Item 1A.
Risk Factors
An investment in our securities involves a high degree of risk. Holders of our securities should carefully consider the following risk factors and the other information contained in this Form 10-Q, including our historical financial statements and related notes included herein. The following discussion highlights some of the risks that may affect future operating results. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or businesses in general, may also impair our businesses or operations. If any of the following risks or uncertainties occur, our business, financial condition and operating results could be adversely affected in a material way. This could cause the trading prices of our securities to decline, perhaps significantly, and you may lose part or all of your investment.
Risks Relating to the Merger
The consummation of the proposed merger of the Company with an affiliate of Gregory H. Sachs, the Company’s Executive Chairman, is not certain and its delay or failure could adversely affect our operating results or the price of our common stock.
On April 3, 2018, the Company announced an agreement to be acquired through the Merger of the Company with an entity controlled by SCG Digital Holdings, Inc., a Delaware corporation and an affiliate Gregory H. Sachs, the Company’s Executive Chairman. The Company cannot provide any assurance that the proposed Merger will be consummated. If consummated, it is currently anticipated to be completed in the third quarter of 2018. However, the Company cannot assure you of the timing of the closing.
Consummation of the proposed Merger is subject to the satisfaction of various conditions, including adoption of the Merger by a vote of a majority of the minority shareholders of the outstanding shares of the Company’s common stock and other customary closing conditions described in the Merger Agreement. The Company cannot guarantee that these closing conditions will be satisfied, that the Company will receive the required approvals or that the proposed Merger will be successfully completed. Many of these conditions are out of the Company’s control. In the event that the proposed Merger is not completed or is delayed:
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management’s and employees’ attention to the Company’s day-to-day business may be diverted because matters related to the proposed Merger may require substantial commitments of their time and resources;
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the Company could lose key employees;
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the Company’s relationships with customers and suppliers may be substantially disrupted as a result of uncertainties with regard to our business and prospects;
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under certain circumstances, if the proposed Merger is not completed and the Merger Agreement is terminated, including if the stockholder vote is not obtained, the Company may be required to pay to Parent a termination fee of up to a maximum of $500,000 (which amount would depend on the circumstances of the termination), plus reimbursement of Parent’s out of pocket legal fees and other expenses;
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under certain circumstances, if the proposed Merger is not completed, an affiliate of Gregory H. Sachs may be required to fund a penalty loan of $1 million to the Company, which loan would bear interest at the prime rate plus five percent and would be payable in kind, and such penalty loan would be the Company’s only source of recovery, regardless of the total amount of the actual damages the Company may suffer as a result of the delay in or failure of the proposed Merger’s consummation; and
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the market price of shares of the Company’s common stock may decline (to the extent that the current market price of those shares reflects a market assumption that the proposed Merger will be completed).
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The Merger Agreement also restricts us from engaging in certain activities and taking certain actions without the Parent’s approval, which could prevent us from pursuing opportunities that may arise prior to a closing of the Merger.
Any of these events could have a materially negative impact on the Company’s results of operations and financial condition and could adversely affect the price of the Company’s common stock.
We have incurred, and will continue to incur, substantial costs in connection with the proposed merger.
The Company has incurred, and will continue to incur, substantial costs in connection with the proposed Merger. These costs are primarily associated with the fees of attorneys, accountants and financial advisors of the Special Committee of our Board of Directors and of our Board of Directors. In addition, the Company has diverted significant management resources in an effort to complete the proposed Merger, and we are subject to restrictions contained in the Merger Agreement on the conduct of our business until the closing of the proposed Merger. If the proposed Merger is not completed, the Company will have incurred significant costs, including the diversion of management resources and, depending on the circumstances, payment of a termination fee of up to $500,000 to Parent, plus reimbursement for Parent’s out of pocket legal fees and other expenses, for which we will have received little or no benefit.
The Merger Agreement contains provisions that could discourage a potential competing acquirer of the Company.
The Merger Agreement contains “no shop” provisions that, subject to limited exceptions, restrict the Company’s ability to solicit, initiate, knowingly facilitate or knowingly encourage competing third-party proposals for the acquisition of the Company’s stock or assets. In certain circumstances, upon termination of the Merger Agreement, the Company will be required to pay a termination fee of up to $500,000. These provisions could discourage a potential third-party that might have an interest in making a competing proposal, even if such third-party were prepared to pay consideration with a higher per share cash or market value than the consideration to be received in the Merger.
We are in breach of our $2 million Bridge Loan with SCG Digital Financing LLC (“Subordinated Lender”), an affiliate of Gregory H. Sachs, our Executive Chairman. If the Subordinated Lender enforces its rights under the Bridge Loan, we could be held in default under such loan, which could accelerate our repayment date and materially adversely affect the value of our stockholders’ investments in us.
On April 2, 2018, in connection with the Merger Agreement, we obtained the Bridge Loan from the Subordinated Lender in an aggregate principal amount of $2 million. The Bridge Loan was fully drawn as of the closing of the facility and is secured by a second lien on all of the Borrowers’ assets. The Bridge Loan accrues interest at a rate equal to the prime rate plus 8% plus 2.0% paid-in-kind and imposes a number of affirmative and negative covenants on the Borrowers. If the Bridge Loan is prepaid, prior to the stated maturity date thereof, the Borrowers are obligated to pay a prepayment premium equal to the interest the loans would have accrued if they had remained outstanding through maturity.
As noted above the Subordinated Lender has given notice to us that we have breached the interest payment terms of the Subordinated Loan Agreement, thus causing the Default. The Subordinated Lender currently has the right to accelerate the repayment date. In addition, if we should breach certain other of those covenants or otherwise additionally default on the Bridge Loan, or if the Merger Agreement is terminated other than for a material breach of Parent or in the event that the Company enters into a definitive agreement with respect to an alternative transaction that constitutes a Superior Proposal pursuant to the Merger Agreement, the Subordinated Lender would have additional rights to accelerate the repayment date. If we do not have sufficient cash to repay the Bridge Loan at that time, we would be forced to refinance the Bridge Loan. We cannot assure you that such refinancing would be available to the Company on favorable terms or at all. In the event that we are unable to refinance the Bridge Loan, subject to certain restrictions in the subordination agreement among Silicon Valley Bank, our senior lender, the Subordinated Lender and the Borrower, the Subordinated Lender is entitled to take remedies against the Company, including foreclosing on the collateral securing the Bridge Loan. In addition, the Bank has the right to exercise its remedies under the Restated Loan Agreement, which entitles the Bank to cease lending money to us and to accelerate the repayment date of our obligations to the Bank. If any such events occur, the Company may be forced to file for bankruptcy protection, which would materially adversely affect the value of our stockholders’ investments in us.
