act covering the underlying shares and a current prospectus relating to them is available.
The Warrants issued as part of the Offering expire on April 8, 2018 or earlier upon redemption or liquidation. The Company may call Warrants for redemption:
·
in whole and not in part;
·
at an exercise price of $0.01 per Warrant;
·
upon not less than 30 days prior written notice of redemption, or the 30-day redemption period, to each Warrant holder; and
F-18
RMG Networks Holding Corporation
Notes to Financial Statements
·
if, and only if, the last sale price of the Companys common stock equals or exceeds $17.50 per share for any 20 trading days within a 30-day trading period ending on the third business day before the Company sends notice of redemption to the Warrant holders.
If the Company calls the Public Warrants for redemption as described above, it will have the option to require any holder of Warrants that wishes to exercise his, her or its Warrant to do so on a cashless basis. If the Company takes advantage of this option, all holders of Public Warrants would pay the exercise price by surrendering his, her or its Warrants for that number of shares of our common stock equal to, but in no case less than $10.00, the quotient obtained by dividing (x) the product of the number of shares of the Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 our common stock issuable upon exercise of the Sponsor Warrants) were not transferable, assignable or salable (other than to the Companys officers and directors and other persons or entities affiliated with the Sponsor)
F-19
RMG Networks Holding Corporation
Notes to Financial Statements
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.
8. 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, 2013, the Company has not issued any shares of preferred stock.
9
.
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 $10,453,334 at June 30, 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.
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 period ended June 30, 2013 or the year ended December 31, 2012.
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, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
$
|
10,453,334
|
|
|
|
|
|
$
|
10,453,334
|
|
|
|
|
F-20
RMG Networks Holding Corporation
Notes to Financial Statements
10. Commitments and Contingencies
Office Lease Obligations
The Company currently leases office space and manufacturing facilities in Dallas, Texas under leases that expire on November 30, 2013 and March 31, 2014. The Company has recently entered in a new ten-year lease for office space in Dallas, Texas.
The Company also leases office space in San Francisco, 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 and in Dubai, UAE under a lease agreement that expires in July 2014.
Future minimum rental payments under these leases are as follows:
|
|
|
|
|
|
Amount
|
Fiscal year ending January 31:
|
|
|
|
2013
|
|
$
|
1,979,000
|
2014
|
|
|
2,025,000
|
2015
|
|
|
1,701,000
|
2016
|
|
|
1,562,000
|
2017
|
|
|
1,450,000
|
Thereafter
|
|
|
6,750,000
|
|
|
$
|
15,467,000
|
Total rent expense under all operating leases for the period April 20 through June 30, 2013 was $346,768. Total rent expense for the Predecessor Company for the six months ended July 31, 2012 was $449,975.
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 years ending December 31:
|
|
|
|
|
|
Capital
Leases
|
2013
|
|
$
|
44,000
|
2014
|
|
|
67,000
|
2015
|
|
|
67,000
|
2016
|
|
|
67,000
|
2017
|
|
|
31,271
|
Thereafter
|
|
|
-
|
Total minimum lease payments
|
|
|
276,271
|
Less amount representing interest
|
|
|
53,373
|
Present value of capital lease obligations
|
|
|
222,898
|
Less current portion
|
|
|
72,022
|
Non-current portion
|
|
$
|
150,876
|
The Company is currently subleasing two facilities and receiving monthly payments which are less than the Companys 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 July 31, 2013, respectively.
F-21
RMG Networks Holding Corporation
Notes to Financial Statements
Revenue Share Commitments
The Company has entered into revenue sharing agreements with four customers, requiring the Company to make minimum yearly revenue sharing payments.
Future minimum payments under these agreements consist of the following amounts for the years ending December 31:
|
|
|
|
2013
|
|
$
|
9,103,000
|
2014
|
|
|
11,189,000
|
2015
|
|
|
12,757,000
|
Total minimum revenue share commitments
|
|
$
|
33,049,000
|
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 Companys financial position, results of operations or cash flows.
11. Accrued Liabilities
Accrued liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
January 31, 2013
|
Professional fees
|
|
$
|
1,600,000
|
|
|
$
|
0
|
Accrued sales commissions
|
|
|
303,493
|
|
|
|
332,844
|
Accrued bonus
|
|
|
225,000
|
|
|
|
580,352
|
Taxes Payable
|
|
|
18,000
|
|
|
|
400,993
|
Other
|
|
|
1,888,778
|
|
|
|
611,712
|
|
|
$
|
4,035,271
|
|
|
$
|
1,925,901
|
12. Geographic Information
Revenues by geographic area are based on the deployment site location of the end customers. Substantially all of the revenues from North America are generated from the United States of America. Geographic area information related to revenues from customers for the period from April 20, 2013 through June 30, 2013 and the six-month period ended July 31, 2012:
|
|
|
|
|
|
|
|
Region
|
|
June 30, 2013
|
|
|
July 31, 2012
|
North America
|
|
$
|
11,681,562
|
|
|
$
|
13,410,876
|
Europe, Middle East, and Asia
|
|
|
3,368,465
|
|
|
|
5,470,105
|
Total
|
|
$
|
15,050,027
|
|
|
$
|
18,880,981
|
The vast majority of the Company's long-lived assets are located in North America.
13. Pro- Forma Operating Income for the Six Months Ended June 30, 2013 and 2012
The following table presents Pro-Forma Operating Income (Loss) for the Company for the six months ended June 30, 2013 and 2012 based on the assumption that both Reach Media and Symon had been acquired on January 1, 2012. Operating expenses do not included any acquisition related expenses. In addition, 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.
F-22
RMG Networks Holding Corporation
Notes to Financial Statements
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
June 30,
2012
|
Revenues
|
|
|
32,920,646
|
|
|
32,465,262
|
Cost of Revenues
|
|
|
17,228,975
|
|
|
15,303,041
|
Gross Profit
|
|
|
15,691,671
|
|
|
17,162,221
|
Operating Expenses
|
|
|
25,041,396
|
|
|
19,080,510
|
Operating Income (Loss)
|
|
|
(9,349,725)
|
|
|
(1,918,289)
|
Operating expenses in 2013 include $4,135,316 of acquisition expenses.
14. Subsequent Events
On July 12, 2013, the Companys stockholders approved the Companys 2013 Equity Incentive Plan (the 2013 Plan) and the reservation of 2,500,000 shares of the Companys 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 Companys employees, directors and consultants with incentives and rewards to encourage them to continue in the Companys service and with a proprietary interest in pursuing the Companys 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 will be 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.
On August 2, 2013, the Company completed a public offering of 5,000,000 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 $36.3 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company has also granted the underwriters a 45-day option to purchase up to an additional 750,000 shares of its common stock to cover over-allotments, if any. As of August 13, 2013, this option had not been exercised. The Company has used $10 million of the net proceeds of the offering to prepay a portion of its outstanding senior indebtedness, and expects to use the remaining net proceeds from the offering for general corporate purposes, which may include the prepayment of additional indebtedness, the funding of growth initiatives in sales and marketing, capital expenditures, working capital and/or strategic acquisitions. The Company has no current agreements or commitments with respect to any strategic acquisition.
F-23
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Symon Holdings Corporation
Plano, TX
We have audited the accompanying consolidated balance sheets of Symon Holdings Corporation as of January 31, 2013, 2012 and 2011 and the related consolidated statements of income and comprehensive income, stockholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Symon Holdings Corporation at January 31, 2013, 2012 and 2011, and the results of its operations and its cash flows for the years then ended
,
in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
BDO USA, LLP
Dallas, Texas
March 28, 2013
F-24
Symon Holdings Corporation
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
10,203,169
|
$
|
3,836,691
|
$
|
3,354,727
|
Accounts receivable, net
|
|
9,061,229
|
|
8,599,281
|
|
9,687,106
|
Inventory, net
|
|
2,988,766
|
|
3,594,981
|
|
2,642,007
|
Deferred tax assets
|
|
372,618
|
|
461,954
|
|
697,682
|
Other current assets
|
|
686,099
|
|
794,531
|
|
728,918
|
Total current assets
|
|
23,311,881
|
|
17,287,438
|
|
17,110,440
|
Property and equipment, net
|
|
963,069
|
|
915,829
|
|
895,626
|
Intangible assets, net
|
|
2,584,443
|
|
3,164,002
|
|
4,044,186
|
Goodwill
|
|
10,972,547
|
|
10,969,148
|
|
10,876,018
|
Other assets
|
|
112,054
|
|
208,498
|
|
286,973
|
Total assets
|
$
|
37,943,994
|
$
|
32,544,915
|
$
|
33,213,243
|
|
|
|
|
|
|
|
Liabilities and Stockholders equity
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
$
|
4,150,730
|
$
|
2,468,300
|
$
|
1,605,826
|
Accrued liabilities
|
|
1,925,901
|
|
2,230,317
|
|
1,514,428
|
Note payable current
|
|
-
|
|
-
|
|
1,400,000
|
Deferred revenue
|
|
10,438,487
|
|
9,414,716
|
|
10,045,087
|
Total current liabilities
|
|
16,515,118
|
|
14,113,333
|
|
14,565,341
|
Deferred revenue non current
|
|
1,073,223
|
|
1,405,811
|
|
1,717,169
|
Note payable non current
|
|
-
|
|
-
|
|
3,600,000
|
Deferred tax liabilities
|
|
704,496
|
|
858,671
|
|
1,049,914
|
Total liabilities
|
|
18,292,837
|
|
16,377,815
|
|
20,932,424
|
|
|
|
|
|
|
|
Commitment and Contingencies
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
Common stock Class L, $0.01 par value, (1,000,000 shares authorized, issued and outstanding)
|
|
10,000
|
|
10,000
|
|
10,000
|
Common stock Class A Non-voting, $0.01 par value, (200,000 shares authorized, 68,889 shares issued and outstanding in 2013 and 2012; and 96,700 shares issued and outstanding in 2011)
|
|
689
|
|
689
|
|
967
|
Common stock Class A Voting, $0.01 par value (200,000 shares authorized, 0 shares issued and outstanding)
|
|
-
|
|
-
|
|
-
|
Additional paid-in capital
|
|
10,149,643
|
|
10,149,643
|
|
10,214,013
|
Accumulated comprehensive income (loss)
|
|
(38,940)
|
|
(41,127)
|
|
1,699
|
Notes receivable restricted stock
|
|
(207,025)
|
|
(197,845)
|
|
(265,308)
|
Retained earnings
|
|
9,736,790
|
|
6,245,740
|
|
2,319,448
|
Total stockholders equity
|
|
19,651,157
|
|
16,167,100
|
|
12,280,819
|
Total liabilities and stockholders equity
|
$
|
37,943,994
|
$
|
32,544,915
|
$
|
33,213,243
|
See accompanying notes to consolidated financial statements.
F-25
Symon Holdings Corporation
Consolidated Statements of Income and Comprehensive Income
|
|
|
|
|
|
|
|
|
|
For the years ended January 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Products
|
$
|
19,185,359
|
$
|
17,050,285
|
$
|
16,763,058
|
Professional services
|
|
6,277,549
|
|
6,988,313
|
|
6,580,350
|
Maintenance and content services
|
|
17,065,483
|
|
16,787,892
|
|
16,367,113
|
Total Revenue
|
|
42,528,391
|
|
40,826,490
|
|
39,710,521
|
|
|
|
|
|
|
|
Cost of Revenue:
|
|
|
|
|
|
|
Products
|
|
11,581,070
|
|
10,034,866
|
|
8,916,616
|
Professional services
|
|
4,352,611
|
|
4,729,414
|
|
4,618,217
|
Maintenance and content services
|
|
2,507,840
|
|
2,430,888
|
|
2,443,698
|
Total Cost of Revenue
|
|
18,441,521
|
|
17,195,168
|
|
15,978,531
|
Gross Profit
|
|
24,086,870
|
|
23,631,322
|
|
23,731,990
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
|
2,103,078
|
|
1,994,581
|
|
2,489,844
|
Sales and marketing
|
|
7,760,739
|
|
7,474,354
|
|
8,212,914
|
General and administrative
|
|
7,693,398
|
|
6,740,205
|
|
7,728,410
|
Depreciation and amortization
|
|
1,111,948
|
|
1,369,747
|
|
2,279,096
|
Total operating expenses
|
|
18,669,163
|
|
17,578,887
|
|
20,710,264
|
Operating income
|
|
5,417,707
|
|
6,052,435
|
|
3,021,726
|
Interest and other expense
|
|
(66,467)
|
|
(212,262)
|
|
(385,234)
|
Income before income taxes
|
|
5,351,240
|
|
5,840,173
|
|
2,636,492
|
Income tax expense
|
|
1,860,190
|
|
1,913,881
|
|
871,061
|
Net income
|
|
3,491,050
|
|
3,926,292
|
|
1,765,431
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
2,187
|
|
(42,826)
|
|
14,320
|
Total comprehensive income
|
$
|
3,493,237
|
$
|
3,883,466
|
|
1,779,751
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
Basic and dilutive net income per share of Class L Common Stock
|
$
|
3.49
|
$
|
3.93
|
$
|
1.77
|
|
|
|
|
|
|
|
Basic and dilutive net income per share of Class A Non-Voting Common Stock
|
$
|
-
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic and dilutive net income per share of Class L Common Stock
|
|
1,000,000
|
|
1,000,000
|
|
1,000,000
|
Weighted average shares used in computing basic and dilutive net income per share of Class A Non-Voting Common Stock
|
|
82,778
|
|
82,778
|
|
96,666
|
See accompanying notes to consolidated financial statements.
F-26
Symon Holdings Corporation
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-voting
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock-Class L
|
|
Common Stock-Class A
|
|
Additional
paid-in
capital
|
|
Notes receivable-
stock
purchases
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Retained
earnings
|
|
Total
Stockholders
equity
|
$0.01 Per Share
|
$0.01 Per Share
|
Shares
|
|
Amount
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2010
|
|
1,000,000
|
$
|
10,000
|
|
96,700
|
$
|
967
|
$
|
10,214,013
|
$
|
(253,544)
|
$$
|
(12,621)
|
$
|
554,017
|
$
|
10,512,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest stock notes receivable
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(11,764)
|
|
-
|
|
-
|
|
(11,764)
|
Net income
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
1,765,431
|
|
1,765,431
|
Foreign currency translation adjustments
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
14,320
|
|
-
|
|
14,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2011
|
|
1,000,000
|
|
10,000
|
|
96,700
|
|
967
|
|
10,214,013
|
|
(265,308)
|
|
1,699
|
|
2,319,448
|
|
12,280,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest stock notes receivable
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(8,773)
|
|
-
|
|
-
|
|
(8,773)
|
Restricted stock repurchases
|
|
-
|
|
-
|
|
(27,811)
|
|
(278)
|
|
(64,370)
|
|
76,236
|
|
-
|
|
-
|
|
11,588
|
Net income
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
3,926,292
|
|
3,926,292
|
Foreign currency translation adjustments
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(42,826)
|
|
-
|
|
(42,826)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2012
|
|
1,000,000
|
|
10,000
|
|
68,889
|
|
689
|
|
10,149,643
|
|
(197,845)
|
|
(41,127)
|
|
6,245,740
|
|
16,167,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest stock notes receivable
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(9,180)
|
|
-
|
|
-
|
|
(9,180)
|
Net income
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
3,491,050
|
|
3,491,050
|
Foreign currency translation adjustments
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
2,187
|
|
-
|
|
2,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2013
|
|
1,000,000
|
$
|
10,000
|
|
68,889
|
$
|
689
|
$
|
10,149,643
|
$
|
(207,025)
|
$
|
(38,940)
|
$
|
9,736,790
|
$
|
19,651,157
|
See accompanying notes to consolidated financial statements.
F-27
Symon Holdings Corporation
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
For the years ended January 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
3,491,050
|
$
|
3,926,292
|
$
|
1,765,431
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
1,111,948
|
|
1,369,747
|
|
2,279,096
|
Deferred tax provision (benefit)
|
|
64,908
|
|
46,683
|
|
(366,978)
|
Foreign currency translation (gain) loss on intercompany advances
|
|
(798)
|
|
(11,492)
|
|
42,157
|
Other non-cash expense (income), net
|
|
(9,180)
|
|
2,815
|
|
(11,764)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
(442,329)
|
|
1,056,750
|
|
(1,103,578)
|
Inventory
|
|
607,540
|
|
(954,635)
|
|
(218,654)
|
Other current assets
|
|
109,977
|
|
(70,594)
|
|
3,187
|
Other assets, net
|
|
96,444
|
|
78,475
|
|
75,100
|
Accounts payable
|
|
1,684,425
|
|
875,783
|
|
(296,162)
|
Accrued liabilities
|
|
(437,955)
|
|
722,085
|
|
438,391
|
Deferred revenue
|
|
686,801
|
|
(922,012)
|
|
2,006,810
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
6,962,831
|
|
6,119,897
|
|
4,613,036
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Payments made to former shareholders for previous business combinations
|
|
-
|
|
(99,723)
|
|
(247,640)
|
Purchases of property and equipment
|
|
(575,106)
|
|
(516,858)
|
|
(312,910)
|
Net cash used in investing activities
|
|
(575,106)
|
|
(616,581)
|
|
(560,550)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Repayments of bank borrowings
|
|
-
|
|
(5,000,000)
|
|
(6,550,000)
|
Net cash used in financing activities
|
|
-
|
|
(5,000,000)
|
|
(6,550,000)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(21,247)
|
|
(21,352)
|
|
5,942
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
6,366,478
|
|
481,964
|
|
(2,491,572)
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
3,836,691
|
|
3,354,727
|
|
5,846,299
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
$
|
10,203,169
|
$
|
3,836,691
|
$
|
3,354,727
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid during the year for interest
|
$
|
19,791
|
$
|
160,587
|
$
|
445,799
|
Cash paid during the year for income taxes
|
$
|
2,061,735
|
$
|
1,050,224
|
$
|
1,005,543
|
See accompanying notes to consolidated financial statements.
F-28
Symon Holdings Corporation
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
Description of Business
Symon Holdings Corporation is a holding company which owns 100% of the capital stock of Symon Communications, Inc. and its subsidiaries (Symon).
Symon develops and sells full-service digital signage solutions and enterprise-class media applications. Its products are used by its customers to power more than one million digital signs and end-points that deliver real-time intelligent visual content that enhance the ways in which organizations communicate with employees and customers. Through its suite of products that include proprietary software, software-embedded hardware, maintenance and support services, content services, installation services and third-party displays, Symon offers its customers real-time status management solutions and multi-media employee and customer communications solutions.
The Companys products are used primarily by Fortune 1,000 companies and international companies. Its customers are located in the United States of America (U.S.), the United Kingdom (U.K.), Continental Europe, and the Middle East and Asia. Symon serves the key cross-industry markets of contact centers, employee communications, and supply chain operations. In addition, Symon also serves the hospitality and gaming markets. Overall Symon has a large concentration of customers in the financial services, telecommunications, manufacturing, healthcare, pharmaceuticals, utilities, transportation industries, and in federal, state and local governments.
Principles of Consolidation
The consolidated financial statements of Symon Holdings Corporation include the accounts of Symon Holdings Corporation and its wholly-owned subsidiaries Symon Communications, Inc., Symon Communications, Ltd., and Symon Dacon Limited (collectively the Company). All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash, and cash equivalents include demand deposits in financial institutions and investments with an original maturity of three months or less.
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 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 allowance for doubtful accounts was $223,458, $336,264 and $539,204 as of January 31, 2013, 2012 and 2011, respectively. As of and for the periods presented, no single customer accounted for more than 10% of accounts receivable or revenues.
Inventory
Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Writeoffs of slow moving and obsolete inventories are provided based on historical experience and estimated future usage.
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 acquired in a purchase business combination and is tested annually 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 assets fair value. 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
F-29
Symon Holdings Corporation
Notes to Consolidated Financial Statements
units 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. Completion of the Companys most recent annual impairment test at January 31, 2013, 2012 and 2011 indicated that no impairment of its goodwill balances exists.
Intangible assets include software, customer relationships, trademarks and trade names, and covenants not-to-compete acquired in purchase business combinations. Certain trademarks and trade names have been determined to have an indefinite life and are not amortized. Software, customer relationships, and definite lived trademarks and trade names are amortized on a straight-line basis, which approximates the customer attrition for customer relationships, over their estimated useful lives. Covenants not-to-compete are amortized over the non-compete period.
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 that have indefinite lives 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. There was no impairment of intangible assets for each of the years ended January 31, 2013, 2012 or 2011.
The Companys acquired Intangible Assets with definite lives are being amortized as follows:
|
|
|
Acquired Intangible Asset:
|
|
Amortization Period:
|
Software
|
|
5 years
|
Customer relationships
|
|
7 to 10 years
|
Tradenames
|
|
5 to 10 years
|
Covenant Not-To-Compete
|
|
5 years
|
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 its long-lived assets for each of the years ended January 31, 2013, 2012 or 2011.
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 managements 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 us to change our assessment of the appropriate accrual amount (see Note 5). U.S. income taxes have not been provided on $3.8 million of undistributed earnings of foreign subsidiaries as of January 31, 2013. 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.
F-30
Symon Holdings Corporation
Notes to Consolidated Financial Statements
Revenue Recognition
The Company recognizes revenue primarily from these sources:
·
Products
·
Professional services
·
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 probable. The Company assesses collectability based on a number of factors, including the customers past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.
Multiple-Element Arrangements
Product consists of our hardware equipment and proprietary software. The Company considers the sale of our software more than incidental to the hardware as it is essential to the functionality of the product and is classified as part of our 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.
Prior to February 1, 2011 the Company recognized revenue in accordance with the provisions of ASC 985-605,
Software Revenue Recognition
. Revenue was allocated among the multiple-elements based on vendor-specific objective evidence (VSOE) of fair value of the undelivered elements and the application of the residual method for arrangements in which the Company has established VSOE of fair value for all undelivered elements.
VSOE of fair value is considered the price a customer would be required to pay if the element was sold separately based on our historical experience of stand-alone sales of these elements to third parties. For maintenance and content services the Company used renewal rates for continued support arrangements to determine fair value. In situations where the Company had fair value of all undelivered elements but not of a delivered element, the Company applied the residual method. Under the residual method, if the fair value of the undelivered elements is determinable, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue assuming the other revenue recognition criteria are met.
On February 1, 2011, the Company adopted an accounting update regarding revenue recognition for multiple arrangements, referred to as multiple element arrangements (MEAs) and an accounting update for certain revenue arrangements that include tangible products containing essential software on a prospective basis for applicable transactions originating or materially modified after February 1, 2011.
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 our control. Revenue from arrangements for the sale of tangible products containing both software and non-software components that function together to deliver the products 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 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 our various applicable tangible products containing essential software products and services. The Company establishes the pricing for our 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 our 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).
F-31
Symon Holdings Corporation
Notes to Consolidated Financial Statements
·
TPE If the Company cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, we use 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 prospectively adopted the new rules and the adoption of the amended revenue recognition rules, consisting primarily of the change from the residual method to the RSP method to allocate the arrangement fee, did not significantly change the timing of revenue recognition nor did it have a material impact on the consolidated financial statements for periods subsequent to January 31, 2011.
Upon the adoption of the new revenue recognition rules the Company re-evaluated its allocation of revenue and determined that it still had similar units of accounting and nearly all of its products and services qualify as separate units of accounting. The Company has established VSOE for its professional services and maintenance and content services of accounting based on the same criteria as previously used under the software revenue recognition rules.
Previously, the Company rarely sold its product 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 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 are generated solely by the Companys 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 Companys 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 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 sales and the related shipping costs are included in cost of sales.
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.
F-32
Symon Holdings Corporation
Notes to Consolidated Financial Statements
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 Companys hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customers 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.
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. The Company maintains cash and cash equivalent balances in the USA and the UK. The balances in the USA are not fully FDIC insured. The carrying value of cash and cash equivalents, 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 debts carrying value approximates its fair value due to the variable market interest rate of the debt.
Net Income per Share
Basic net income 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 available to the common stockholders, based upon their distribution rights, by the weighted average number of common shares outstanding for the period. Diluted income per share is computed similar to basic; however diluted income per share reflects the assumed conversion of all potentially dilutive securities. There were no stock options, warrants, or other dilutive equity instruments outstanding at January 31, 2013, 2012 or 2011, respectively. Note 6 provides for additional information regarding income per common share.
Foreign Currency Translation
The functional currency of the Companys United Kingdom subsidiary is the British pound sterling. All assets and all liabilities of the subsidiary are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated to U.S. dollars at the weighted-average rate of exchange prevailing during the year. Resultant translation adjustments are recorded in accumulated other comprehensive income (loss), a separate component of stockholders equity.