Risks Related to Our Business
We may not be able to generate sufficient cash to service our debt obligations.
Effective October 13, 2017, we entered into an amended and restated loan and security agreement (the “Restated Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which the Bank agreed to make a revolving credit facility available to the Company and certain of its subsidiaries (collectively, the “Borrowers”) in the principal amount of up to $7.5 million (the “Revolving Facility”). The Revolving Facility is secured by a first-priority security interest in
substantially all of our assets. When we have a balance outstanding, our ability to make payments on and to refinance our outstanding indebtedness will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. Likewise, when we have a balance outstanding, we may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If we are unable to make payments or otherwise default on our debt obligations, the lender could foreclose on our assets, which would have a material adverse effect on our business, financial condition and results of operations.
Our outstanding indebtedness requires us to comply with certain financial covenants, the default of which may result in the acceleration of our indebtedness.
The Revolving Facility contains financial and operational covenants, including covenants requiring us to achieve specified levels of consolidated adjusted EBITDA. Failure to comply with these or other covenants in the Revolving Facility would result in an event of default. In the event of any default under the Revolving Facility, such as the Default, the lenders could elect to declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be immediately due and payable and could foreclose on our assets.
We may require significant amounts of additional financing to execute our business plan and fund our other liquidity needs. If our future operating results do not meet or exceed our projections or we are unable to raise sufficient funds, we may be unable to continue operations and could be forced to substantially curtail operations or cease operations all together.
At June 30, 2018, the Company had $1.1 million in borrowings and $2.4 million in unused availability under the Revolving Facility and $2.0 million in borrowings under the Bridge Loan.
On July 16, 2018, the Company paid interest owed to the Subordinated Lender under the Subordinated Loan Agreement for interest due June 30, 2018. The Company inadvertently failed to pay the interest payment when it came due on June 30, 2018 and it paid the default interest premium on July 17, 2018.
On July 23, 2018, the Subordinated Lender delivered a Notice of Default to the Company for failure to make a payment of interest due within the timeframe specified in the Subordinated Loan Agreement. The Subordinated Loan Agreement permits the Subordinated Lender to exercise certain remedies in the event of such a default, including demanding immediate repayment of all outstanding principal and interest.
In addition, the Subordinated Lender states that it is not exercising any remedies
with respect to the Default
at this time but reserves its rights and remedies.
The Default has caused a cross-default under the Restated Loan Agreement, which has caused the Company to not be in compliance with all covenants thereunder as referenced above.
At June 30, 2018, the Company’s cash and cash equivalents balance was $1.7 million. This includes cash and cash equivalents of $1.1 million held in bank accounts of its subsidiaries located outside the United States. Year-to-date through June 30, 2018, the Company has incurred $1.3 million in transaction related expenses. The Company projects the transaction related expenses to continue until the effective date of the merger which is expected to occur by the end of the third quarter of 2018.
If we are unable to increase our revenues or decrease our operating expenses to meet our operating plan, if the Bank enforce its rights and remedies under the Restated Loan Agreement due to the Default, or if we fail to meet any of the financial covenants in the Revolving Facility and are unable to obtain a waiver or an amendment from the Bank to allow us to continue to borrow under the Revolving Facility, we may need to obtain additional capital within the next twelve months to fund our planned operations. Under any of those circumstances, we may need to pursue one or more alternatives, such as to reduce or delay planned capital expenditures or investments in our business, seek additional financing, sell assets or curtail our operations. Any such actions may materially and adversely affect our prospects. In addition, we cannot assure you that we will be able to raise additional equity capital or obtain additional financing on commercially reasonable terms or at all.
We have a history of incurring significant net losses, and our future profitability is not assured.
For the six months ended June 30, 2018 and 2017, we incurred net losses of approximately $5.0 million and $2.5 million, respectively. Our operating results for future periods are subject to numerous uncertainties and there can be no assurances that we will be profitable in the foreseeable future, if at all. If our revenues in a given period are below levels that would result in profitable operation, we may be unable to reduce costs since a significant part of our cost of revenues and operating
expenses are fixed, which could materially and adversely affect our business and, therefore, our results of operations and lead to a net loss (or a larger net loss) for that period and subsequent periods
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The markets for digital signage are competitive and we may be unable to compete successfully.
The markets for digital signage are very competitive and we must compete with other established providers. We compete with larger companies in many of the markets we serve.
We expect existing competitors and new entrants into the markets where we do business to constantly revise and improve their business models, technology, and offerings considering challenges from us or other companies in the industry. If we cannot respond effectively to advances by our competitors, our business and financial performance may be adversely affected.
Increased competition may result in new products and services that fundamentally change our markets, reduce prices, reduce margins or decrease our market share. We may be unable to compete successfully against current or future competitors, some of whom may have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do.
Implementation and integration of new products, such as expanding our software, media player and services product portfolios and our recently-released Korbyt Software platform offerings, could harm our results of operations.
A key component of our growth strategy is to develop and market new products. We may be unable to produce new products and services that meet customers’ needs or specifications. If we fail to meet specific product specifications requested by a customer, the customer may have the right to seek an alternate source for a product or service or to terminate an underlying agreement. A failure to successfully meet the specifications of our potential customers could decrease demand or otherwise significantly hinder market adoption of our products and may have a material adverse effect on our business, financial condition or results of operations.
The process of introducing a new product to the market is extremely complex, time consuming and expensive, and will become more complex as new platforms and technologies emerge. In the event we are not successful in developing a wide range of offerings or do not gain wide acceptance in the marketplace, we may not recoup our investment costs, and our business, financial condition and results of operations may be materially adversely affected.
In addition, implementation of a SaaS offering may reduce demand for our existing product lines, which may have a material adverse effect on our business, financial condition or result of operations.
If we fail to successfully manage our business model transition to cloud-based products and a subscription pricing model, our results of operations could be negatively impacted.
To address the industry transition to cloud and mobile, we have accelerated our move to the cloud with the release of our Korbyt Software platform in the fourth quarter of 2017.
The launch of the Korbyt Software platform begins our multi-year, strategic transition from a perpetual use software license and maintenance business model to a subscription business model. While we will continue to sell perpetual use software licenses for our ES software platform, we expect the customer transition to the Korbyt platform and subscription business model will drive an increasing portion of our revenues in the future to subscriptions. The subscription model prices and delivers our products in a way that differs from the historical perpetual pricing and delivery methods. These changes reflect a significant shift from perpetual license sales and distribution of our software in favor of providing our customers the right to access certain of our software in a hosted environment or use downloaded software for a specified subscription period. During this transition, revenue, orders, gross margin, net income (loss), earnings (loss) per share, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front.
Our ability to achieve our financial objectives is subject to risks and uncertainties. Our new offerings require a considerable investment of technical, financial, legal, and sales resources, and a scalable organization. Market acceptance of such offerings is affected by a variety of factors, including but not limited to: security, reliability, performance, current license terms, customer preference, social/community engagement, customer concerns with entrusting a third party to store and manage their data, public concerns regarding privacy and the enactment of restrictive laws or regulations. Whether our business model transition will prove successful and will accomplish our business and financial objectives is subject to
numerous uncertainties, including but not limited to: customer demand, attach and renewal rates, channel acceptance, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, tax and accounting implications, pricing, and our costs. In addition, the metrics we use to gauge the status of our business model transition may evolve over the course of the transition as significant trends emerge. If we are unable to successfully establish these new offerings and navigate our business model transition in light of the foregoing risks and uncertainties, our results of operations could be negatively impacted.
Our operations are subject to the strength or weakness of our customers’ businesses, and we may not be able to mitigate that risk.
A large percentage of our business is attributable to customers in industries that are sensitive to general economic conditions. During periods of economic slowdown or during periods of weak business results, our customers often reduce their capital expenditures and defer or cancel pending projects or facilities upgrades. Such developments occur even among customers that are not experiencing financial difficulties.
Similar slowdowns could affect our customers in the hospitality industry in the wake of terrorist attacks, economic downturns or material changes in corporate travel habits. In addition, expenditures tend to be cyclical, reflecting economic conditions, budgeting and buying patterns. Periods of a slowing economy or recession, or periods of economic uncertainty, may be accompanied by a decrease in spending.
Continued weakness in the industries we serve has had, and may in the future have, an adverse effect on sales of our products and our results of operations. A long term continued or heightened economic downturn in one or more of the key industries that we serve, or in the worldwide economy, could cause actual results of operations to differ materially from historical and expected results.
Furthermore, even in the absence of a downturn in general economic conditions, our customers may reduce the money they spend on our products and services for a number of other reasons, including:
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a decline in economic conditions in an industry we serve;
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a decline in capital spending in general;
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a decision to shift expenditures to competing products;
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unfavorable local or regional economic conditions; or
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a downturn in an individual business sector or market.
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Such conditions could have a material and adverse effect on our ability to generate revenue from our products and services, with a corresponding adverse effect on our financial condition and results of operations.
The process of a U.K. exit from the European Union could adversely impact our business, results of operations and financial condition.
On June 23, 2016, the U.K. Government held an in-or-out referendum on the U.K.’s membership within the E.U. The referendum results favored a U.K. exit from the E.U. (“Brexit”). On March 29, 2017, the U.K. government delivered formal notice to the E.U. of its intent to exit, triggering a two-year countdown to the U.K.’s withdrawal from the E.U. A process of negotiation will determine the future terms of the U.K.’s relationship with the E.U.
When Brexit occurs, we will likely face new regulatory costs and challenges, the scope of which are presently unknown. Depending on the terms of Brexit, if any, the U.K. could also lose access to the single E.U. market and to the global trade deals negotiated by the E.U. on behalf of its members. Such a decline in trade could affect the attractiveness of the U.K. as a global investment center and, as a result, could have a detrimental impact on U.K. growth. Such a decline could also make our doing business in Europe more difficult, which could delay new sales contracts and reduce the scope of such sales contracts. The uncertainty of the outcome of the Brexit process could also have a negative impact on the U.K. and other European economies. Although we have an international customer base, we could be adversely affected by reduced growth and greater volatility in the U.K. and European economies.
Currency exchange rates in the British pound and the euro with respect to each other and the U.S. dollar have already been affected by Brexit. As a significant portion of our revenues are derived from our U.K. operations, further exchange rate fluctuations could adversely affect our business, our results of operations and financial condition.
Our revenues are sensitive to fluctuations in foreign currency exchange rates and are principally exposed to fluctuations in the value of the U.S. dollar, the British pound and the euro. Changes to U.K. immigration policy could likewise occur because of Brexit. Although the U.K. would likely retain its diverse pool of talent, London’s role as a global center for business may decline, particularly if access to the single E.U. market is interrupted. Any of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.
The recent and ongoing global economic uncertainty may adversely impact our business, operating results or financial condition.
As widely reported, financial markets in the U.S., Europe and Asia experienced extreme disruption in 2008 and 2009. While there has been improvement in recent years, the worldwide economy remains fragile as uncertainty remains regarding when each global region’s economy will improve to historical growth levels. In addition, political changes in the United States, the United Kingdom and other nations, including Brexit, contribute to economic uncertainty. Any return to the conditions that existed during the 2008-2009 recession or other unfavorable changes in economic conditions, including declining consumer confidence, concerns about inflation or deflation, the threat of another recession, increases in the rates of default and bankruptcy, sovereign credit concerns in Europe and the Middle East, the extended decline in crude oil prices and its effects on Middle Eastern economies and extreme volatility in the credit and equity markets, may lead to decreased demand or delay in payments by our customers or to slowing of their payments to us, and our results of operations and financial condition could be adversely affected by these actions. These challenging economic conditions also may result in:
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increased competition for fewer industry dollars;
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pricing pressure that may adversely affect revenue and gross margin;
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reduced credit availability and/or access to capital markets;
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difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers; or
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customer financial difficulty and increased risk of doubtful accounts receivable.