F-33
Symon Holdings Corporation
Notes to Consolidated Financial Statements
The Company includes currency gains and losses on temporary intercompany advances in the determination of net income. Currency gains and losses, including translation gains and losses and those on temporary intercompany advances were a net gain of $7,861 for the year ended January 31, 2013, net loss of $1,584 for the year ended January 31, 2012 and a net gain of $57,259 for the year ended January 31, 2011. Currency gains and losses are included in interest and other expenses in the consolidated statements of income and comprehensive income.
Business Segment
The Company has one operating and reporting segment consisting of the development and sale of software solutions, digital appliances and flat screen display installations for using in monitoring and communicating information to customers and employees. The Companys chief operating decision maker is considered to be the Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the single reporting segment level.
The Company primarily sells to customers in the U.S., U.K. Continental Europe, and Middle East, and Asia and has operations in the U.S., U.K., and United Arab Emirates (U.A.E.).
Recently Issued Accounting Standards
On January 1, 2012, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2011-08, "Intangibles - Goodwill and Other (Topic 350), Testing Goodwill for Impairment." This standard simplified the process a company must go through to test goodwill for impairment. Companies have an option to first assess qualitative factors of a reporting unit being tested before having to assess quantitative factors. If a company believes no impairment exists based on qualitative factors, then it will no longer be required to perform the two-step quantitative impairment test. The Company tests its $11.0 million of goodwill for impairment as of January 31 each year. The adoption of this new standard did not have a material impact on the Company's consolidated financial statements.
In June 2011, the FASB issued amended disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The Company adopted these changes in 2011 and applied retrospectively for all periods presented. Such adoption did not have material effect on Companys financial position or results of operations as it related only to changes in financial statement presentation.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). This standard update allows companies the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not the asset is impaired. The amendments are effective for annual interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. The implementation of this ASU is not expected to have a material impact on the Companys consolidated financial position or results of operations.
On January 1, 2012, the Company adopted the FASB ASU 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This guidance amended certain fair value measurement concepts in FASB ASC 820, "Fair Value Measurement," including items such as the application of the concept of highest and best use and required certain other disclosure requirements, including among other things, the level of the hierarchy used in the fair value measurement and a description of the valuation techniques and unobservable inputs used in Level 2 and 3 fair value measurements. The adoption of this new standard did not have a material impact on the Company's consolidated financial statements.
F-34
Symon Holdings Corporation
Notes to Consolidated Financial Statements
2. Property and Equipment
Property and equipment consist of the following at January 31, 2013, 2012 and 2011:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Machinery and equipment
|
$
|
2,424,874
|
$
|
2,378,246
|
$
|
2,130,430
|
Furniture and fixtures
|
|
646,643
|
|
597,262
|
|
594,270
|
Software
|
|
1,828,705
|
|
1,563,979
|
|
1,340,607
|
Leasehold improvements
|
|
269,087
|
|
246,741
|
|
212,185
|
|
|
5,169,309
|
|
4,786,228
|
|
4,277,492
|
Less accumulated depreciation and amortization
|
|
(4,206,240)
|
|
(3,870,399)
|
|
(3,381,866)
|
Property and equipment, net
|
$
|
963,069
|
$
|
915,829
|
$
|
895,626
|
Depreciation and amortization expense for the years ended January 31, 2013, 2012 and 2011 was $528,485, $494,810 and $607,225, respectively.
3. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the years ended January 31, 2013, 2012 and 2011, respectively, were as follows:
|
|
|
Balance at January 31, 2010
|
$
|
10,797,649
|
Contingent payments
|
|
247,640
|
Effects of foreign exchange
|
|
(169,271)
|
Balance at January 31, 2011
|
|
10,876,018
|
Contingent payments
|
|
99,723
|
Effects of foreign exchange
|
|
(6,593)
|
Balance at January 31, 2012
|
|
10,969,148
|
Effects of foreign exchange
|
|
3,399
|
Balance at January 31, 2013
|
$
|
10,972,547
|
The Companys definite-lived intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, 2013
|
|
|
Weighted Average Amortization Years
|
|
Gross Carrying Amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
Software
|
|
5
|
$
|
6,430,000
|
$
|
(6,430,000)
|
$
|
-
|
Customer relationships
|
|
8
|
|
4,921,204
|
|
(4,399,984)
|
|
521,220
|
Tradename
|
|
7
|
|
463,068
|
|
(299,845)
|
|
163,223
|
Covenant not-to-compete
|
|
5
|
|
270,952
|
|
(270,952)
|
|
-
|
Total
|
|
|
$
|
12,085,224
|
$
|
(11,400,781)
|
$
|
684,443
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2012
|
|
|
Weighted Average Amortization Years
|
|
Gross Carrying Amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
Software
|
|
5
|
$
|
6,430,000
|
$
|
(6,408,510)
|
$
|
21,490
|
Customer relationships
|
|
8
|
|
4,916,569
|
|
(3,912,070)
|
|
1,004,499
|
Tradename
|
|
7
|
|
462,776
|
|
(246,998)
|
|
215,778
|
Covenant not-to-compete
|
|
5
|
|
270,623
|
|
(248,388)
|
|
22,235
|
Total
|
|
|
$
|
12,079,968
|
$
|
(10,815,966)
|
$
|
1,264,002
|
F-35
Symon Holdings Corporation
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
January 31, 2011
|
|
|
Weighted Average Amortization Years
|
|
Gross Carrying Amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
Software
|
|
5
|
$
|
6,430,000
|
$
|
(6,302,510)
|
$
|
127,490
|
Customer relationships
|
|
8
|
|
4,926,983
|
|
(3,255,537)
|
|
1,671,446
|
Tradename
|
|
7
|
|
463,432
|
|
(194,836)
|
|
268,596
|
Covenant not-to-compete
|
|
5
|
|
271,361
|
|
(194,707)
|
|
76,654
|
Total
|
|
|
$
|
12,091,776
|
$
|
(9,947,590)
|
$
|
2,144,186
|
Amortization expense for the years ended January 31, 2013, 2012 and 2011 was $583,463, $874,937 and $1,671,871, respectively.
Projected amortization expense for these assets for the subsequent five years ending January 31 is as follows:
|
|
|
2014
|
$
|
157,263
|
2015
|
|
143,595
|
2016
|
|
140,120
|
2017
|
|
140,120
|
2018
|
|
103,343
|
Trademarks and trade names amounting to $1,900,000 as of January 31, 2013, 2012 and 2011 have been determined to have indefinite lives.
4. Note Payable
At January 31, 2011, the Companys note payable to a bank had a balance of $5,000,000. During the year ended January 31, 2012, the Company paid the remaining balance of its note payable. The Companys note had an interest rate equal to, at the Companys option, either 1.25% above the prime rate or 4.25% above the LIBOR rate. Interest expense on the note totaled $0, $108,382 and $464,677 for the years ended January 31, 2013, 2012 and 2011, respectively.
As part of the credit facility with the bank, the Company also has a $2,000,000 revolving credit facility. The Company has no outstanding draws on the credit facility at January 31, 2013 and the entire balance is available for future borrowings. The credit facility is secured by substantially all assets of the Company and matures on April 4, 2013. The credit facility bears interest at a variable rate which was 5.25% as of January 31, 2013.
The credit facility contains numerous financial covenants, violation of which results in an event of a default. The Company was in compliance with all covenants as of January 31, 2013.
5. Income Taxes
The components of income before income taxes consist of the following for the years ended January 31:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Domestic
|
$
|
3,723,156
|
$
|
3,611,193
|
$
|
1,963,040
|
Foreign
|
|
1,628,084
|
|
2,228,980
|
|
673,452
|
|
$
|
5,351,240
|
$
|
5,840,173
|
$
|
2,636,492
|
F-36
Symon Holdings Corporation
Notes to Consolidated Financial Statements
The following table summarizes the provision (benefit) for U.S. federal, state and foreign taxes on income for the years ended January 31:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Current
|
|
|
|
|
|
|
Federal
|
$
|
1,391,000
|
$
|
1,336,358
|
$
|
1,125,188
|
State
|
|
116,215
|
|
150,366
|
|
100,543
|
Foreign
|
|
417,814
|
|
476,833
|
|
12,308
|
|
|
1,925,029
|
|
1,963,557
|
|
1,238,039
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
(44,421)
|
|
(155,886)
|
|
(419,237)
|
State
|
|
-
|
|
-
|
|
-
|
Foreign
|
|
(20,418)
|
|
106,210
|
|
52,259
|
|
|
(64,839)
|
|
(49,676)
|
|
(366,978)
|
|
$
|
1,860,190
|
$
|
1,913,881
|
$
|
871,061
|
Income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes as follows:
|
|
|
|
|
|
|
|
|
For the years ended January 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Computed expected tax expense
|
$
|
1,819,422
|
$
|
1,985,659
|
$
|
896,407
|
Non deductible expenses
|
|
144,978
|
|
16,656
|
|
48,928
|
Release of beginning of year valuation allowance
|
|
-
|
|
-
|
|
(73,312)
|
Utilization of net operating loss carryforwards
|
|
(1,787)
|
|
(22,040)
|
|
(73,426)
|
International tax rate differences
|
|
(156,296)
|
|
(171,186)
|
|
(40,407)
|
State tax expense, net of federal benefit
|
|
116,215
|
|
99,241
|
|
66,359
|
Other
|
|
(62,342)
|
|
5,551
|
|
46,512
|
Total
|
$
|
1,860,190
|
$
|
1,913,881
|
$
|
871,061
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax (assets) liabilities at January 31, 2013, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Deferred tax assets
:
|
|
|
|
|
|
|
Deferred revenues
|
$
|
222,578
|
$
|
296,881
|
$
|
302,265
|
Deferred state sales tax
|
|
34,000
|
|
8,835
|
|
8,835
|
Bad debt reserve
|
|
46,588
|
|
85,000
|
|
114,881
|
Revaluation of short-term Intercompany loan
|
|
61,138
|
|
61,137
|
|
157,766
|
Net operating loss carryforwards
|
|
8,314
|
|
10,101
|
|
113,935
|
Total deferred tax assets current
|
|
372,618
|
|
461,954
|
|
697,682
|
Deferred tax asset (liabilities)
|
|
|
|
|
|
|
Intangible assets
|
|
(721,433)
|
|
(888,129)
|
|
(1,116,849)
|
Depreciation
|
|
16,937
|
|
29,458
|
|
66,935
|
Net deferred tax asset (liabilities) non current
|
|
(704,496)
|
|
(858,671)
|
|
(1,049,914)
|
Net deferred tax liabilities
|
$
|
(331,878)
|
$
|
(396,717)
|
$
|
(352,232)
|
The Company expects its net operating loss carryforward to be fully utilized as of January 31, 2014. The IRS completed an examination of the Companys U.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 the Companys tax returns. Subsequent to the examinations and as of January 31, 2012 and 2011, the Company has determined that there are no uncertain tax positions and therefore no accruals have been made.
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.
F-37
Symon Holdings Corporation
Notes to Consolidated Financial Statements
6. Common Stock
The Company has authorized, issued and outstanding 1,000,000 shares of Class L Common Stock, par value of $0.01 per share. Each share of Class L Common Stock accrues a quarterly dividend equal to 10% of each shares unreturned original cost plus unpaid accrued dividends. The accrued dividends are recorded and payable when, as and if declared out of the funds of the Company legally available. At January 31, 2013, no accrued dividends had been declared payable. All holders of Class L Common Stock are entitled to one vote per share on all matters to be voted on by the Companys shareholders.
If and when distributions are declared, the holders of Class L Common Stock are entitled to receive all unpaid dividends and the full amount of their unreturned original cost before distributions are made to any other shareholder. After the holders of Class L Common Stock have received all unpaid dividends and their unreturned original cost, all holders of Common Stock as a group shall be entitled to receive the remaining portion of such distribution ratably among such holders based upon the number of all common shares held by each shareholder at the time of such distribution. As a result of the above provisions, the holders of Class L Common Stock would be allocated $10.1 million, $8.3 million and $6.6 million of unaccrued dividends as of January 31, 2013, 2012 and 2011, respectively, in the event of a distribution in addition to the unreturned cost of $10.0 million.
The Company has authorized 200,000 shares of Class A Non-Voting Common Stock, par value of $0.01 per share, with 68,889 shares issued and outstanding. The Company has sold 68,889 shares of the Class A Non-Voting Stock to certain executives at a price of $2.3274 per share. The Class A Non-Voting shares are restricted and all 68,889 shares outstanding were vested as of January 31, 2012. In return for the shares, the executives delivered promissory notes in the aggregate initial principal amount of $258,600. In the event of default, the notes provide recourse to the general assets of the executives and management intends to enforce this provision if needed. The outstanding principal amount of the notes, plus all accrued and unpaid interest, is due on the eighth anniversary of the date of issuance. The notes receivable associated with these restricted stock certificates are reflected as a component of stockholders equity. The owners of the Class A Non-Voting Common Stock do not have voting rights, directly or indirectly, and do not currently have any distributions allocated to them as a result of the dividend provisions associated with the Class L Common Stock as described above. During 2012, the Company authorized the repurchase of 27,811 Class A common shares in the amount of $64,648. In conjunction with the repurchase, promissory notes with a value of $76,236 were cancelled.
The Company has also authorized 200,000 shares of Class A Voting Common Stock, par value of $0.01 per share. All holders of the Class A Voting Common Stock are entitled to one vote per share on all matters to be voted on by the Companys shareholders. No shares of Class A Voting Stock were issued or outstanding at January 31, 2013.
The Company has a capital structure that includes more than one class of common stock with differing dividend rates that participate in dividends with common shareholders and therefore the two-class method of computing net income per share must be utilized. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.
7. Commitments and Contingencies
Lease Obligations -
The Company leases office space and manufacturing facilities in Dallas, Texas under long-term lease agreements that expire in March 2014 and March 2013, respectively. The Company also leases office space in Pittsford, New York under a lease agreement that expires in December 2013, and in Las Vegas, Nevada under a lease agreement that expired in January 2013.
In addition, the Company leases office space in London, England under a lease agreement that expires in August 2016 and in Dubai, UAE under a lease agreement that expires in July 2013. Future minimum rental payments under these leases are as follows:
|
|
|
|
|
Amount
|
Fiscal year ending January 31:
|
|
|
2014
|
$
|
626,602
|
2015
|
|
195,852
|
2016
|
|
126,000
|
2017
|
|
73,500
|
Thereafter
|
|
-
|
Total
|
$
|
1,021,954
|
Total rent expense under all operating leases for the years ended January 31, 2013, 2012 and 2011 was $885,238, $788,609 and $815,134, respectively.
F-38
Symon Holdings Corporation
Notes to Consolidated Financial Statements
Contingent Purchase Price -
In connection with past acquisitions, the Company was required to make additional cash payments to the previous shareholders of the companies because future minimum sales levels were attained and certain other conditions were met. During the fiscal year ended January 31, 2012, the Company made such contingent payments totaling $99,723. During the year ended January 31, 2011 the Company made such contingent payments totaling $247,640. All of these contingent payments were recorded as adjustments to goodwill as the acquisitions occurred prior to the adoption of ASC 850,
Business Combinations
. The Company has no remaining obligations to make additional cash payments to the previous shareholders of the companies it has acquired.
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 Companys financial position, results of operations or cash flows.
8. Related Party Transactions
The Company incurs an annual management fee of $125,000 from Golden Gate Capital, the Companys majority shareholder. This management fee expense
is included in selling, general, and administrative expense in the consolidated statements of income and comprehensive income with no amounts due as of January 31, 2013, 2012 and 2011, respectively.
9. Accrued Liabilities
Accrued liabilities as of January 31, 2013, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Accrued sales commissions
|
$
|
332,844
|
$
|
258,473
|
$
|
145,850
|
Accrued bonus
|
|
580,352
|
|
559,625
|
|
350,000
|
Taxes payable
|
|
400,993
|
|
661,777
|
|
354,763
|
Other
|
|
611,712
|
|
750,442
|
|
663,815
|
|
$
|
1,925,901
|
$
|
2,230,317
|
$
|
1,514,428
|
10. Geographic Information
Revenues by geographic area are based on the deployment site location of the end customers. Substantially all of the revenues from North America are generated from the United States of America. Geographic area information related to revenues from customers for the years ended January 31, 2013, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
Years Ended January 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Region
|
|
|
|
|
|
|
North America
|
$
|
29,750,058
|
$
|
29,610,611
|
$
|
30,430,458
|
Europe, Middle East, and Asia
|
|
12,778,333
|
|
11,215,879
|
|
9,280,063
|
Total
|
$
|
42,528,391
|
$
|
40,826,490
|
$
|
39,710,521
|
Geographic area information related to long-lived assets as of January 31, 2013, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Region
|
|
|
|
|
|
|
North America
|
$
|
1,111,651
|
$
|
1,622,079
|
$
|
2,461,257
|
Europe, Middle East, and Asia
|
|
647,915
|
|
766,250
|
|
865,528
|
Total
|
$
|
1,759,566
|
$
|
2,388,329
|
$
|
3,326,785
|
11. Subsequent Events
On March 1, 2013, the Company entered into an Agreement and Plan of Merger whereby it will merge with a subsidiary of SCG Financial Acquisition Corp. (SCG), and will become a subsidiary of SCG for an estimated purchase price of $45,000,000 upon completion of certain requirements.
F-39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Reach Media Group Holdings, Inc. (dba RMG Networks, Inc.)
San Francisco, California
We have audited the accompanying consolidated balance sheet of Reach Media Group Holdings, Inc. (dba RMG Networks, Inc.) (the Company) as of December 31, 2011, and the related consolidated statement of operations, stockholders equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Reach Media Group Holdings, Inc. (dba RMG Networks, Inc.) as of December 31, 2011 and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Frank, Rimerman + Co., LLP
Palo Alto, California
February 4, 2013
F-41
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Balance Sheets
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
|
2011
|
ASSETS
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,334,290
|
|
$
|
1,301,527
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
|
|
|
of $560,000 ($179,000 in 2011)
|
|
6,253,260
|
|
|
5,486,681
|
Prepaid expenses and other current assets
|
|
148,837
|
|
|
937,770
|
Total current assets
|
|
7,736,387
|
|
|
7,725,978
|
Restricted Cash
|
|
167,926
|
|
|
202,850
|
Property and Equipment, net
|
|
537,645
|
|
|
929,159
|
Other Assets
|
|
173,454
|
|
|
119,454
|
Intangible Assets, net
|
|
8,092,533
|
|
|
13,279,181
|
Goodwill
|
|
5,474,351
|
|
|
6,094,338
|
Total assets
|
$
|
22,182,296
|
|
$
|
28,350,960
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
Current Liabilities
|
|
|
|
|
|
Line of credit
|
$
|
-
|
|
$
|
1,399,723
|
Accounts payable
|
|
2,483,306
|
|
|
1,427,547
|
Accrued expenses and other current liabilities
|
|
1,615,090
|
|
|
1,610,536
|
Accrued revenue share and agency fees
|
|
2,292,659
|
|
|
3,007,130
|
Notes payable, net of discount
|
|
28,653,723
|
|
|
-
|
Deferred revenue
|
|
-
|
|
|
2,000,000
|
Capital lease obligations, current portion
|
|
70,027
|
|
|
56,724
|
Deferred rent, current portion
|
|
3,159
|
|
|
11,180
|
Total current liabilities
|
|
35,117,964
|
|
|
9,512,840
|
Capital Lease Obligations, net of current portion
|
|
195,244
|
|
|
63,994
|
Notes Payable, net of discount
|
|
-
|
|
|
21,155,037
|
Deferred Rent, net of current portion
|
|
227,504
|
|
|
235,450
|
Other Non-Current Liabilities
|
|
420,845
|
|
|
29,173
|
Commitments and Contingencies (Notes 5 and 7)
|
|
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
|
|
|
Convertible preferred stock; $0.0001 par value;
|
|
|
|
|
|
issued and outstanding in 2012 and 2011 - 41,709,135
|
|
|
|
|
|
(aggregate liquidation preference of $40,741,450)
|
|
4,170
|
|
|
4,170
|
Common stock; $0.0001 par value; 140,000,000 shares authorized;
|
|
|
|
|
|
6,334,095 shares issued in 2012 and 2011
|
|
634
|
|
|
634
|
Additional paid-in capital
|
|
47,704,140
|
|
|
47,301,675
|
Accumulated deficit
|
|
(61,488,205)
|
|
|
(49,952,013)
|
Total stockholders' deficit
|
|
(13,779,261)
|
|
|
(2,645,534)
|
Total liabilities and stockholders' deficit
|
$
|
$22,182,296
|
|
$
|
28,350,960
|
F-42
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Statements of Operations
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
|
2011
|
Revenues
|
|
|
|
|
|
Advertising
|
$
|
21,635,113
|
|
$
|
18,126,251
|
Software services
|
|
4,034,960
|
|
|
2,355,000
|
Total revenues
|
$
|
25,670,073
|
|
$
|
20,481,251
|
Cost of Revenues
|
|
|
|
|
|
Advertising
|
|
13,135,715
|
|
|
13,935,704
|
Software services
|
|
997,294
|
|
|
723,635
|
Total cost of revenues
|
|
14,133,009
|
|
|
14,659,339
|
Gross margin
|
|
11,537,064
|
|
|
5,821,912
|
Operating Expenses
|
|
|
|
|
|
General and administrative
|
|
7,602,048
|
|
|
9,315,649
|
Sales and marketing
|
|
4,988,457
|
|
|
5,299,698
|
Research and development
|
|
1,626,870
|
|
|
1,465,705
|
Impairment of goodwill and intangible assets
|
|
2,915,420
|
|
|
637,138
|
Total operating expenses
|
|
17,132,795
|
|
|
16,718,190
|
Loss from Operations
|
|
(5,595,731)
|
|
|
(10,896,278)
|
Other Income (Expense)
|
|
|
|
|
|
Interest expense
|
|
(5,940,461)
|
|
|
(4,019,256)
|
Loss before Income Tax Expense
|
|
(11,536,192)
|
|
|
(14,915,534)
|
Income Tax Expense
|
|
-
|
|
|
-
|
Net Loss
|
$
|
(11,536,192)
|
|
$
|
(14,915,534)
|
|
|
|
|
|
|
Net Loss per Share - basic and diluted
|
$
|
(1.82)
|
|
$
|
(2.36)
|
Shares used in the computation of basic
|
|
|
|
|
|
and diluted earnings per share
|
|
6,334,095
|
|
|
6,332,328
|
F-43
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
Additional
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
Balances, December 31, 2010
|
41,709,135
|
$
|
4,170
|
|
6,329,095
|
$
|
633
|
$
|
40,744,359
|
$
|
(35,036,479)
|
$
|
5,712,683
|
Issuance of common stock upon exercise of stock options for cash
|
-
|
|
-
|
|
5,000
|
|
1
|
|
499
|
|
-
|
|
500
|
Issuance of Series A convertible preferred stock warrants, Series B convertible preferred stock warrants, Series C convertible preferred stock warrants, and common stock warrants in connection with notes payable
|
-
|
|
-
|
|
-
|
|
-
|
|
6,103,097
|
|
-
|
|
6,103,097
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
453,720
|
|
-
|
|
453,720
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(14,915,534)
|
|
(14,915,534)
|
Balances, December 31, 2011
|
41,709,135
|
|
4,170
|
|
6,334,095
|
|
634
|
|
47,301,675
|
|
(49,952,013)
|
|
(2,645,534)
|
Stock-based compensation
|
-
|
|
-
|
|
-
|
|
-
|
|
402,465
|
|
-
|
|
402,465
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(11,536,192)
|
|
(11,536,192)
|
Balances, December 31, 2012
|
41,709,135
|
$
|
4,170
|
|
6,334,095
|
$
|
634
|
$
|
47,704,140
|
$
|
(61,488,205)
|
$
|
(13,779,261)
|
F-44
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
|
2011
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net loss
|
$
|
(11,536,192)
|
|
$
|
(14,915,534)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
used in operating activities:
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
381,860
|
|
|
34,000
|
Depreciation and amortization
|
|
3,352,976
|
|
|
3,835,004
|
Loss on disposal of property and equipment
|
|
122,611
|
|
|
5,284
|
Impairment of goodwill and intangible assets
|
|
2,915,420
|
|
|
637,138
|
Amortization of discounts on notes payable
|
|
1,713,274
|
|
|
1,258,635
|
Accrued interest on notes payable
|
|
4,191,139
|
|
|
1,768,944
|
Lease impairment
|
|
296,111
|
|
|
7,302
|
Stock-based compensation
|
|
402,465
|
|
|
453,720
|
Changes in operating assets and liabilities
|
|
|
|
|
|
Accounts receivable
|
|
(1,148,439)
|
|
|
799,648
|
Prepaid expenses and other current assets
|
|
788,933
|
|
|
(681,066)
|
Other assets
|
|
(54,000)
|
|
|
43,109
|
Accounts payable
|
|
1,055,759
|
|
|
114,889
|
Accrued expenses and other current liabilities
|
|
4,554
|
|
|
1,066,423
|
Accrued revenue share and agency fees
|
|
(714,471)
|
|
|
|
Deferred revenue
|
|
(2,000,000)
|
|
|
2,000,000
|
Deferred rent
|
|
(15,967)
|
|
|
49,783
|
Other non-current liabilities
|
|
95,561
|
|
|
3,554
|
Net cash used in operating activities
|
|
(148,406)
|
|
|
(3,519,167)
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Purchases of property and equipment
|
|
(168,011)
|
|
|
(200,194)
|
Proceeds from disposal of property and equipment
|
|
175,000
|
|
|
4,000
|
Capitalized software development costs
|
|
-
|
|
|
(115,401)
|
Net cash provided by (used in) investing activities
|
|
6,989
|
|
|
(311,595)
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Net repayment of line of credit
|
|
(1,399,723)
|
|
|
(143,029)
|
Proceeds from note payable
|
|
1,594,273
|
|
|
4,922,116
|
Repayment of notes payable
|
|
-
|
|
|
(202,248)
|
Payments on capital lease obligations
|
|
(55,294)
|
|
|
(34,749)
|
Decrease in restricted cash
|
|
34,924
|
|
|
-
|
Proceeds from issuance of common stock
|
|
-
|
|
|
500
|
Net cash provided by financing activities
|
|
174,180
|
|
|
4,542,590
|
Increase in Cash and Cash Equivalents
|
|
32,763
|
|
|
711,828
|
Cash and Cash Equivalents, beginning of the year
|
|
1,301,527
|
|
|
589,699
|
Cash and Cash Equivalents, end of the year
|
$
|
1,334,290
|
|
$
|
1,301,527
|
F-45
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Statements of Cash Flows (continued)
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
|
2011
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
Cash paid for interest
|
$
|
-
|
|
$
|
1,005,096
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
-
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
Property and equipment purchased under capital lease obligations
|
$
|
199,847
|
|
$
|
72,847
|
Capitalized discount on notes payable
|
$
|
-
|
|
$
|
750,000
|
Issuance of Series A convertible preferred stock warrants,
|
|
|
|
|
|
Series B convertible preferred stock warrants, Series C
|
|
|
|
|
|
convertible preferred stock warrants, and common stock
|
|
|
|
|
|
warrants in connection with notes payable
|
$
|
-
|
|
$
|
6,103,097
|
Notes payable proceeds used for acquisition of EMN (Note 6)
|
$
|
-
|
|
$
|
18,000,000
|
Notes payable proceeds directed to previous
|
|
|
|
|
|
notes payable (Note 6)
|
$
|
-
|
|
$
|
1,327,884
|
Assets acquired and liabilities assumed in connection with the
|
|
|
|
|
|
acquisition of EMN (Note 6)
|
|
|
|
|
|
Accounts receivable
|
$
|
-
|
|
$
|
1,349,415
|
Other assets
|
$
|
-
|
|
$
|
13,480
|
Property and equipment
|
$
|
-
|
|
$
|
21,434
|
Intangible assets
|
$
|
-
|
|
$
|
11,504,215
|
Goodwill
|
$
|
-
|
|
$
|
5,474,351
|
Accounts payable
|
$
|
-
|
|
$
|
347,147
|
Accrued liabilities
|
$
|
-
|
|
$
|
15,748
|
F-46
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
1.
Nature of Business and Managements Plans Regarding the Financing of Future Operations
Nature of Business
RMG Networks, Inc. (RMG) was incorporated as a Delaware corporation on September 23, 2005 under the name Danouv, Inc. and subsequently changed its name to RMG Networks, Inc. in September 2009. In April 2011, in connection with the acquisition of Executive Media Network Worldwide and its wholly-owned subsidiaries, Corporate Image Media, Inc. and Prophet Media, LLC, (collectively EMN) (Note 6) RMG established Reach Media Group Holdings, Inc. (the Company), which was incorporated as a Delaware corporation on April 11, 2011 (closing date). As of the closing date, the Company and RMG Networks, Inc. merged, with RMG Networks, Inc. becoming a wholly-owned subsidiary of the Company.
Headquartered in San Francisco, California, RMG was founded as a media network of screens in coffee shops and eateries. The acquisition of EMN in 2011 provided RMG with airline partner relationships and contracts that allowed it to evolve into a global digital signage company that now operates the RMG Airline Media Network, a U.S.-based air travel media network covering digital media assets in airline executive clubs, in-flight entertainment systems, in-flight Wi-Fi portals and private airport terminals. The Companys platform delivers premium video content and information to high value consumer audiences. RMGs digital signage solutions group builds and operates digital place-based networks and offers a range of innovative digital signage software, hardware and services to small and medium businesses and enterprise customers.
Managements Plans Regarding the Financing of Future Operations
The Company has incurred net losses and net cash outflows from operations since inception. In April 2011, the Company borrowed $25,000,000 under a credit agreement with an investment company, and used the majority of the funds to acquire EMN under an agreement and plan of merger (Note 6). The Company is in violation of a loan covenant that allows the lender to demand immediate repayment of the debt (Note 5).
In January 2013, the Company signed an agreement to merge with a public company (Note 13). If the merger is consummated, the Company will become a subsidiary of the public company, at which time the existing borrowings under the credit agreement described above are scheduled to be extinguished.
Should the merger not be consummated, the Company intends to work with the lender to negotiate more favorable loan terms. If more favorable terms cannot be obtained, additional debt or equity financing will be required. If additional future financing is required, there can be no assurance that such financing will be available on terms that will be acceptable to the Company or at all.
2.
Significant Accounting Policies
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Danoo (Beijing) Technologies, Ltd. (name formally changed to RMG China, Ltd. in 2012), a foreign operating entity; RMG Networks, Inc.; EMN Acquisition Corporation; Executive Media Network, Inc.; Prophet Media, LLC; and Corporate Image Media, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency Transactions:
The U.S. dollar is the functional currency of the Company and its foreign and domestic subsidiaries. Foreign exchange transaction gains and losses are included in the consolidated statements of operations. The Company transfers U.S. dollars to China to fund operating expenses. Should RMG China generate operating net income in Chinese currency, the Peoples Republic of China would impose restrictions over the transfer of funds to the U.S.
Acquisition Accounting:
In March 2010, the Company acquired certain assets formerly belonging to Pharmacy TV Networks, LLC (PTV). In connection with the acquisition, the Company recorded all acquired assets of PTV at fair value, resulting in a new accounting basis for the acquired assets, including the recording of goodwill (Note 6). As of December 31, 2012, all assets related to PTV, including goodwill, were written off after the network was abandoned in early 2011 to focus on core airline and airline lounge network assets.
F-47
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Acquisition Accounting:
(continued)
In April 2011, the Company acquired EMN. In connection with the acquisition, the Company recorded all assets of EMN at fair value. The Company performed a purchase price allocation resulting in a new accounting basis for the purchased assets, including the recording of intangible assets and goodwill (Note 6).
Revenue Recognition:
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. RMG 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 Boards (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 RMG shares with its partners ranges from 25% to 80% depending on the partner and the media asset. RMG makes minimum annual guarantee payments under four agreements (three to airline partners and one to another travel partner). Payments to all other partners are calculated on a revenue sharing basis. RMGs partnership agreements have terms ranging from one to five years. Four partnership agreements renew automatically unless terminated prior to renewal and the remainder have no obligation to renew.
The Company also recognizes revenue from professional services for development of software and sale of software license agreements. Professional service revenue is recognized ratably over the life of the contract and represents the revenue from one base contract and ancillary agreements for 2012 and 2011. Software license revenue is recognized after persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. In software arrangements that include rights to multiple software products, support and/or other services, the Company allocates the total arrangement fee among each deliverable based on vendor-specific objective evidence of fair value. If vendor-specific objective evidence for the undelivered elements cannot be ascertained, and the arrangement cannot be unbundled, then revenue is deferred until the delivery of the undelivered elements or, if the only undelivered element is customer support, recognized ratably over the service period.
Deferred revenue as of December 31, 2011 relates to a software service contract with a customer for which revenue was recognized ratably under the terms of the agreement. This contract was completed in 2012.
Cash and Cash Equivalents:
Cash and cash equivalents include all cash balances and highly liquid investments purchased with remaining maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of money market accounts.
Restricted Cash:
Restricted cash related to funds held to guarantee the Companys corporate credit cards and as guarantees required under lease agreements for two of the Companys office facilities. Restriction requirements continue through the term of the leases, which expire in 2015 and 2020, respectively.
F-48
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Business Concentrations:
For the year ended December 31, 2012, the Company had two major customers: Customers A and B each represented approximately 16% of revenues. For the year ended December 31, 2011, the Company had four major customers: Customers A, B, C and D represented 13%, 13%, 11% and 11%, respectively, (48% total) of annual revenues. The Company had accounts receivable of $1,009,000 and $913,240 ($1,922,240 total) from Customers A and B, respectively, at December 31, 2012 and had accounts receivable of $581,000 and $18,000 ($599,000 total) from Customers B and C, respectively, as of December 31, 2011.
Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents, restricted cash, and accounts receivable.
The Company does not require collateral or other security for accounts receivable. However, credit risk is mitigated by the Companys ongoing evaluations of customer creditworthiness. The Company maintains an allowance for doubtful accounts receivable balances. The allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts on a customer by customer basis. Accounts deemed uncollectible are written off. Such credit losses have been within managements expectations.
The Company maintains its cash and cash equivalents in the United States with two financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation insurable limit. Cash and cash equivalents of $150,000 and $86,000 held in a foreign country as of December 31, 2012 and 2011, respectively, were not insured.
Property and Equipment:
Property and equipment is stated at cost, less accumulated depreciation and amortization. The Company depreciates property and equipment using the straight-line method over estimated useful lives ranging from three to five years. Leasehold improvements are amortized over the shorter of the assets useful life or the remaining lease term.
Capitalized Software Development Costs:
The Company capitalizes costs related to the development of internal use software after such a time as it is considered probable the software will be completed and will be used to perform the function intended. The Company capitalizes external direct costs of materials and services consumed in developing and obtaining internal-use computer software, and payroll and payroll-related costs for employees who are directly associated with and who devote time to developing the internal-use software. The Company capitalized software development costs of $115,401 in October 2011. Capitalized costs are not amortized until each development project is completed and new functionality has been implemented. The Company recognized amortization expense of $23,080 and $5,754 for the years ended December 31, 2012 and 2011, respectively.
Other Assets:
Other assets consist of deposits related to leases for office facilities.
Intangible Assets:
Intangible assets are carried at cost, less accumulated amortization. Amortization of intangibles with finite lives is computed using the straight-line method over estimated useful lives of two to seven years. Intangible assets consist of customer and vendor relationships, trademarks, domain names, non-compete agreements and acquired technology resulting from acquisitions (Notes 4 and 6), and internally developed software.
Intangible assets not subject to amortization are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that of the reporting unit is impaired. Intangible assets subject to amortization are tested for recoverability whenever events or changes in circumstances indicate that asset groups carrying amount may not be recoverable.
F-49
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Intangible Assets:
(continued)
An impairment loss for an intangible asset subject to amortization is recognized only if the carrying amount of the related long-lived asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). The Company recognized an impairment charge of $2,295,433 for intangible assets related to the IdeaCast, Inc. acquisition in the year ended December 31, 2012 (none in the year ended December 31, 2011). (See Note 6).
Goodwill:
Goodwill reflects the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill is not amortized but is subject to a review for impairment. The Company reviews its goodwill for impairment annually or whenever circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. The Company tests goodwill for impairment by first assessing qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An impairment loss is recognized for any excess of the carrying amount of the reporting units goodwill over the implied fair value of the goodwill.
The Company recognized an impairment charge of $619,987 and $637,138in the years ended December 31, 2012 and 2011, respectively, due to the underperformance of certain network units within the Company.
Accounting for Impairment of Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured to be the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of their carrying cost amount or the fair value less the cost to sell.
Advertising and Promotion Costs:
The Company expenses advertising and promotion costs as incurred. Advertising and promotion expense was $19,000 and $96,000 for the years ended December 30, 2012 and 2011, respectively, and is included in sales and marketing expense.
Stock-Based Compensation:
The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair value of the shares at date of grant. All stock option grants are accounted for using the fair value method (Black-Scholes model) and compensation is recognized as the underlying options vest.
Stock-based compensation for options or warrants granted to non-employees is measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for options granted to non-employees is periodically re-measured as the underlying options vest.
Research and Development:
The Company expenses research and development expenditures as incurred.
Deferred Revenue:
Deferred revenue consists of billings or payments received in advance of revenue recognition from professional service agreements described above and is recognized as the revenue recognition criteria are met. The Company generally invoices the customer in annual installments.
F-50
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Income Taxes:
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future income tax effects of differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts recorded for income tax purposes. Deferred income taxes are classified as current or non-current, based on the classifications of the related assets and liabilities giving rise to the temporary differences. A valuation allowance is provided against the Companys deferred income tax assets when their realization is not reasonably assured.
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 the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Segment Information:
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a companys chief operating decision maker (the Companys Chief Executive Officer (CEO)) in assessing performance and deciding how to allocate resources. The Companys business is conducted in a single operating segment. The CEO reviews a single set of financial data that encompasses the Companys entire operations for purposes of 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.
Reclassifications:
Certain prior year balances have been reclassified to conform with current year presentation. The reclassifications did not impact previously reported net loss or stockholders deficit.
Recently Issued Accounting Pronouncements:
In October 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-4
, Technical Corrections and Improvements
. This ASU clarifies the FASBs Accounting Standards Codification (ASC) or corrects unintended application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair value in ASC Topic 820,
Fair Value Measurement.
Amendments to the Codification without transition guidance are effective upon issuance for both public and nonpublic entities. For public entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2013. The Company expects that this pronouncement will not have a material effect on the consolidated financial statements.
In August 2012, the FASB issued ASU 2012-03,
Technical Amendments and Corrections to SEC SectionsAmendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22.
ASU 2012-03 clarifies the Codification or corrects unintended application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair value in ASC Topic 820,
Fair Value Measurement
. Amendments to the Codification without transition guidance are effective upon issuance for both public and nonpublic entities. For public entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2013. The Company expects that this pronouncement will not have a material effect on the consolidated financial statements.
F-51
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements:
(continued)
In July 2012, the FASB issued ASU 2012-02
, IntangiblesGoodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
. The amendments in this ASU will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2012-2 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entitys financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company adopted ASU 2012-02 in its financial statements for the year ended December 31, 2012.
In December 2011, the FASB issued ASU 2011-12,
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
ASU 2012-12 defers only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. The paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(June 2011). ASU 2011-12 is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is effective for nonpublic entities for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The Company adopted ASU 2011-12 in its financial statements for the year ended December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11.
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
The objective of ASU 2011-11 is to provide enhanced disclosures that will enable users of an entitys financial statements to evaluate the effect or potential effect of netting arrangements on an entitys financial position. This includes the effect or potential effect of rights of setoff associated with an entitys recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. The Company expects that this pronouncement will not have a material effect on the consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08,
IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for Impairment
. The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 in its financial statements for the year ended December 31, 2012.
F-52
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements:
(continued)
In June 2011, the FASB issued ASU 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income.
For public entities, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, ASU 2011-5 is effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. See ASU 2011-12 above for amendments to the effective date. The Company has adopted this ASU during the year ended December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04,
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
(ASC 2011-04). The amendments in this ASU generally represent clarifications of FASB ASC Topic 820 (ASC 820), but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) issued by the International Auditing Standards Board. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. The Company has adopted this ASU during the year ended December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its consolidated financial statements.
3.
Property and Equipment
Property and equipment consisted of the following as of December 31:
|
|
|
|
|
|
|
2012
|
|
2011
|
Equipment
|
$
|
770,848
|
$
|
3,322,150
|
Furniture and fixtures
|
|
266,544
|
|
374,217
|
Leasehold improvements
|
|
23,209
|
|
10,779
|
|
|
1,060,601
|
|
3,707,146
|
Less accumulated depreciation and amortization
|
|
522,956
|
|
2,777,987
|
|
$
|
537,645
|
$
|
929,159
|
Depreciation expense for the years ended December 31, 2012 and 2011 was $461,763 and 794,196, respectively.
4.
Intangible Assets and Goodwill
Intangible assets related to acquisitions (Note 6) and capitalized internally developed software consisted of the following as of December 31:
|
|
|
|
|
|
|
2012
|
|
2011
|
Customer relationships
|
$
|
2,050,578
|
$
|
9,101,138
|
Vendor relationships
|
|
6,123,665
|
|
6,123,665
|
Non-compete agreements
|
|
2,818,350
|
|
2,818,350
|
Acquired and developed software
|
|
380,832
|
|
380,833
|
Trademarks
|
|
224,522
|
|
224,522
|
Domain names
|
|
21,668
|
|
21,668
|
|
|
11,619,614
|
|
18,670,176
|
Less accumulated amortization
|
|
3,527,081
|
|
5,390,995
|
|
$
|
8,092,533
|
$
|
13,279,181
|
F-53
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
4.
Intangible Assets and Goodwill (continued)
Amortization expense for the years ended December 31, 2012 and 2011 was $2,891,213 and $3,040,808, respectively.
The expected life of the identified intangibles is as follows:
|
|
|
|
|
Years
|
Customer relationships
|
|
4-6
|
Vendor relationships
|
|
7
|
Non-compete agreements
|
|
4
|
Acquired and developed software
|
|
5
|
Trademarks
|
|
5
|
Domain names
|
|
2
|
Annual amortization expense, which is based on the value of the intangible asset and its estimated useful life, is expected to be as follows for future years:
|
|
|
Years ending December 31:
|
|
|
2013
|
$
|
2,045,228
|
2014
|
|
2,042,231
|
2015
|
|
1,532,611
|
2016
|
|
1,261,013
|
2017
|
|
969,379
|
Thereafter
|
|
242,071
|
|
$
|
8,092,533
|
Intangible assets related to the IdeaCast acquisition were written off in 2012 after the Company determined they had no value in a sale to a third party (see Note 6).
As of December 31, 2010 the goodwill balance was $1,257,125 and consisted of goodwill recorded for the IdeaCast and Pharmacy TV Networks acquisitions (see Note 6). During the year 2011 goodwill of $5,474,351 was added as a result of the EMN acquisition and $637,138 impairment loss was recognized for Pharmacy TV, which network was closed down. As of December 31, 2011 the balance of $6,094,338 consisted of goodwill recorded for the IdeaCast and EMN acquisitions. Goodwill related to the IdeaCast acquisition of $619,987 was written off in the year 2012 resulting in a balance of $5,474,351 as of December 31, 2012.
5.
Borrowings
Notes Payable:
In March 2007, the Company entered into a loan and security agreement (the Agreement) with a financial institution, for a term loan facility of $2,000,000. The Company borrowed $1,000,000 under the Agreement in June 2007 and the remaining $1,000,000 in September 2007. Borrowings under the Agreement included interest at the rate of 9.5% per annum and were secured by the assets of the Company. In August 2008, the Agreement was amended to increase the available borrowings under the Agreement to $4,000,000. The additional $2,000,000 was borrowed in December 2009, and included interest at the rate of 7% per annum. In April 2011, the Company fully repaid the remaining outstanding borrowings under the Agreement. As such, there were no outstanding borrowings under the Agreement at December 31, 2012 or 2011.
In August 2008 and December 2009, in connection with amendments to the Agreement, the Company issued warrants for the purchase of 52,059 and 34,706 shares of Series B convertible preferred stock (Series B) at $1.7288 per share (Note 9), respectively. The warrants were valued at $22,606 and $14,584, respectively, calculated using a Black-Scholes option-pricing model. The fair value allocated to the warrants resulted in a discount to the notes payable that was amortized to interest expense over the repayment term of the notes payable. The debt discount was fully amortized in the year ended December 31, 2011. The warrants remain outstanding at December 31, 2012 (Note 9).
F-54
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
5.
Borrowings (continued)
Notes Payable:
(continued)
In April 2011, the Company entered into a $50,000,000 credit agreement (the Credit Agreement) with an investment institution. The Company borrowed $25,000,000 upon the closing of the Credit Agreement and used the majority of these proceeds to acquire EMN (Note 6) and repay the outstanding balance under the former Agreement. Additional drawdowns of $1,594,273 occurred in 2012. Borrowings under the Credit Agreement bear interest at the rate of 14% per annum, and the Company has the option to pre-pay a portion of the interest quarterly as stipulated under the terms of the Credit Agreement. All unpaid interest is applied to the principal. The Credit Agreement, which is collateralized by substantially all of the Companys assets, matures in April 2015, at which time all outstanding principal and interest will be due. Outstanding borrowings under the Credit Agreement as of December 31, 2012 and 2011 were $32,554,356 and $26,768,944, respectively, which includes $5,960,083 and $1,768,944 as of December 31, 2012 and 2011, respectively, in interest applied to the principal.
The Credit Agreement is subject to certain financial and non-financial covenants, the most restrictive of which is a performance to plan test with respect to consolidated adjusted EBITDA, as defined. The Companys ability to borrow under this Credit Agreement has been suspended in 2012 due to non-compliance with this covenant. The investor may present a demand for repayment but has not to date. In the event that the investor would present a demand for repayment, any unamortized discount would be charged to expense in the same period as the demand. The Company has accordingly reclassified the note payable balance as a current liability as of December 31, 2012. In connection with the Credit Agreement, the Company was required to pay a $750,000 facility fee, which was withheld from the $25,000,000 borrowed. This facility fee was recognized as a discount to the notes payable and is being amortized to interest expense ratably over the life of the Credit Agreement. The amounts amortized for the years ended December 31, 2012 and 2011 were $187,500 and $135,616, respectively. The unamortized discount related to the facility fee as of December 31, 2012 and 2011 was $426,884 and $614,384, respectively.
In April 2011, in connection with the issuance of the Credit Agreement, the Company issued warrants for the purchase 3,880,044 shares of Series A convertible preferred stock (Series A), 4,227,584 shares of Series B, 2,423,152 shares of Series C convertible preferred stock (Series C), and 12,257,897 shares of common stock at $0.01 per share (Note 9). The fair value of $645,243, $1,764,449, $780,947 and $2,912,458, respectively, was recorded as a discount to the notes payable and additional paid-in capital and is being amortized to interest expense ratably over the life of the Credit Agreement. The amount amortized was $1,525,774 and $1,103,574 for the years ended December 31, 2012 and 2011, respectively. The unamortized discount related to the warrants as of December 31, 2012 and 2011 was $3,473,749 and $4,999,523, respectively. The warrants remain outstanding as of December 31, 2012.
Line of Credit:
In November 2010, the Agreement was amended to provide a credit facility against eligible accounts receivable. The credit facility availability was based on 80% of eligible accounts receivable up to $4,000,000. In 2011, in connection with the Credit Agreement, the Company amended the credit facility under the Agreement to increase the available borrowings up to $9,375,000, based on 80% of eligible accounts receivable. Borrowings under the credit facility bore interest at the greater of 7.25% per annum or prime plus 3.25% (7.25% at December 31, 2011). The credit facility expires in April 2013, but was effectively terminated in June 2012, at which time the financial institution ceased to accept additional borrowing by the Company. As of December 31, 2012, the Company had no outstanding borrowings under the Agreement. The Company had outstanding borrowings of $1,399,723 as of December 31, 2011.
F-55
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
6.
Acquisitions
IdeaCast, Inc.:
In June 2009, the Company purchased certain assets formerly belonging to IdeaCast, Inc. under a foreclosure sale.
The aggregate purchase price of $8,255,547 was paid in the form of shares of convertible preferred stock and common stock of the Company and warrants to purchase shares common stock (Note 9) upon closing of the acquisition agreement as follows: 5,225,933 shares of Series B convertible preferred stock, 3,483,956 shares of Series A convertible preferred stock, 370,000 shares of common stock and warrants to purchase a total of 3,435,000 shares of common stock through June 30, 2012.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
|
|
|
Intangible assets
|
$
|
7,050,560
|
Accounts receivable
|
|
585,000
|
Goodwill
|
|
619,987
|
Assets acquired
|
$
|
8,255,547
|
In 2012, the Company deemed the remaining intangible assets and goodwill to be impaired and recognized an impairment charge of $2,915,420 on the accompanying consolidated statement of operations. The assets related to the IdeaCast acquisition were sold to a third party in July 2012.