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Currency fluctuations may adversely affect our business.
For the six months ended June 30, 2018, approximately 37% of our revenues were generated outside of the United States. Accordingly, we receive a significant portion of our revenues in pounds sterling, euros, and other foreign currencies. However, for financial reporting purposes, we use the U.S. dollar. To the extent the U.S. dollar strengthens against the pounds sterling and other foreign currencies, the translation of foreign currency denominated transactions will result in reduced revenue, operating expenses and net income for us. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited, and we may not be able to successfully hedge our exchange rate risks.
A higher percentage of our sales and profitability occur in the third and fourth quarters.
We sell more of our products in the third and fourth quarters because of traditional technology buying patterns of our customers. Corporate year end budgets, government buying and regional economics will affect the amount of our products and services that will fit into customers’ budgets late in the year. Any unanticipated decrease in demand for our products during the third and fourth quarters could have an adverse effect on our annual sales, profitability, and cash flow from operations. In addition, slower selling cycles during the first and second quarters may adversely affect our stock price
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Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly in the future.
Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. These fluctuations may cause the market price of our common stock to decline. We base our planned operating expenses in part on expectations of future revenues, and our expenses are relatively fixed in the short term. If revenues for a particular quarter are lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter. In future periods, our revenue and operating results may be below the expectation of analysts and investors, which may cause the market price of our common stock to decline. Factors that are likely to cause our revenues and operating results to fluctuate include those discussed elsewhere in this section
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Our business could be adversely affected if our consumer protection, data privacy and security practices are not adequate, or are perceived as being inadequate, to prevent data breaches, or by the application of consumer protection and data privacy and security laws generally.
In the course of our business, we collect certain personal information that may be considered personally identifiable information (“PII”). Although we take measures to protect PII from unauthorized access, acquisition, disclosure and misuse, our security controls, policies and practices may not be able to prevent the improper or unauthorized access, acquisition or disclosure of such PII. In addition, third party vendors and business partners which in the course of our business receive access to PII that we collect also may not prevent data security breaches with respect to the PII we provide them or fully enforce our policies, contractual obligations, and disclosures regarding the collection, use, storage, transfer and retention of personal data. The unauthorized access, acquisition or disclosure of PII could significantly harm our reputation, compel us to comply with disparate breach notification laws and otherwise subject us to proceedings by governmental entities or others and substantial legal liability. A perception that we do not adequately secure PII could result in a loss of current or potential consumers and business partners, as well as a loss of anticipated revenues. Our key business partners also face these same risks with respect to PII they collect and data security breaches with respect to such information could cause reputational hard to them and negatively impact our ability to offer our products and services through their platforms.
In addition, the rate of data privacy, security and consumer protection law-making is accelerating globally, and the interpretation and application of consumer protection and data privacy and security laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. For example, the European Union has adopted new data privacy regulations, the General Data Protection Regulation, or GDPR, which became effective in 2016 and became enforceable in May 2018. These regulations comprehensively reform the prior data protection rules of the European Union in order to protect the use and disclosure of personal information, and are more stringent and apply to a broader range of personal data than those in the United States. The GDPR is applicable to U.S.-based companies, such as ours, that do business or offer services in the European Union. Our current processes and practices do not comply with the GDPR, and we will need to expend considerable time and resources, including management attention, to revise our practices and bring them into compliance. The GDPR and other changes in laws or regulations associated with the enhanced protection of personal and other types of data could greatly increase the size of potential fines related to data protection and our cost of providing our products and services and could result in changes to our business practices or even prevent us from offering certain products or services in jurisdictions in which we operate. It is possible that these laws may be interpreted or applied in a manner that is adverse to us or otherwise inconsistent with our practices, which could result in litigation, regulatory investigations and potential legal liability or require us to change our practice in a manner adverse to our business. As a result, our reputation may be harmed, we could incur substantial costs, and we could lose both customers and revenue.
Any failure by us, or our agents to comply with our privacy policies or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others as well as resulting liability.
Our business could be adversely affected if our cybersecurity practices are inadequate to prevent unauthorized intrusions or theft of data.
We are at risk for interruptions, outages, and breaches of: (i) operational systems (including business, financial, accounting, product development, consumer receivables, data processing, or manufacturing processes); and/or (ii) our facility security systems. Such cyber incidents could materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively
sensitive information; compromise personally identifiable information of customers, employees or other; jeopardize the security of our facilities; and/or affect the performance of our customer-facing solutions. A cyber incident could be caused by malicious third parties using sophisticated, targeted methods to circumvent firewalls, encryption, and other security defenses, including hacking, fraud, trickery, or other forms of deception. The techniques used by third parties change frequently and may be difficult to detect for long periods of time. A significant cyber incident could impact production capability, harm our reputation and/or subject us to regulatory actions or litigation.
We rely significantly on information systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to effectively operate our business, harm our net sales, increase our expenses and harm our reputation.
Our ability to effectively serve our customers on a timely basis depends significantly on our information systems and those of our cloud service providers. To manage the growth of our operations, we will need to continue to improve and expand our operational and financial systems, internal controls and business processes; in doing so, we could encounter implementation issues and incur substantial additional expenses. The failure of our information systems to operate effectively, problems with transitioning to upgraded or replacement systems or a breach in security of these systems could adversely impact financial accounting and reporting, efficiency of our operations and our ability to properly forecast earnings and cash requirements. We could be required to make significant additional expenditures to remediate any such failure, problem or breach. Such events may have a material adverse effect on us.