Pharmacy TV Networks, LLC:
In March 2010, the Company purchased certain assets formerly belonging to PTV under an Asset Purchase Agreement (APA).
The aggregate purchase price of $680,538 was paid in the form of 837,333 shares of common stock of the Company upon closing of the acquisition and 1,164,250 shares of common stock in connection with earn-outs, as defined in the APA. In connection with the acquisition, the Company entered into two consulting agreements to assist in the integration, which require monthly payments of $5,000 each. In 2010, the Company paid $35,000 in connection with these consulting agreements. The consulting agreements were terminated in May 2010.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
|
|
|
Property and equipment
|
$
|
43,400
|
Goodwill
|
|
637,138
|
Assets acquired
|
$
|
680,538
|
In 2011, the Company closed down the network, determined the goodwill to be impaired and recognized an impairment charge of $637,138 on the accompanying consolidated statement of operations. During the year ended December 31, 2012, all assets related to PTV were disposed.
Executive Media Network Worldwide:
In April 2011, the Company acquired EMN, which became a wholly-owned subsidiary of the Company.
The aggregate purchase price of $18,000,000 was paid directly from proceeds received in connection with a Credit Agreement (Note 5). The following table summarizes the estimated fair value of the net assets acquired at the date of acquisition:
|
|
|
Intangible assets
|
$
|
11,504,215
|
Net working capital
|
|
1,000,000
|
Property and equipment
|
|
21,434
|
Goodwill
|
|
5,474,351
|
Net assets acquired
|
$
|
18,000,000
|
F-56
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
6.
Acquisitions (continued)
Executive Media Network Worldwide:
(continued)
The acquisition of EMN was consummated as a legal matter on April 11, 2011. However, the results of EMNs operations were included in RMGs consolidated results beginning on April 1, 2011, resulting in a full nine months of financial operating results of EMN within the RMG consolidated results. The revenues and expenses of EMN for the ten days from April 1, 2011 through April 10, 2011 were immaterial to the overall financial statements of RMG for the year ended December 31, 2011. If EMN had been a wholly-owned subsidiary of the Company for the entire year ended December 31, 2011, rather than for the nine months ended December 31, 2011, RMG estimates that its revenue would increased by $1,906,000 and the loss for the year 2011 would have increased by $1,693,000.
7.
Commitments and Contingencies
Lease Commitments:
The Company leases its office facilities in San Francisco, New York, and Chicago under non-cancelable operating lease agreements expiring at various dates through September 2020. For the years ended December 31, 2012 and 2011, the Company recognized $1,015,000 and $741,000, respectively, as rent expense (which includes amounts related to lease impairments).
In the years ended December 31, 2012 and 2011, the Company entered into capital lease agreements with leasing companies for the financing of equipment and furniture purchases. Under the lease agreements, the Company financed equipment purchases of $199,847 and $72,847 in the years 2012 and 2011, respectively). The capital lease payments expire at various dates through June 2017.
Future minimum lease payments under non-cancelable operating and capital lease agreements consist of the following as of December 31, 2012:
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
Years ending December 31:
|
|
|
|
|
2013
|
$
|
92,000
|
$
|
729,000
|
2014
|
|
67,000
|
|
697,000
|
2015
|
|
67,000
|
|
593,000
|
2016
|
|
67,000
|
|
564,000
|
2017
|
|
31,271
|
|
514,000
|
Thereafter
|
|
-
|
|
1,123,000
|
Total minimum lease payments
|
|
324,271
|
$
|
4,220,000
|
Less amount representing interest
|
|
59,000
|
|
|
Present value of capital lease obligations
|
|
265,271
|
|
|
Less current portion
|
|
70,027
|
|
|
Non-current portion
|
$
|
195,244
|
|
|
The Company is currently subleasing two facilities and receiving monthly payments which are less than the Companys monthly lease obligations. Based upon the then current real estate market conditions, the Company believed that these leases had been impaired and accrued $305,000 and $9,508 of lease impairment for the years 2012 and 2011, respectively. The impairment charges were calculated based on future lease commitments less estimated future sublease income. The leases expire in February 28, 2021 and July 31, 2013, respectively.
Revenue Share Commitments:
From 2006 through 2012, the Company entered into revenue sharing agreements with four customers, requiring the Company to make minimum yearly revenue sharing payments.
F-57
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
7.
Commitments and Contingencies (continued)
Revenue Share Commitments:
(continued)
Future minimum payments under these agreements consisted of the following as of December 31, 2012:
|
|
|
Years ending December 31:
|
|
|
2013
|
$
|
9,661,000
|
2014
|
|
10,189,000
|
2015
|
|
12,757,000
|
Total minimum revenue share commitments
|
$
|
32,607,000
|
Contingencies:
The Company sold two media networks and all related assets in 2012. Although existing network commitments were assigned to the new buyers as a result of these transactions, there were certain vendor/partners that did not formally accept the assignments and resolve balances due under existing contracts. Although the Company has accrued for commitments through the sale dates, there remains uncertainty as to the status of the Companys obligations under these contracts. In the opinion of management, any liabilities resulting from these uncertainties will not have a material adverse effect on the Companys financial position or results of operations.
8.
Income Taxes
Due to net losses in each year, the Company had no current, deferred, or total income tax expense in the years 2012 and 2011.
A reconciliation of income tax expense with amounts determined by applying the statutory U.S. federal income tax rate to loss before income taxes is as follows:
|
|
|
|
|
|
|
2012
|
|
2011
|
Tax on loss before income tax expense computed at the federal statutory rate of 34%
|
$
|
(3,922,305)
|
$
|
(5,054,877)
|
Goodwill impairment and amortization
|
|
991,243
|
|
216,627
|
Non-cash interest
|
|
1,422,240
|
|
601,441
|
Non-deductible expense
|
|
272,276
|
|
184,156
|
Deferred revenue
|
|
(680,000)
|
|
-
|
Debt discount amortization
|
|
518,763
|
|
381,826
|
Amortization of intangibles
|
|
870,732
|
|
809,314
|
Net operating loss carry-forward generated
|
|
306,500
|
|
2,718,640
|
Other
|
|
200,551
|
|
142,873
|
Income tax expense
|
|
0
|
|
0
|
Effective income tax rate
|
$
|
0%
|
$
|
0%
|
F-58
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
8.
Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
2012
|
|
2011
|
Deferred tax assets:
|
|
|
|
|
Net Operating Loss carry-forward
|
$
|
14,537,245
|
$
|
13,312,765
|
Research and development credit
|
|
156,033
|
|
156,033
|
Other
|
|
572,462
|
|
450,812
|
Total deferred tax assets
|
|
15,265,740
|
|
13,919,610
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Intangible assets
|
|
3,466,842
|
|
2,051,204
|
Other
|
|
11,586
|
|
164,910
|
Total deferred tax liabilities
|
|
3,478,428
|
|
2,216,114
|
Net deferred tax assets before valuation allowance
|
|
11,787,312
|
|
11,703,496
|
Valuation allowance
|
|
(11,787,312)
|
|
(11,703,496)
|
Net deferred tax assets
|
$
|
0
|
$
|
0
|
The Company recorded an increase (decrease) in the valuation allowance of $83,816 and ($315,000) in the years 2012 and 2011, respectively.
The Company has federal and state net operating loss carry-forwards for income tax purposes as of December 31, 2012 of $34,266,000 and $32,655,000, respectively, both of which expire beginning in 2025 Additionally, at December 31, 2012, the Company had federal and state research and development tax credits totaling $76,000 and $80,000, respectively. The federal tax credits may be carried forward until 2025. The state tax credits may be carried forward indefinitely.
Section 382 of the Internal Revenue Code limits the use of net operating loss and income tax credit carry-forwards in certain situations where changes occur in the stock ownership of a company. If the Company should have an ownership change of more than 50% of the value of the Companys capital stock, utilization of the carry-forwards could be restricted.
The Company files income tax returns in the U.S. federal jurisdiction, certain state jurisdictions and for its subsidiary in China. In the normal course of business, the Company is subject to examination by federal, state, local and foreign jurisdictions, where applicable. The tax return years 2007 through 2012 remain open to examination by the major taxing jurisdictions to which the Company is subject.
The Company has adopted the provisions set forth in FASB ASC Topic 740, to account for uncertainty in income taxes. In the preparation of income tax returns in federal, state and foreign jurisdictions, the Company asserts certain tax positions based on its understanding and interpretation of the income tax law. The taxing authorities may challenge such positions, and the resolution of such matters could result in recognition of income tax expense in the Companys consolidated financial statements. Management believes it has used reasonable judgments and conclusions in the preparation of its income tax returns.
The Company uses the more likely than not criterion for recognizing the tax benefit of uncertain tax positions and to establish measurement criteria for income tax benefits. The Company has determined it has no material unrecognized assets or liabilities related to uncertain tax positions as of December 31, 2012 and 2011. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months. In the event the Company should need to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as income tax expense.
F-59
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
9.
Capital Stock
Common Stock:
The Company is authorized to issue 140,000,000 shares of common stock with a par value of $0.0001 per share. As of both December 31, 2012 and 2011, the Company had 6,334,095 shares issued and outstanding. Each holder of common stock is entitled to one vote per share. The holders of common stock, voting as a single class, are entitled to elect two members to the Board of Directors.
Convertible Preferred Stock:
The Company has authorized the issuance of up to 60,175,878 shares of convertible preferred stock with a par value of $0.0001 per share. As of both December 31, 2012 and 2011, the Company had the following shares of convertible preferred stock issued and outstanding:
|
|
|
|
|
|
|
Shares
Designated
|
|
Shares
Outstanding
|
|
Liquidation
Preference
|
Series A
|
13,846,580
|
|
9,692,606
|
$
|
5,838,826
|
Series B
|
24,157,621
|
|
16,794,649
|
|
29,034,589
|
Series C
|
22,171,677
|
|
15,221,880
|
|
5,868,035
|
|
60,175,878
|
|
41,709,135
|
$
|
40,741,450
|
The holders of Series A, Series B and Series C (collectively, preferred stock), have the rights, preferences, privileges and restrictions as follows:
Dividends:
The holders of Series C are entitled to receive non-cumulative dividends as adjusted for stock splits, dividends, reclassifications or the like, prior and in preference to any declaration or payment of any dividends to the holders of Series A, Series B and common stock, when and if declared by the Board of Directors, at a rate of $0.04819 per share, as adjusted, per annum.
After the payment of dividends to the holders of Series C, the holders of Series A and Series B are entitled to receive non-cumulative dividends as adjusted for stock splits, dividends, reclassifications or the like, prior and in preference to any declaration or payment of any dividends to the holders of common stock, when and if declared by the Board of Directors, at a rate of $0.03084 and $0.13830 per share, respectively, as adjusted, per annum. The Company has not declared any dividends as of December 31, 2012.
Liquidation:
In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of Series C are entitled to receive, prior to and in preference to holders of Series A, Series B, and common stock, an amount per share, as adjusted for stock splits, stock dividends, reclassifications or the like, equal to $0.602355, plus all declared but unpaid dividends. If, upon occurrence of such an event, the assets and funds of the Company are insufficient to make this distribution, the holders of Series C will receive the available proceeds on a pro rata basis, based on the amounts that would otherwise be distributable.
F-60
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
9.
Capital Stock (continued)
Liquidation:
(continued)
Following the full distribution to the holders of Series C, the holders of Series A and Series B will be entitled to receive, prior to and in preference to holders of common stock, an amount per share, as adjusted for stock splits, stock dividends, reclassifications or the like, equal to $0.3855 and $1.7288, respectively, plus declared but unpaid dividends. If, upon occurrence of such an event, the assets and funds distributed among the holders of Series A and Series B are insufficient to permit the above payment to such holders, then the entire remaining assets and funds of the Company legally available for distribution will be distributed ratably among the holders of Series A and Series B in proportion to the preferential amount each such holder is otherwise entitled to receive.
After full payment to the holders of preferred stock of the full preferential amounts specified above, the entire remaining assets and funds of the Company legally available for distribution will be distributed on a pro rata basis to the holders of common stock.
Voting:
The holder of each share of preferred stock is entitled to voting rights equal to the number of shares of common stock into which each share of preferred stock could be converted.
So long as there are at least 2,000,000 shares of Series A issued and outstanding, the holders of Series A, voting as a single class, are entitled to elect two members to the Board of Directors. So long as there are at least 2,000,000 shares of Series B issued and outstanding, the holders of Series B, voting as a single class, are entitled to elect two members to the Board of Directors. The holders of warrants issued in April 2011 in connection with the acquisition of EMN are entitled to vote as a separate class and to elect a percentage of the members to the Board of Directors equal to their percentage of fully diluted ownership in the Company. Any additional members of the Board of Directors are elected by the holders of preferred and common stock, voting together as a single class, on an as-converted basis.
Protective Provisions:
As long as 2,000,000 shares of preferred stock remain outstanding, the approval of the majority of the holders of preferred stock, voting together as a single class, is required before the rights, preferences and privileges of preferred stock can be altered to materially and adversely affect such shares, increase or decrease the total number of authorized preferred stock or common stock, alter or repeal the Certificate of Incorporation or the By-Laws of the Company, increase or decrease the size of the Board of Directors, declare or pay any distribution, take any action that results in the redemption or repurchase of any shares of common stock, consummate a liquidation event, or create any subsidiary of the Company unless unanimously approved by the Board of Directors.
Conversion:
Each share of preferred stock is convertible to common stock, at the option of the holder, at any time after the date of issuance. Each share of preferred stock automatically converts into that number of shares of common stock determined in accordance with the conversion rate upon the earlier of (i) the closing of a public offering with aggregate proceeds of at least $30,000,000 or (ii) the date specified by written consent or agreement of the holders of at least a majority of the shares of preferred stock, voting together as a single class, on an as converted basis.
F-61
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
9.
Capital Stock (continued)
Warrants:
The following table provides information about the outstanding warrants to purchase common stock as of December 31, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number Outstanding
|
|
|
|
|
Expire
|
|
2012
|
|
2011
|
|
Exercise
Price
Per Share
|
|
|
|
|
|
|
|
|
|
|
Issued in June 2009 in connection with IdeaCast acquisition
|
June 2012
|
|
-
|
|
1,435,000
|
$
|
2.075
|
|
|
|
|
|
|
|
|
|
|
Issued in December 2009 in connection with IdeaCast acquisition
|
June 2012
|
|
-
|
|
2,000,000
|
|
3.760
|
|
|
|
|
|
|
|
|
|
|
Issued in March and June 2010, 10,838,414 and 916,905 shares, respectively, in connection with the issuance of Series C
|
March and June 2017
|
|
11,755,319
|
|
11,755,319
|
|
0.340
|
|
|
|
|
|
|
|
|
|
|
Issued in April 2011, in connection with the Credit Agreement
|
April 2021
|
|
12,257,897
|
|
12,257,897
|
$
|
0.010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,013,216
|
|
27,448,216
|
|
|
The following table provides information about the outstanding warrants to purchase preferred stock as of December 31 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number Outstanding
|
|
|
|
|
Expire
|
|
2012
|
|
2011
|
|
Exercise
Price
Per Share
|
|
|
|
|
|
|
|
|
|
|
Series A, issued in April 2006, in connection with convertible notes payable
|
April 2012
|
|
-
|
|
142,653
|
$
|
0.3855
|
|
|
|
|
|
|
|
|
|
|
Series A, issued in May 2007, in connection with the Agreement
|
May 2014
|
|
155,641
|
|
155,641
|
|
0.3855
|
|
|
|
|
|
|
|
|
|
|
Series B, issued in February 2008, in connection with Convertible Notes Payable
|
February 2013
|
|
28,921
|
|
28,921
|
|
1.7288
|
|
|
|
|
|
|
|
|
|
|
Series B issued in August 2008 and December 2009, 52,059 and 34,706 shares, respectively, in connection with the Agreement
|
August 2018
|
|
86,765
|
|
86,765
|
|
1.7288
|
|
|
|
|
|
|
|
|
|
|
Issued in April 2011 in connection with the Credit Agreement
|
April 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
3,880,044
|
|
3,880,044
|
|
0.010
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
4,227,584
|
|
4,227,584
|
|
0.010
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
|
2,423,152
|
|
2,423,152
|
$
|
0.010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,802,107
|
|
10,944,760
|
|
|
The following are the significant assumptions used in the valuation of the warrants issued in 2011.
|
|
|
Expected Term (Years)
|
|
4
|
Risk-Free Rate (%)
|
|
1.83
|
Volatility (%)
|
|
52.4
|
Dividend Yield (%)
|
|
0
|
F-62
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
10.
Stock Options
In 2006, the Company adopted the 2006 Global Share Plan (the Plan) under which 27,982,558 shares of the Companys common stock has been reserved for issuance to employees, directors and consultants.
Under the Plan, the Board of Directors may grant incentive stock options and non-statutory stock options. Incentive stock options may only be granted to employees and directors. The exercise price of incentive stock options and non-statutory stock options shall be no less than 100% of the fair value per share of the Companys common stock on the grant date. Options expire after 10 years. The Board of Directors determines the period over which options vest and become exercisable (the requisite service period), generally 4 years. The Company has a repurchase option exercisable upon the voluntary or involuntary termination of the purchasers employment with the Company for any reason.
The fair value of each award granted in 2012 and 2011 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for the years ended December 31:
|
|
|
|
|
|
|
2012
|
|
2011
|
Expected term (years)
|
|
4.7 - 6.1
|
|
4.7 - 6.1
|
Expected volatility
|
|
51% - 55%
|
|
51% - 60%
|
Expected dividends
|
|
$0
|
|
$0
|
Risk-free interest rate
|
|
1.36 - 1.43%
|
|
1.11 1.97%
|
Forfeiture rate
|
|
23.14%
|
|
20.79%
|
Expected volatility is based on historical volatilities of public companies operating in the Companys industry. The expected term of the options represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees historical exercise and post-vesting employment termination behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.
In the years ended December 31, 2012 and 2011 the Company recognized $402,565 and $361,479, respectively, of employee stock-based compensation. No income tax benefits have been recognized in the consolidated statements of operations for stock-based compensation arrangements.
The total fair value of shares vested during the years ended December 31, 2012 and 2011 was $554,932 and $217,936, respectively.
Future stock-based compensation for unvested employee
options outstanding as of December 31, 2012 is $648,709 to be recognized over a weighted-average remaining requisite service period of 2.03 years.
Stock option activity under the Plan is as follows:
The weighted average remaining contractual life and the aggregate intrinsic value for total options outstanding as of December 31, 2012 was 7.2 years and $0, respectively. The weighted average grant date fair value for options that were granted for the years ended December 31, 2012 and 2011 were $.0001 and $.1369, respectively.
The following table reflects data for options that are vested and expected to vest and options that are vested and currently exercisable outstanding as of December 31, 2012:
The Company also uses the fair value method to value options granted to non-employees. There were no options granted to non-employees in 2012. The Companys valuation for non-employee grants in 2011 was calculated using the Black-Scholes option pricing model based on the following assumptions: expected life of 6.8 to 8.6 years; risk-free interest rate of 1.47% to 2.75%; expected volatility of 50% to 54%; and no dividends during the expected term.
Options granted to non-employees that vest over time result in variable accounting treatment until they become vested. Unvested options subject to variable accounting treatment are re-measured at subsequent reporting dates, based on fluctuations of the fair value of the Companys common stock. The stock-based compensation associated with these fluctuations is charged to operations in the period incurred. Stock-based compensation is a non-cash expense and, therefore, will have no impact on the Companys consolidated cash flows or liquidity. Variable accounting treatment may result in unpredictable stock-based compensation charges in future years. The amount of future stock-based compensation adjustments is dependent on fluctuations in the fair value for the Companys common stock. In the year ended December 31, 2011, the Company recognized $92,241 stock-based compensation expense related to options issued to non-employees. The Company recognized no stock-based compensation expense in 2012.
The Company has a 401(k) plan to provide defined contribution retirement benefits for all eligible employees. Participants may contribute a portion of their compensation to the plan, subject to limitations under the Internal Revenue Code. The Companys contributions to the plan are at the discretion of the Board of Directors. The Company has not made any contributions to the plan during the years ended December 31, 2012 and 2011.
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding and dilutive potential common shares outstanding during the period. For the years 2012 and 2011, the effect of issuing the potential common shares would have been anti-dilutive due to the net losses in each period. Therefore, the number of shares used to compute basic and diluted earnings per share were the same for each of those years.
Following are common shares that would be issued if all common stock options and warrants were exercised, and all preferred stock warrants were exercised and converted to common stock. These potential common shares have not been included in the calculation of fully diluted shares outstanding, because the effect of including them would be anti-dilutive.
In November 2012, the Company entered into a letter of intent to be acquired by a public company and signed a merger agreement on January 11, 2013. If the merger is consummated, the Company will become a subsidiary of the public company. No assurance can be given that the merger agreement will be consummated as planned.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Reach Media Group Holdings, Inc. (dba RMG Networks, Inc.)
San Francisco, California
We have audited the accompanying consolidated balance sheets of Reach Media Group Holdings, Inc. (dba RMG Networks, Inc.) (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Reach Media Group Holdings, Inc. (dba RMG Networks, Inc.) as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Frank, Rimerman + Co. LLP
Palo Alto, California
February 4, 2013
F-66
REACH MEDIA GROUP HOLDINGS, INC.
(dba RMG Networks, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
December 31,
|
|
|
2011
|
|
2010
|
ASSETS
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,301,527
|
$
|
589,699
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
|
|
of $179,000 ($145,000 in 2010)
|
|
5,486,681
|
|
4,970,914
|
Prepaid expenses and other current assets
|
|
937,770
|
|
256,704
|
Total current assets
|
|
7,725,978
|
|
5,817,317
|
Restricted Cash
|
|
202,850
|
|
202,850
|
Property and Equipment, net
|
|
929,159
|
|
1,438,164
|
Other Assets
|
|
119,454
|
|
149,083
|
Intangible Assets, net
|
|
13,279,181
|
|
4,700,373
|
Goodwill
|
|
6,094,338
|
|
1,257,125
|
Total assets
|
$
|
28,350,960
|
$
|
13,564,912
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
Current Liabilities
|
|
|
|
|
Line of credit
|
$
|
1,399,723
|
$
|
1,542,752
|
Accounts payable
|
|
1,427,547
|
|
965,511
|
Accrued expenses and other current liabilities
|
|
1,610,536
|
|
990,985
|
Accrued revenue share and agency fees
|
|
3,007,130
|
|
2,544,510
|
Notes payable, net of discount
|
|
-
|
|
744,325
|
Deferred revenue
|
|
2,000,000
|
|
-
|
Capital lease obligations, current portion
|
|
56,724
|
|
18,800
|
Deferred rent, current portion
|
|
11,180
|
|
139,264
|
Total current liabilities
|
|
9,512,840
|
|
6,946,147
|
Capital Lease Obligations, net of current portion
|
|
63,994
|
|
63,820
|
Notes Payable, net of discount
|
|
21,155,037
|
|
766,362
|
Deferred Rent, net of current portion
|
|
235,450
|
|
50,281
|
Other Non-Current Liabilities
|
|
29,173
|
|
25,619
|
Commitments and Contingencies (Notes 5 and 7)
|
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
|
|
Convertible preferred stock; $0.0001 par value;
|
|
|
|
|
(aggregate liquidation preference of $40,741,450)
|
|
4,170
|
|
4,170
|
Common stock; $0.0001 par value
|
|
634
|
|
633
|
Additional paid-in capital
|
|
47,301,675
|
|
40,744,359
|
Accumulated deficit
|
|
(49,952,013)
|
|
(35,036,479)
|
Total stockholders' equity (deficit)
|
|
(2,645,534)
|
|
5,712,683
|
Total liabilities and stockholders' equity
|
$
|
28,350,960
|
$
|
13,564,912
|
F-67
REACH MEDIA GROUP HOLDINGS, INC.
(dba RMG Networks, Inc.)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Revenue
|
|
|
|
|
Advertising
|
$
|
18,126,251
|
$
|
11,969,228
|
Software services
|
|
2,355,000
|
|
-
|
Total revenue
|
|
20,481,251
|
|
11,969,228
|
Cost of Revenue
|
|
|
|
|
Advertising
|
|
13,935,704
|
|
9,955,711
|
Software services
|
|
723,635
|
|
-
|
Total cost of revenue
|
|
14,659,339
|
|
9,955,711
|
Gross margin
|
|
5,821,912
|
|
2,013,517
|
Operating Expenses
|
|
|
|
|
General and administrative
|
|
9,315,649
|
|
6,319,915
|
Sales and marketing
|
|
5,299,698
|
|
5,473,178
|
Research and development
|
|
1,465,705
|
|
1,814,591
|
Impairment of goodwill
|
|
637,138
|
|
-
|
Total operating expenses
|
|
16,718,190
|
|
13,607,684
|
Loss from Operations
|
|
(10,896,278)
|
|
(11,594,167)
|
Interest Expense
|
|
(4,019,256)
|
|
(215,746)
|
Loss before Income Tax Expense
|
|
(14,915,534)
|
|
(11,809,913)
|
Income Tax Expense
|
|
-
|
|
-
|
Net Loss
|
$
|
(14,915,534)
|
$
|
(11,809,913)
|
|
|
|
|
|
Net Loss per Share - basic and diluted
|
$
|
(2.36)
|
$
|
(2.33)
|
Shares used in the computation of basic
|
|
|
|
|
and diluted earnings per share
|
|
6,332,328
|
|
5,064,567
|
F-68
REACH MEDIA GROUP HOLDINGS, INC.
(dba RMG Networks, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
Balances, December 31, 2009
|
32,016,529
|
$
|
3,201
|
|
4,290,535
|
$
|
429
|
$
|
33,855,586
|
$
|
(23,226,566)
|
$
|
10,632,650
|
Issuance of common stock upon exercise of stock options for cash
|
-
|
|
-
|
|
36,977
|
|
4
|
|
3,695
|
|
-
|
|
3,699
|
Issuance of common stock in connection with business acquisition
|
-
|
|
-
|
|
2,001,583
|
|
200
|
|
680,338
|
|
-
|
|
680,538
|
Issuance of Series C convertible preferred stock, net of issuance costs
|
9,692,606
|
|
969
|
|
-
|
|
-
|
|
5,732,030
|
|
-
|
|
5,732,999
|
Stock-based compensation
|
-
|
|
-
|
|
-
|
|
-
|
|
472,710
|
|
-
|
|
472,710
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(11,809,913)
|
|
(11,809,913)
|
Balances, December 31, 2010
|
41,709,135
|
|
4,170
|
|
6,329,095
|
|
633
|
|
40,744,359
|
|
(35,036,479)
|
|
5,712,683
|
Issuance of common stock upon exercise of stock options for cash
|
-
|
|
-
|
|
5,000
|
|
1
|
|
499
|
|
-
|
|
500
|
Issuance of Series A convertible preferred stock warrants, Series B convertible preferred stock warrants, Series C convertible preferred stock warrants, and common stock warrants in connection with notes payable
|
-
|
|
-
|
|
-
|
|
-
|
|
6,103,097
|
|
-
|
|
6,103,097
|
Stock-based compensation
|
-
|
|
-
|
|
-
|
|
-
|
|
453,720
|
|
-
|
|
453,720
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(14,915,534)
|
|
(14,915,534)
|
Balances, December 31, 2011
|
41,709,135
|
$
|
4,170
|
|
6,334,095
|
$
|
634
|
$
|
47,301,675
|
$
|
(49,952,013)
|
$
|
(2,645,534)
|
F-69
REACH MEDIA GROUP HOLDINGS, INC.
(dba RMG Networks, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Cash Flows from Operating Activities
|
|
|
|
|
Net loss
|
$
|
(14,915,534)
|
$
|
(11,809,913)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
34,000
|
|
101,000
|
Depreciation and amortization
|
|
3,835,004
|
|
2,492,576
|
Loss on disposal of property and equipment
|
|
5,284
|
|
31,599
|
Impairment of goodwill
|
|
637,138
|
|
-
|
Amortization of discounts on notes payable
|
|
1,258,635
|
|
19,662
|
Accrued interest on notes payable
|
|
1,768,944
|
|
-
|
Lease impairment
|
|
7,302
|
|
2,206
|
Stock-based compensation
|
|
453,720
|
|
472,710
|
Changes in operating assets and liabilities, net of business acquisition:
|
|
|
|
|
Accounts receivable
|
|
799,648
|
|
(2,015,489)
|
Prepaid expenses and other current assets
|
|
(681,066)
|
|
87,328
|
Restricted cash
|
|
-
|
|
(122,850)
|
Other assets
|
|
43,109
|
|
(76,697)
|
Accounts payable
|
|
114,889
|
|
280,901
|
Accrued expenses and other current liabilities
|
|
1,066,423
|
|
1,885,077
|
Deferred revenue
|
|
2,000,000
|
|
-
|
Deferred rent
|
|
49,783
|
|
161,900
|
Other non-current liabilities
|
|
3,554
|
|
(11,087)
|
Net cash used in operating activities
|
|
(3,519,167)
|
|
(8,501,077)
|
Cash Flows from Investing Activities
|
|
|
|
|
Purchase of property and equipment
|
|
(200,194)
|
|
(1,280,810)
|
Proceeds from disposal of property and equipment
|
|
4,000
|
|
-
|
Capitalized software development costs
|
|
(115,401)
|
|
-
|
Net cash used in investing activities
|
|
(311,595)
|
|
(1,280,810)
|
Cash Flows from Financing Activities
|
|
|
|
|
Net proceeds from (repayment of) line of credit
|
|
(143,029)
|
|
1,542,752
|
Proceeds from note payable
|
|
4,922,116
|
|
-
|
Repayment of notes payable
|
|
(202,248)
|
|
(1,165,286)
|
Payments on capital lease obligations
|
|
(34,749)
|
|
(3,125)
|
Proceeds from issuance of common stock
|
|
500
|
|
3,699
|
Proceeds from issuance of Series C convertible
|
|
|
|
|
preferred stock, net
|
|
-
|
|
5,732,999
|
Net cash provided by financing activities
|
|
4,542,590
|
|
6,111,039
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
711,828
|
|
(3,670,848)
|
Cash and Cash Equivalents, beginning of the year
|
|
589,699
|
|
4,260,547
|
Cash and Cash Equivalents, end of the year
|
$
|
1,301,527
|
$
|
589,699
|
F-70
REACH MEDIA GROUP HOLDINGS, INC.
(dba RMG Networks, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
Cash paid for interest
|
$
|
1,005,096
|
$
|
153,264
|
Cash paid for income taxes
|
$
|
-
|
$
|
-
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
|
|
|
|
|
Property and equipment purchased under capital lease obligations
|
$
|
72,847
|
$
|
85,745
|
Capitalized discount on notes payable
|
$
|
750,000
|
$
|
-
|
Issuance of Series A convertible preferred stock warrants, Series B convertible preferred stock warrants, Series C convertible preferred stock warrants, and common stock warrants in connection with notes payable
|
$
|
6,103,097
|
$
|
-
|
Notes payable proceeds used for acquisition of EMN (Note 6)
|
$
|
18,000,000
|
$
|
-
|
|
|
|
|
|
Notes payable proceeds directed to previous notes payable (Note 6)
|
$
|
1,327,884
|
$
|
-
|
|
|
|
|
|
Assets acquired and liabilities assumed in connection with the acquisition of EMN (Note 6)
|
|
|
|
|
Accounts receivable
|
$
|
1,349,415
|
$
|
-
|
Other assets
|
$
|
13,480
|
$
|
-
|
Property and equipment
|
$
|
21,434
|
$
|
-
|
Intangible assets
|
$
|
11,504,215
|
$
|
-
|
Goodwill
|
$
|
5,474,351
|
$
|
-
|
Accounts payable
|
$
|
347,147
|
$
|
-
|
Accrued liabilities
|
$
|
15,748
|
$
|
-
|
Issuance of common stock in connection with business acquisition
|
$
|
-
|
$
|
680,538
|
Property and equipment acquired in business acquisition
|
$
|
-
|
$
|
43,400
|
Goodwill acquired in business acquisition
|
$
|
-
|
$
|
637,138
|
F-71
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
1.
Nature of Business and Managements Plans Regarding the Financing of Future Operations
Nature of Business
RMG Networks, Inc. (RMG) was incorporated as a Delaware corporation on September 23, 2005 under the name Danouv, Inc. and subsequently changed its name to RMG Networks, Inc. in September 2009. In April 2011, in connection with the acquisition of Executive Media Network Worldwide and its wholly-owned subsidiaries, Corporate Image Media, Inc. and Prophet Media, LLC, (collectively EMN) (Note 6) RMG established Reach Media Group Holdings, Inc. (the Company), which was incorporated as a Delaware corporation on April 11, 2011 (closing date). As of the closing date, the Company and RMG Networks, Inc. merged, with RMG Networks, Inc. becoming a wholly-owned subsidiary of the Company.
Headquartered in San Francisco, California, RMG was founded as a media network of screens in coffee shops and eateries. The acquisition of EMN in 2011 provided RMG with airline partner relationships and contracts that allowed it to evolve into a global digital signage company that now operates the RMG Airline Media Network, a U.S.-based air travel media network covering digital media assets in airline executive clubs, in-flight entertainment systems, in-flight Wi-Fi portals and private airport terminals. The Companys platform delivers premium video content and information to high value consumer audiences. RMGs digital signage solutions group builds and operates digital place-based networks and offers a range of innovative digital signage software, hardware and services to small and medium businesses and enterprise customers.
Managements Plans Regarding the Financing of Future Operations
The Company has incurred net losses and net cash outflows from operations since inception. In April 2011, the Company borrowed $25,000,000 under a credit agreement with an investment company, and used the majority of the funds to acquire EMN under an agreement and plan of merger (Note 6). Although the Company had sufficient resources to meet working capital needs through December 31, 2012, it is in violation of a loan covenant that allows the lender to demand immediate repayment of the debt (Note 5).
In January 2013, the Company signed an agreement to merge with a public company (note 12). Upon consummation of the merger, the Company will become a subsidiary of the public company, at which time the existing borrowings under the credit agreement described above are scheduled to be extinguished.
Should the merger not be consummated, the Company intends to work with the lender to negotiate more favorable loan terms. If more favorable terms cannot be obtained, additional debt or equity financing will be required. If additional future financing is required, there can be no assurance that such financing will be available on terms that will be acceptable to the Company or at all.
2.
Significant Accounting Policies
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Danoo (Beijing) Technologies, Ltd. (name formally changed to RMG China, Ltd. in 2012), a foreign operating entity; RMG Networks, Inc.; EMN Acquisition Corporation; Executive Media Network, Inc.; Prophet Media, LLC; and Corporate Image Media, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency Transactions:
The U.S. dollar is the functional currency of the Company and its foreign and domestic subsidiaries. Foreign exchange transaction gains and losses are included in the consolidated statements of operations. The Company transfers U.S. dollars to China to fund operating expenses. Should RMG China generate operating net income in Chinese currency, the Peoples Republic of China would impose restrictions over the transfer of funds to the U.S.
F-72
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Acquisition Accounting:
In March 2010, the Company acquired certain assets formerly belonging to Pharmacy TV Networks, LLC (PTV). In connection with the acquisition, the Company recorded all acquired assets of PTV at fair value, resulting in a new accounting basis for the acquired assets, including the recording of substantial goodwill (Note 6). As of December 31, 2012, all assets related to PTV, including goodwill, were written off after the network was abandoned in early 2011 to focus on core airline and airline lounge network assets.
In April 2011, the Company acquired EMN. In connection with the acquisition, the Company recorded all assets of EMN at fair value. The Company performed a purchase price allocation resulting in a new accounting basis for the purchased assets, including the recording of substantial intangible assets and goodwill (Note 6).
Revenue Recognition:
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. RMG 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 Boards (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 Company also recognizes revenue from professional services for development of software and sale of software license agreements. Professional service revenue is recognized ratably over the life of the contract and represents the revenue from one base contract and ancillary agreements for 2011 and 2010. Software license revenue is recognized after persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. In software arrangements that include rights to multiple software products, support and/or other services, the Company allocates the total arrangement fee among each deliverable based on vendor-specific objective evidence of fair value. If vendor-specific objective evidence for the undelivered elements cannot be ascertained, and the arrangement cannot be unbundled, then revenue is deferred until the delivery of the undelivered elements or, if the only undelivered element is customer support, recognized ratably over the service period.
Deferred revenue at December 31, 2011 relates to a software service contract with a customer for which revenue is being recognized ratably under the terms of the agreement.
Cash and Cash Equivalents:
Cash and cash equivalents include all cash balances and highly liquid investments purchased with remaining maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of money market accounts.
Restricted Cash:
Restricted cash related to funds held to guarantee the Companys corporate credit cards and as guarantees required under lease agreements for one of the Companys office facilities. Restriction requirements continue through the term of the lease, which expires in 2013.
F-73
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Business Concentrations:
For the year ended December 31, 2011, the Company had four major customers: customers A, B, C and D represented 13%, 13%, 11% and 11%, respectively, (48% total) of annual revenues. For the year ended December 31, 2010, the Company had two major customers: customers A and B represented 19% and 16%, respectively, (35% total) of annual revenue in year 2010). The Company had $581,000 and $18,000 ($599,000 total) from Customers B and C, respectively as of December 31, 2011 and $0 from major customers at December 31, 2010.
Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents, restricted cash, and accounts receivable.
The Company does not require collateral or other security for accounts receivable. However, credit risk is mitigated by the Companys ongoing evaluations of customer creditworthiness. The Company maintains an allowance for doubtful accounts receivable balances. The allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts. Such credit losses have been within managements expectations.
The Company maintains its cash and cash equivalents in the United States with two financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation insurable limit. Cash and cash equivalents of $86,000 and $25,000 held in a foreign country at December 31, 2011 and December 31, 2010, respectively, were not insured.
Property and Equipment:
Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company depreciates property and equipment using the straight-line method over estimated useful lives ranging from three to five years. Leasehold improvements are amortized over the shorter of the assets useful life or the remaining lease term.
Capitalized Software Development Costs:
The Company capitalizes costs related to the development of internal use software after such a time as it is considered probable the software will be completed and will be used to perform the function intended. The Company capitalizes external direct costs of materials and services consumed in developing and obtaining internal-use computer software, and payroll and payroll-related costs for employees who are directly associated with and who devote time to developing the internal-use software. The Company capitalized software development costs of $115,401 in October 2011. Capitalized costs are not amortized until each development project is completed and new functionality has been implemented. The Company recognized amortization expense of $5,754 in the year 2011.
Other Assets:
Other assets consist of deposits related to leases for office facilities.
Intangible Assets:
Intangible assets are carried at cost, less accumulated amortization. Amortization of intangibles with finite lives is computed using the straight-line method over estimated useful lives of two to seven years. Intangible assets with an indefinite useful life are not amortized until their useful life is determined to be no longer indefinite. Intangible assets consist of customer and vendor relationships, trademarks, domain names, non-compete agreements and acquired technology resulting from acquisitions (Notes 4 and 6), and internally developed software.
F-74
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Intangible Assets: (continued)
Intangible assets not subject to amortization are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that of the reporting unit is impaired. Intangible assets subject to amortization are tested for recoverability whenever events or changes in circumstances indicate that asset groups carrying amount may not be recoverable. The Company tests intangible assets not subject to amortization for impairment by first assessing qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test.
An impairment loss for an intangible asset subject to amortization is recognized only if the carrying amount of the related long-lived asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group).
Goodwill:
Goodwill reflects the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill is not amortized but is subject to a review for impairment. The Company reviews its goodwill for impairment annually or whenever circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. The Company tests goodwill for impairment by first assessing qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An impairment loss is recognized for any excess of the carrying amount of the reporting units goodwill over the implied fair value of the goodwill.
The Company recognized impairment charges of $637,138 for the year ended December 31, 2011 due to the underperformance of certain network units within the Company (and none in the year 2010).
Accounting for Impairment of Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured to be the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of their carrying cost amount or the fair value less the cost to sell. The Company did not record any impairment related to long-lived assets, with the exception of the impairment of goodwill or intangible assets, in the nine months ended September 30, 2012 and 2011 or the years ended December 31, 2011 and 2010.
Advertising and Promotion Costs:
The Company expenses advertising and promotion costs as incurred. Advertising and promotion expense was $96,000 and $306,000 for the years ended December 31, 2011 and 2010, respectively, and is included in sales and marketing expense.
Research and Development:
The Company expenses research and development expenditures as incurred.
Stock-Based Compensation:
The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair value of the shares at date of grant. All stock option grants are accounted for using the fair value method and compensation is recognized as the underlying options vest.
F-75
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Stock-Based Compensation: (continued)
Stock-based compensation for options or warrants granted to non-employees is measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for options granted to non-employees is periodically re-measured as the underlying options vest.
Deferred Revenue:
Deferred revenue consists of billings or payments received in advance of revenue recognition from professional service agreements described above and is recognized as the revenue recognition criteria are met. The Company generally invoices the customer in annual installments.
Income Taxes:
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future income tax effects of differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts recorded for income tax purposes. Deferred income taxes are classified as current or non-current, based on the classifications of the related assets and liabilities giving rise to the temporary differences. A valuation allowance is provided against the Companys deferred income tax assets when their realization is not reasonably assured.
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 the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Segment Information:
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a companys chief operating decision maker (the Companys Chief Executive Officer (CEO)) in assessing performance and deciding how to allocate resources. The Companys business is conducted in a single operating segment. The CEO reviews a single set of financial data that encompasses the Companys entire operations for purposes of 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.
Reclassifications:
Certain prior year balances have been reclassified to conform with current year presentation. The reclassifications did not impact previously reported net loss on stockholders deficit.
Recently Issued Accounting Pronouncements:
In December 2011, the FASB issued ASU 2011-12,
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
ASU 2012-12 defers only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. The paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(June 2011). ASU 2011-12 is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is effective for nonpublic entities for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The Company adopted ASU No. 2011-12 in its financial statements for the year ending December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
F-76
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
2.
Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements: (continued)
In December 2011, the FASB issued ASU 2011-11.
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
The objective of ASU 2011-11 is to provide enhanced disclosures that will enable users of an entitys financial statements to evaluate the effect or potential effect of netting arrangements on an entitys financial position. This includes the effect or potential effect of rights of setoff associated with an entitys recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. The Company expects that this pronouncement will not have a material effect on the consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08,
IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for Impairment
. The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 in its financial statements for the year ended December 31, 2012.
In June 2011, the FASB issued ASU 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income.
For public entities, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, ASU 2011-5 is effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. See ASU 2011-12 above for amendments to the effective date. The Company has adopted this ASU during the year ended December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04,
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
(ASC 2011-04). The amendments in this ASU generally represent clarifications of FASB ASC Topic 820 (ASC 820), but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) issued by the International Auditing Standards Board. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. The Company has adopted this ASU during the year ended December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its consolidated financial statements.
F-77
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
3.
Property and Equipment
Property and equipment consisted of the following as of December 31:
|
|
|
|
|
|
|
2011
|
|
2010
|
Equipment
|
$
|
3,322,150
|
$
|
3,122,718
|
Furniture and fixtures
|
|
374,217
|
|
290,797
|
Leasehold improvements
|
|
10,779
|
|
10,779
|
|
|
3,707,146
|
|
3,424,294
|
Less accumulated depreciation and amortization
|
|
2,777,987
|
|
1,986,130
|
|
$
|
929,159
|
$
|
1,438,164
|
Depreciation expense for the years ended December 31, 2011 and 2010 was $794,196 and $142,389, respectively.
4.
Intangible Assets and Goodwill
Intangible assets related to acquisitions (Note 6) and capitalized internally developed software consisted of the following as of December 31:
|
|
|
|
|
|
|
2011
|
|
2010
|
Customer relationships
|
$
|
9,101,138
|
$
|
7,050,560
|
Vendor relationships
|
|
6,123,665
|
|
-
|
Non-compete agreements
|
|
2,818,350
|
|
-
|
Acquired and developed software
|
|
380,833
|
|
-
|
Trademarks
|
|
224,522
|
|
-
|
Domain names
|
|
21,668
|
|
-
|
|
|
18,670,176
|
|
7,050,560
|
Less accumulated amortization
|
|
5,390,995
|
|
2,350,187
|
|
$
|
13,279,181
|
$
|
4,700,373
|
Amortization expense for the years ended December 31, 2011 and 2010 was $3,040,808 and $2,350,187, respectively.
The expected life of the identified intangibles is as follows:
|
|
|
|
|
Years
|
|
|
|
Customer relationships
|
|
4-6
|
Vendor relationships
|
|
7
|
Non-compete agreement
|
|
4
|
Acquired and developed software
|
|
5
|
Trademark
|
|
5
|
Domain name
|
|
2
|
F-78
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
4.
Intangible Assets (continued)
Annual amortization expense, which is based on the value of the intangible asset and its estimated useful life, is expected to be as follows for future years:
|
|
|
Years ending December 31:
|
|
|
2012
|
$
|
3,620,000
|
2013
|
|
3,662,000
|
2014
|
|
2,842,000
|
2015
|
|
1,533,000
|
2016
|
|
1,261,000
|
Thereafter
|
|
1,211,000
|
|
$
|
13,279,000
|
As of December 31, 2010 the goodwill balance was $1,257,125 and consisted of goodwill recorded for the IdeaCast and Pharmacy TV Networks acquisitions (see Note 6). During the year 2011 goodwill of $5,474,351 was added as a result of the EMN acquisition and $637,138 impairment loss was recognized for Pharmacy TV, which network was closed down. As of December 31, 2011 the balance of $6,094,338 consisted of goodwill recorded for the IdeaCast and EMN acquisitions.
5.
Borrowings
Notes Payable:
In March 2007, the Company entered into a loan and security agreement (the Agreement) with a financial institution, for a term loan facility of $2,000,000. The Company borrowed $1,000,000 under the Agreement in June 2007 and the remaining $1,000,000 in September 2007. Borrowings under the Agreement include interest at the rate of 9.5% per annum and were secured by the assets of the Company. In August 2008, the Agreement was amended to increase the available borrowings under the Agreement to $4,000,000. The additional $2,000,000 was borrowed in December 2009, and included interest at the rate of 7% per annum. In April 2011, the Company fully repaid the remaining outstanding borrowings under the Agreement. As such, there were no outstanding borrowings under the Agreement at December 31, 2011. There were outstanding borrowings under the Agreement of $1,530,132 at December 31, 2010.
In August 2008 and December 2009, in connection with amendments to the Agreement, the Company issued warrants for the purchase of 52,059 and 34,706 shares of Series B convertible preferred stock (Series B) at $1.7288 per share (Note 9), respectively. The warrants were valued at $22,606 and $14,584, respectively, calculated using a Black-Scholes option-pricing model. The fair value allocated to the warrants resulted in a discount to the notes payable that was amortized to interest expense over the repayment term of the notes payable. The debt discount was fully amortized in the year ended December 31, 2011, unamortized debt discount related to the warrant was $19,445 at December 31, 2010. The warrants remain outstanding at December 31, 2011 (Note 9).
In April 2011, the Company entered into a $50,000,000 credit agreement (the Credit Agreement) with an investment institution. The Company borrowed $25,000,000 upon the closing of the Credit Agreement and used the majority of these proceeds to acquire EMN (Note 6) and repay the outstanding balance under the former Agreement. Borrowings under the Credit Agreement bear interest at the rate of 14% per annum, and the Company has the option to pre-pay a portion of the interest quarterly as stipulated under the terms of the Credit Agreement. All unpaid interest is applied to the principal. The Credit Agreement, which is collateralized by substantially all of the Companys assets, matures in April 2015, at which time all outstanding principal and interest will be due. At December 31, 2011, there were outstanding borrowings of $26,768,944, which included $1,768,944 in interest applied to principal.
F-79
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
5.
Borrowings (continued)
Notes Payable:
(continued)
The Credit Agreement is subject to certain financial and non-financial covenants, the most restrictive of which is a performance to plan test with respect to consolidated adjusted EBITDA, as defined. The Companys ability to borrow under this Credit Agreement has been suspended in 2012 due to non-compliance with this covenant. In connection with the Credit Agreement, the Company was required to pay a $750,000 facility fee, which was withheld from the $25,000,000 borrowed. This facility fee was recognized as a discount to the notes payable and is being amortized to interest expense ratably over the life of the Credit Agreement. The amount amortized for the the year 2011 was $135,616. The unamortized discount related to the facility fee at December 31, 2011 was $614,384.