Our current or future internet-based operations may be affected by our reliance on third-party hardware and software providers, technology changes, risks related to the failure of computer systems that operate our internet business, telecommunications failures, electronic break-ins and similar disruptions. Furthermore, our ability to conduct business on the internet may be affected by liability for online content, patent infringement and state and federal privacy laws. In addition, we may now and in the future implement new systems to increase efficiencies and profitability. To manage growth of our operations and personnel, we will need to continue to improve and expand our operational and financial systems, internal controls and business processes. When implementing new or changing existing processes, we may encounter transitional issues and incur substantial additional expenses
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Experienced computer programmers and hackers, or even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our customers, create system disruptions or cause shutdowns. In addition, employee error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of its network. Any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth.
We rely on third parties for data transmission, and the interruption or unavailability of adequate bandwidth for transmission could prevent us from distributing our programming as planned.
We transmit our SaaS offering and most of the content that we provide to our customers using Internet connectivity supplied by a variety of third-party network providers. If we experience failures or limited network capacity, we may be unable to maintain programming commitments. Problems with data transmission may be due to hardware failures, operating system failures or other causes beyond our control. In addition, there are a limited number of Internet providers with whom we could contract, and we may be unable to replace our current providers on favorable terms, if at all. If the transmission of data to our customers becomes unavailable, limited due to bandwidth constraints or is interrupted or delayed because of necessary equipment changes, our customer relationships and our ability to obtain revenues from current and new customers could suffer.
Shortages of components or a loss of, or problems with, a supplier could result in a disruption in the installation or operation of our products or services.
From time to time, we have experienced delays in manufacturing our products for several reasons, including component delivery delays, component shortages and component quality deficiencies. Component shortages, delays in the delivery of components, cloud hosting provider outages and supplier product quality deficiencies may occur in the future. These delays or problems have in the past and could in the future result in delivery delays, reduced revenues, strained relations with customers and loss of business. Also, in an effort to avoid actual or perceived component shortages, we may purchase more components or cloud capacity than we may otherwise require. Excess component or cloud capacity inventory resulting from over-purchases, obsolescence, installation cancellations or a decline in the demand for our products could result in equipment impairment, which in the past has had and in the future would have a negative effect on our financial results.
We obtain several of the components used in our products from limited sources. We rarely have guaranteed supply arrangements with our suppliers, and cannot be sure that suppliers will be able to meet our current or future component
requirements. If component manufacturers do not allocate a sufficient supply of components to meet our needs or if current suppliers do not provide components of adequate quality or compatibility, we may have to obtain these components at a higher cost from distributors or on the spot market. If we are forced to use alternative suppliers of components, we may have to alter our manufacturing processes or solutions offerings to accommodate these components. Modification of our manufacturing processes or our solutions offerings to use alternative components could cause significant delays and reduce our ability to generate revenues.
The failure of our service providers to provide, install and maintain our equipment could result in service interruptions and damage to our business.
We are and will continue to be significantly dependent upon third-party service providers to provide, install and maintain relevant video display and media player equipment at our installations. The failure of any third-party provider to continue to perform these services adequately and timely could interrupt our business and damage our relationship with our partners and their relationship with consumers. Any outage would also impact our ability to deliver on the contracted service levels, which would prevent us from recognizing revenues.
Our products often operate on the same network used by our customers for other aspects of their businesses, and we may be held responsible for defects or breakdowns in these networks if it is believed that such defects or breakdowns were caused by our products.
Our products are operated across our customers’ proprietary networks, which are used to operate other aspects of these customers’ businesses. In these circumstances, any defect or virus that occurs on our products may enter a customer’s network, which could impact other aspects of the customer’s business. The impact on a customer’s business could be severe, and if we were held responsible, it could have an adverse effect on our customer relationships and on our operating results.
The content we distribute to customers may expose us to liability.
We provide or facilitate the distribution of content for our customers. This content is procured from third-parties and can include news, weather, sports and stock information as well as other types of media content. As a distributor of content, we face potential liability for negligence, copyright, patent or trademark infringement, or other claims based on the content that we distribute. We or entities that we license content from may not be adequately insured or indemnified to cover claims of these types or liability that may be imposed on us.
Our operations are subject to numerous U.S. and foreign laws, regulations and restrictions affecting our services, solutions, labor and the markets in which we operate, and non-compliance with these laws, regulations and restrictions could have a material adverse effect on our business and financial condition.
Various aspects of our services and solutions offerings are subject to U.S. federal, state and local regulation, as well as regulations outside the United States. Failure to comply with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of service, and/or the imposition of civil and criminal penalties, including fines which could have a material adverse effect on our business, reputation and financial condition. In addition, our international business subjects us to numerous U.S. and foreign laws and regulations, including, without limitation, the Foreign Corrupt Practices Act (“FCPA”). We hold contracts with various instrumentalities of foreign governments, potentially increasing our FCPA compliance risk. Our failure or the failure of our sales representatives or consultants to comply with these laws and regulations could have a material adverse effect on our business, financial condition and results of operation. In addition, even an inadvertent failure to comply with laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage our reputation and brands. Any or all of the foregoing could have a negative impact on our business, financial condition, results of operations, and cash flow.
We are subject to risks related to our international operations.
We currently have direct sales coverage in North America, the United Kingdom, South East Asia and the United Arab Emirates, as well as coverage of emerging markets through distributors, value added resellers and system integrators in Europe, Asia and the Middle East. Approximately 37% and 33% of our revenue was derived from international markets
in the six months ended June 30, 2018 and 2017, respectively, and we hope to expand the volume of the services and solutions that we provide internationally. Our international operations subject us to additional risks, including:
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uncertainties concerning import and export license requirements, tariffs and other trade barriers;
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restrictions on repatriating foreign profits back to the United States;
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changes in foreign policies and regulatory requirements;
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inadequate intellectual property protection in foreign countries;
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difficulty in enforcing agreements and collections in foreign legal systems;
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changes in, or unexpected interpretations of, intellectual property laws in any country in which we operate;
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difficulties in staffing and managing international operations;
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the extended decline in crude oil prices and its effects on Middle Eastern and other economies;
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political, cultural and economic uncertainties; and
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potential disruption due to terrorist threat or action in certain countries in which we operate.
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These risks could restrict our ability to provide services to international clients and could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to receive or retain the necessary licenses or authorizations required for us to export or re-export our products, technical data or services, which could have a material adverse effect on our business, financial condition and results of operations.