In April 2011, in connection with the issuance of the Credit Agreement, the Company issued warrants for the purchase 3,880,044 shares of Series A convertible preferred stock (Series A), 4,227,584 shares of Series B, 2,423,152 shares of Series C convertible preferred stock (Series C), and 12,257,897 shares of common stock at $0.01 per share (Note 9). The fair value of $645,243, $1,764,449, $780,947 and $2,912,458, respectively, was recorded as a discount to the notes payable and additional paid-in capital and is being amortized to interest expense ratably over the life of the Credit Agreement. The amount amortized was $1,103,574 for the year 2011. The unamortized discount related to the warrants was $4,999,523 at December 31, 2011. The warrants remain outstanding at December 31, 2011.
Line of Credit:
In November 2010, the Agreement was amended to provide a credit facility against eligible accounts receivable. The credit facility availability was based on 80% of eligible accounts receivable up to $4,000,000. In 2011, in connection with the Credit Agreement, the Company amended the credit facility under the Agreement to increase the available borrowings up to $9,375,000, based on 80% of eligible accounts receivable. Borrowings under the credit facility bore interest at the greater of 7.25% per annum or prime plus 3.25% (7.25% at December 31, 2011). The credit facility expires in April 2013, but was effectively terminated in June 2012, at which time the financial institution ceased to accept additional borrowing by the Company. The Company had outstanding borrowings of $1,399,723 and $1,542,752 at December 31, 2011 and 2010, respectively.
6.
Acquisitions
IdeaCast, Inc.:
In June 2009, the Company purchased certain assets formerly belonging to IdeaCast, Inc. under a foreclosure sale.
The aggregate purchase price of $8,255,547 was paid in the form of shares of convertible preferred stock and common stock of the Company and warrants to purchase shares common stock (Note 9) upon closing of the acquisition agreement as follows: 5,225,933 shares of Series B convertible preferred stock, 3,483,956 shares of Series A convertible preferred stock, 370,000 shares of common stock and warrants to purchase a total of 3,435,000 shares of common stock through June 30, 2012.
F-80
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
6.
Acquisitions (continued)
IdeaCast, Inc.
(continued)
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
|
|
|
Intangible assets
|
$
|
7,050,560
|
Accounts receivable
|
|
585,000
|
Goodwill
|
|
619,987
|
Assets acquired
|
$
|
8,255,547
|
Pharmacy TV Networks, LLC:
In March 2010, the Company purchased certain assets formerly belonging to PTV under an Asset Purchase Agreement (APA).
The aggregate purchase price of $680,538 was paid in the form of 837,333 shares of common stock of the Company upon closing of the acquisition and 1,164,250 shares of common stock in connection with earn-outs, as defined in the APA. In connection with the acquisition, the Company entered into two consulting agreements to assist in the integration, which require monthly payments of $5,000 each. In 2010, the Company paid $35,000 in connection with these consulting agreements. The consulting agreements were terminated in May 2010.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
|
|
|
Property and equipment
|
$
|
43,400
|
Goodwill
|
|
637,138
|
Assets acquired
|
$
|
680,538
|
In September 2011, the Company deemed the goodwill to be impaired and recognized an impairment charge of $637,138 on the accompanying consolidated statement of operations.
Executive Media Network Worldwide:
In April 2011, the Company acquired EMN, which became a wholly-owned subsidiary of the Company.
The aggregate purchase price of $18,000,000 was paid in cash with proceeds received by the Company in connection with the Credit Agreement (Note 5). The following table summarizes the estimated fair value of the net assets acquired at the date of acquisition:
|
|
|
Intangible assets
|
$
|
11,504,215
|
Net working capital
|
|
1,000,000
|
Property and equipment
|
|
21,434
|
Goodwill
|
|
5,474,351
|
Net assets acquired
|
$
|
18,000,000
|
If EMN had been a wholly owned subsidiary of the Company for the year ended December 31, 2011 and 2010, revenue would have been estimated to increase in 2011 and 2010 by $1,906,000 and $8,808,000, respectively. The loss for the year would have been estimated to increase by $1,693,000 in 2011 and decreased by $1,472,000 in 2010.
F-81
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
7.
Commitments and Contingencies
Lease Commitments:
The Company leases its office facilities in San Francisco, New York, and Chicago under non-cancelable operating lease agreements expiring at various dates through September 2020. For the years ended December 31, 2011 and 2010, the Company recognized $741,000 and $470,000, respectively, as rent expense (which includes amounts related to a lease impairment).
In the years ended December 31, 2011 and 2010, the Company entered into capital lease agreements with leasing companies for the financing of equipment and furniture purchases. Under the lease agreements, the Company financed equipment purchases of $72,847 and $85,745 in the years 2011 and 2010, respectively. The capital lease payments expire at various dates through October 2015.
Future minimum lease payments under non-cancelable operating and capital lease agreements consist of the following at December 31, 2011.
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
Years ending December 31:
|
|
|
|
|
2012
|
$
|
61,832
|
$
|
740,000
|
2013
|
|
39,042
|
|
717,000
|
2014
|
|
13,800
|
|
697,000
|
2015
|
|
11,500
|
|
594,000
|
2016
|
|
-
|
|
565,000
|
Thereafter
|
|
-
|
|
1,623,000
|
Total minimum lease payments
|
|
126,174
|
$
|
4,936,000
|
Less amount representing interest
|
|
5,456
|
|
|
Present value of capital lease obligations
|
|
120,718
|
|
|
Less current portion
|
|
56,724
|
|
|
Non-current portion
|
$
|
63,994
|
|
|
The Company is currently subleasing a facility and receiving monthly payments which are less than the Companys monthly lease obligation. Based upon the current real estate market conditions, the Company believes that this lease has been impaired and has accrued $9,508 and $2,206 of lease impairment at December 31, 2011 and 2010, respectively. The impairment charge was calculated based on future lease commitments less estimated future sublease income. The lease expired in July 2012.
Revenue Share Commitments:
From 2006 through 2010, the Company entered into revenue sharing agreements with four customers, requiring the Company to make minimum yearly revenue sharing payments.
Future minimum payments under these agreements consist of the following at December 31, 2011:
|
|
|
Years ending December 31:
|
|
|
2012
|
$
|
3,035,000
|
2013
|
|
1,751,000
|
Total minimum revenue share commitments
|
$
|
4,786,000
|
F-82
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
7.
Commitments and Contingencies (continued)
Litigation
From time to time, the Company receives inquiries or is involved in legal disputes. In the opinion of management, any liabilities resulting from these claims, other than those described below, will not have a material adverse effect on the Companys financial position or results of operations. Subsequent to year end, the Company settled seven legal disputes in which it was the defendant. In connection with these disputes the Company paid out approximately $600,000 in settlement claims. Of these seven legal disputes, one related to events that occurred prior to December 31, 2011, and the Company accrued $425,000 in connection with this claim, which includes $150,000 in legal fees incurred. The $425,000 accrued has been included within accrued expenses and other current liabilities as of December 31, 2011.
8.
Income Taxes
Due to net losses in each year, the Company had no current, deferred, or total income tax expense in the years 2011 and 2010. The Company determined the income tax expense for the nine-month period ended September 30, 2012 based on the effective tax rate expected for the full year. Due to continuing losses in 2012, there is no income tax expense for the nine month period ended September 30, 2012.
A reconciliation of income tax expense with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows:
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
2011
|
|
2010
|
|
|
|
|
|
Tax on the loss before income tax expense computed at the federal statutory rate of 34%
|
$
|
(5,054,877)
|
$
|
(4,005,630)
|
Goodwill impairment and amortization
|
|
216,627
|
|
-
|
Non-cash interest
|
|
983,267
|
|
6,685
|
Non-deductible expense
|
|
184,156
|
|
197,026
|
Amortization of intangibles
|
|
809,314
|
|
308,148
|
|
|
|
|
|
Net operating loss carry-forward generated
|
|
2,718,640
|
|
3,308,182
|
Other
|
|
142,873
|
|
185,589
|
|
|
|
|
|
Income tax expense
|
$
|
0
|
$
|
0
|
|
|
|
|
|
Effective income tax rate
|
|
0%
|
|
0%
|
F-83
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
8.
Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2011
|
|
2010
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net Operating Loss carry-forward
|
$
|
13,312,765
|
$
|
10,198,972
|
Intangible assets
|
|
-
|
|
1,382,786
|
Research and development credit
|
|
156,033
|
|
158,521
|
Accumulated depreciation
|
|
-
|
|
126,427
|
Other
|
|
450,812
|
|
151,839
|
Total deferred tax assets
|
|
13,919,610
|
|
12,018,545
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
2,051,204
|
|
-
|
Accumulated depreciation
|
|
164,910
|
|
-
|
Total deferred tax liabilities
|
|
2,216,114
|
|
-
|
|
|
|
|
|
Net deferred tax assets before valuation allowance
|
|
11,703,496
|
|
12,018,545
|
Valuation allowance
|
|
(11,703,496)
|
|
(12,018,545)
|
|
|
|
|
|
Net deferred tax assets
|
$
|
0
|
$
|
0
|
The Company recorded an increase (decrease) in the valuation allowance of ($315,000) and $8,898,000 to fully reserve the net deferred tax assets in the years 2011 and 2010, respectively.
The Company has federal and state net operating loss carry-forwards for income tax purposes at December 31, 2011 of $33,365,000 and $31,753,000, respectively, both of which expire beginning in 2025 ($25,369,000 and $25,369,000, respectively, at December 31, 2010). Additionally, at December 31, 2011 and 2010, the Company had federal and state research and development tax credits totaling $76,000 and $80,000, respectively. The federal tax credits may be carried forward until 2025. The state tax credits may be carried forward indefinitely.
Section 382 of the Internal Revenue Code limits the use of net operating loss and income tax credit carry-forwards in certain situations where changes occur in the stock ownership of a company. If the Company should have an ownership change of more than 50% of the value of the Companys capital stock, utilization of the carryforwards could be restricted.
The Company files income tax returns in the U.S. federal jurisdiction, certain state jurisdictions and for its subsidiary in China. In the normal course of business, the Company is subject to examination by federal, state, local and foreign jurisdictions, where applicable. The tax return years 2007 through 2011 remain open to examination by the major taxing jurisdictions to which the Company is subject.
F-84
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
8.
Income Taxes (continued)
The Company has adopted the provisions set forth in FASB ASC Topic 740, to account for uncertainty in income taxes. In the preparation of income tax returns in federal, state and foreign jurisdictions, the Company asserts certain tax positions based on its understanding and interpretation of the income tax law. The taxing authorities may challenge such positions, and the resolution of such matters could result in recognition of income tax expense in the Companys consolidated financial statements. Management believes it has used reasonable judgments and conclusions in the preparation of its income tax returns.
The Company uses the more likely than not criterion for recognizing the tax benefit of uncertain tax positions and to establish measurement criteria for income tax benefits. The Company has determined it has no material unrecognized assets or liabilities related to uncertain tax positions as of December 31, 2011 and 2010. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months. In the event the Company should need to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as an accrued liability.
9.
Capital Stock
Common Stock:
The Company is authorized to issue 140,000,000 shares of common stock with a par value of $0.0001 per share. As of December 31, 2011, the Company had 6,334,095 shares issued and outstanding (6,329,055 shares at December 31, 2010). Each holder of common stock is entitled to one vote per share. The holders of common stock, voting as a single class, are entitled to elect two members to the Board of Directors.
Convertible Preferred Stock:
The Company has authorized the issuance of up to 60,175,878 shares of convertible preferred stock with a par value of $0.0001 per share. At December 31, 2011 and 2010, the Company had the following shares of convertible preferred stock issued and outstanding:
|
|
|
|
|
|
|
Shares
Designated
|
|
Shares
Outstanding
|
|
Liquidation
Preference
|
Series C
|
13,846,580
|
|
9,692,606
|
$
|
5,838,826
|
Series B
|
24,157,621
|
|
16,794,649
|
|
29,034,589
|
Series A
|
22,171,67
|
|
15,221,880
|
|
5,868,035
|
|
60,175,878
|
|
41,709,135
|
$
|
40,741,450
|
The holders of Series A, Series B and Series C (collectively, preferred stock), have the rights, preferences, privileges and restrictions as follows:
Dividends:
The holders of Series C are entitled to receive non-cumulative dividends as adjusted for stock splits, dividends, reclassifications or the like, prior and in preference to any declaration or payment of any dividends to the holders of Series A, Series B and common stock, when and if declared by the Board of Directors, at a rate of $0.04819 per share, as adjusted, per annum.
After the payment of dividends to the holders of Series C, the holders of Series A and Series B are entitled to receive non-cumulative dividends as adjusted for stock splits, dividends, reclassifications or the like, prior and in preference to any declaration or payment of any dividends to the holders of common stock, when and if declared by the Board of Directors, at a rate of $0.03084 and $0.13830 per share, respectively, as adjusted, per annum. The Company has not declared any dividends as of December 31, 2011.
F-85
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
9.
Capital Stock (continued)
Liquidation:
In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of Series C are entitled to receive, prior to and in preference to holders of Series A, Series B, and common stock, an amount per share, as adjusted for stock splits, stock dividends, reclassifications or the like, equal to $0.602355, plus all declared but unpaid dividends. If, upon occurrence of such an event, the assets and funds of the Company are insufficient to make this distribution, the holders of Series C will receive the available proceeds on a pro rata basis, based on the amounts that would otherwise be distributable.
Following the full distribution to the holders of Series C, the holders of Series A and Series B will be entitled to receive, prior to and in preference to holders of common stock, an amount per share, as adjusted for stock splits, stock dividends, reclassifications or the like, equal to $0.3855 and $1.7288, respectively, plus declared but unpaid dividends. If, upon occurrence of such an event, the assets and funds distributed among the holders of Series A and Series B are insufficient to permit the above payment to such holders, then the entire remaining assets and funds of the Company legally available for distribution will be distributed ratably among the holders of Series A and Series B in proportion to the preferential amount each such holder is otherwise entitled to receive.
After full payment to the holders of preferred stock of the full preferential amounts specified above, the entire remaining assets and funds of the Company legally available for distribution will be distributed on a pro rata basis to the holders of common stock.
Voting:
The holder of each share of preferred stock is entitled to voting rights equal to the number of shares of common stock into which each share of preferred stock could be converted.
So long as there are at least 2,000,000 shares of Series A issued and outstanding, the holders of Series A, voting as a single class, are entitled to elect two members to the Board of Directors. So long as there are at least 2,000,000 shares of Series B issued and outstanding, the holders of Series B, voting as a single class, are entitled to elect two members to the Board of Directors. The holders of warrants issued in April 2011 in connection with the acquisition of EMN are entitled to vote as a separate class and to elect a percentage of the members to the Board of Directors equal to their percentage of fully diluted ownership in the Company. Any additional members of the Board of Directors are elected by the holders of preferred and common stock, voting together as a single class, on an as-converted basis.
Protective Provisions:
As long as 2,000,000 shares of preferred stock remain outstanding, the approval of the majority of the holders of preferred stock, voting together as a single class, is required before the rights, preferences and privileges of preferred stock can be altered to materially and adversely affect such shares, increase or decrease the total number of authorized preferred stock or common stock, alter or repeal the Certificate of Incorporation or the By-Laws of the Company, increase or decrease the size of the Board of Directors, declare or pay any distribution, take any action that results in the redemption or repurchase of any shares of common stock, consummate a liquidation event, or create any subsidiary of the Company unless unanimously approved by the Board of Directors.
Conversion:
Each share of preferred stock is convertible to common stock, at the option of the holder, at any time after the date of issuance. Each share of preferred stock automatically converts into that number of shares of common stock determined in accordance with the conversion rate upon the earlier of (i) the closing of a public offering with aggregate proceeds of at least $30,000,000 or (ii) the date specified by written consent or agreement of the holders of at least a majority of the shares of preferred stock, voting together as a single class, on an as converted basis.
F-86
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
9.
Capital Stock (continued)
Warrants:
The following table provides information about the outstanding warrants to purchase common stock as of December 31.
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding
|
|
|
|
Expire
|
|
2011
|
|
2010
|
|
Exercise
Price
Per Share
|
|
|
|
|
|
|
|
|
Issued in June 2009 in connection with IdeaCast acquisition
|
June 2012
|
|
1,435,000
|
|
1,435,000
|
$
|
2.075
|
|
|
|
|
|
|
|
|
Issued in December 2009 in connection with IdeaCast acquisition
|
June 2012
|
|
2,000,000
|
|
2,000,000
|
|
3.760
|
|
|
|
|
|
|
|
|
Issued in March and June 2010, 10,838,414 and 916,905 shares, respectively, in connection with the issuance of Series C
|
March and June 2017
|
|
11,755,319
|
|
11,755,319
|
|
0.340
|
|
|
|
|
|
|
|
|
Issued in April 2011, in connection with the Credit Agreement
|
April 2021
|
|
12,257,897
|
|
-
|
$
|
0.010
|
|
|
|
|
|
|
|
|
|
|
|
27,448,216
|
|
15,190,319
|
|
|
The following table provides information about the outstanding warrants to purchase preferred stock as of December 31.
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding
|
|
|
|
Expire
|
|
2011
|
|
2010
|
|
Exercise
Price Per
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A, issued in April 2006, in connection with convertible notes payable
|
April 2012
|
|
142,653
|
|
142,653
|
$
|
0.3855
|
|
|
|
|
|
|
|
|
Series A, issued in May 2007, in connection with the Agreement
|
May 2014
|
|
155,641
|
|
155,641
|
|
0.3855
|
|
|
|
|
|
|
|
|
Series B, issued in February 2008, in connection with Convertible Notes Payable
|
February 2013
|
|
28,921
|
|
28,921
|
|
1.7288
|
|
|
|
|
|
|
|
|
Series B issued in August 2008 and December 2009, 52,059 and 34,706 shares, respectively, in connection with the Agreement
|
August 2018
|
|
86,765
|
|
86,765
|
|
1.7288
|
|
|
|
|
|
|
|
|
Issued in April 2011 in connection with the Credit Agreement
|
April 2021
|
|
|
|
|
|
|
Series A
|
|
|
3,880,044
|
|
-
|
|
0.010
|
Series B
|
|
|
4,227,584
|
|
-
|
|
0.010
|
Series C
|
|
|
2,423,152
|
|
-
|
$
|
0.010
|
|
|
|
|
|
|
|
|
|
|
|
10,944,760
|
|
413,980
|
|
|
F-87
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
9.
Capital Stock (continued)
Warrants:
(continued)
The following are the significant assumptions used in the valuation of the warrants issued in the years 2011 and 2010.
|
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
2011
|
|
|
|
|
Expected Term (Years)
|
|
4
|
|
4
|
Risk-Free Rate (%)
|
|
1.83
|
|
1.83
|
Volatility (%)
|
|
52.4
|
|
52.4
|
Dividend Yield (%)
|
|
0
|
|
0
|
|
|
|
|
|
2010
|
|
|
|
|
Expected Term (Years)
|
|
|
|
7
|
Risk-Free Rate (%)
|
|
|
|
3.37
|
Volatility (%)
|
|
|
|
56
|
Dividend Yield (%)
|
|
|
|
0
|
10.
Stock Options
In 2006, the Company adopted the 2006 Global Share Plan (the Plan) under which 27,982,558 shares of the Companys common stock has been reserved for issuance to employees, directors and consultants.
Under the Plan, the Board of Directors may grant incentive stock options and non-statutory stock options. Incentive stock options may only be granted to employees and directors. The exercise price of incentive stock options and non-statutory stock options shall be no less than 100% of the fair value per share of the Companys common stock on the grant date. Options expire after 10 years. The Board of Directors determines the period over which options vest and become exercisable. The Company has a repurchase option exercisable upon the voluntary or involuntary termination of the purchasers employment with the Company for any reason.
The fair value of each award granted in 2011 and 2010 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected life of 4.7 to 6.1 years; risk-free interest rates from 1.10% to 2.92%; expected volatility of 51% to 60%; forfeiture rate of 20.79% to 24.15% and no dividends during the expected life. Expected volatility is based on historical volatilities of public companies operating in the Companys industry. The expected life of the options represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees historical exercise and post-vesting employment termination behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.
In the years ended December 31, 2011 and 2010, the Company recognized $302,500, $271,109, $361,479, and $282,557, respectively, of employee stock-based compensation. No income tax benefits have been recognized in the consolidated statements of operations for stock-based compensation arrangements and no stock-based compensation costs have been capitalized as part of property and equipment as of December 31, 2011 or December 31, 2010.
The total fair value of shares vested during the years ended December 31, 2011 and 2010 was $217,936 and $240,966, respectively.
Future stock-based compensation for unvested employee options granted and outstanding as of December 31, 2011 was $961,000 with a requisite service period of 2.33 years.
F-88
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
10.
Stock Options (continued)
Stock option activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Available
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted-Average Grant Date Fair Value
|
|
Total Intrinsic Value
|
Balances, December 31, 2010
|
|
2,871,312
|
|
9,901,943
|
|
$ 0.331
|
|
|
|
|
|
Authorized
|
|
15,172,624
|
|
-
|
|
-
|
|
|
|
|
|
Granted
|
|
(8,555,244)
|
|
8,555,244
|
|
0.306
|
$
|
0.137
|
|
|
|
Exercised
|
|
-
|
|
(5,000)
|
|
0.100
|
|
|
$
|
1,200
|
|
Forfeited or expired
|
|
2,601,156
|
|
(2,601,156)
|
|
0.175
|
|
|
|
|
Balances, December 31, 2011
|
|
12,089,848
|
|
15,851,031
|
|
0.327
|
|
|
|
|
The weighted average remaining contractual life for options outstanding at December 31, 2011 is 8.33 years.
The following table reflects data for options that were vested and exercisable at the end of the period.
|
|
|
|
|
|
|
|
|
Vested and Exercisable
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value
|
December 31, 2011
|
5,849,440
|
$
|
0.338
|
|
6.77
|
$
|
315,596
|
The Company also uses the fair value method to value options granted to non-employees. The Companys calculation for non-employee grants in 2011 and 2010 was made using the Black-Scholes option pricing model with the following assumptions: expected life of 6.8 to 8.6 years; risk-free interest rate of 1.47% to 2.75%; expected volatility of 50% to 54%; and no dividends during the expected term.
Options granted to non-employees that vest over time result in variable accounting treatment until they become vested. Unvested options subject to variable accounting treatment are re-measured at subsequent reporting dates, based on fluctuations of the fair value of the Companys common stock. The stock-based compensation associated with these fluctuations is charged to operations in the period incurred. Stock-based compensation is a non-cash expense and, therefore, will have no impact on the Companys consolidated cash flows or liquidity. Variable accounting treatment may result in unpredictable stock-based compensation charges in future years. The amount of future stock-based compensation adjustments is dependent on fluctuations in the fair value for the Companys common stock. In the years ended December 31, 2011 and 2010, the Company recognized stock-based compensation related to options issued to non-employees of $92,241 and $190,153, respectively.
11.
Employee Benefit Plan
The Company has a 401(k) plan to provide defined contribution retirement benefits for all eligible employees. Participants may contribute a portion of their compensation to the plan, subject to limitations under the Internal Revenue Code. The Companys contributions to the plan are at the discretion of the Board of Directors. The Company has not made any contributions to the plan during the years ended December 31, 2011 and 2010.
F-89
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Notes to the Consolidated Financial Statements
12.
Subsequent Events
In November 2012, the Company entered into a letter of intent to be acquired by a public company and signed a merger agreement on January 11, 2013. Upon consummation of the merger, the Company will become a subsidiary of the public company.
13.
Earnings Per Share
Basic earnings per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net loss by the weighted-average number of common shares outstanding and dilutive potential common shares outstanding during the period. For the years 2011 and 2010, the effect of issuing the potential common shares would have been anti-dilutive due to the net losses in each period. Therefore, the number of shares used to compute basic and diluted earnings per share were the same for each of those periods.
The following is a reconciliation of the number of shares used in the calculation of basic earnings per share and diluted earnings per share for the years ended December 31:
|
|
|
|
|
|
|
2011
|
|
2010
|
Common shares outstanding at beginning of period
|
|
6,329,095
|
|
4,290,535
|
Weighted average shares issued upon exercise of stock options
|
|
3,233
|
|
29,687
|
Weighted average shares issued in connection with business acquisitions
|
|
-
|
|
744,345
|
Weighted average common shares outstanding during the period
|
|
6,332,328
|
|
5,064,567
|
Following are common shares that would be issued if all options and warrants were exercised. These potential common shares have not been included in the calculation of fully diluted shares outstanding, because the effect of including them would be anti-dilutive.
|
|
|
|
|
|
|
2011
|
|
2010
|
Options to purchase common stock
|
|
15,851,031
|
|
9,901,943
|
Warrants to purchase common stock
|
|
27,448,216
|
|
15,190,319
|
Shares of common stock subject to convertible preferred stock
|
|
41,709,135
|
|
41,709,135
|
Shares of common stock ultimately subject to warrants to purchase convertible preferred stock
|
|
10,944,760
|
|
413,980
|
|
|
95,953,142
|
|
67,215,377
|
F-90
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
2013
|
|
|
2012
|
ASSETS
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
739,052
|
|
$
|
1,334,290
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $86,000 ($560,000 in 2012)
|
|
4,755,509
|
|
|
6,253,260
|
Prepaid expenses and other current assets
|
|
163,729
|
|
|
148,837
|
Total current assets
|
|
5,658,290
|
|
|
7,736,387
|
Restricted Cash
|
|
80,000
|
|
|
167,926
|
Property and Equipment, net
|
|
514,280
|
|
|
537,645
|
Other Assets
|
|
187,449
|
|
|
173,454
|
Intangible Assets, net
|
|
7,579,269
|
|
|
8,092,533
|
Goodwill
|
|
5,474,351
|
|
|
5,474,351
|
Total assets
|
$
|
19,493,639
|
|
$
|
22,182,296
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
2,220,858
|
$
|
|
2,483,306
|
Accrued expenses and other current liabilities
|
|
1,401,736
|
|
|
1,615,090
|
Accrued revenue share and agency fees
|
|
2,721,121
|
|
|
2,292,659
|
Notes payable, net of discount
|
|
30,228,877
|
|
|
28,653,723
|
|
|
|
|
|
|
Capital lease obligations, current portion
|
|
70,027
|
|
|
70,027
|
Deferred rent, current portion
|
|
2,718
|
|
|
3,159
|
Total current liabilities
|
|
36,645,337
|
|
|
35,117,964
|
Capital Lease Obligations, net of current portion
|
|
173,764
|
|
|
195,244
|
|
|
|
|
|
|
Deferred Rent, net of current portion
|
|
227,504
|
|
|
227,504
|
Other Non-Current Liabilities
|
|
411,684
|
|
|
420,845
|
Commitments and Contingencies (Notes 5 and 7)
|
|
|
|
|
|
Stockholders' Equity (Deficit)
|
|
|
|
|
|
Convertible preferred stock; $0.0001 par value; issued and outstanding in 2013 and 2012 - 41,709,135 (aggregate liquidation preference of $40,741,450)
|
|
4,170
|
|
|
4,170
|
Common stock; $0.0001 par value; 140,000,000 shares authorized; 6,334,095 shares issued in 2013 and 2012
|
|
634
|
|
|
634
|
Additional paid-in capital
|
|
47,804,105
|
|
|
47,704,140
|
Accumulated deficit
|
|
(65,773,559)
|
|
|
(61,488,205)
|
Total stockholders' deficit
|
|
(17,964,650)
|
|
|
(13,779,261)
|
Total liabilities and stockholders' deficit
|
$
|
19,493,639
|
|
$
|
22,182,296
|
See Notes to Consolidated Financial Statements.
F-91
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
2013
|
|
|
2012
|
Revenues
|
|
|
|
|
|
Advertising
|
$
|
5,592,874
|
|
$
|
5,009,010
|
Software services
|
|
547,740
|
|
|
1,890,000
|
Total revenues
|
|
6,140,615
|
|
|
6,899,010
|
Cost of Revenues
|
|
|
|
|
|
Advertising
|
|
3,856,742
|
|
|
3,577,352
|
Software services
|
|
139,619
|
|
|
190,363
|
Total cost of revenues
|
|
3,996,361
|
|
|
3,767,715
|
Gross margin
|
|
2,144,254
|
|
|
3,131,295
|
Operating Expenses
|
|
|
|
|
|
General and administrative
|
|
1,531,457
|
|
|
1,710,955
|
Sales and marketing
|
|
1,816,582
|
|
|
1,211,440
|
Research & Development
|
|
324,524
|
|
|
430,824
|
Depreciation & Amortization
|
|
546,446
|
|
|
1,057,139
|
Transaction Expenses
|
|
694,748
|
|
|
0
|
Total operating expenses
|
|
4,913,757
|
|
|
4,410,358
|
Loss from Operations
|
|
(2,769,503)
|
|
|
(1,279,063)
|
Other Income (Expense)
|
|
64,791
|
|
|
|
Interest expense
|
|
1,580,642
|
|
|
1,407,010
|
Loss before Income Tax Expense
|
|
(4,285,354)
|
|
|
(2,686,073)
|
Income Tax Expense
|
|
0
|
|
|
0
|
Net Loss
|
$
|
(4,285,354)
|
|
$
|
(2,686,073)
|
|
|
|
|
|
|
Net Loss per Share - basic and diluted
|
$
|
(0.68)
|
|
$
|
(0.42)
|
Shares used in the computation of basic and diluted earnings per share
|
|
6,334,095
|
|
|
6,334,095
|
See Notes to Consolidated Financial Statements.
F-92
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Statements of Stockholders' Equity (Deficit)
3 Months Ended March 31, 2013 and 2012
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
Additional
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
Balances, December 31, 2012
|
41,709,135
|
$
|
4,170
|
|
6,334,095
|
$
|
634
|
$
|
47,704,140
|
$
|
(61,488,205)
|
$
|
(13,779,261)
|
Stock-based compensation
|
-
|
|
-
|
|
-
|
|
-
|
|
99,965
|
|
-
|
|
99,965
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(4,285,354)
|
|
(4,285,354)
|
Balances, March 31, 2013
|
41,709,135
|
$
|
4,170
|
|
6,334,095
|
$
|
634
|
$
|
47,804,105
|
$
|
(65,773,559)
|
$
|
(17,964,650)
|
See Notes to Consolidated Financial Statements.
F-93
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
2013
|
|
|
2012
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net loss
|
$
|
(4,285,354)
|
$
|
|
(2,686,073)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
(474,647)
|
|
|
150,000
|
Depreciation and amortization
|
|
546,446
|
|
|
1,057,139
|
Loss on disposal of property and equipment
|
|
(48,889)
|
|
|
1,955
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
Amortization of discounts on notes payable
|
|
422,451
|
|
|
422,451
|
Accrued interest on notes payable
|
|
1,152,703
|
|
|
953,075
|
Lease impairment
|
|
|
|
|
|
Stock-based compensation
|
|
99,965
|
|
|
100,096
|
Changes in operating assets and liabilities
|
|
|
|
|
|
Accounts receivable
|
|
1,972,397
|
|
|
(235,353)
|
Prepaid expenses and other current assets
|
|
(14,892)
|
|
|
424,628
|
Other assets
|
|
(13,995)
|
|
|
7,453
|
Accounts payable
|
|
(262,448)
|
|
|
667,892
|
Accrued expenses and other current liabilities
|
|
(213,354)
|
|
|
1,159,871
|
Accrued revenue share and agency fees
|
|
428,462
|
|
|
(526,448)
|
Deferred revenue
|
|
0
|
|
|
(982,248)
|
Other non-current liabilities
|
|
(9,604)
|
|
|
1,494
|
Net cash provided by (used in) operating activities
|
|
(602,981)
|
|
|
515,932
|
Cash Flows from Investing Activities
|
|
|
|
|
|
Purchases of property and equipment
|
|
(58,703)
|
|
|
0
|
Net cash provided by (used in) investing activities
|
|
(58,703)
|
|
|
0
|
Cash Flows from Financing Activities
|
|
|
|
|
|
Net repayment of line of credit
|
|
0
|
|
|
(906,452)
|
Proceeds from note payable
|
|
0
|
|
|
750,000
|
Payments on capital lease obligations
|
|
(21,480)
|
|
|
(13,810)
|
Decrease in restricted cash
|
|
87,926
|
|
|
(87,926)
|
Proceeds from issuance of common stock
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
66,446
|
|
|
(258,188)
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
(595,238)
|
|
|
257,744
|
Cash and Cash Equivalents, beginning of the year
|
|
1,334,290
|
|
|
1,301,527
|
Cash and Cash Equivalents, end of period
|
$
|
739,052
|
|
$
|
1,559,271
|
See Notes to Consolidated Financial Statements.
F-94
Reach Media Group Holdings, Inc.
(dba RMG Networks, Inc.)
Consolidated Statements of Cash Flows (continued)
(Unaudited)
|
|
|
|
|
|
|
3 Months Ended March 31,
|
|
|
2013
|
|
|
2012
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
Cash paid for interest
|
$
|
5,458
|
|
$
|
31,510
|
Cash paid for income taxes
|
$
|
-
|
|
$
|
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
Property and equipment purchased under capital lease obligations
|
$
|
-
|
|
$
|
751
|
Capitalized discount on notes payable
|
$
|
-
|
|
$
|
750,000
|
See Notes to Consolidated Financial Statements.
F-95
1. Nature of Business and Managements Plans Regarding the Financing of Future Operations
Nature of Business
RMG Networks, Inc. (RMG) was incorporated as a Delaware corporation on September 23, 2005 under the name Danouv, Inc. and subsequently changed its name to RMG Networks, Inc. in September 2009. In April 2011, in connection with the acquisition of Executive Media Network Worldwide and its wholly-owned subsidiaries, Corporate Image Media, Inc. and Prophet Media, LLC, (collectively EMN) (Note 6) RMG established Reach Media Group Holdings, Inc. (the Company), which was incorporated as a Delaware corporation on April 11, 2011 (closing date). As of the closing date, the Company and RMG Networks, Inc. merged, with RMG Networks, Inc. becoming a wholly-owned subsidiary of the Company.
Headquartered in San Francisco, California, RMG was founded as a media network of screens in coffee shops and eateries. The acquisition of EMN in 2011 provided RMG with airline partner relationships and contracts that allowed it to evolve into a global digital signage company that now operates the RMG Airline Media Network, a U.S.-based air travel media network covering digital media assets in airline executive clubs, in-flight entertainment systems, in-flight Wi-Fi portals and private airport terminals. The Companys platform delivers premium video content and information to high value consumer audiences. RMGs digital signage solutions group builds and operates digital place-based networks and offers a range of innovative digital signage software, hardware and services to small and medium businesses and enterprise customers.
Managements Plans Regarding the Financing of Future Operations
The Company has incurred net losses and net cash outflows from operations since inception. In April 2011, the Company borrowed $25,000,000 under a credit agreement with an investment company, and used the majority of the funds to acquire EMN under an agreement and plan of merger (Note 6). The Company is in violation of a loan covenant that allows the lender to demand immediate repayment of the debt (Note 5).
In January 2013, the Company signed an agreement to merge with a public company (Note 13). The merger was consummated on April 18, 2013 and the Company became a subsidiary of the public company as of this date, at which time the existing borrowings under the credit agreement described in Note 5 were extinguished.
2. Significant Accounting Policies
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Danoo (Beijing) Technologies, Ltd. (name formally changed to RMG China, Ltd. in 2012), a foreign operating entity; RMG Networks, Inc.; EMN Acquisition Corporation; Executive Media Network, Inc.; Prophet Media, LLC; and Corporate Image Media, Inc. All significant intercompany transactions and balances have been eliminated in consolidation.
Basis of Presentation for Interim Financial Statements:
The accompanying unaudited financial statements of the Company as of and for the three month periods ended March 31, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles accepted in the United States for complete financial statements. The unaudited Financial Statements for the interim period ended March 31, 2013 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim period. This includes all normal and recurring adjustments, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, the unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys annual report for the fiscal year ended December 31, 2012 that are incorporated in this Prospectus. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
Foreign Currency Transactions:
The U.S. dollar is the functional currency of the Company and its foreign and domestic subsidiaries. Foreign exchange transaction gains and losses are included in the consolidated statements of operations. The Company transfers U.S. dollars to China to fund operating expenses. Should RMG China generate operating net income in Chinese currency, the Peoples Republic of China would impose restrictions over the transfer of funds to the U.S.
F-96
2. Significant Accounting Policies (continued)
Acquisition Accounting:
In March 2010, the Company acquired certain assets formerly belonging to Pharmacy TV Networks, LLC (PTV). In connection with the acquisition, the Company recorded all acquired assets of PTV at fair value, resulting in a new accounting basis for the acquired assets, including the recording of goodwill (Note 6). As of December 31, 2012, all assets related to PTV, including goodwill, were written off after the network was abandoned in early 2011 to focus on core airline and airline lounge network assets.
In April 2011, the Company acquired EMN. In connection with the acquisition, the Company recorded all assets of EMN at fair value. The Company performed a purchase price allocation resulting in a new accounting basis for the purchased assets, including the recording of intangible assets and goodwill (Note 6).
Revenue Recognition:
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. RMG 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 Boards (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 RMG shares with its partners ranges from 25% to 80% depending on the partner and the media asset. RMG makes minimum annual guarantee payments under four agreements (three to airline partners and one to another travel partner). Payments to all other partners are calculated on a revenue sharing basis. RMGs partnership agreements have terms ranging from one to five years. Four partnership agreements renew automatically unless terminated prior to renewal and the remainder have no obligation to renew.
The Company also recognizes revenue from professional services for development of software and sale of software license agreements. Professional service revenue is recognized ratably over the life of the contract and represents the revenue from one base contract and ancillary agreements for 2012. Software license revenue is recognized after persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. In software arrangements that include rights to multiple software products, support and/or other services, the Company allocates the total arrangement fee among each deliverable based on vendor-specific objective evidence of fair value. If vendor-specific objective evidence for the undelivered elements cannot be ascertained, and the arrangement cannot be unbundled, then revenue is deferred until the delivery of the undelivered elements or, if the only undelivered element is customer support, recognized ratably over the service period.
Cash and Cash Equivalents:
Cash and cash equivalents include all cash balances and highly liquid investments purchased with remaining maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of money market accounts.
Restricted Cash:
Restricted cash related to funds held to guarantee the Companys corporate credit cards and as guarantees required under lease agreements for two of the Companys office facilities. Restriction requirements continue through the term of the leases, which expire in 2015 and 2020, respectively.
F-97
2. Significant Accounting Policies (continued)
Business Concentrations:
For the quarter ended March 31, 2013, the Company had three major customers: Customers A, B, and C represented 29%, 14%, and 10%, respectively (53% total) of quarterly revenues. For the quarter ended March 31, 2012, the Company had three major customers: Customers A, B and C represented 14%, 13%, and 10%, respectively, (37% total) of quarterly revenues. The Company had accounts receivable of $1,597,359, $787,795, and $555,791 ($2,940,856 total) from Customers A, B and C, respectively, as of March 31, 2013, and had accounts receivable of $663,461, $36,000, and $700,397 ($1,399,858 total) from Customers A, B, and C, respectively, at March 31, 2012.
Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents, restricted cash, and accounts receivable.
The Company does not require collateral or other security for accounts receivable. However, credit risk is mitigated by the Companys ongoing evaluations of customer creditworthiness. The Company maintains an allowance for doubtful accounts receivable balances. The allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts on a customer by customer basis. Accounts deemed uncollectible are written off. Such credit losses have been within managements expectations.
The Company maintains its cash and cash equivalents in the United States with two financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation insurable limit. Cash and cash equivalents of $141,000 and $150,000 held in a foreign country as of March 31, 2013 and December 31, 2012, respectively, were not insured.
Property and Equipment:
Property and equipment is stated at cost, less accumulated depreciation and amortization. The Company depreciates property and equipment using the straight-line method over estimated useful lives ranging from three to five years. Leasehold improvements are amortized over the shorter of the assets useful life or the remaining lease term.
Capitalized Software Development Costs:
The Company capitalizes costs related to the development of internal use software after such a time as it is considered probable the software will be completed and will be used to perform the function intended. The Company capitalizes external direct costs of materials and services consumed in developing and obtaining internal-use computer software, and payroll and payroll-related costs for employees who are directly associated with and who devote time to developing the internal-use software. Capitalized costs are not amortized until each development project is completed and new functionality has been implemented. The Company recognized amortization expense of $5,770 and $5,770 for the three months ended March 31, 2013 and 2012, respectively, and $23,080 for the year ended December 31, 2012.
Other Assets:
Other assets consist of deposits related to leases for office facilities.
Intangible Assets:
Intangible assets are carried at cost, less accumulated amortization. Amortization of intangibles with finite lives is computed using the straight-line method over estimated useful lives of two to seven years. Intangible assets consist of customer and vendor relationships, trademarks, domain names, non-compete agreements and acquired technology resulting from acquisitions (Notes 4 and 6), and internally developed software.
Intangible assets not subject to amortization are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that of the reporting unit is impaired. Intangible assets subject to amortization are tested for recoverability whenever events or changes in circumstances indicate that asset groups carrying amount may not be recoverable.
F-98
2. Significant Accounting Policies (continued)
Intangible Assets: (continued)
An impairment loss for an intangible asset subject to amortization is recognized only if the carrying amount of the related long-lived asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). The Company recognized an impairment charge of $2,295,433 for intangible assets related to the IdeaCast, Inc. acquisition in the year ended December 31, 2012 (See Note 6). There was no impairment charge for the three months ended March 31, 2013.
Goodwill:
Goodwill reflects the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill is not amortized but is subject to a review for impairment. The Company reviews its goodwill for impairment annually or whenever circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. The Company tests goodwill for impairment by first assessing qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An impairment loss is recognized for any excess of the carrying amount of the reporting units goodwill over the implied fair value of the goodwill.
The Company recognized an impairment charge of $619,987 in the year ended December 31, 2012 due to the underperformance of certain network units within the Company. There was no impairment charge for the three months ended March 31, 2013.
Accounting for Impairment of Long-Lived Assets:
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured to be the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of their carrying cost amount or the fair value less the cost to sell.
Advertising and Promotion Costs:
The Company expenses advertising and promotion costs as incurred. Advertising and promotion expense was $11,170 and $19,000 for the three months ended March 31, 2013 and 2012, respectively, and $19,000 for the year ended December 31, 2012, and is included in sales and marketing expense.
Stock-Based Compensation:
The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair value of the shares at date of grant. All stock option grants are accounted for using the fair value method (Black-Scholes model) and compensation is recognized as the underlying options vest.
Stock-based compensation for options or warrants granted to non-employees is measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Compensation expense for options granted to non-employees is periodically re-measured as the underlying options vest.
Research and Development:
The Company expenses research and development expenditures as incurred.
Deferred Revenue:
Deferred revenue consists of billings or payments received in advance of revenue recognition from professional service agreements described above and is recognized as the revenue recognition criteria are met. The Company generally invoices the customer in annual installments.
F-99
2. Significant Accounting Policies (continued)
Income Taxes:
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future income tax effects of differences between the amounts at which assets and liabilities are recorded for financial reporting purposes and the amounts recorded for income tax purposes. Deferred income taxes are classified as current or non-current, based on the classifications of the related assets and liabilities giving rise to the temporary differences. A valuation allowance is provided against the Companys deferred income tax assets when their realization is not reasonably assured.
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 the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Segment Information:
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a companys chief operating decision maker (the Companys Chief Executive Officer (CEO)) in assessing performance and deciding how to allocate resources. The Companys business is conducted in a single operating segment. The CEO reviews a single set of financial data that encompasses the Companys entire operations for purposes of 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.
Recently Issued Accounting Pronouncements:
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2013-02, Other Comprehensive Income (Topic 220) (ASU 2013-02). The objective of ASU 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 seeks to attain that objective by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This accounting standard update is effective prospectively for annual and interim periods beginning after December 15, 2012. The Company adopted ASU 2011-12 in its financial statements for the three months ended March 31, 2013.
In October 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-4
, Technical Corrections and Improvements
. This ASU clarifies the FASBs Accounting Standards Codification (ASC) or corrects unintended application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair value in ASC Topic 820,
Fair Value Measurement.
Amendments to the Codification without transition guidance are effective upon issuance for both public and nonpublic entities. For public entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2013. The Company expects that this pronouncement will not have a material effect on the consolidated financial statements.
In August 2012, the FASB issued ASU 2012-03,
Technical Amendments and Corrections to SEC SectionsAmendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22.
ASU 2012-03 clarifies the Codification or corrects unintended application of guidance and includes amendments identifying when the use of fair value should be linked to the definition of fair value in ASC Topic 820,
Fair Value Measurement
. Amendments to the Codification without transition guidance are effective upon issuance for both public and nonpublic entities. For public entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. For nonpublic entities, amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2013. The Company expects that this pronouncement will not have a material effect on the consolidated financial statements.
F-100
2. Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements: (continued)
In July 2012, the FASB issued ASU 2012-02,
IntangiblesGoodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
. The amendments in this ASU will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2012-2 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entitys financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The Company adopted ASU 2012-02 in its financial statements for the year ended December 31, 2012.
In December 2011, the FASB issued ASU 2011-12,
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
ASU 2012-12 defers only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. The paragraphs in ASU No. 2011-12 supersede certain pending paragraphs in ASU No. 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income
(June 2011). ASU 2011-12 is effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is effective for nonpublic entities for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The Company adopted ASU 2011-12 in its financial statements for the year ended December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11.
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
The objective of ASU 2011-11 is to provide enhanced disclosures that will enable users of an entitys financial statements to evaluate the effect or potential effect of netting arrangements on an entitys financial position. This includes the effect or potential effect of rights of setoff associated with an entitys recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. Adoption did not have a material effect on the consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08,
IntangiblesGoodwill and Other (Topic 350): Testing Goodwill for Impairment
. The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 in its financial statements for the year ended December 31, 2012.
In June 2011, the FASB issued ASU 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income.
For public entities, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, ASU 2011-5 is effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. See ASU 2011-12 above for amendments to the effective date. The Company adopted this ASU during the year ended December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
F-101
2. Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements:
(continued)
In May 2011, the FASB issued ASU 2011-04,
Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
(ASC 2011-04). The amendments in this ASU generally represent clarifications of FASB ASC Topic 820 (ASC 820), but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This Update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) issued by the International Auditing Standards Board. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. The Company has adopted this ASU during the year ended December 31, 2012. Adoption did not have a material effect on the consolidated financial statements.
The Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its consolidated financial statements.
3. Property and Equipment
Property and equipment consisted of the following as of March 31,2013 and December 31, 2012:
|
|
|
|
|
|
|
2013
|
|
2012
|
Equipment
|
$
|
745,367
|
$
|
770,848
|
Furniture and fixtures
|
|
108,863
|
|
266,544
|
Leasehold improvements
|
|
12,430
|
|
23,209
|
|
|
866,660
|
|
1,060,601
|
Less accumulated depreciation and amortization
|
|
352,380
|
|
522,956
|
|
$
|
514,280
|
$
|
537,645
|
Depreciation expense for the three months ended March 31, 2013 and 2012 was $33,180 and $153,560, respectively.
4. Intangible Assets and Goodwill
Intangible assets related to acquisitions (Note 6) and capitalized internally developed software consisted of the following as of March 31, 2013 and December 31, 2012:
|
|
|
|
|
|
|
2013
|
|
2012
|
Customer relationships
|
$
|
2,050,578
|
$
|
2,050,578
|
Vendor relationships
|
|
6,123,665
|
|
6,123,665
|
Non-compete agreements
|
|
2,818,350
|
|
2,818,350
|
Acquired and developed software
|
|
380,832
|
|
380,832
|
Trademarks
|
|
224,522
|
|
224,522
|
Domain names
|
|
21,668
|
|
21,668
|
|
|
11,619,615
|
|
11,619,615
|
Less accumulated amortization
|
|
4,040,346
|
|
3,527,081
|
|
$
|
7,579,269
|
$
|
8,092,533
|
Amortization expense for the three months ended March 31, 2013 and 2012 was $513,266 and $903,579, respectively.
The expected life of the identified intangibles is as follows:
|
|
|
|
|
Years
|
Customer relationships
|
|
4-6
|
Vendor relationships
|
|
7
|
Non-compete agreements
|
|
4
|
Acquired and developed software
|
|
5
|
Trademarks
|
|
5
|
Domain names
|
|
2
|
F-102
4. Intangible Assets and Goodwill (continued)
Annual amortization expense, which is based on the value of the intangible asset and its estimated useful life, is expected to be as follows for future years:
|
|
|
Years ending December 31:
|
|
|
2013
|
$
|
2,045,228
|
2014
|
|
2,042,231
|
2015
|
|
1,532,611
|
2016
|
|
1,261,013
|
2017
|
|
969,379
|
Thereafter
|
|
242,071
|
|
$
|
8,092,533
|
Intangible assets related to the IdeaCast acquisition were written off in 2012 after the Company determined they had no value in a sale to a third party (see Note 6).