In order for us to export certain products, services or solutions, we are required to obtain licenses from the U.S. government. We cannot be sure of our ability to obtain the U.S. government licenses or other approvals required to export our services and solutions for sales to foreign governments, foreign commercial clients or foreign destinations. Failure to receive required licenses or authorizations could hinder our ability to export our services and solutions and could harm our business, financial condition and results of operations. Export transactions may also be subject to the import laws of the importing and destination countries. If we fail to comply with these import laws, our ability to sell our services and solutions may be negatively impacted which would have a material adverse effect on our business and results of operations.
If we fail to manage our growth effectively, we may not be able to take advantage of market opportunities or execute on expansion strategies.
We continue to strive to expand, our operations into new markets. The growth in our business and operations has required, and will continue to require, significant attention from management and places a strain on operational systems and resources. To accommodate this growth, we will need to upgrade, improve or implement a variety of operational and financial systems, procedures and controls, including the improvement of accounting and other internal management systems, all of which require substantial management efforts
.
We will also need to continue to expand, train, manage and motivate our workforce, manage our relationships with our customers, and add sales and marketing offices and personnel to service these relationships. All of these endeavors will require substantial managerial efforts and skill, and incur additional expenditures. We may not be able to manage our growth effectively and, as a result, may not be able to take advantage of market opportunities, execute on expansion strategies or meet the demands of our customers
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Our strategy to expand our sales and marketing operations and activities may not generate the revenue increases anticipated or such revenue increases may only be realized over a longer period than currently expected.
Building a digital signage solutions customer base and achieving broader market acceptance of our digital signage solutions will depend to a significant extent on our ability to expand our sales and marketing operations and activities. We plan to expand our direct
sales force both domestically and internationally; however, there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. Our business could be harmed if our sales and marketing expansion efforts do not generate a corresponding significant increase in revenue.
We must adapt our business model to keep pace with rapid changes in the visual communications market, including rapidly changing technologies and the development of new products and services.
Providing visual communications solutions is a relatively new and rapidly evolving business, and we will not be successful if our business model does not keep pace with new trends and developments. If we are unable to adapt our business model to keep pace with changes in the industry, or if we are unable to continue to demonstrate the value of our services to our customers, our business, results of operations, financial condition and liquidity could be materially adversely affected. Our success is also dependent on our ability to adapt to rapidly changing technology and to make investments to develop new products and services. Accordingly, to maintain our competitive position and our revenue base, we must continually modernize and improve the features, reliability and functionality of our products and services. Future technological advances may result in the availability of new service or product offerings or increase in the efficiency of our existing offerings. Some of our competitors have longer operating histories, larger client bases, longer relationships with clients, greater brand or name recognition, or significantly greater financial, technical, marketing and public relations resources than we do. As a result, they may be in a position to respond more quickly to new or emerging technologies and changes in customer requirements, and to develop and promote their products and services more effectively than we can. We may not be able to adapt to such technological changes or offer new products on a timely or cost-effective basis or establish or maintain competitive positions. If we are unable to develop and introduce new products and services, or enhancements to existing products and services, in a timely and successful manner, our business, results of operations, financial condition and liquidity could be materially and adversely affected.
We may not obtain sufficient patent protection for our systems, processes and technology, which could harm our competitive position and increase our expenses.
Our success and ability to compete depends in some regard upon the protection of our proprietary technology. As of June 30, 2018, we held two issued patents in the United States. Any patents issued may provide only limited protection for our technology and the rights that may be granted under any future issued patents may not provide competitive advantages to us. Also, patent protection in foreign countries may be limited or unavailable where we need this protection. Competitors may independently develop similar technologies, design around our patents or successfully challenge any issued patent that we hold
.
We rely upon trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and if these rights are not sufficiently protected, our ability to compete and generate revenues could be harmed.
We rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and expand our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software under signed license agreements, which impose restrictions on the licensee’s ability to utilize the software. We provide SaaS under subscription agreements which impose restrictions on the subscriber’s ability to use the services. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality and invention assignment agreements. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. Our proprietary rights may not be adequately protected because:
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laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and
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policing unauthorized use of our products, services and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use.
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The laws of certain foreign countries may not protect the use of unregistered trademarks or our proprietary technologies to the same extent as do the laws of the United States. As a result, international protection of our image may be limited and our right to use our trademarks and technologies outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for digital signage in foreign countries. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries. Our inability to register our trademarks or technologies or purchase or license the right to use the relevant trademarks or technologies in these jurisdictions could limit our ability to penetrate new markets in jurisdictions outside the United States.
We have not registered copyrights for many of our software, written materials or other copyrightable works. The United States Copyright Act automatically protects all of our copyrightable works, but, without registration, we cannot enforce those copyrights against infringers or seek certain statutory remedies for any such infringement. Preventing others from copying our products, written materials and other copyrightable works is important to our overall success in the marketplace. In the event we decide to enforce any of our unregistered copyrights against infringers, we will first be required to register the relevant copyrights, and we cannot be sure that all of the material for which we seek copyright registration would be registrable, in whole or in part, or that, once registered, we would be successful in bringing a copyright claim against any such infringers.
Litigation may be necessary to protect our trademarks and other intellectual property rights, to enforce these rights or to defend against claims by third parties alleging that we infringe, dilute or otherwise violate third-party trademark or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all or prevent us from manufacturing or selling certain products, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in its loss of significant rights.
Other parties may assert intellectual property infringement claims against us, and our products may infringe the intellectual property rights of third parties. From time to time, we receive letters alleging infringement of intellectual property rights of others. We may also initiate claims against third parties to defend our intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our core business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Also, we may be unaware of filed patent applications that relate to our products. Parties making infringement claims may be able to obtain an injunction, which could prevent us from operating portions of our business or using technology that contains the allegedly infringing intellectual property. Any intellectual property litigation could adversely affect our business, financial condition or results of operations. See “Litigation Patent Proceeding” elsewhere in this filing.
We depend on key executive management and other key personnel, and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.