As of December 31, 2010 the goodwill balance was $1,257,125 and consisted of goodwill recorded for the IdeaCast and Pharmacy TV Networks acquisitions (see Note 6). During the year 2011 goodwill of $5,474,351 was added as a result of the EMN acquisition and $637,138 impairment loss was recognized for Pharmacy TV, which network was closed down. As of December 31, 2011 the balance of $6,094,338 consisted of goodwill recorded for the IdeaCast and EMN acquisitions. Goodwill related to the IdeaCast acquisition of $619,987 was written off in the year 2012 resulting in a balance of $5,474,351 as of December 31, 2012.
5. Borrowings
Notes Payable:
In March 2007, the Company entered into a loan and security agreement (the Agreement) with a financial institution, for a term loan facility of $2,000,000. The Company borrowed $1,000,000 under the Agreement in June 2007 and the remaining $1,000,000 in September 2007. Borrowings under the Agreement included interest at the rate of 9.5% per annum and were secured by the assets of the Company. In August 2008, the Agreement was amended to increase the available borrowings under the Agreement to $4,000,000. The additional $2,000,000 was borrowed in December 2009, and included interest at the rate of 7% per annum. In April 2011, the Company fully repaid the remaining outstanding borrowings under the Agreement. As such, there were no outstanding borrowings under the Agreement at December 31, 2012.
In August 2008 and December 2009, in connection with amendments to the Agreement, the Company issued warrants for the purchase of 52,059 and 34,706 shares of Series B convertible preferred stock (Series B) at $1.7288 per share (Note 9), respectively. The warrants were valued at $22,606 and $14,584, respectively, calculated using a Black-Scholes option-pricing model. The fair value allocated to the warrants resulted in a discount to the notes payable that was amortized to interest expense over the repayment term of the notes payable. The debt discount was fully amortized in the year ended December 31, 2011. The warrants remain outstanding at December 31, 2012 (Note 9).
In April 2011, the Company entered into a $50,000,000 credit agreement (the Credit Agreement) with an investment institution. The Company borrowed $25,000,000 upon the closing of the Credit Agreement and used the majority of these proceeds to acquire EMN (Note 6) and repay the outstanding balance under the former Agreement. Additional drawdowns of $1,594,273 occurred in 2012. Borrowings under the Credit Agreement bear interest at the rate of 14% per annum, and the Company has the option to pre-pay a portion of the interest quarterly as stipulated under the terms of the Credit Agreement. All unpaid interest is applied to the principal. The Credit Agreement, which is collateralized by substantially all of the Companys assets, matures in April 2015, at which time all outstanding principal and interest will be due. Outstanding borrowings under the Credit Agreement as of March 31, 2013 and December 31,2012 were $ 33,707,058 and $32,554,356, respectively, which includes $7,112,785 and $5,960,083 as of March 31, 2013 and December 31, 2012, respectively, in interest applied to the principal.
F-103
5. Borrowings (continued)
Notes Payable:
(continued)
The Credit Agreement is subject to certain financial and non-financial covenants, the most restrictive of which is a performance to plan test with respect to consolidated adjusted EBITDA, as defined. The Companys ability to borrow under this Credit Agreement has been suspended in 2012 due to non-compliance with this covenant. The investor may present a demand for repayment but has not to date. In the event that the investor would present a demand for repayment, any unamortized discount would be charged to expense in the same period as the demand. The Company has accordingly reclassified the note payable balance as a current liability as of March 31, 2013 and December 31, 2012. In connection with the Credit Agreement, the Company was required to pay a $750,000 facility fee, which was withheld from the $25,000,000 borrowed. This facility fee was recognized as a discount to the notes payable and is being amortized to interest expense ratably over the life of the Credit Agreement. The amounts amortized for the quarters ended March 31, 2013 and 2012 were $46,233 and $46,233, respectively. The unamortized discount related to the facility fee as of March 31, 2013 and December 31, 2012 was $380,651 and $426,884, respectively.
In April 2011, in connection with the issuance of the Credit Agreement, the Company issued warrants for the purchase 3,880,044 shares of Series A convertible preferred stock (Series A), 4,227,584 shares of Series B, 2,423,152 shares of Series C convertible preferred stock (Series C), and 12,257,897 shares of common stock at $0.01 per share (Note 9). The fair value of $645,243, $1,764,449, $780,947 and $2,912,458, respectively, was recorded as a discount to the notes payable and additional paid-in capital and is being amortized to interest expense ratably over the life of the Credit Agreement. The amount amortized was $376,218 and $376,218 for the quarters ended March 31, 2013 and 2012, respectively. The unamortized discount related to the warrants as of March 31, 2013 and December 31, 2012 was $3,097,531 and $3,473,749, respectively. The warrants remain outstanding as of March 31, 2013.
Line of Credit:
In November 2010, the Agreement was amended to provide a credit facility against eligible accounts receivable. The credit facility availability was based on 80% of eligible accounts receivable up to $4,000,000. In 2011, in connection with the Credit Agreement, the Company amended the credit facility under the Agreement to increase the available borrowings up to $9,375,000, based on 80% of eligible accounts receivable. Borrowings under the credit facility bore interest at the greater of 7.25% per annum or prime plus 3.25% (7.25% at December 31, 2011). The credit facility expired in April 2013, but was effectively terminated in June 2012, at which time the financial institution ceased to accept additional borrowing by the Company. As of December 31, 2012, the Company had no outstanding borrowings under the Agreement.
6. Acquisitions
IdeaCast, Inc.:
In June 2009, the Company purchased certain assets formerly belonging to IdeaCast, Inc. under a foreclosure sale.
The aggregate purchase price of $8,255,547 was paid in the form of shares of convertible preferred stock and common stock of the Company and warrants to purchase shares common stock (Note 9) upon closing of the acquisition agreement as follows: 5,225,933 shares of Series B convertible preferred stock, 3,483,956 shares of Series A convertible preferred stock, 370,000 shares of common stock and warrants to purchase a total of 3,435,000 shares of common stock through June 30, 2012.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
|
|
|
Intangible assets
|
$
|
7,050,560
|
Accounts receivable
|
|
585,000
|
Goodwill
|
|
619,987
|
Assets acquired
|
$
|
8,255,547
|
In 2012, the Company deemed the remaining intangible assets and goodwill to be impaired and recognized an impairment charge of $2,915,420 on the accompanying consolidated statement of operations. The assets related to the IdeaCast acquisition were sold to a third party in July 2012.
F-104
6. Acquisitions (continued)
Pharmacy TV Networks, LLC:
In March 2010, the Company purchased certain assets formerly belonging to PTV under an Asset Purchase Agreement (APA).
The aggregate purchase price of $680,538 was paid in the form of 837,333 shares of common stock of the Company upon closing of the acquisition and 1,164,250 shares of common stock in connection with earn-outs, as defined in the APA. In connection with the acquisition, the Company entered into two consulting agreements to assist in the integration, which require monthly payments of $5,000 each. In 2010, the Company paid $35,000 in connection with these consulting agreements. The consulting agreements were terminated in May 2010.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
|
|
|
Property and equipment
|
$
|
43,400
|
Goodwill
|
|
637,138
|
Assets acquired
|
$
|
680,538
|
In 2011, the Company closed down the network, determined the goodwill to be impaired and recognized an impairment charge of $637,138 on the accompanying consolidated statement of operations. During the year ended December 31, 2012, all assets related to PTV were disposed.
Executive Media Network Worldwide:
In April 2011, the Company acquired EMN, which became a wholly-owned subsidiary of the Company.
The aggregate purchase price of $18,000,000 was paid directly from proceeds received in connection with a Credit Agreement (Note 5). The following table summarizes the estimated fair value of the net assets acquired at the date of acquisition:
|
|
|
Intangible assets
|
$
|
11,504,215
|
Net working capital
|
|
1,000,000
|
Property and equipment
|
|
21,434
|
Goodwill
|
|
5,474,351
|
Net assets acquired
|
$
|
18,000,000
|
7. Commitments and Contingencies
Lease Commitments:
The Company leases its office facilities in San Francisco, New York, and Chicago under non-cancelable operating lease agreements expiring at various dates through September 2020. For the three months ended March 31, 2013 and 2012, the Company recognized $292,162 and $187,883, respectively, and $1,015,000 for the year ended December 31, 2012, as rent expense (which includes amounts related to lease impairments).
In the years ended December 31, 2012 and 2011, the Company entered into capital lease agreements with leasing companies for the financing of equipment and furniture purchases. Under the lease agreements, the Company financed equipment purchases of $199,847 and $72,847 in the years 2012 and 2011, respectively). The capital lease payments expire at various dates through June 2017.
F-105
7. Commitments and Contingencies (continued)
Lease Commitments: (continued)
Future minimum lease payments under non-cancelable operating and capital lease agreements consist of the following as of December 31, 2012:
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
Years ending December 31:
|
|
|
|
|
2013
|
$
|
92,000
|
$
|
729,000
|
2014
|
|
67,000
|
|
697,000
|
2015
|
|
67,000
|
|
593,000
|
2016
|
|
67,000
|
|
564,000
|
2017
|
|
31,271
|
|
514,000
|
Thereafter
|
|
-
|
|
1,123,000
|
Total minimum lease payments
|
|
324,271
|
$
|
4,220,000
|
Less amount representing interest
|
|
59,000
|
|
|
Present value of capital lease obligations
|
|
265,271
|
|
|
Less current portion
|
|
70,027
|
|
|
Non-current portion
|
$
|
195,244
|
|
|
The Company is currently subleasing two facilities and receiving monthly payments which are less than the Companys monthly lease obligations. Based upon the then current real estate market conditions, the Company believed that these leases had been impaired and accrued $305,000 of lease impairment for the year 2012. The impairment charges were calculated based on future lease commitments less estimated future sublease income. The leases expire in February 28, 2021 and July 31, 2013, respectively.
Revenue Share Commitments:
From 2006 through 2012, the Company entered into revenue sharing agreements with four customers, requiring the Company to make minimum yearly revenue sharing payments.
Future minimum payments under these agreements are as follows:
|
|
|
Years ending December 31:
|
|
|
2013
|
$
|
9,661,000
|
2014
|
|
10,189,000
|
2015
|
|
12,757,000
|
Total minimum revenue share commitments
|
$
|
32,607,000
|
The Company sold two media networks and all related assets in 2012. Although existing network commitments were assigned to the new buyers as a result of these transactions, there were certain vendor/partners that did not formally accept the assignments and resolve balances due under existing contracts. Although the Company has accrued for commitments through the sale dates, there remains uncertainty as to the status of the Companys obligations under these contracts. In the opinion of management, any liabilities resulting from these uncertainties will not have a material adverse effect on the Companys financial position or results of operations.
8. Income Taxes
Due to net losses, the Company had no current, deferred, or total income tax expense in the 3 months ending March 31, 2013 and 2012, and the year ended December 31, 2012.
F-106
8. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities as of March 31, 2013 did not change significantly from December 31, 2012. The Company has recorded a valuation allowance equal to the full amount of the net deferred tax assets at both March 31, 2013 and December 31, 2012.
The Company has federal and state net operating loss carry-forwards for income tax purposes as of March 31, 2013 of $38,551,000 and $36,940,000, respectively, and as of December 31, 2012 of $34,266,000 and $32,655,000, respectively, which expire beginning in 2025. Additionally, at March 31, 2013 and December 31, 2012, the Company had federal and state research and development tax credits totaling $76,000 and $80,000, respectively. The federal tax credits may be carried forward until 2025. The state tax credits may be carried forward indefinitely.
Section 382 of the Internal Revenue Code limits the use of net operating loss and income tax credit carry-forwards in certain situations where changes occur in the stock ownership of a company. If the Company should have an ownership change of more than 50% of the value of the Companys capital stock, utilization of the carry-forwards could be restricted.
The Company files income tax returns in the U.S. federal jurisdiction, certain state jurisdictions and for its subsidiary in China. In the normal course of business, the Company is subject to examination by federal, state, local and foreign jurisdictions, where applicable. The tax return years 2007 through 2012 remain open to examination by the major taxing jurisdictions to which the Company is subject.
The Company has adopted the provisions set forth in FASB ASC Topic 740, to account for uncertainty in income taxes. In the preparation of income tax returns in federal, state and foreign jurisdictions, the Company asserts certain tax positions based on its understanding and interpretation of the income tax law. The taxing authorities may challenge such positions, and the resolution of such matters could result in recognition of income tax expense in the Companys consolidated financial statements. Management believes it has used reasonable judgments and conclusions in the preparation of its income tax returns.
The Company uses the more likely than not criterion for recognizing the tax benefit of uncertain tax positions and to establish measurement criteria for income tax benefits. The Company has determined it has no material unrecognized assets or liabilities related to uncertain tax positions as of March 31, 2013 and December 31, 2012. The Company does not anticipate any significant changes in such uncertainties and judgments during the next 12 months. In the event the Company should need to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as income tax expense.
9. Capital Stock
Common Stock:
The Company is authorized to issue 140,000,000 shares of common stock with a par value of $0.0001 per share. As of both March 31, 2013 and December 31, 2012, the Company had 6,334,095 shares issued and outstanding. Each holder of common stock is entitled to one vote per share. The holders of common stock, voting as a single class, are entitled to elect two members to the Board of Directors.
Convertible Preferred Stock:
The Company has authorized the issuance of up to 60,175,878 shares of convertible preferred stock with a par value of $0.0001 per share. As of both March 31, 2013 and December 31, 2012, the Company had the following shares of convertible preferred stock issued and outstanding:
|
|
|
|
|
|
|
Shares
Designated
|
|
Shares
Outstanding
|
|
Liquidation
Preference
|
Series A
|
13,846,580
|
|
9,692,606
|
$
|
5,838,826
|
Series B
|
24,157,621
|
|
16,794,649
|
|
29,034,589
|
Series C
|
22,171,677
|
|
15,221,880
|
|
5,868,035
|
|
60,175,878
|
|
41,709,135
|
$
|
40,741,450
|
F-107
9. Capital Stock (continued)
The holders of Series A, Series B and Series C (collectively, preferred stock), have the rights, preferences, privileges and restrictions as follows:
Dividends:
The holders of Series C are entitled to receive non-cumulative dividends as adjusted for stock splits, dividends, reclassifications or the like, prior and in preference to any declaration or payment of any dividends to the holders of Series A, Series B and common stock, when and if declared by the Board of Directors, at a rate of $0.04819 per share, as adjusted, per annum.
After the payment of dividends to the holders of Series C, the holders of Series A and Series B are entitled to receive non-cumulative dividends as adjusted for stock splits, dividends, reclassifications or the like, prior and in preference to any declaration or payment of any dividends to the holders of common stock, when and if declared by the Board of Directors, at a rate of $0.03084 and $0.13830 per share, respectively, as adjusted, per annum. The Company has not declared any dividends as of March 31, 2013.
Liquidation:
In the event of any liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of Series C are entitled to receive, prior to and in preference to holders of Series A, Series B, and common stock, an amount per share, as adjusted for stock splits, stock dividends, reclassifications or the like, equal to $0.602355, plus all declared but unpaid dividends. If, upon occurrence of such an event, the assets and funds of the Company are insufficient to make this distribution, the holders of Series C will receive the available proceeds on a pro rata basis, based on the amounts that would otherwise be distributable.
Following the full distribution to the holders of Series C, the holders of Series A and Series B will be entitled to receive, prior to and in preference to holders of common stock, an amount per share, as adjusted for stock splits, stock dividends, reclassifications or the like, equal to $0.3855 and $1.7288, respectively, plus declared but unpaid dividends. If, upon occurrence of such an event, the assets and funds distributed among the holders of Series A and Series B are insufficient to permit the above payment to such holders, then the entire remaining assets and funds of the Company legally available for distribution will be distributed ratably among the holders of Series A and Series B in proportion to the preferential amount each such holder is otherwise entitled to receive.
After full payment to the holders of preferred stock of the full preferential amounts specified above, the entire remaining assets and funds of the Company legally available for distribution will be distributed on a pro rata basis to the holders of common stock.
Voting:
The holder of each share of preferred stock is entitled to voting rights equal to the number of shares of common stock into which each share of preferred stock could be converted.
So long as there are at least 2,000,000 shares of Series A issued and outstanding, the holders of Series A, voting as a single class, are entitled to elect two members to the Board of Directors. So long as there are at least 2,000,000 shares of Series B issued and outstanding, the holders of Series B, voting as a single class, are entitled to elect two members to the Board of Directors. The holders of warrants issued in April 2011 in connection with the acquisition of EMN are entitled to vote as a separate class and to elect a percentage of the members to the Board of Directors equal to their percentage of fully diluted ownership in the Company. Any additional members of the Board of Directors are elected by the holders of preferred and common stock, voting together as a single class, on an as-converted basis.
F-108
9. Capital Stock (continued)
Protective Provisions:
As long as 2,000,000 shares of preferred stock remain outstanding, the approval of the majority of the holders of preferred stock, voting together as a single class, is required before the rights, preferences and privileges of preferred stock can be altered to materially and adversely affect such shares, increase or decrease the total number of authorized preferred stock or common stock, alter or repeal the Certificate of Incorporation or the By-Laws of the Company, increase or decrease the size of the Board of Directors, declare or pay any distribution, take any action that results in the redemption or repurchase of any shares of common stock, consummate a liquidation event, or create any subsidiary of the Company unless unanimously approved by the Board of Directors.
Conversion:
Each share of preferred stock is convertible to common stock, at the option of the holder, at any time after the date of issuance. Each share of preferred stock automatically converts into that number of shares of common stock determined in accordance with the conversion rate upon the earlier of (i) the closing of a public offering with aggregate proceeds of at least $30,000,000 or (ii) the date specified by written consent or agreement of the holders of at least a majority of the shares of preferred stock, voting together as a single class, on an as converted basis.
Warrants:
The following table provides information about the outstanding warrants to purchase common stock as of March 31, 2013 and December 31, 2012.
|
|
|
|
|
|
|
Expire
|
|
Number
|
|
Exercise Price
Per Share
|
Issued in March and June 2010, 10,838,414 and 916,905 shares, respectively, in connection with the issuance of Series C
|
March and June 2017
|
|
11,755,319
|
|
0.340
|
Issued in April 2011, in connection with the Credit Agreement
|
April 2021
|
|
12,257,897
|
$
|
0.010
|
|
|
|
24,013,216
|
|
|
The following table provides information about the outstanding warrants to purchase preferred stock as of March 31, 2013 and December 31 2012.
|
|
|
|
|
|
|
Expire
|
|
Number
|
|
Exercise Price
Per Share
|
Series A, issued in May 2007, in connection with the Agreement
|
May 2014
|
|
155,641
|
|
0.3855
|
Series B, issued in February 2008, in connection with Convertible Notes Payable
|
February 2013
|
|
28,921
|
|
1.7288
|
Series B issued in August 2008 and December 2009, 52,059 and 34,706 shares, respectively, in connection with the Agreement
|
August 2018
|
|
86,765
|
|
1.7288
|
Issued in April 2011 in connection with the Credit Agreement
|
April 2021
|
|
|
|
|
Series A
|
|
|
3,880,044
|
|
0.010
|
Series B
|
|
|
4,227,584
|
|
0.010
|
Series C
|
|
|
2,423,152
|
$
|
0.010
|
Balance at December 31, 2012
|
|
|
10,802,107
|
|
|
Warrants expired
|
|
|
(28,921)
|
|
|
Balance at March 31, 2013
|
|
|
10,773,186
|
|
|
F-109
9. Capital Stock (continued)
The following are the significant assumptions used in the valuation of the warrants issued in 2011.
|
|
|
Expected Term (Years)
|
|
4
|
Risk-Free Rate (%)
|
|
1.83
|
Volatility (%)
|
|
52.4
|
Dividend Yield (%)
|
|
0
|
10. Stock Options
In 2006, the Company adopted the 2006 Global Share Plan (the Plan) under which 27,982,558 shares of the Companys common stock has been reserved for issuance to employees, directors and consultants.
Under the Plan, the Board of Directors may grant incentive stock options and non-statutory stock options. Incentive stock options may only be granted to employees and directors. The exercise price of incentive stock options and non-statutory stock options shall be no less than 100% of the fair value per share of the Companys common stock on the grant date. Options expire after 10 years. The Board of Directors determines the period over which options vest and become exercisable (the requisite service period), generally 4 years. The Company has a repurchase option exercisable upon the voluntary or involuntary termination of the purchasers employment with the Company for any reason.
The fair value of each award granted in 2012 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
2012
|
Expected term (years)
|
|
4.7 - 6.1
|
Expected volatility
|
|
51% - 55%
|
Expected dividends
|
|
$0
|
Risk-free interest rate
|
|
1.36 - 1.43%
|
Forfeiture rate
|
|
23.14%
|
Expected volatility is based on historical volatilities of public companies operating in the Companys industry. The expected term of the options represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees historical exercise and post-vesting employment termination behavior. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.
In the quarters ended March 31, 2013 and 2012, and the year ended December 31, 2012, the Company recognized $99,965, $100,096, and $402,465, respectively, of employee stock-based compensation. No income tax benefits have been recognized in the consolidated statements of operations for stock-based compensation arrangements.
The total fair value of shares vested during the year ended December 31, 2012 was $554,932.
Future stock-based compensation for unvested employee
options outstanding as of December 31, 2012 is $648,709 to be recognized over a weighted-average remaining requisite service period of 2.03 years.
F-110
10. Stock Options (continued)
Stock option activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
Options Available
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
Balances, December 31, 2012
|
|
14,393,035
|
|
13,547,844
|
$
|
0.331
|
|
Authorized
|
|
-
|
|
-
|
|
|
|
Granted
|
|
-
|
|
-
|
|
0.
|
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
Forfeited
|
|
163,907
|
|
163,907
|
|
0.2997
|
|
Expired
|
|
|
|
|
|
|
Balances, March 31, 2013
|
|
14,556,942
|
|
13,383,937
|
$
|
0.332
|
The weighted average remaining contractual life and the aggregate intrinsic value for total options outstanding as of March 31, 2013 was 7.0 years and $0, respectively. The weighted average grant date fair value for options that were granted for the year ended December 31, 2012 was $.0001.
The following table reflects data for options that are vested and expected to vest and options that are vested and currently exercisable outstanding as of March 31, 2013:
|
|
|
|
|
|
|
Vested and Expected to Vest
|
|
Vested and Currently Exercisable
|
Number of shares
|
|
12,572,139
|
|
9,024,455
|
Weighted-average exercise price
|
$
|
.332
|
$
|
.338
|
Aggregate intrinsic value
|
$
|
0
|
$
|
0
|
Weighted-average contractual term (years)
|
|
7.03
|
|
6.62
|
11. Employee Benefit Plan
The Company has a 401(k) plan to provide defined contribution retirement benefits for all eligible employees. Participants may contribute a portion of their compensation to the plan, subject to limitations under the Internal Revenue Code. The Companys contributions to the plan are at the discretion of the Board of Directors. The Company did not make any contributions to the plan during the three months ended March 31, 2013 or the year ended December 31, 2012.
12. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding and dilutive potential common shares outstanding during the period. For the three months ended March 31, 2013 and the year ended December 31, 2012, the effect of issuing the potential common shares would have been anti-dilutive due to the net losses in each period. Therefore, the number of shares used to compute basic and diluted earnings per share were the same for each of those years.
F-111
12. Net Loss Per Share (continued)
Following are common shares that would be issued if all common stock options and warrants were exercised, and all preferred stock warrants were exercised and converted to common stock. These potential common shares have not been included in the calculation of fully diluted shares outstanding, because the effect of including them would be anti-dilutive.
|
|
|
|
|
|
|
March 31,
|
|
|
2013
|
|
2012
|
Options to purchase common stock
|
|
13,383,937
|
|
13,547,844
|
Warrants to purchase common stock
|
|
24,013,216
|
|
24,013,216
|
Shares of common stock subject to conversion of outstanding convertible preferred stock
|
|
41,709,135
|
|
41,709,135
|
Warrants to purchase convertible preferred stock which in turn is convertible into common stock
|
|
10,773,186
|
|
10,802,107
|
|
|
89,879,474
|
|
90,072,302
|
13. Subsequent Events
In November 2012, the Company entered into a letter of intent to be acquired by a public company and signed a merger agreement on January 11, 2013. The merger was consummated on April 8, 2013, and the Company is a subsidiary of the public company. In connection with the consummation of the merger, the existing borrowings under the credit agreement described in Note 5 were extinguished.
F-112
13,066,666 Shares of Common Stock (for Issuance)
5,066,666 Warrants and 5,729,666
Shares of Common Stock
(for Resale)
, 2013