We depend on the leadership and experience of our key executive management, as well as other key personnel with specialized industry, sales and technical knowledge and/or industry relationships. Because of the intense competition for these employees,
particularly in certain of the metropolitan areas in which we operate, we may be unable to retain our management team and other key personnel and may be unable to find qualified replacements if their services were no longer available to us. Most of our key employees are employed on an “at will” basis and we do not have key-man life insurance covering any of our employees. The loss of the services of any of our executive management members or other key personnel could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all.
Our facilities are located in areas that could be negatively impacted by natural disasters.
Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel, which are primarily located in Addison, Texas. In addition, we manage our networks from our headquarters in Addison. Addison is located in an area that experiences frequent severe weather, including tornadoes. Should a tornado, war, terrorist act or other catastrophe, such as fires, floods, power loss, communication failure or similar events, disable our facilities, our operations would be disrupted. While we have developed a backup and recovery plan, such plan may not ultimately prove effective
.
Changes in government regulation could require us to change our business practices and expose us to legal action.
The Federal Communications Commission, or the FCC, has broad jurisdiction over the telecommunications industry in the United States, and the governments of other nations have regulatory bodies performing similar functions. FCC licensing, program content and related regulations generally do not currently affect us. However, the FCC or analogous agencies in other countries could promulgate new regulations that impact our business directly or indirectly or interpret existing laws in a manner that would cause us to incur significant compliance costs or force us to alter our business strategy.
FCC (and similar foreign agency) regulations also affect many of our content providers and, therefore, these regulations may indirectly affect our business. In addition, the industries in which we provide service are subject to regulation by the Federal Trade Commission, the Food and Drug Administration and other federal and state agencies, and to review by various civic groups and trade organizations. New laws or regulations governing our business or the industries we serve could substantially harm our business.
We may also be required to obtain various regulatory approvals from local, state or national governmental bodies. We may not be able to obtain any required approvals, and any approval may be granted on terms that are unacceptable to us or that adversely affect our business.
Changes in regulations relating to Wi-Fi networks or other areas of the Internet may require us to alter our business practices or incur greater operating expenses.
A number of regulations, including those referenced below, may impact our business as a result of our use of Wi-Fi networks. The Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, liability for distributing materials that infringe copyrights or other rights. Portions of the Communications Decency Act are intended to provide statutory protections to online service providers who distribute third-party content. The Child Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. The costs of compliance with these regulations, and other regulations relating to our Wi-Fi networks or other areas of our business, may be significant. The manner in which these and other regulations may be interpreted or enforced may subject us to potential liability, which in turn could have an adverse effect on our business, financial condition or results of operations. Changes to these and other regulations may impose additional burdens on us or otherwise adversely affect our business and financial results because of, for example, increased costs relating to legal compliance, defense against adverse claims or damages, or the reduction or elimination of features, functionality or content from our Wi-Fi networks. Likewise, any failure on our part to comply with these and other regulations may subject us to additional liabilities.
We may not realize the anticipated benefits of future acquisitions or investments.
In the past, we have grown our businesses in part through acquisitions. For example, AFS Message-Link and Dacon, Ltd. are companies that Symon purchased in 2006 and 2008, respectively. AFS Message-Link allowed Symon to enter the hospitality digital markets as a key industry participant, and Symon’s acquisition of Dacon, a company based in the United Kingdom, expanded Symon’s contact center market presence and its base of large resellers. As part of our business strategy, we may make future acquisitions of, or investments in, technologies, products and businesses that we believe could complement or expand our business, enhance our technical capabilities or offer growth opportunities. However, we may be unable to identify suitable acquisition candidates in the future or make these acquisitions on a commercially reasonable basis, or at all. In addition, we may spend significant management time and resources in analyzing and negotiating acquisitions or investments that do not come to fruition. These resources could otherwise be spent on our own customer development, marketing and customer sales efforts and research and development.
Any future acquisitions and investments we may undertake, subject us to various risks, including:
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failure to transition key customer relationships and sustain or grow sales levels, particularly in the short-term;
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loss of key employees related to acquisitions;
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inability to successfully integrate acquired technologies or operations;
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failure to realize anticipated synergies in sales, marketing and distribution;
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diversion of management’s attention;
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adverse effects on our existing business relationships;
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potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;
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expenses related to amortization of intangible assets and potential write-offs of acquired assets; and
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the inability to recover the costs of acquisitions.
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The growth of our business is dependent in part on successfully implementing our international expansion strategy.
Our growth strategy includes expanding our geographic coverage in or into the Middle East, Europe and the Asia-Pacific region. In many cases, we have limited experience in these regions, and may encounter difficulties due to different technology standards, legal considerations, language barriers, distance and cultural differences. We may not be able to manage operations in these regions effectively and efficiently or compete effectively in these new markets. If we do not generate sufficient revenues from these regions to offset the expense of expansion into these regions, or if we do not effectively manage accounts receivable, foreign currency exchange rate fluctuations and taxes, our business and our ability to increase revenues and enhance our operating results could suffer.
Risks Related to Our Common Stock
The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.
As of June 30, 2018, Donald R. Wilson, Jr. and affiliated or related entities beneficially owned approximately 42% of our outstanding common stock, and Gregory H. Sachs, our Executive Chairman, and affiliated entities beneficially owned approximately 23% of our outstanding common stock. As a result, these persons and entities have the ability to exercise control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change in control of our company that other stockholders may view as beneficial
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We may not be able to maintain our listing on Nasdaq
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On August 9, 2018, RMG Networks Holdings Corporation (the “Company”) received notice from Nasdaq that we no longer comply with Nasdaq Listing Rules 5605(b)(1), 5605(c)(2) and 5605(d)(2) due to the resignations from our board of directors effective August 2, 2018, of Jeffrey Hayzlett, Alan Swimmer, and Jonathan Trutter which resulted in us having only one independent director and no members remaining on its audit and compensation committees.
Nasdaq advised us that, although we would normally have 45 calendar days to submit a plan to regain compliance, Nasdaq has determined to apply more stringent criteria based upon its review of our recent disclosures, particularly surrounding the simultaneous resignations of three of our independent directors. We must submit a plan on or before August 23, 2018. Nasdaq advised us that, if our plan is accepted, Nasdaq can grant an extension of time to evidence compliance of up to 180 calendar days from the date of the notice letter. The Company is considering its options with respect to the actions it will take in response to Nasdaq’s notice.
In addition, as of June 30, 2018, the Company is no longer in compliance with the Nasdaq Capital Market stockholders’ equity requirement which could result in the Nasdaq initiating delisting proceedings.
In the past, we have received written notices from Nasdaq indicating that we were not in compliance with the Nasdaq Listing Rule which requires us to maintain a minimum bid price of $1.00 per share. We are not currently subject to delisting based on the minimum bid price requirement, our common stock has traded below $1.00 on many trading days. If the closing bid price for our common stock is below $1.00 for a period of 30 consecutive business days, we would again be subject to potential delisting from Nasdaq. In 2017, we effected a 1-for-4 reverse stock split of our common stock in order to regain compliance following a previous notice of failure to meet the Nasdaq minimum bid price requirement. We intend to continue to monitor the bid price of our common stock. If our common stock once again does not trade at a level that is likely to maintain compliance with the Nasdaq requirements, our board of directors may consider other options that may be available to achieve compliance, including by carrying out an additional reverse stock split, if necessary. Such measures could have negative implications.
If our common stock is delisted from Nasdaq, it would likely trade only on the over-the-counter market (the “OTC”). If our common stock were to trade on the OTC, selling our common stock could be more difficult because smaller quantities
of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage may be reduced. In addition, in the event our common stock is delisted, broker-dealers transacting in our common stock would be subject to certain additional regulatory burdens, which may discourage them from effecting transactions in our common stock, thus further limiting the liquidity of our common stock and potentially resulting in lower prices and larger spreads in the bid and ask prices for our common stock.
Compliance with the Sarbanes-Oxley Act of 2002 requires substantial financial and management resources.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our system of internal controls and, if and when we are no longer a “smaller reporting company,” will require that we have such system of internal controls audited. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide reliable financial reports could harm our business. Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities.
We may issue additional shares of our common stock or other equity securities, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. This might have an adverse effect on the market price of our common stock.
We may finance the execution of our business plan or generate additional working capital through additional equity financings. Therefore, subject to the rules of the SEC and Nasdaq, we may issue additional shares of our common stock, preferred stock, warrants and other equity securities of equal or senior rank, with or without stockholder approval, in a number of circumstances from time to time. The issuance by us of shares of our common stock, preferred stock or other equity securities of equal or senior rank may have the following effects:
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a decrease in the proportionate ownership interest in us held by our existing stockholders;
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the relative voting strength of each previously outstanding share of common stock may be diminished; and
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the market price of our common stock or warrants may decline.
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Provisions in our charter documents and Delaware law may discourage or delay an acquisition that stockholders may consider favorable, which could decrease the value of our common stock.
Our certificate of incorporation, our bylaws, and Delaware corporate law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include those that: authorize the issuance of up to 1,000,000 shares of preferred stock in one or more series without a stockholder vote; limit stockholders’ ability to call special meetings; establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and provide for staggered terms for our directors. In addition, in certain circumstances, Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.
We have not paid cash dividends to our shareholders and currently have no plans to pay future cash dividends.
We plan to retain earnings to finance future growth and have no current plans to pay cash dividends to shareholders. In addition, our credit facility restricts our ability to pay dividends. Because we have not paid cash dividends, holders of our securities will experience a gain on their investment in our securities only in the case of an appreciation of value of our securities. You should neither expect to receive dividend income from investing in our securities nor an appreciation in value.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.
Default Upon Indebtedness
On July 16, 2018, the Company paid $62,750 of interest owed to SCG Digital Finance, LLC under the Subordinated Loan Agreement pursuant to which the Bridge Loan was made for interest due June 30, 2018. The Company inadvertently failed to pay the interest payment when it came due on June 30, 2018 and it paid the default interest premium of $2,015 on July 17, 2018. On July 23, 2018, the Company received a letter from the Subordinated Lender, notifying the Company that it is in default under the Subordinated Loan Agreement due to the Company’s failure to timely pay cash interest pursuant to the terms of the Subordinated Loan Agreement. In the letter, the Subordinated Lender also states that the breaches of the Merger Agreement alleged by Parent in its letters dated June 21, 2018, July 10, 2018 and July 20, 2018 constitute breaches of the Subordinated Loan Agreement. In addition, the Subordinated Lender states that it is not exercising any remedies at this time but reserves its rights and remedies. Additionally, the default under the Subordinated Loan Agreement caused a cross default under the Loan Agreement as a result of the Company’s failure to timely pay cash interest on the Subordinated Loan Agreement due on June 30, 2018. As of August 14, 2018, there was no arrearage of interest due to the Subordinated Lender by the Company.
Item 5.
Other Information
None.
Item 6.
Exhibits
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Exhibit
Number
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Exhibit
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2.1
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Agreement and Plan of Merger, dated April 2, 2018 (7)
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3.1
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Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 12, 2013 (1
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3.2
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Certificate of Amendment to Amended and Restated Certificate of Incorporation (2)
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3.3
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Form of Certificate of Designation of Series A Convertible Preferred Stock (3)
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3.4
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Amended and Restated Bylaws (4)
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10.1
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Amended and Restated Loan and Security Agreement, dated November 6, 2017 (5)
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10.2
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First Amendment to the Amended and Restated Loan and Security Agreement, dated as of April 2, 2018 (6)
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10.3
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Subordinated Loan and Security Agreement, dated as of April 2, 2018 (7)
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10.4
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Voting Agreement, dated April 2, 2018 (7)
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31.1*
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
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31.2*
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
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32.1*
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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(1)
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Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on July 18, 2013.
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(2)
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Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on August 15, 2017.
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(3)
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Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on March 25, 2015.
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(4)
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Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on July 24, 2014.
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(5)
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Incorporated by reference to an exhibit to the Quarterly Report on Form 10-Q filed by the registrant on November 8, 2017.
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(6)
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Incorporated by reference to an exhibit to the Annual Report on Form 10-K by the registrant on April 4, 2018.
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(7)
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Incorporated by reference to an exhibit to the Current Report on Form 8-K of RMG Networks Holding Corporation filed with the Securities and Exchange Commission on April 3, 2018.
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